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EX-32.1 - EXHIBIT 32.1 - Timios National Corpc96365exv32w1.htm
EX-32.2 - EXHIBIT 32.2 - Timios National Corpc96365exv32w2.htm
EX-31.2 - EXHIBIT 31.2 - Timios National Corpc96365exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - Timios National Corpc96365exv31w1.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934
For the quarterly period ended December 31, 2009
     
o   Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     .
Commission file number
814-00631
HOMELAND SECURITY CAPITAL CORPORATION
(Name of small business issuer in its charter)
     
Delaware   52-2050585
(State or Other Jurisdiction of Incorporation   (I.R.S. Employer Identification No.)
or Organization)    
     
1005 North Glebe Road, Suite 550    
Arlington, VA   22201
(Address of principal executive offices)   (Zip code)
(703) 528-7073
(Issuer’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of February 19, 2010, there were 48,864,440 shares of common stock, par value $.001 per share, issued, 45,294,009 shares of common stock outstanding and 3,570,431 shares of common stock held in treasury.
Transitional Small Business Disclosure Format (check one): Yes o No þ
 
 

 

 


 

PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements.
The accompanying interim condensed consolidated financial statements and notes to the consolidated financial statements for the interim periods as of December 31, 2009 and for the three and six month periods ended December 31, 2009 and 2008, are unaudited. The accompanying interim unaudited financial statements have been prepared by Homeland Security Capital Corporation (the “Company” or the “Holding Company”) in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the requirements for reporting on Form 10-Q. Accordingly, these interim unaudited financial statements do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended December 31, 2009, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010. The condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended June 30, 2009.

 

 


 

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
                 
    December 31,     June 30  
    2009     2009  
    (unaudited)          
Assets:
               
Cash
  $ 1,087,259     $ 2,356,534  
Accounts receivable — net
    16,937,245       13,425,804  
Cost in excess of billings on uncompleted contracts
    5,895,497       3,937,086  
Other current assets
    547,101       613,348  
 
           
Total current assets
    24,467,102       20,332,772  
 
           
Fixed assets — net
    3,548,394       4,398,833  
Deferred financing costs — net
    139,026       386,210  
Notes receivable — related party
    421,453       412,127  
Securities available for sale
    138,532       193,945  
Other non-current assets
    327,937       319,516  
Intangible assets — net
    369,093       391,372  
Goodwill
    6,403,982       6,403,982  
 
           
Total assets
  $ 35,815,519     $ 32,838,757  
 
           
Liabilities and Stockholders’ Deficit
               
Current liabilities:
               
Accounts payable
  $ 9,263,780     $ 10,003,336  
Current portion of long term debt
    2,907,735       1,247,016  
Current portion of long term debt — related party
    2,500,000        
Notes payable — related party
    51,370       50,110  
Accrued interest and other liabilities
    2,839,065       3,257,903  
Billings in excess of costs on uncompleted contracts
    1,703,534       1,022,125  
Income taxes payable
    182,816        
Deferred revenue
    32,562       59,636  
 
           
Total current liabilities
    19,480,862       15,640,126  
 
           
Senior notes payable — related party
    11,428,907       13,904,870  
Interest payable — related party
    3,082,392       2,210,131  
Secured notes payable — related party
    250,000       250,000  
Long term debt, less current maturities
    1,102,621       1,421,272  
Dividends payable
    2,673,666       1,869,107  
 
           
Total liabilities
    38,018,448       35,295,506  
 
           
Warrants Payable — Series H Preferred Stock
    169,768       169,768  
 
           
Stockholders’ Deficit
               
Homeland Security Capital Corporation stockholders’ deficit:
               
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 1,918,080 shares issued and outstanding
    14,268,569       14,261,207  
Common stock, $0.001 par value, 2,000,000,000 shares authorized, 48,864,440 and 53,270,160 shares issued and 45,294,009 and 49,699,729 shares outstanding, respectively
    48,864       53,270  
Additional paid-in capital
    54,679,705       54,131,548  
Additional paid-in capital — warrants
    272,529       272,529  
Treasury stock - 3,570,431 shares at cost
    (250,000 )     (250,000 )
Accumulated deficit
    (71,179,916 )     (70,817,549 )
Accumulated comprehensive loss
    (210,214 )     (141,591 )
 
           
Total Homeland Security Capital Corporation stockholders’ deficit
    (2,370,463 )     (2,490,586 )
 
           
Noncontrolling interest
    (2,234 )     (135,931 )
 
           
Total stockholders’ deficit
    (2,372,697 )     (2,626,517 )
 
           
Total liabilities and stockholders’ deficit
  $ 35,815,519     $ 32,838,757  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 


 

HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
                                 
    Three Months Ended December 31,     Six Months Ended December 31,  
    2009     2008     2009     2008  
Net contract revenue
  $ 26,572,415     $ 22,212,461     $ 47,421,857     $ 39,879,692  
 
                       
 
                               
Contract costs
    20,801,955       18,480,949       38,105,195       33,313,889  
 
                       
 
                               
Gross profit on sales
    5,770,460       3,731,512       9,316,662       6,565,803  
 
                       
 
                               
Operating expenses:
                               
Marketing
    131,507       54,094       198,947       123,851  
Personnel
    2,027,003       1,744,094       4,215,312       4,353,851  
Insurance and facility costs
    278,391       226,407       538,514       522,022  
Travel and transportation
    92,454       109,053       190,373       272,501  
Other operating costs
    269,557       225,428       486,502       458,051  
Depreciation and amortization
    375,752       468,978       722,446       616,508  
Amortization of intangible assets
    11,140       34,274       22,279       68,548  
Professional services
    249,824       199,080       446,012       514,263  
Administrative costs
    246,194       326,140       518,120       627,432  
 
                       
Total operating expenses
    3,681,822       3,387,548       7,338,505       7,557,027  
 
                       
Operating income (loss)
    2,088,638       343,964       1,978,157       (991,224 )
Other (expense) income:
                               
Interest expense
    (490,985 )     (504,537 )     (980,777 )     (1,006,189 )
Amortization of debt discounts and offering costs
    (138,768 )     (135,111 )     (286,379 )     (270,222 )
Other income
    14,344       28,633       46,534       59,494  
 
                       
Total other expense
    (615,409 )     (611,015 )     (1,220,622 )     (1,216,917 )
 
                       
Income (loss) income from continuing operations before income taxes
    1,473,229       (267,051 )     757,535       (2,208,141 )
Income tax expense
    (172,129 )     (143,000 )     (202,284 )     (143,000 )
 
                       
Net income (loss)
    1,301,100       (410,051 )     555,251       (2,351,141 )
 
                       
Less: Net (income) loss attributable to noncontrolling interests
    (76,524 )     65,799       (105,697 )     112,269  
 
                       
Net income (loss) attributable to Homeland
                               
Security Capital Corporation stockholders
    1,224,576       (344,252 )     449,554       (2,238,872 )
Less preferred dividends and other beneficial conversion features associated with preferred stock issuance
    (405,960 )     (360,591 )     (811,921 )     (721,180 )
 
                       
Net income (loss) attributable to common stockholders of Homeland Security Capital Corporation
  $ 818,616     $ (704,843 )   $ (362,367 )   $ (2,960,052 )
 
                       
Income (loss) per common share attributable to Homeland Security Capital Corporation stockholders - basic and diluted
                               
Basic
  $ 0.02     $ (0.01 )   $ (0.01 )   $ (0.06 )
 
                       
Diluted
  $ 0.00     $ (0.01 )   $ (0.01 )   $ (0.06 )
 
                       
Weighted average shares outstanding -
                               
Basic
    53,270,160       47,506,560       53,270,160       48,183,683  
 
                       
Diluted
    536,203,500       47,506,560       53,270,160       48,183,683  
 
                       
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 


 

HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
                 
    Six Months Ended December 31,  
    2009     2008  
Cash flows from operating activities:
               
Net income (loss)
  $ 555,251     $ (2,351,141 )
Adjustments to reconcile net income (loss) to net cash (used in) operating activities:
               
Share-based compensation expense
    543,751       1,348,278  
Depreciation
    1,022,187       886,497  
Amortization of intangibles
    22,279       68,548  
Loss on disposal of assets
    7,556        
Amortization of debt discount
    24,037       24,037  
Amortization of debt offering costs
    247,184       246,185  
Changes in operating assets and liabilities:
               
Accounts receivable
    (3,511,441 )     (6,227,294 )
Costs in excess of billings on uncompleted contracts
    (1,958,411 )     (76,718 )
Other assets
    48,500       17,678  
Accounts payable
    (739,556 )     936,206  
Billings in excess of costs on uncompleted contracts
    681,409       2,625,933  
Accrued interest and other liabilities
    453,423       507,563  
Income taxes payable
    182,816       143,000  
Deferred revenue
    (27,074 )     (15,407 )
 
           
Net cash used in operating activities
    (2,448,089 )     (1,866,635 )
Cash flows from investing activities:
               
Purchase of fixed assets
    (200,804 )     (313,321 )
Proceeds from sale of assets
    21,500        
Investment received for noncontrolling interest of subsidiary
    28,000        
 
           
Net cash used in investing activities
    (151,304 )     (313,321 )
Cash flows from financing activities:
               
Net borrowings on line of credit
    1,691,000       1,178,065  
Proceeds from notes payable
    59,270        
Payments on term debt
    (406,942 )     (332,107 )
 
           
Net cash provided by financing activities
    1,343,328       845,958  
Effect of exchange rate changes on cash
    (13,210 )     (268,534 )
 
           
Net decrease in cash
    (1,269,275 )     (1,602,532 )
Cash, beginning of period
    2,356,534       3,182,357  
 
           
Cash, end of period
  $ 1,087,259     $ 1,579,825  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 


 

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)
                                                                                 
    Homeland Security Capital Corporation Shareholders                
                                    Additional                                      
                            Additional     Paid-In                     Accumulated             Total  
    Preferred     Common Stock     Paid-In     Capital -     Treasury     Accumulated     Comprehensive     Noncontrolling     Stockholders’  
    Stock     Shares Issued     Amount     Capital     Warrants     Stock     Deficit     Loss     Interest     (Deficit)  
Balance, June 30, 2009
                                                                               
As previously reported
  $ 14,261,207       53,270,160     $ 53,270     $ 54,131,548     $ 272,529     $ (250,000 )   $ (70,953,480 )   $ (141,591 )   $     $ (2,626,517 )
Adjustment for adoption of FASB ASC 810
                                          135,931             (135,931 )      
 
                                                           
Balance, June 30, 2009 as restated
    14,261,207       53,270,160       53,270       54,131,548       272,529       (250,000 )     (70,817,549 )     (141,591 )     (135,931 )     (2,626,517 )
Amortization of Series H warrants
                                        (804,559 )                 (804,559 )
Dividends on Series H and Series I
    7,362                                     (7,362 )                  
Value of vested stock options
                      543,751                                     543,751  
Rescission of option exercise
          (4,405,720 )     (4,406 )     4,406                                      
Noncontrolling interest’s investment in subsidiary
                                                    28,000       28,000  
Decrease in value of securities available for sale
                                              (55,413 )           (55,413 )
Currency translation
                                              (13,210 )           (13,210 )
Net income
                                        449,554             105,697       555,251  
 
                                                           
Balance, December 31, 2009
  $ 14,268,569       48,864,440     $ 48,864     $ 54,679,705     $ 272,529     $ (250,000 )   $ (71,179,916 )   $ (210,214 )   $ (2,234 )   $ (2,372,697 )
 
                                                           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 


 

HOMELAND SECURITY CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
December 31, 2009
1. Organization and Basis of Presentation of Unaudited Interim Financial Statements.
Organization
Homeland Security Capital Corporation (the “Company” or the “Holding Company”) is an international provider of specialized technology-based radiological, nuclear, environmental disaster relief and electronic security solutions to government and commercial customers. We are engaged in the strategic acquisition, operation, development and consolidation of companies operating in the chemical, biological, radiological, nuclear and explosive (“CBRNE”) incident response and security marketplace within the homeland security industry. We are focused on creating long-term shareholder value by taking a controlling interest in and developing our subsidiary companies through superior management, operations, marketing and finance. We operate businesses that provide products and services solutions, growing organically and by acquisitions. The Company targets emerging companies that are generating revenues but face challenges in scaling their businesses to capitalize on opportunities in the aforementioned industry sectors.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Safety & Ecology Holdings Corporation (“Safety”) (including Safety’s wholly-owned Untied Kingdom subsidiary Safety and Ecology Corporation Limited and majority owned subsidiary Radcon Alliance, LLC) and majority owned subsidiaries Nexus Technologies Group, Inc. (“Nexus”) and Polimatrix, Inc. (“PMX”). The Company controls each of the subsidiary boards of directors and provides extensive advisory services to the subsidiaries. Accordingly, the Company believes it exercises sufficient control over the operations and financial results of each company and consolidates the results of operations. All intercompany balances and transactions have been eliminated.
In July 2009, the Company adopted FASB ASC Topic 810 “Noncontrolling Interest” (“FASB ASC 810”) (formerly known as FASB 160), which amends ARB 51 to establish accounting and reporting standards for noncontrolling interests in a subsidiary. FASB ASC 810 further clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported in the financial statements. Accordingly, the Company has included the noncontrolling subsidiary minority interests in the current year financial statements and adjusted the previous year periods for comparative presentation.
Reclassifications – Certain prior period balances have been reclassified to conform with current period presentation related to the adoption of FASB ASC 810 “Noncontrolling Interest”.

 

 


 

The Company has evaluated the financial statements for subsequent events through the filing date of this Form 10-Q.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (Topic 470). This Accounting Standards Update amends Subtopic 470-20, Debt with Conversion and Other Options and Subtopic 260-10, Earnings Per Share. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810 clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. This guidance was effective for the Company’s interim quarter ended December 31, 2009 and did not have a material effect on the financial position, results of operations, or cash flows of the Company.
2. Fair Value Measurements
The Company follows Topic 820 – Fair Value Measurements and Disclosures (“FASB ASC 820”), formerly known as SFAS 157 Fair Value Measurements, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to utilize the best available information. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and lowest priority to unobservable inputs (level 3 measurement). The three levels of fair value hierarchy are as follows:
Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2 — Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3 — Unobservable inputs for the asset or liability.
As of December 31, 2009, the Company’s securities available for sale had a carrying value of $138,532, which was measured by quoted prices in active markets for identical assets.
3. Minority Interest in Ultimate Escapes, Inc.
The Company has indirectly acquired a minority equity interest in Ultimate Escapes, Inc., a luxury destination club (“UEI”) (NYSE Amex: UEI; formerly known as Secure America Acquisition Corporation, or “SAAC”), as a result of the business combination between SAAC and Ultimate Escapes Holdings, LLC, which was consummated on October 29, 2009. Through its membership interests in Secure America Acquisition Holdings, LLC (“SAAH”), the Company is deemed to beneficially own 40,912 shares, or approximately 1.5% of the outstanding capital stock of UEI, at December 31, 2009, and is entitled to receive such shares of common stock in UEI upon the release of SAAH’s shares from escrow, which is expected in October 2010.
In addition to the Company’s ownership in SAAH, our Chief Executive Officer and Chairman beneficially owns 149,867 membership interests in SAAH, or approximately 50.5% of SAAH’s membership interests; our Chief Financial Officer owns 10,385 membership interests, or approximately 3.5% of SAAH’s membership interests; and two of our directors collectively own 15,735 membership interests in SAAH, or approximately 5.3% of SAAH’s membership interests.

 

 


 

Management of the Company does not believe it is appropriate to measure its investment in SAAH membership units at the current market price of UEI common shares because the Company will not receive such shares until October 2010. Management believes there is still uncertainty as to what market price might be achievable at the end of the escrow period and therefore has chosen to carry its investment in SAAH at cost, but will continue to measure any impairment to its investment periodically, using current market prices.
4. Income Taxes
The Company has not recorded any federal income tax expense or benefit for the three and six months ended December 31, 2009 and 2008, mainly due to available federal net operating loss carryforwards. The Company has recorded an income tax valuation allowance equal to the benefit of any deferred tax asset because of the uncertain nature of realization.
5. Stock Options
Stock Options Awarded Under the 2005 Plan
There are 7,200,000 shares of common stock reserved for issuance upon exercise of options under the Company’s 2005 stock option plan (the “2005 Plan”). From August 2005 through October 2006, 6,800,000 options were granted under the 2005 Plan at strike prices ranging from $0.08 to $0.17. Of the options granted, all have vested through December 31, 2009, and $629,096 of compensation expense has been recognized in the financial statements of the Company through that date. During the six month periods ending December 31, 2009 and 2008, the Company recorded $2,500 and $63,187 as compensation expense, respectively, under the 2005 Plan. At December 31, 2009, there were 400,000 options available for award under the 2005 Plan. There have been no exercises of vested options under the 2005 Plan.
Stock Options Awarded Under the 2008 Plan
There are 75,000,000 shares of common stock reserved for issuance upon exercise of options under the Company’s 2008 stock option plan (the “2008 Plan”). In July 2008, 73,850,000 options were granted under the 2008 Plan at a strike price of $0.05. Of the options granted, 59,955,238 have fully vested, 33,360 have been exercised and 66,640 have been forfeited through December 31, 2009 and compensation expense of $2,169,422 has been recognized in the financial statements of the Company through that date. During the six month periods ending December 31, 2009 and 2008, the Company recorded $500,288 and $1,168,545 as compensation expense, respectively, under the 2008 Plan. At December 31, 2009, there are 1,216,640 options available for award under the 2008 Plan.
On December 31, 2009, two officers of the Company rescinded their prior exercise of 7,640,626 options, as a result of which 4,405,720 shares of common stock were cancelled by the Company and the options were reinstated in the respective officer’s names.
Stock Options Awarded Outside of the 2005 Plan and the 2008 Plan
From December 2005 through May 2007, the Company granted 2,760,000 options to three directors and one consultant outside of the 2005 Plan and the 2008 Plan at strike prices ranging from $0.12 to $0.17. All of these options have vested through December 31, 2009, and $390,000 in compensation expense has been recognized in the financial statements of the Company through that date.
The compensation expense related to all previously granted, non-vested options not yet recognized under all option plans amounted to $500,288 as of December 31, 2009, which compensation expense is expected to be recognized over the next two quarters.
Additional information about the Company’s stock option plans is summarized below:
                                                 
    December 2009     June 2009  
            Weighted Average             Weighted Average  
            Exercise     Grant Date             Exercise     Grant Date  
    Options     Price     Fair Value     Options     Price     Fair Value  
Outstanding at beginning of period
    75,669,374     $ 0.057     $ 0.049       9,560,000     $ 0.103     $ 0.107  
Granted
                          73,850,000       0.050       0.036  
Rescinded (Exercised)
    7,640,626       0.050       0.036       (7,673,986 )     0.050       0.036  
Forfeited
                          (66,640 )     0.050       0.036  
 
                                   
Outstanding at end of year
    83,310,000     $ 0.056     $ 0.044       75,669,374     $ 0.057     $ 0.049  
 
                                   
Options exercisable at end of period
    69,481,878     $ 0.057     $ 0.046       47,992,293     $ 0.060     $ 0.050  
 
                                   

 

 


 

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of between 4.0% and 4.95%, volatility between 60% and 456% and expected lives of ten years. All options granted have a maximum three year service period.
Not included in the table above, but included in consolidated compensation expense, are options issued by our subsidiaries to purchase shares of the subsidiaries’ common stock in the future or accept cash settlements in exchange for the increased value of any vested subsidiary options. Compensation expense for these options is calculated by comparing our subsidiaries to comparable publicly traded companies in their industry for stock volatility purposes and using the Black-Scholes option-pricing model.
6. Business Segments
The Company analyzes its assets, liabilities, cash flows and results of operations by operating unit or subsidiary. In the case of our subsidiary companies, the Company relies on local management to analyze each of its controlled subsidiaries and report to us based on a consolidated entity. As a result, the Company will make its financial decisions based on the overall performance of its direct subsidiaries. Our subsidiaries derive their revenues and cash flow from different activities, (i) engineering and environmental remediation services in the case of Safety, (ii) design, installation and maintenance of electronic security systems in the case of Nexus, and (iii) sales of radiological detection products and services in the case of PMX.
The following tables reflect the Company’s segments for the three months ended December 31, 2009 and 2008, without regard to minority interests:
                                         
For the Three Months Ended December 31, 2009  
Homeland Security   Holding     Services     Services     Products        
Capital Corporation -   Company     Company     Company     Company        
Consolidated   (HSCC)     (Safety)     (Nexus)     (PMX)     Consolidated  
 
                                       
Revenues
  $     $ 22,344,769     $ 3,209,146     $ 1,018,500     $ 26,572,415  
Gross margin
          4,457,618       1,272,102       40,740       5,770,460  
Operation expenses
    385,135       2,305,371       304,263       22,699       3,017,468  
Depreciation expense
          638,687       25,667             664,354  
Other income (expense) — net
    (536,128 )     (67,325 )     (11,956 )           (615,409 )
Income tax (benefit) expense
    (469,296 )     641,425                   172,129  
Net income (loss) from continuing operations
    (451,967 )     804,810       930,216       18,041       1,301,100  
Current assets
    166,912       20,166,258       3,383,327       750,605       24,467,102  
Total assets
    101,159       31,343,452       3,620,303       750,605       35,815,519  
Interest expense
    (429,955 )     (59,325 )     (1,705 )           (490,985 )
Capital expenditures
          110,108       52,013             162,121  

 

 


 

                                         
For the Three Months Ended December 31, 2008  
Homeland Security   Holding     Services     Services     Products        
Capital Corporation -   Company     Company     Company     Company        
Consolidated   (HSCC)     (Safety)     (Nexus)     (PMX)     Consolidated  
 
                                       
Revenues
  $     $ 21,096,372     $ 1,114,289     $ 1,800     $ 22,212,461  
Gross margin
          3,461,847       267,865       1,800       3,731,512  
Operation expenses
    744,483       1,736,713       278,854       124,246       2,884,296  
Depreciation expense
    2,400       478,211       22,641             503,252  
Other income (expense) — net
    (521,788 )     (85,494 )     (3,733 )           (611,015 )
Income tax (benefit) expense
          143,000                   143,000  
Net income (loss) from continuing operations
    (1,268,671 )     1,018,429       (37,363 )     (122,446 )     (410,051 )
Current assets
    128,954       23,664,296       1,960,382       2,495       25,756,127  
Total assets
    827,457       34,033,548       2,151,187       2,495       37,014,687  
Interest expense
    (431,093 )     (68,652 )     (4,792 )           (504,537 )
Capital expenditures
          134,289                   134,289  
The following tables reflect the Company’s segments for the six months ended December 31, 2009 and 2008, without regard to minority interests:
                                         
For the Six Months Ended December 31, 2009  
Homeland Security   Holding     Services     Services     Products        
Capital Corporation -   Company     Company     Company     Company        
Consolidated   (HSCC)     (Safety)     (Nexus)     (PMX)     Consolidated  
 
                                       
Revenues
  $     $ 40,432,354     $ 5,292,003     $ 1,697,500     $ 47,421,857  
Gross margin
          7,398,476       1,850,286       67,900       9,316,662  
Operation expenses
    1,163,042       4,615,603       514,974       22,699       6,316,318  
Depreciation expense
          988,299       33,888             1,022,187  
Other income (expense) — net
    (1,083,299 )     (127,591 )     (9,732 )           (1,220,622 )
Income tax (benefit) expense
    (567,774 )     770,058                   202,284  
Net income (loss) from continuing operations
    (1,678,567 )     896,925       1,291,692       45,201       555,251  
Current assets
    166,912       20,166,258       3,383,327       750,605       24,467,102  
Total assets
    101,159       31,343,452       3,620,303       750,605       35,815,519  
Interest expense
    (873,521 )     (102,598 )     (4,658 )           (980,777 )
Capital expenditures
          125,182       75,622             200,804  
                                         
For the Six Months Ended December 31, 2008  
Homeland Security   Holding     Services     Services     Products        
Capital Corporation -   Company     Company     Company     Company        
Consolidated   (HSCC)     (Safety)     (Nexus)     (PMX)     Consolidated  
 
                                       
Revenues
  $     $ 37,682,248     $ 2,184,482     $ 12,962     $ 39,879,692  
Gross margin
          5,803,021       760,199       2,583       6,565,803  
Operation expenses
    2,305,341       3,644,395       701,981       220,254       6,871,971  
Depreciation expense
    4,800       653,878       26,378             685,056  
Other income (expense) — net
    (1,037,578 )     (169,439 )     (9,900 )           (1,216,917 )
Income tax (benefit) expense
          143,000                   143,000  
Net income (loss) from continuing operations
    (3,347,719 )     1,192,309       21,940       (217,671 )     (2,351,141 )
Current assets
    128,954       23,664,296       1,960,382       2,495       25,756,127  
Total assets
    827,457       34,033,548       2,151,187       2,495       37,014,687  
Interest expense
    (859,032 )     (135,755 )     (11,402 )           (1,006,189 )
Capital expenditures
          307,514       5,807             313,321  

 

 


 

7. Income (Loss) Per Share
The basic income (loss) per share was computed by dividing the net income or loss applicable to the Company’s common stockholders by the weighted average shares of Common Stock outstanding during each period.
Diluted earnings per share are computed using outstanding shares of Common Stock plus the Preferred Shares, Common Stock options and warrants that can be exercised or converted, as applicable, into Common Stock. Diluted earnings per share are not indicated for the three month period ending December 31, 2008 and the six month periods ending December 31, 2009 and 2008 because these periods indicate losses and the computation would be anti-dilutive.
The reconciliations of the basic and diluted income (loss) Per Share for the income (loss) attributable to the Company’s shareholders are as follows:
                                 
    Three Months Ended December 31,     Six Months Ended December 31,  
    2009     2008     2009     2008  
 
                               
Basic and Diluted Earnings (Loss) Per Share:
                               
Income (Loss) (Numerator)
  $ 1,224,576     $ (344,252 )   $ 449,554     $ (2,238,872 )
Less: Series H Preferred Stock beneficial conversion feature
    (3,681 )     (3,681 )     (7,362 )     (7,362 )
Less: Preferred stock dividends
    (402,279 )     (356,910 )     (804,559 )     (713,818 )
 
                       
Loss attributable to common stockholders
  $ 818,616     $ (704,843 )   $ (362,367 )   $ (2,960,052 )
 
                       
 
                               
Shares (Denominator)
                               
Weighted-average number of common shares:
                               
Basic
    53,270,160       47,506,560       53,270,160       48,183,683  
Diluted
    536,203,500       47,506,560       53,270,160       48,183,683  
 
                               
Earnings Per Common Share
                               
 
                       
Basic income (loss) per share
  $ 0.02     $ (0.01 )   $ (0.01 )   $ (0.06 )
 
                       
Diluted loss per share
  $ 0.00     $ (0.01 )   $ (0.01 )   $ (0.06 )
 
                       
8. Cash Flows
Supplemental disclosure of cash flow information for the six month periods ending December 31, 2009 and 2008, are as follows:
                 
    Six Months Ended December 31,  
    2009     2008  
Cash paid during the period for:
               
Interest
  $ 107,256     $ 147,157  
Taxes
  $ 6,947     $  
 
               
Supplemental disclosure for noncash investing and financing activity:
Temporary impairment of value of securities available for sale
  $ (55,413 )   $ (1,641,602 )
Dividends accrued on Perferred Stock
  $ (804,559 )   $ (713,818 )
Dividends recognized from beneficial conversion feature
  $ (7,362 )   $ (7,362 )
Purchase of treasury stock for notes
  $     $ (250,000 )

 

 


 

9. Related Party Transactions
Safety leases approximately 21,000 square feet of office space from a company controlled by our President. The Company recognized rent expense under this agreement of $172,012 and $172,014 during the six month periods ending December 31, 2009 and 2008, respectively.
At December 31, 2009, the Company has a promissory note due to our President in the amount of $51,370, including accrued interest of $1,370, bearing interest at 5% per annum and is due on or before February 19, 2010. Interest expense related to this note was $1,260 for the six months ended December 31, 2009.
On June 1, 2007, the Company loaned $500,000 to SAAH, an entity controlled by our Chairman and Chief Executive Officer. The loan is evidenced by a note bearing 5% interest per annum and is due on or before May 31, 2011, with no prepayment penalties. The loan is guaranteed in its entirety by our Chairman and Chief Executive Officer. At December 31, 2009 and June 30, 2009, the balance of the note, including interest, was $421,453 and $412,127, respectively. Interest income related to this note was $9,326 and $9,593 for the six month periods ended December 31, 2009 and 2008, respectively.
On October 29, 2007, the Company entered into an agreement with SAAC (now known as UEI), pursuant to which it received a monthly fee of up to $7,500 for providing SAAC with office space and certain office and administrative services for 24 months. Certain employees of the Company performed required services pursuant to such agreement. The Company has earned $30,000 and $45,000 for the aforementioned services in each of the six month periods ended December 31, 2009 and 2008, respectively. At December 31, 2009, the Company had a receivable due of $40,000 related to these services. This amount was paid in its entirety on January 6, 2010.
10. Series H Convertible Preferred Stock
In March 2008, the Company entered into a stock purchase agreement with YA Global Investments, L.P. (“YA”) pursuant to which the Company sold to YA 10,000 shares of its Series H Convertible Preferred Stock (“Series H Stock”). The Series H Stock is convertible into shares of Common Stock at an initial ratio of 33,333 shares of Common Stock for each share of Series H Stock, subject to adjustments, including Safety achieving certain earnings milestones, as defined, for the calendar years ending December 31, 2009 and 2008.
Safety operates its business on a fiscal year ending June 30. Safety achieved the first milestone for the calendar year ending December 31, 2008. However, based upon information available as of the date of this filing, the second financial milestone for the calendar year ended December 31, 2009, has not been satisfied, resulting in a potential adjustment to the conversion ratio yielding approximately 56,300 shares of Common Stock for each share of Series H Stock, or approximately a potential additional 230,000,000 shares of our Common Stock in the aggregate.
Management is currently discussing with YA the possibility of a waiver or amendment of any adjustment to the Series H Stock conversion ratio, however there can be no assurances YA will waive or amend the adjustment, if any, to the Series H Stock conversion ratio. YA has not exercised its conversion rights as of the date of this filing.
11. Continuing Operations
The primary source of financing for the Company since its inception has been through the issuance of equity and debt securities. The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of December 31, 2009, the Company has a stockholders’ deficit of $2,372,697. The Company had net income (loss) of $555,251 and ($2,351,141) during the six months ended December 31, 2009 and 2008, respectively. Management recognizes that it will be necessary to continue to generate positive cash flow from operations and have availability to other sources of capital to continue as a going concern and continues to implement measures to increase profitability in our operations and reduce certain expenses.
12. Subsequent Events
In June 2009 the Company entered into an agreement YA extending the due date on its senior notes payable, and accrued interest, to YA from March 14, 2010 until October 1, 2010 for $2,500,000 and April 1, 2011 for $10,560,000. In exchange for the extension agreement, the Company agreed to an increase in the interest rate, from 13% to 15%, on the senior notes payable and certain other debt due to YA, effective January 1, 2010, if the Company failed to secure a certain contract by March 2010. In December 2009, the Company was informed that it had been eliminated from the award process for this contract. Accordingly, the Company will begin recording interest expense at the increased rate effective January 1, 2010.

 

 


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including, without limitation, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. The forward-looking information is based on various factors and was derived using numerous assumptions. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as “believe,” “anticipate,” “plan,” “seek,” “expect,” “intend” and similar expressions.
Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including those set forth in Part I, Item 1A, entitled “Risk Factors,” of our Annual Report on Form 10-K for the year ended June 30, 2009, as may be updated and supplemented by Part II, Item 1A, entitled “Risk Factors,” of this Quarterly Report on Form 10-Q, and elsewhere in this report. These factors as well as other cautionary statements made in this Quarterly Report on Form 10-Q, should be read and understood as being applicable to all related forward-looking statements wherever they appear herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. In this report, the “Company,” “the Holding Company,” “we,” “us,” and “our” refer to Homeland Security Capital Corporation.
Overview
The Company focuses on the acquisition and development of businesses whose primary operations are in the CBRNE incident response and security marketplace of the homeland security industry. The Company’s near term focus is to grow these businesses both organically and through complementary acquisitions. The Company targets growth companies that are generating revenues but face challenges in scaling their businesses to capitalize on homeland security opportunities. The Company will enhance the operations of these companies by helping them generate new business, grow revenues, build infrastructure and improve cash flows.
The Company currently conducts its ongoing operations through one wholly owned subsidiary and two majority-owned subsidiaries. Our wholly owned subsidiary Safety, is a provider of global environmental, hazardous material and radiological infrastructure remediation and advanced construction services in the United States and the United Kingdom. Our majority owned subsidiaries include Nexus, a security integration company having a presence in the Mid-Atlantic region with a focus on the New York City, New Jersey and Pennsylvania markets and PMX, a company focused on radiological detection and isotope identification.

 

 


 

Results of Operations
Three Month Period Ended December 31, 2009 as Compared to the Three Month Period Ended December 31, 2008
Contract revenue
For the three months ended December 31, 2009, the Company recorded contract revenue of $26,572,415 as compared to $22,212,461 recorded for the three months ended December 31, 2008. The increase of $4,359,954 is further outlined below:
                                 
    Three Months Ended December 31,        
    2009     2008     Increase (Decrease)  
Holding Company
  $     $     $        
Safety
    22,344,769       21,096,372       1,248,397       5.9 %
Nexus
    3,209,146       1,114,289       2,094,857       188.0 %
PMX
    1,018,500       1,800       1,016,700       56,483.3 %
 
                       
 
  $ 26,572,415     $ 22,212,461     $ 4,359,954       19.6 %
 
                       
The overall increase of $4,359,954 or 19.6% reflects increased revenues in all our subsidiaries attributable to both expanded services within existing contracts and services provided under new contracts as compared to the prior year. The significant increase in revenues for PMX is as a result of shipments to a significant customer that started in January 2009.
Contract cost
For the three months ended December 31, 2009, the Company recorded contract cost of $20,801,955 as compared to $18,480,949 recorded for the three months ended December 31, 2008. The increase of $2,321,006 is further outlined below:
                                 
    Three Months Ended December 31,        
    2009     2008     Increase (Decrease)  
Holding Company
  $     $     $        
Safety
    17,887,151       17,634,525       252,626       1.4 %
Nexus
    1,937,044       846,424       1,090,620       128.9 %
PMX
    977,760       0       977,760        
 
                       
 
  $ 20,801,955     $ 18,480,949     $ 2,321,006       12.6 %
 
                       
The overall increase of $2,321,006, or 12.6%, are costs associated with the additional contract revenues noted above. Our gross profit on contract revenue improved from 17.0% for the three months ended December 31, 2008 to 21.7% for the three months ended December 31, 2009. This improved margin is mainly due to a more effective management of contract costs at all our subsidiaries.
Operating expenses
For the three months ended December 31, 2009, the Company recorded operating expenses of $3,681,822 as compared to $3,387,548 recorded for the three months ended December 31, 2008. The increase of 294,274 is further outlined below:
                                 
    Three Months Ended December 31,        
    2009     2008     Increase (Decrease)  
Holding Company
  $ 385,135     $ 746,883     $ (361,747 )     (48.4 %)
Safety
    2,944,058       2,214,924       729,133       32.9 %
Nexus
    329,930       301,495       28,435       9.4 %
PMX
    22,699       124,246       (101,547 )     (81.7 %)
 
                       
 
  $ 3,681,822     $ 3,387,548     $ 294,274       8.7 %
 
                       
The overall increase of $294,274, or 8.7%, is primarily due to increased personnel costs during the three months ended December 31, 2009 due to an increase in the number of employees required to support increased operating levels at Safety and Nexus partially offset by expense reduction in the holding company and PMX’s reductions of operating expenses due to operating efficiencies gained because Safety oversees certain operations of PMX.

 

 


 

Other income and expense
For the three months ended December 31, 2009, the Company recorded net other expenses of $615,409 as compared to $611,015 recorded for the three months ended December 31, 2008. The increase in net other expenses of $4,394 is further outlined below by operating unit and functional line item:
                                 
    Three Months Ended December 31,        
    2009     2008     (Increase) Decrease  
Holding Company
  $ (536,128 )   $ (521,788 )   $ (14,340 )     (2.7 %)
Safety
    (67,325 )     (85,494 )     18,169       21.3 %
Nexus
    (11,956 )     (3,733 )     (8,223 )     (220.3 %)
PMX
                       
 
                       
 
  $ (615,409 )   $ (611,015 )   $ (4,394 )     (0.7 %)
 
                       
                                 
    Three Months Ended December 31,        
    2009     2008     (Increase) Decrease  
Interest expense
  $ (490,985 )   $ (504,537 )   $ 13,552       2.7 %
Amortization of debt offering costs
    (126,750 )     (123,092 )     (3,658 )     (3.0 %)
Amortization of debt discount
    (12,018 )     (12,019 )     1        
Interest and other income
    14,344       28,633       (14,289 )     (49.9 %)
 
                       
 
  $ (615,409 )   $ (611,015 )   $ (4,394 )     (0.7 %)
 
                       
The overall increase in net other expenses of $4,394, or 0.7%, mainly reflects the consistency of interest costs, amortization expense and interest and other income between the periods.
Net income (loss)
As a result of the foregoing, the Company recorded net income of $1,301,100 for the three months ended December 31, 2009 as compared to a net loss of $410,051 for the three months ended December 31, 2008. These results reflect larger margins on increased contract revenues and reductions in operating costs during the current period.
Six Month Period Ended December 31, 2009 as Compared to the Six Month Period Ended December 31, 2008
Contract revenue
For the six months ended December 31, 2009, the Company recorded contract revenue of $47,421,857 as compared to $39,879,692 recorded for the six months ended December 31, 2008. The increase of $7,542,165 is further outlined below:
                                 
    Six Months Ended December 31,  
    2009     2008     Increase (Decrease)  
Holding Company
  $     $     $        
Safety
    40,432,354       37,682,248       2,750,106       7.3 %
Nexus
    5,292,003       2,184,482       3,107,521       142.3 %
PMX
    1,697,500       12,962       1,684,538       12,996.0 %
 
                       
 
  $ 47,421,857     $ 39,879,692     $ 7,542,165       18.9 %
 
                       
The overall increase of $7,542,165, or 18.9%, reflects increased revenues in all our subsidiaries attributable to both expanded services within existing contracts and services provided under new contracts as compared to the prior year. The significant increase in revenues for PMX is as a result of shipments to a significant customer that started in January 2009.

 

 


 

Contract cost
For the six months ended December 31, 2009, the Company recorded contract cost of $38,105,195 as compared to $33,313,889 recorded for the six months ended December 31, 2008. The increase of $4,791,306 is further outlined below:
                                 
    Six Months Ended December 31,  
    2009     2008     Increase (Decrease)  
Holding Company
  $     $     $        
Safety
    33,033,878       31,879,227       1,154,651       3.6 %
Nexus
    3,441,717       1,424,283       2,017,434       141.6 %
PMX
    1,629,600       10,379       1,619,221       15,600.9 %
 
                       
 
  $ 38,105,195     $ 33,313,889     $ 4,791,306       14.4 %
 
                       
The overall increase of $4,791,306, or 14.4%, are costs associated with the additional contract revenues noted above. Our gross profit on contract revenue improved from 16.5% for the six months ended December 31, 2008 to 19.6% for the six months ended December 31, 2009. This improved margin is mainly due to a more effective management of contract costs at all our subsidiaries.
Operating expenses
For the six months ended December 31, 2009, the Company recorded operating expenses of $7,338,505 as compared to $7,557,027 recorded for the six months ended December 31, 2008. The decrease of $218,522 is further outlined below:
                                 
    Six Months Ended December 31,  
    2009     2008     Increase (Decrease)  
Holding Company
  $ 1,163,042     $ 2,310,141     $ (1,147,099 )     (49.7 %)
Safety
    5,603,902       4,298,273       1,305,629       30.4 %
Nexus
    548,862       728,359       (179,497 )     (24.6 %)
PMX
    22,699       220,254       (197,555 )     (89.7 %)
 
                       
 
  $ 7,338,505     $ 7,557,027     $ (218,522 )     (2.9 %)
 
                       
The overall decrease of $218,522, or 2.9%, is primarily due to compensation expense associated with the accelerated vesting of stock options during the period ended December 31, 2008 not present in 2009 (Holding Company), offset by increased personnel costs during the six months ended December 31, 2009 due to an increase in the number of employees required to support increased operating levels (Safety). Nexus’ operating expenses decreased as a result of streamling overhead expenditures and PMX’s operating expense decreased due to operating efficiencies gained because Safety oversees certain operations of PMX. Operating expenses were 15.5% of contract revenue for the six months ended December 31, 2009 and 19.0% of contract revenues for the six months ended December 31, 2008.
Other income and expense
For the six months ended December 31, 2009, the Company recorded net other expenses of $1,220,622 as compared to $1,216,917 recorded for the six months ended December 31, 2008. The increase in net other expense of $3,705 is further outlined below by operating unit and functional line item:
                                 
    Six Months Ended December 31,  
    2009     2008     (Increase) Decrease  
Holding Company
  $ (1,083,299 )   $ (1,037,578 )   $ (45,721 )     (4.4 %)
Safety
    (127,591 )     (169,439 )     41,848       24.7 %
Nexus
    (9,732 )     (9,900 )     168       1.7 %
PMX
                       
 
                       
 
  $ (1,220,622 )   $ (1,216,917 )   $ (3,705 )     (0.3 %)
 
                       

 

 


 

                                 
    Six Months Ended December 31,  
    2009     2008     (Increase) Decrease  
Interest expense
  $ (980,777 )   $ (1,006,189 )   $ 25,412       2.5 %
Amortization of debt offering costs
    (262,342 )     (246,185 )     (16,157 )     (6.6 %)
Amortization of debt discount
    (24,037 )     (24,037 )            
Currency loss
    (151 )           (151 )      
Interest and other income
    46,685       59,494       (12,809 )     (21.5 %)
 
                       
 
  $ (1,220,622 )   $ (1,216,917 )   $ (3,705 )     (0.3 %)
 
                       
The overall increase in net other expenses of $3,705, or 0.3%, mainly reflects the consistency of interest costs, amortization expense and other income between the periods.
Net income (loss)
As a result of the foregoing, the Company recorded net income of $555,251 for the six months ended December 31, 2009 as compared to a net loss of $2,351,141 for the six months ended December 31, 2008. These results reflect larger margins on increased contract revenues and reductions in operating costs during the current period.
Liquidity and Capital Resources
The primary source of financing for the Company since its inception has been through the issuance of common stock, preferred stock and convertible debt. The Company had cash on hand of $1,087,259, working capital of $4,986,240 and approximately $5,800,000 available for borrowing on our credit line at December 31, 2009. Our primary needs for cash are to fund our ongoing operations and to have cash available to make additional acquisitions of businesses that provide products and services in our target industries. While we believe that we have sufficient cash on hand and available credit to satisfy our current operating commitments, we will require significant additional funding in order to make additional acquisitions.
During the six months ended December 31, 2009, we had a net decrease in cash of $1,269,275. Our sources and uses of funds were as follows:
Cash Flows From Operating Activities
We used net cash of $2,448,089 in our operating activities during the six months ended December 31, 2009 primarily from income of $2,422,245 (net income of $555,251 adjusted for non-cash items of $1,866,994) offset by net uses of cash of $4,870,334 due to changes in our operating assets and liabilities.
Cash Flows From Investing Activities
We used net cash of $151,304 in our investing activities during the six months ended December 31, 2009, related to the purchase of fixed assets of $200,804 reduced by $21,500 in proceeds from the sale of fixed assets plus net working assets of $28,000 acquired by minority investment in a controlled subsidiary.
Cash Flows From Financing Activities
We provided net cash of $1,343,328 from our financing activities during the six months ended December 31, 2009, consisting of proceeds from borrowing for fixed asset purchases of $59,200 and net borrowing on Safety’s line of credit of $1,691,000 to reduce accounts payable, offset by repayment of installment notes payable of $406,942.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, also known as special purpose entities.

 

 


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide information required by this item.
Item 4(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
During the most recently completed fiscal quarter, there has been no significant change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act.

 

 


 

PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
As of December 31, 2009, we are not subject to any material legal proceedings. From time to time, however, we and/or our subsidiaries may become involved in litigation and other legal proceedings relating to claims arising from our operations in the normal course of business
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to provide information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibits.
         
Exhibit   Description
  31.1    
Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
       
 
  31.2    
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
       
 
  32.1    
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
       
 
  32.2    
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
     
*   Exhibit filed with this Quarterly Report

 

 


 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed in its behalf by the undersigned, thereunto duly authorized.
         
  HOMELAND SECURITY CAPITAL CORPORATION
 
 
Date: February 22, 2010  /s/ Michael T. Brigante    
  Michael T. Brigante   
  (Authorized Officer and Principal Financial Officer)