U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2010
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 000-23279
Homeland Security Capital Corporation
(Exact Name of Registrant as Specified in Charter)
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1005 North Glebe Road, Suite 550 |
Delaware
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52-2050585
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Arlington, Virginia 22201 |
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(State or other jurisdiction
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(IRS Employer
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(Address of principal executive offices) |
of incorporation)
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Identification No.)
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Registrants telephone number, including area code: (703) 528-7073
Common Stock, par value $.001 per share
(Title of Class)
Securities Registered under Section 12(b) of the Exchange Act: Common Stock, $0.001 par value,
OTCBB
Securities Registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes o No þ
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 (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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S- K
(§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendments to this Form 10-K. þ
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.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant on December 31, 2009 (as of the last business day of the registrants most recently
completed second fiscal quarter), was $3,197,125 based on the closing price of the registrants
common stock on Over-the-Counter Electronic Bulletin Board of $0.145 per share.
There were 54,194,268 shares of common stock outstanding as of September 24, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
None.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Information included or incorporated by reference in this filing may contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). This information may involve known and unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially different from the
future results, performance or achievements expressed or implied by any forward-looking statements.
Forward-looking statements, which involve assumptions and describe our future plans, strategies and
expectations, are generally identifiable by use of the words may, will, should, expect,
anticipate, estimate, believe, intend or project or the negative of these words or other
variations on these words or comparable terminology.
This filing contains forward-looking statements, including statements regarding, among other
things, our (a) projected revenues and profitability, (b) growth strategies, (c) future financing
plans and (d) anticipated needs for working capital. These statements may be found under
Managements Discussion and Analysis of Financial Condition and Results of Operations and
Business, as well as in this annual report generally. Actual events or results may differ
materially from those discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under Risk Factors beginning on page 19 and
matters described in this filing generally. In light of these risks and uncertainties, there can be
no assurance that the forward-looking statements contained in this filing will in fact occur.
3
PART I
ITEM 1. BUSINESS
The Company
Homeland Security Capital Corporation (together with any subsidiaries shall be referred to as
the Company, we, us and our) is an international provider of specialized technology-based
radiological, nuclear, environmental, disaster relief and electronic security solutions to
government and commercial customers. The Company is engaged in the strategic acquisition,
operation, development and consolidation of companies operating in the chemical, biological,
radiological, nuclear and explosive, or CBRNE, incident response and security marketplaces within
the homeland security industry. We are focused on creating long-term shareholder value by taking
controlling interests in and developing our subsidiary companies through superior management,
operations, marketing and finance. The Companys Chairman and Chief Executive Officer is former
Congressman C. Thomas McMillen, who served three consecutive terms in the U.S. House of
Representatives representing the 4th Congressional District of Maryland. We operate
businesses that provide cutting edge 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.
At June 30, 2010, we had approximately 476 employees that delivered our products and services
from 22 locations, including one international location. Our fiscal year 2010 revenues were
approximately $97.9 million, and our fiscal year 2010 after tax net income attributable to our
stockholders was approximately $1.9 million. At June 30, 2010, our funded backlog of approximately
$89.1 million was diversified in terms of customer concentration, end markets served and products
and services provided. Approximately 73.7% of our backlog was comprised of cost-reimbursable
contracts and approximately 26.3% of fixed-price contracts. Most of our fixed-price contracts
contain some cost risk-sharing mechanisms, such as escalation or price adjustments for items such
as labor and product prices.
Our History
The Company was incorporated in Delaware in August 1997 under the name Celerity Systems,
Inc. The Companys original business was to develop and manufacture digital set top boxes and
digital video servers for interactive television and high speed internet networks, or interactive
video. The Company also designed, developed, installed, and supported CD-ROM software products for
business applications.
On June 3, 2003, the Company elected to become a business development company, or a BDC, to be
regulated pursuant to Section 54 of the Investment Company Act of 1940, as amended. A BDC is an
investment company designed to assist eligible portfolio companies with capital formation and
management advice. Accordingly, the Company changed its business plan to primarily seek investments
in developing companies.
On December 30, 2005, the stockholders of the Company voted to amend the Certificate of
Incorporation of the Company to change its name to Homeland Security Capital Corporation and
voted to withdraw the Companys election as a BDC. Accordingly, the Company changed its business
plan to primarily seek acquisitions of and joint ventures with companies that provide homeland
security products and services.
On February 7, 2006, the Company organized Nexus Technologies Group, Inc., or Nexus, and
purchased $3,434,000 of Nexus convertible preferred stock. Simultaneously, Nexus acquired 100% of
the common stock of Corporate Security Solutions, Inc., a security integration firm having
operations in the Mid-Atlantic region with a focus on the New York City market. At June 30, 2010,
the Company owned approximately 93% of the outstanding capital stock of Nexus, with the remaining
ownership distributed among former management and directors of Nexus.
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On September 15, 2006, the Company formed Polimatrix, Inc., or PMX, and, on September 18,
2006, entered into a U.S.-based joint venture with Polimaster, Inc., or PMR, a company focused on
radiological detection and isotope identification. At June 30, 2010, the Company owned 51% of PMX
and PMR owned 49% of PMX.
On March 13, 2008, the Company entered into an Agreement and Plan of Merger and Stock Purchase
Agreement, or the Safety Purchase Agreement, with Safety & Ecology Holdings Corporation, or Safety,
and certain persons named therein. Pursuant to the Safety Purchase Agreement, the Company purchased
10,550,000 shares of Safetys Series A Convertible Preferred Stock for an aggregate purchase price
of $10,550,000. The Company effectively acquired 100% of Safety, subject to future management
equity incentive programs and, at June 30, 2010, owned 100% of the outstanding capital stock of
Safety.
Business Overview
We are building consolidated enterprises (platform companies) through the acquisition and
integration of businesses in the homeland security industry, particularly businesses focused on
CBRNE incident response. The Company has focused on consequence management entities that provide
specialized technology-based radiological, nuclear, environmental and chemical, disaster relief and
security solutions to government agencies and commercial customers. Management believes that CBRNE
incident response and consequence management are rapidly growing, underserved sectors within the
homeland security industry. We believe we can create shareholder value by acquiring controlling
interests in companies that provide CBRNE and consequence management products and services and
helping them develop through superior management, operations and strategic acquisitions. Our
strategy is designed to foster significant growth at our platform companies by providing leadership
and counsel, capital support and financial expertise, strategic guidance and operating discipline,
access to best practices and industry knowledge. We generally target emerging and established
companies in all sectors of the homeland security industry with a specific focus on companies that
have specific applications in incident response and consequence management. These target companies
are typically generating revenues from promising technologies and/or products and services but face
challenges in scaling their businesses to capitalize on homeland security opportunities.
Our goal is to become a leading consolidator of product and service companies, whose primary
focus is CBRNE incident response, consequence management and preventative security integration. We
believe that our strong intergovernmental relationships, the operating and acquisition expertise of
our management team, and our ability to address the needs of our subsidiary management teams allow
us to achieve our goal of being a consolidator of choice of acquisition candidates in the
homeland security industry.
In order to achieve our goal, we have focused on:
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identifying acquisition candidates which meet our consolidation
criteria, including the presence of a strong management team as a
platform company; |
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attracting and acquiring companies through implantation of our
decentralized management approach coupled with strong performance
incentives including the use of financially attractive earn-out
arrangements and contingent purchase payments for selling
managers; |
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achieving operating efficiencies and synergies by combining
non-customer related administrative functions, implementing system
and technology improvements and purchasing products and services
in large volumes; and |
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achieving organic growth in our platform companies through
cross-selling, targeted marketing and streamlined management and
acquiring follow-on companies that provide complementary products
or services to our platform companies. |
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We offer a range of management and operational services to each of our subsidiaries through a
team of dedicated professionals. Our subsidiaries compensate our holding company for such services.
We engage in an ongoing planning and assessment process through our involvement and engagement in
the development of our platform companies, and our executives, directors and advisors provide
mentoring, advice and guidance to develop the management of these companies.
In general, we expect to hold our ownership interest in our platform companies as long as we
believe that such companies meet our strategic criteria and that we can leverage our resources to
assist them in achieving superior financial performance and value growth. When a platform company
or other subsidiary no longer meets our strategic criteria, we will consider divesting the company
and redeploying the capital realized in other acquisitions and development opportunities. We may
achieve liquidity events through a number of means, including sales of an entire company or sales
of our interest in a company, which may include, in the case of public companies owned by us, sales
in the open market or in privately negotiated sales and public offerings of the companys
securities. We may also, in certain cases, take our platform companies public through a registered
spin-off, rights offering or stock dividend distribution by distributing our subsidiarys stock
held by us to our public stockholders and subsequently registering such shares with the United
States Securities and Exchange Commission, or the Commission.
Our Industry
We believe the homeland security industry, including CBRNE incident response and consequence
management, is a fast growing industry in the United States. We believe that the billions of
dollars of governmental and private sector expenditures, especially in light of the American
Recovery and Reinvestment Act, or the ARRA, should result in increased demand for our products and
services. We also believe that this anticipated growth should create attractive acquisition
opportunities with potential for capital appreciation.
In 2009, as part of ARRA spending, the Federal government announced a $13.4 billion stimulus
spending program to be administered by the Department of Energys Environmental Management, or
DOE-EM, which received $6.0 billion and the Department of Defense, or DoD, branches which received
$7.4 billion for FY 2009. The stimulus spending program is designed to provide funding for a
variety of shovel-ready projects managed by the DOE and the DoD. The DOE and DoD have sought and
continue to seek providers who have assets in place to immediately start these projects. We project
the DOE and DoD will spend approximately $3.4 billion over the next three years on environmental,
decommissioning, construction and security projects at existing DOE and DoD managed facilities, at
which we already have ongoing work and contracting vehicles. We foresee that a significant portion
of future DOE and DoD environmental expenditures will continue to be directed to cleaning up
domestic military bases and to restoring former nuclear weapons facilities. Both agencies have long
recognized the need to stabilize and safely remediate sites contaminated with hazardous and
radioactive waste, often located near population centers.
Our core services include environmental remediation and restoration, regulatory compliance,
facilities management, facility deactivation, decommissioning and demolition, emergency response,
design and construction services and security integration to U.S. government agencies such as the
DOE, the DoD, the Environmental Protection Agency, or the EPA, the Federal Emergency Management
Agency, or FEMA, the U.S. Army Corps of Engineers and the National Aeronautics and Space
Administration, or NASA.
Our Strategy
We offer the financial, managerial and operational resources to address the challenges facing
our subsidiary companies. We believe that our experience in developing and operating companies
enables us to identify and attract companies with potential for success and to create value for our
stockholders.
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Management and Operational Strategy
We offer management and operational support to our platform companies. We believe these
services provide our companies with significant competitive advantages in their individual markets.
The resources that we provide our companies in order to accelerate their development include the
following:
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Marketing. The identification of the companys market position and
the development and implementation of effective market
penetration, branding and marketing strategies. |
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Business Development. Providing access to the initial reference
customers and external marketing channels that generate growth
opportunities through strategic partnerships, joint ventures or
acquisitions. |
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Technology. The strategic assessment of technology, market
opportunities and trends; the design, development and
commercialization of proprietary technology solutions; and access
to complementary technologies and strategic partnerships. |
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Operations. Significant management interaction to optimize a
companys business, ranging from the establishment of facilities
and administrative processes to the operations and financial
infrastructure a growing enterprise requires. |
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Legal and Financial. The development of appropriate corporate,
legal and financial structures and the expertise to execute a wide
variety of corporate and financial transactions. |
We engage in an ongoing planning and assessment process through our involvement and engagement
in the development of our companies. Our executive officers, directors and advisors provide
mentoring, advice and guidance to develop the management of our companies. Our executive officers
will generally serve on the boards of directors of our subsidiary companies and work with them to
develop and implement strategic and operating plans. Achievement of these plans is measured and
monitored through reporting of performance measurements and financial results within our segments.
We believe our business model provides us with certain competitive advantages. Our
decentralized management approach allows managers of our acquired companies to benefit from the
economies of a larger organization while simultaneously retaining local operational control,
enabling them to provide flexible and responsive service to customers. Such an approach could,
however, limit possible consolidation efficiencies and integration efforts. In addition, although
our management team has experience in acquiring and consolidating businesses, we may have limited
experience in the specific sectors of the homeland security industry that we may select for
consolidation. We, therefore, expect to rely in part upon management of acquired companies, our
directors or advisors who are experienced in the sectors that we may pursue for acquisition and
consolidation.
Operating Strategy
Capitalize on Cross-Selling Opportunities. We leverage our current client relationships by
cross-selling the range of products and services offered by our various platform companies. For
example, we believe cross-selling opportunities will increase as we acquire businesses in various
sectors of the homeland security industry.
Achieve Operating Efficiencies. We achieve operating efficiencies within our various platform
companies. For example, as new businesses are acquired, we believe our existing technology
infrastructure can support additional users. At the corporate level, we also seek to combine
certain administrative functions, such as financial reporting, insurance, employee benefits and
legal support and to realize volume purchasing advantages with respect to travel and other
purchases across our Company.
Leverage Platform Company Autonomy. We conduct our operations on a decentralized basis whereby
management of each platform company will be responsible for its day-to-day operations, sales and
service relationships and the identification of additional acquisition candidates in their
respective sectors. Our senior management will provide the platform companies with strategic
oversight and guidance with
respect to acquisitions, financing, marketing, operations and cross selling opportunities. We
believe that a decentralized management approach will result in better customer service by allowing
management of each platform company the flexibility to implement policies and make decisions based
on the needs of customers. This management approach is in contrast to the traditional consolidation
approach used by other consolidators in which the owners/operators and their employees are often
relieved of management responsibility as a result of complete centralization of management in the
consolidated enterprises.
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Implement Technology. We utilize technology to enhance our efficiency and ability to monitor
our various companies. We believe we will be able to increase the operating margin of combined
acquired companies by using operating and technology systems to improve and enhance the operations
of the combined acquired companies. We believe that many of our acquired companies have not made
material investments in such operating and technology systems because, as independent entities,
they lack the necessary scale to justify the investment. We believe the implantation of such
systems significantly increases the efficiency of our acquired companies.
Management Execution Teams. We utilize the collective experience of all our senior management
disciplines, our directors and advisors to enhance the management efforts of each of our platform
companies. We believe that collectively our solid group of senior management, directors and
advisors with their extensive entrepreneurial experiences, enhances each subsidiary management
group and enables best in class mentoring on marketing, operational, financial and management
functions.
Acquisition Strategy
Identify and Pursue Strategic Consolidation Opportunities. We seek to capitalize upon
consolidation opportunities within the CBRNE incident response, consequence management and security
integration sectors of the homeland security industry by acquiring companies in these growing
sectors that will benefit from economies of scale having some or all of the following
characteristics:
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generating revenues and preferably profits, with established customers; |
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long-term growth prospects for technology-based products and services offered; |
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experienced management team willing to continue managing the enterprise; |
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significant acquisition consideration that is performance-based; and |
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a highly fragmented sector of the homeland security industry characterized by
significant potential smaller acquisition targets with few market leaders in
the sector. |
We believe that the homeland security sectors in which we will pursue consolidation
opportunities are fragmented and often headed by owners/operators who desire liquidity and may be
unable to gain the scale necessary to access the capital markets effectively. These owner/operators
also may not have access to the government markets that are characterized by complex and
bureaucratic processes, protracted sales cycles, and diffused procurement between federal, state
and local levels.
Acquire Complementary Businesses. We intend to acquire businesses that offer additional
expertise and cross-selling opportunities for our current platform companies operations. We also
believe that adding complementary businesses may offer geographic breadth and expand our target
markets. Increasing our presence within geographic regions will allow us to service our clients
more efficiently and cost effectively. As our customers industries continue to consolidate, we
believe that national coverage and technology capabilities will become increasingly important.
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Our Platform Companies
We currently conduct our ongoing operations through one wholly-owned subsidiary, one
majority-owned subsidiary and one joint venture. The following chart provides certain information
about those subsidiaries and the joint venture at June 30, 2010:
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Name, Address And |
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Place Of |
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Ownership |
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Headquarters |
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Formation |
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Percentage |
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Business |
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Safety & Ecology
Holdings Corporation
2800 Solway Road
Knoxville, TN 37931
www.sec-tn.com
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Nevada, USA
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100% |
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Safety & Ecology
Holdings
Corporation is an
international
provider of
environmental,
nuclear and
radiological
infrastructure
remediation,
disaster relief
solutions and
advanced
construction
services. |
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Nexus Technologies
Group, Inc.
7 West Cross Street
Hawthorne, NY 10532
www.nexusna.com
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Delaware, USA
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93%
(remaining 7% owned
by former Nexus
management and
directors)
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Nexus Technologies
Group, Inc.
designs, develops
and installs
integrated security
systems for
government and
commercial clients. |
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Polimatrix, Inc.
1005 North Glebe Road
Suite 550
Arlington, VA 22201
www.polimatrix.com
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Virginia, USA
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51%
(remaining 49%
owned by Polimaster
Inc.)
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Polimatrix, Inc.
markets, sells and
distributes
proprietary
radiological
detection
equipment. |
As a result of our ownership percentages and our control of the boards of directors of the
above subsidiaries and joint venture, we consolidate the results of operations, excluding minority
interests, where applicable.
Company Businesses, Products and Services
From July 1, 2009 through June 30, 2010, our total revenue of $97.9 million were generated
from sales at each of our subsidiaries of: (1) $85.7 million, consisting of environmental
remediation, site cleanup and restoration, demolition and construction services (Safety); (2) $10.2
million, consisting of engineering, design and installation of security systems and related
services (Nexus) and (3) $2.0 million, consisting of product sales and services of radiological
detection devices (PMX). We believe that sales from these products and services will continue to
increase during Fiscal Year 2011, or FY 2011, due mainly to the (i) stimulus spending by DOE, DoD
and the Federal government in general for environmental remediation and clean up and restoration
services provided by Safety; (ii) addition of new customers, increase of geographic footprint and
the growth in our backlog of services provided by Nexus and (iii) continued orders and sales of
products and services by PMX, specifically to the State of Illinois.
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SAFETY & ECOLOGY HOLDINGS CORPORATION
Safety is a provider of global environmental, hazardous and radiological infrastructure
remediation, upgrades and nuclear services in the United States and the United Kingdom. Safetys
main core business areas and service offerings include: (1) decommissioning and remediation
environmental and remedial consultancy services, (2) environmental and consultancy services, (3)
nuclear energy design, build, refurbishment and operational support services; and (4)
instrumentation and measurement technologies.
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Decommissioning and Remediation. Safety offers a full range of services that include:
characterization, decontamination, decommissioning of facilities, soil and groundwater
remediation, infrastructure reduction and demolition, site preparation, excavation, and
remedial system construction; underground and overhead utility installation; electrical and
mechanical installation; security fencing and device installation and upgrades; building
renovation; piping; roadways, parking lots, and drainage system construction/repair; and
landfill remediation and capping. Safety also engages in facility deactivation, demolition
and closure solutions, including: project investigation; radiological pre-engineering;
demolition planning; removing above ground structures and structural components; storing,
testing, certifying, processing and shipping nuclear waste; and abatement of hazardous
materials. Safety has established the ability to implement project management processes to
estimate, execute and complete projects on-time and within budget. The elements of a
successful project execution program are risk management, mitigation, project management
systems and controls, experienced leadership, quality control programs, safety processes
and the ability to develop complex proposals including estimating and innovative solutions. |
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Environmental and Consultancy Services. Safety provides environmental consulting and
staff services that are distinguished and unique among its world-wide competitors. Safety
focuses its service offering on the application and integration of health physics,
industrial hygiene, hazardous material consultancy and safety and health. In addition,
Safety couples its technology with its instrumentation offering, on-site radiological
laboratory capabilities, mobile radiological materials license, and a team of over 250
certified health physicists (CHP), certified industrial hygienists (CIH), engineers
and radiological technicians to provide complete radiological services and consultation. |
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Nuclear Energy Design, Build, Refurbishment and Operations Support Services. Safety
provides comprehensive integrated services to the nuclear energy industry. Safety has a
wide spectrum of technical and engineering expertise and employs professions who bring
innovation and build on practical experience to meet the significant challenges faced by
the nuclear industry. Safety provides specialized services to a wide customer base,
including government agencies, commercial customers and major engineering and construction
companies around the world that are focused in the nuclear new plant deployment
initiative, facility operation, decommissioning and refurbishment. |
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Instrumentation and Measurement Technologies. Safety has developed proven processes and
methodologies to deliver comprehensive project execution services to a wide diversity of
clients. Within Safetys core competencies is a portfolio of technologies offered to
clients as a direct service, a sub-element of project services or as a component of a
technical solution. The primary elements of Safetys technology offering are
instrumentation services and instrumentation technology, both of which are targeted to
field investigations, characterizations of contaminants and clean-up and material
management and disposal solutions. |
Safety has an established history of successful past performance and brand recognition in both
the federal and commercial markets for nuclear cold war facility remediation and project
completion. Safety considers itself a consequence management provider with a focus on remediation
opportunities among legacy sites as well as recurring opportunities for disaster or other accident
sites. By leveraging its unique experience and a comprehensive suite of core competencies, Safety
has earned the reputation as a leading company for executing complex high profile projects in both
established and emerging markets. In the past five years, Safety has expanded its offering
domestically and globally addressing the pressing issues of government owned facilities clean-up
and rebuild programs, non-proliferation, emergency response, anti-terrorism and advanced
construction management.
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Safety addresses the needs of both government and commercial customers as a single source
provider for technology-based nuclear services including engineering, D&D, specialty construction,
logistics, transportation, processing and disposal. At June 30, 2010, Safety had 449 employees in
its domestic and international offices, and has been ranked as high as 12th (2003) among
Engineering News-Records top federal nuclear remediation companies. Safetys project management
expertise and supporting
infrastructure systems have positioned Safety as a trusted service provider to domestic and
international customers. Safety has established a stronghold in these markets utilizing strategic
office locations throughout the U.S. and U.K., while also displaying versatility by executing
critical need programs in remote environments including: hurricane relief in Louisiana; facility
construction and clean-up activities at Christmas Island (Kiritimati); and global emergency and
anti-terrorism response.
Domestically, Safety provides government and commercial organizations the ability to safely
execute radiological and hazardous material projects as energy infrastructure continues to erode
and environmental awareness emerges as a national priority. Safetys specialized work environment
requires high-level expertise combined with consistent delivery of on-time, on-budget results and
an outstanding safety record. Within the U.S. federal government, the DoD, DOE and the Department
of Homeland Security, or DHS, continue to drive demand for radiological and hazardous material
services. Safety has excellent relations and project successes with all three of these important
customers. As a prime or subcontractor, Safety continues to build strong brand recognition and a
reputation for consistent delivery of high-quality, cost-effective, safe and timely results.
Management believes an increased focus on environmental issues and strong demand for legacy
facility remediation will create a strong potential for growth by Safety, as evidenced by the
recent U.S. Congressional approval for full funding of the $6.0 billion budget request for DOEs
continued defense environmental cleanup efforts.
Safety continues to execute its goal of becoming a premier provider for complex radioactive
material remediation and D&D projects. We believe that Safety maintains significant competitive
advantages when competing on specialized DOE project opportunities due to (1) the knowledge level
and experience required in dealing with the complicated DOE regulatory environment, and (2)
Safetys strong relationships forged with DOE site and project managers. Safetys international
relationships with the U.K. NDA and with Defense Estates, or DE, an agency of the U.K. Ministry of
Defense, or MOD, continue to offer growth opportunities. Safety leverages these Governmental
Decommissioning Service relationships and continues to aggressively pursue domestic and
international opportunities within its niche and has established relationships and obtained
significant positions in major global initiatives.
Locations
Safetys U.S. headquarters are in Knoxville, Tennessee, and its international headquarters are
located in Blaydon On Tyne, England. Safety believes that having a strong presence at customer
facilities and being close to decision-makers allows it to further position itself in its customers
and teaming partners operations. Geographic proximity also provides for greater insight into
opportunities to increase the scope of Safetys contracts and allows managers to identify, propose
and respond to customer needs. We believe that recent investment to these strategic hot area
offices represent the greatest opportunity for growth and access to secured federal funding.
Critical marketing and networking presence in these regions are important to capture large
opportunities and respond daily to clients needs.
NEXUS TECHNOLOGIES GROUP, INC.
Nexus is a mid-Atlantic security integrator for the corporate and governmental security
markets that specializes in the engineering and installation of custom designed integrated
electronic security solutions including access control, alarm, CCTV, video, communication,
perimeter protection and bomb and metal detection security systems. Nexus provides innovative,
highly engineered and scalable solutions to effectively protect people, property and assets.
The market for integrated security applications is one that continues to grow rapidly as the
business and public sectors continue to recognize the importance and benefits of protecting their
personnel, facilities and assets. Nexus has positioned itself to capitalize on this trend and lead
the industry in system design and innovation. By leveraging a unique combination of the latest
technology and its managements many years of industry experience, including technical engineering
applications; Nexus provides the means for its customers to meet their critical security needs.
Based on a solid reputation for excellence, Nexus is typically contracted for the more technically
challenging security integration projects that other security firms are not capable of completing.
11
Nexus has developed a solid reputation in the integrated electronic security market through
its ability to engineer open ended system platforms which combine previously separated security
systems into one comprehensive security solution. This enables clients to utilize open ended
technology effectively integrating older existing security technologies and newly developed state
of the art technologies in the overall security solution. This approach is often a more cost
effective alternative for Nexus customers; utilizing existing equipment and software and
integrating new security, fire and HVAC equipment and software into the same network.
As a systems integrator, Nexus primarily engineers, designs, customizes, installs, integrates
and maintains closed CCTV, access control, video and communication systems for its customers.
Together or on a stand-alone basis, the goal of these integrated systems is to detect and/or reduce
crime, prevent unauthorized entry and record evidence of infractions or accidents, while
communicating any infractions or accidents to the proper authorities. These integrated systems have
proven to be an effective tool in improving building and facility security management and providing
a deterrent to and preventative measure for unauthorized activities.
Nexus has utilized its engineering and design capabilities to expand its business in the
multi-billion dollar electronic security market by contracting for more technically challenging
projects initiated by federal and state government, nuclear utilities, colleges and corporate
clients. Nexus has undertaken projects in a variety of markets, including: financial services,
corporate and commercial, healthcare, government, nuclear utility services, public transportation,
airports, industrial complexes, museums, prisons, higher education and data centers.
Nexus builds partnerships and relationships with customers by working closely with them to
completely understand their specific security needs. Security system solutions are a business
process that impacts all departments in the complex organizations we serve. Nexus understands that
to achieve the proper security system design, an in-depth understanding of the clients business
and their management information systems is vital. By taking the time to achieve a clear
understanding of the clients needs and objectives, Nexus is able to maximize return on investment,
enhance customer system performance and ensure customer satisfaction.
To maintain Nexus competitive edge, it is our policy to consistently seek and utilize
nationally recognized third parties advanced technologies applicable to our customers and the
marketplaces evolving needs. As a non-proprietary provider of custom engineered integrated
security solutions including access control, alarm/intrusion, CCTV, communication, perimeter
protection and bomb and metal detection security systems, Nexus is aligned with most of the major
industry Original Equipment Manufacturers, or OEMs. These strategic alliances provide our clients
with flexibility and cost efficiency. This is a key aspect of the Nexus business model. While the
technology that Nexus incorporates into its integrated electronic security systems is highly
sophisticated and proprietary, Nexus has followed a policy of using commercial off-the-shelf
technology, or COTS, for the individual components that make up a integrated system. This minimizes
development costs on the front-end and provides the purchasers our security systems with
scalability and lower maintenance costs on the back-end.
The systems developed by Nexus pull together all core facility security systems and seamlessly
integrate information from these different enterprise subsystems. Ultimately, Nexus engineered
solutions enable its customers to have the timely information they need to make critical decisions
quickly and correctly. Currently Nexus has focused on five major sectors in which it intends to
expand, both vertically and horizontally. These sectors are:
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Financial Institutions including banks, brokerage facilities,
trading facilities and foreign currency exchange centers; |
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Infrastructure Security including nuclear power generating
facilities, water processing facilities, electricity generating
facilities, power transfer stations and transportation centers
which include highway, bridge, tunnel, airport, rail and port
security; |
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Government Facilities including federal, state and local
government buildings and offices, domestic and foreign embassies,
military installations and police and fire department operations
centers; |
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Education Facilities including grammar, high school and college
buildings, dorms and campuses, satellite learning centers and
daycare centers; and |
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Corporate Markets including office buildings and grounds, parking
lots, garages, retail locations, warehouses and apartment and
condominium complexes. |
Information technology and computer networking are always critically important to a well
designed and engineered security infrastructure. Nexus products and services are grounded in IT
standards. By utilizing the latest software industry practices and standards in the selection of
its strategic partners, Nexus efforts bring the power of cutting-edge technology and flexibility
of open systems architecture to a previously proprietary security market.
Nexus also maintains the security systems it designs and installs. It is our practice to offer
our customers a cost effective short or long term agreement for the maintenance, upgrade, addition
or replacement of each system we install. Our customers often take advantage of this cost effective
means to keep their security systems operating consistently and to keep their security needs up to
current technological standards.
POLIMATRIX, INC.
PMX is a total solutions provider delivering advanced, networked and cost effective radiation
and nuclear protection and detection services through several highly engineered portable and
stationary devices. The company has been operating since September 2006 as a joint venture between
the Company and PMR. PMR has been in the radiological detection business for fifteen years with its
technology widely in use in the U.S. Department of State, U.S. Secret Service, Coast Guard and the
New York Police Department.
Central to PMXs business plan is the development and marketing of radiological detection
products and services that are cost effective and can enable the end user to quickly and
effectively put the product or service into use. An example of this process is the current contract
with the Illinois Law Enforcement Alarm System (ILEAS). In November 2007, ILEAS placed a purchase
order with PMX for the purchase of up to 20,000 of our portable radiation detectors. Our ability to
quickly deliver this product, train the end users and help ILEAS with a state wide implementation
program has brought PMX many inquirers concerning similar federal, state and local programs.
Internationally, PMX has given several demonstrations of its products to government agency
personnel, whose governments recognize the need to have effective detection programs in place.
PMX has developed a wide ranging domestic and international marketing initiative that has
leveraged the successful implementation of its portable detection devices in Washington, DC,
Virginia and Illinois. These states have used the PMX detection devices for a wide range of
detection, prevention and first responder activities. As a result a broad number of states and
localities have adopted measures to ensure public safety in the event of a man made, commercial or
unlawful radiological incident that could compromises public safety. PMX is at the forefront of
this safety and awareness trend and has helped several states, localities and public safety
organizations in the development of their efforts to determine how to prevent and detect such
incidents through the use of products such as ours.
Studies have shown that a major threat to security around the world is the potential
introduction of nuclear and radiological contamination by terrorists through the use of a dirty
bomb, a radiological dispersion device, or RDD, that is not a nuclear bomb and does not result in
a nuclear explosion. Rather, an RDD is a device that contains radioactive materials and some method
by which those materials can be spread over a wide area. These devices can be built in a variety of
sizes, and the radiation released can cause physical and environmental contamination, economic
damage and physical harm.
13
PMX believes that that a large scale deployment of cost effective, portable and networked
detectors is an easily implemented cost effective technologically driven solution for the detection
of nuclear or other radioactive materials that could be used in making a dirty bomb. The deployment
of these devices in police cars, fire trucks, subway trains, buses or taxis could result in a
randomly layered, wide spread net of detection capability with information communicated to central
command posts for further tracking or apprehension a suspect.
Additionally, with nuclear energy being considered as a major part of the U.S. energy program
for the future, many federal, state and local government agencies have expressed concern over the
transport and disposal of nuclear materials in or through their jurisdictions. Also a concern is
the potential environment impact of the accidental venting or disposal of radioactive material at
or by a nuclear utility facility. PMXs product line of portable detection devices are designed to
detect these potential threats and can be positioned along transportation routes or carried by
nuclear power generating facility security personnel. Such deployments as described above could
provided early notice should an accidental incident take place.
We currently operate PMX with the assistance of Safetys personnel. Safetys technical
proficiency in radiological detection processes has been a significant benefit to PMX, especially
in developing programs for training, implementation and use of our devices. Safetys laboratory
personnel, health physicists and technical engineers have brought a value added proposition to
PMXs customers. We believe this combination of product and personnel will serve our current and
future customers well.
Investments
The Company holds 692,660 common shares in Vuance, Ltd. (OTCQB: VUNCF). The Company received
these shares as consideration for the sale if its majority interest in Security Holding
Corporation, or SHC, on July 3, 2007. The Company classifies these shares as available-for-sale
for financial reporting purposes and, accordingly, adjusts the carrying value of the shares at the
closing market price on the valuation date by recording an increase or decrease in the carrying
value of this investment and a corresponding increase or decrease in shareholders equity. At June
30, 2010, the carrying value of this investment was $110,825, or $0.16 per share (see Note 13 to
the Consolidated Financial Statements).
The Company has indirectly acquired a minority equity interest in Ultimate Escapes, Inc.
(OTCBB: ULEI; formerly known as Secure America Acquisition Corporation, or SAAC), or UEI, 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, or SAAH, the Company is deemed to beneficially own 40,912 shares, or approximately
1.5% of the outstanding capital stock in UEI, at June 30, 2010, and is entitled to receive such
shares of common stock in UEI upon the release of SAAHs shares from escrow, which is expected to
take place in October 2010. On June 30, 2010, the Company recorded the carrying value of the
underlying shares of UEI at $45,003 (see Note 6 to the Consolidated Financial Statements). On
September 20, 2010, UEI filed for Chapter 11 bankruptcy protection in the United States Bankruptcy
Court in Wilmington, Delaware. Given the recent date of the filing, we do not yet have sufficient
information to determine what impact this will have on the carrying value of the underlying shares
of UEI.
The Company measures impairment of its investments on a monthly basis and adjusts the carrying
amounts accordingly.
14
Significant Customers
For the year ending June 30, 2010, our Safety subsidiary generated approximately 94% of total
revenues from prime contracts or subcontracts with the U.S. Government. Safety generated 10% or
more of consolidated revenue over the last year from each of the U.S. Department of Energy, Bechtel
Jacobs Company, Washington Group International and Clauss Construction. For the year ended June 30,
2010, our Nexus subsidiary generated approximately 70% of total revenues from three customers. For
the year ended June 30, 2010, our PMX joint venture generated 100% of total revenues from a
contract with ILEAS.
For the year ending June 30, 2009, our Safety subsidiary generated approximately 78% of total
revenues from contracts or subcontracts with the U.S. Government. Safety generated 10% or more of
consolidated revenue during this period from each of the U.S. Department of Energy, Bechtel Jacobs
Company and Alcoa Inc. For the year ended June 30, 2009, our Nexus subsidiary generated
approximately 70% of the total revenues from two customers. For the year ended June 30, 2009, our
PMX joint venture generated 100% of total revenues from a contract with ILEAS.
Significant Suppliers
For the fiscal years ended June 30, 2010 and June 30, 2009, PMX purchased all of its products
from PMR, our joint venture partner. If our relationship with PMR were to terminate or if PMX were
unable to purchase radiation detection products from them, for any reason, our business could be
materially adversely affected.
Our Safety and Nexus subsidiaries are able to obtain the products or services they require
from various suppliers and do not have a specific concentration of supply from any one supplier.
Research and Development
Consistent with our product development strategy, we are seeking to identify and evaluate new
products and services in all of our subsidiaries. During the years ended June 30, 2010 and 2009, we
did not have any material research and development expenditures. During FY 2011, we do not expect
to incur significant research and development expenditures. While we continue to move forward with
our research and development programs and pursue the establishment of proprietary patented,
copyrighted, trademarked or service marked products or services, as appropriate, we do not expect
to receive significant revenues in FY 2011 from these products or services.
Patents and Proprietary Rights
As of June 30, 2010, we do not have any patents. We rely primarily on a combination of trade
secrets, confidentiality procedures and contractual provisions to protect our technology,
intellectual property and proprietary rights. Despite our efforts to protect our rights,
unauthorized parties may attempt to copy aspects of our products or services or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our technology and products
and services is difficult. In addition, the laws of many countries do not protect our rights in
information, materials and intellectual property that we regard as proprietary to as great an
extent as do the laws of the United States. There can be no assurance that our means of protecting
our rights in proprietary information, processes and technology will be adequate or that our
competitors will not independently develop similar information, technology or intellectual
property. See Risk Factors beginning on page 19.
Competition
Many of our potential competitors are larger and have significantly greater financial,
technical, marketing and other resources than we do. Some of our competitors may form partnerships
or alliances with other large homeland security companies, environmental remediation or engineering
companies and security integration companies with the resulting entity possessing much greater
market strength than we
have. Many of the areas in which we either compete or intend to compete are rapidly evolving,
with new companies often emerging. Competition may develop a patentable product or process that may
prevent us from competing in our intended markets. While we expect to compete primarily on the
basis of product performance, technical services, proprietary position and price, in many cases the
first company to introduce a product or service to the market will obtain at least a temporary
competitive advantage over subsequent market entrants. We face competition in both of our
subsidiaries and in our joint venture as described below.
15
Safety. Safety is engaged in highly competitive businesses in which most of our government
contracts and some of our commercial contracts are awarded through competitive bidding processes.
The extent of such competition varies according to the industries and markets in which our
customers operate as well as the geographic areas in which we operate. The degree and type of
competition we face is also often influenced by the type of projects for which Safety competes,
especially projects subject to the governmental bid process. Some of Safetys competitors are
larger and possess greater resources and technical abilities than Safety does, which may give them
an advantage when bidding for certain projects. Competition also places downward pressure on
Safetys contract bid prices and profit margins. Intense competition is expected to continue for
government environmental service contracts, challenging our ability to maintain strong growth rates
and acceptable profit margins. If Safety is unable to meet these competitive challenges, it could
lose market share and experience an overall reduction in its profits.
Part of Safetys business strategy includes bidding on government contracts as a lead prime
contractor in a consortium. In the past, we have operated as a subcontractor or in a minority
position on a prime contractor team. In pursuing a lead prime contractor role, Safety will be
competing directly with a number of large national and regional radiological services and
environmental remediation firms that may possess or develop technologies superior to our
technologies and have greater financial, management and marketing resources than Safety. Many of
these companies also have long-established customer relationships and reputations. When operating
as a subcontractor, Safety faces direct competition from numerous other companies. In some
instances Safety may be limited its ability to bid on and receive awards on contracts allocated
specifically to small businesses as defined.
Safetys principal competitors in small business environmental project management include:
Stoller, Cabrera, Portage, LATA Northwind, Demco, Eagle, Pro2Serv, PMTech and Navarro. Our
significant large business project management competitors include Energy Solutions, the Washington
Group, Tetra Tech, Shaw Environmental and C2HM Hill.
In April 2010, after receiving a project award set aside for completion by a qualified small
business, Safetys award was protested by an unsuccessful bidder. The protest is disputing Safetys
size, as measured by the headcount of Safety, which is to include the headcount of all affiliated
companies of Safety under the rules of the Small Business Administration, or the SBA. In August
2010, the SBA ruled that Safety is other than small for the captioned size standard by finding
that Safety is affiliated with its mentor protégé (a mentoring relationship program promoted by the
SBA) and, therefore, its mentor protégés headcount should be included in Safetys headcount.
Management believes that the SBA determination is incorrect and inconsistent with otherwise common
industry practice and, as such, has appealed the determination to the SBAs Office of Hearings and
Appeals. See Note 21 Subsequent Events to the Consolidated Financial Statements.
Nexus. A large number of companies are involved in the security integration industry, an
industry that receives a significant impetus from potential terrorist threats and activities. Many
of these companies (such as Henry Brothers Electronics, Inc., Diebold, Inc. and ADT) are
significantly larger than Nexus and generally have greater financial resources at their disposal.
We believe that our unique approach to business in this sector of the industry coupled with our
highly engineered and custom security system design and installation and our management teams many
years of experience coupled with our customer relationships will be attractive to the marketplace.
Given the size and importance of this market, we anticipate that even greater competition will
emerge. Additionally, within the services segment of homeland security, we believe there will
continue to be significant additions to security services required. There will be continued
pressure within this business segment by larger service providers such as Henry Brothers
Electronics, Inc.
and ADT. However, niche segments exist that provide us significant opportunities that
otherwise could be underrepresented.
16
PMX. The market for nuclear, radiological and isotope detection devices as applied to homeland
security is rapidly growing. Many large domestic and international companies (such as Thermo
Scientific and Canberra) have nuclear and radiological detection product lines, either through
acquisition or development. These companies are significantly larger than PMX and have greater
financial resources and more developed marketing strategies than PMX. Our entry into this industry
segment is through a joint venture with a long established, well respected company. We believe that
through our partners past success in this industry and our management expertise, we will be able
to gain a foothold in this emerging industry. Also, our development efforts have been concentrated
primarily in handheld networked nuclear and radiological detection equipment. This niche segment of
the market has fewer competitors and currently has no clear leader.
Manufacturing and Supply
Other than with PMR, our joint venture partner in PMX, we do not have any written agreements
with our suppliers. Although we attempt to reduce our dependence on our suppliers, disruption or
termination of any of the sources could occur, and such disruptions or terminations could have at
least a temporary, materially adverse effect on our business, financial condition, and results of
operations. Moreover, a prolonged inability to obtain alternative sources of supply could have a
materially adverse effect on our relations with our customers.
Generally, we find the products and services necessary for our operations to be readily
available, either from the general marketplace for raw materials that are commonly available, or
through our current suppliers.
Government Regulation
Regulation and standards of government agencies in the United States and other countries is a
significant consideration in the research, development, production, distribution and marketing of
our radiological detection products and in delivering our environmental remediation services. In
order to test, manufacture, distribute, market and sell products and provide services, we must
comply with applicable environmental and safety guidance established by regulatory authorities. We
may be subject to various laws, regulations and requirements relating to such matters as the import
and export of our products, ensuring safe working conditions and manufacturing practices, and the
use, storage and disposal of hazardous or toxic materials used in connection with our research,
development, manufacturing activities and services. The regulations potentially material to our
business are summarized below.
Radiological Detection. The federal government does not specifically regulate the performance
of the radiological detection devices we sell. However, in developing and testing these devices we
use licensed radiological sources to verify product effectiveness. These radionuclides are
regulated by state and national agencies. Users must obtain and maintain licenses to possess these
materials or to provide services that involve radioactive materials. These state and national
authorities also regulate the purchase, shipment and storage of such materials, and we are subject
to unannounced inspections to verify compliance with license requirements and regulations.
Additionally, the American National Standards Institute, or ANSI, promulgates performance and
testing criteria that are factors in determining whether our products are qualified for
procurements involving federal funds. Certain PMX instruments have been tested by Department of
Homeland Security and other third-party validators and have been shown to meet applicable portions
of these standards. As a result, those devices are included in the Responder Knowledge Base list
of qualified products. Similar programs operate in other countries using national or international
standards, and our devices generally comport with these international criteria. Beyond these
general standards, individual procurements typically include minimum performance criteria
that instruments must meet to be qualified. These procurement standards by necessity must be
evaluated on a case by case basis.
17
Environmental Remediation. Safety is subject to a variety of environmental, health and safety
laws and regulations governing, among other things, discharges to air and water, the handling,
storage and disposal of hazardous or radioactive materials and wastes, the remediation of
contamination associated with releases of hazardous substances and human health and safety, both
domestically and internationally. These laws and regulations and the risk of attendant litigation
can cause significant delays to a project and add significantly to its cost. Our projects often
involve highly regulated materials, including hazardous and radioactive materials and wastes.
Environmental laws and regulations generally impose limitations and standards for regulated
materials and sometimes require us to obtain permits and licenses and comply with various other
requirements. Fees associated with such environmental permits and licenses can be costly. In
addition, the improper characterization, handling, testing, transportation or disposal of regulated
materials or any other failure to comply with these environmental, health and safety laws,
regulations, permits or licenses have resulted in fines or penalties from time to time and could
subject Safety and Safetys management to civil and criminal penalties, the imposition of
investigatory or remedial obligations or the issuance of injunctions that could restrict or prevent
our operations. These laws and regulations may also become more stringent, or be more stringently
enforced, in the future.
Various national, state and local environmental laws and regulations, as well as common law,
may impose liability for property damage and costs of investigation and clean-up of hazardous or
toxic substances on property currently or previously owned by Safety or arising out of Safetys
waste management or environmental remediation services. These laws may impose responsibility and
liability without regard to knowledge of or causation of the presence of contaminants. The
liability under these laws can be joint and several, meaning liability for the entire cost of
clean-up can be imposed upon any responsible party.
Product Liability and Insurance
Our business exposes us to substantial product, occupational and other liability risks. These
risks are inherent in product research and development, manufacturing, installation, marketing,
distribution, and in the use of our products and operations and delivery of our services. We have,
at the subsidiary-level, and will attempt to continue to renew, liability insurance in order to
protect ourselves from potential exposures; however, there can be no guarantee that, upon
expiration of our current coverage, adequate insurance coverage will be available, or, if
available, that the cost will not be prohibitive. Furthermore, a liability or other claim could
materially and adversely affect our business or financial condition. The terms of our customer
agreements provide that liability is limited to our standard warranty to replace non-conforming
product or correct substandard services, and liability for consequential damages caused by the
improper use of our products or sub-standard delivery of our services is limited by contractual
terms. Nevertheless, one or more third parties could file suit against us based on product
liability, breach of warranty or other claims. The foregoing contract clauses may or may not
effectively limit our liability in any such actions.
Employees
As of June 30, 2010, we had 476 full-time employees. We had 449 employees employed by our
Safety subsidiary; 25 employees employed by our Nexus subsidiary; and 2 employees employed by our
corporate offices.
We consider our relations with our employees to be good. Certain of our employees are covered
by collective bargaining agreements. We also employ a number of contractors, consultants and part
time employees on a regular basis.
Available Information
We have filed reports, proxy statements and other information with the Commission. Copies of
our reports, proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at its Headquarters, Public Reference Room, 100 F
Street, N.E., Washington D.C. 20549. The public may obtain information on the operation of the
Commissions Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission
maintains a website that
contains reports, proxy statements and other information regarding Homeland Security Capital
Corporation. The address of the Commissions website is http://www.sec.gov. We will also provide
copies of our current reports on Forms 8-K, annual report on Form 10-K, quarterly reports on Form
10-Q and proxy statements, and all amendments to those reports at no charge through our website at
www.hscapcorp.com as soon as reasonably practicable after such material is electronically filed
with, or furnished to, the Commission. Copies are also available, without charge, from Homeland
Security Capital Corporation, 1005 North Glebe Road, Suite 550, Arlington, VA 22201.
18
ITEM 1A. RISK FACTORS
In analyzing our Company, you should consider carefully the following risk factors, together
with all of the other information included in this annual report on Form 10-K. Factors that could
cause or contribute to differences in our actual results include those discussed in the following
subsection, as well as those discussed in Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere throughout this annual report on Form 10-K. Each
of the following risk factors, either alone or taken together, could adversely affect our business,
operating results and financial condition, as well as adversely affect the value of an investment
in our Company.
General Risks
We have a limited operating history, which makes it difficult to evaluate our current business and
future prospects and may cause our revenues to decline.
The Company consolidates companies in the homeland security industry. Until its acquisition of
Nexus in 2006, its joint venture with Polimaster in 2006 and its acquisition of Safety in March
2008, the Company had not generated any revenues since 2002, other than interest income on its
cash. The Companys ability to generate revenues and earnings (if any) will be directly dependent
upon the operating results of such acquired business and any additional acquisitions, and the
successful integration and consolidation of those businesses. No assurances can be given that we
will be successful in generating revenues and earnings based on our business model.
We are dependent upon key personnel who would be difficult to replace and whose loss could impede
our development.
The Company believes that its success depends principally upon the experience of C. Thomas
McMillen, its Chairman and Chief Executive Officer, Christopher P. Leichtweis, its President, and
Michael T. Brigante, its Chief Financial Officer. Although Messrs. McMillen and Brigante have
substantial experience in acquiring and consolidating businesses, our acquired companies personnel
do not have significant experience in managing companies formed for the specific purpose of
consolidating one or more companies. Additionally, Messrs. McMillen and Brigante did not have
experience in managing companies in the various sectors of the homeland security industry. As a
result, the Company likely will rely significantly on the senior management of the businesses it
acquires. Such acquired senior management may not be suitable to the Companys business model or
combined operations. If the Company loses the services of one or more of its current executives,
the Companys business could be adversely affected. The Company may not successfully recruit
additional personnel and any additional personnel that are recruited may not have the requisite
skills, knowledge or experience necessary or desirable to enhance the incumbent management.
Appropriate acquisitions may not be available, which may adversely affect our growth.
The results of the Companys planned operations are dependent upon the Companys ability to
identify, attract and acquire additional desirable acquisition candidates, which may take
considerable time. Our acquisition strategy is important to the success of our business because it
supports our strategy of selling a broad platform of integrated offerings to customers who we
believe prefer to buy multiple products and service offerings from fewer vendors. The Company may
not be successful in identifying, attracting or acquiring additional acquisition candidates, in
integrating such candidates into the Company or in realizing profits from any acquisition
candidates, if acquired. Other companies also pursue acquisitions of companies in the homeland
security marketplace and we expect competition for acquisition candidates in our industry to
increase, which may mean fewer suitable acquisition opportunities for us, as well as higher
acquisition prices. In addition, even if we are successful in acquiring target companies, we may
have difficulty integrating the acquired companies product and service offerings with our existing
offerings and sales channels, which would reduce the benefits to us of the acquisitions and limit
the effectiveness of our strategy. The failure to complete additional acquisitions or to operate
the acquired companies profitably
would have a material adverse effect on the Companys business, financial condition and results of
operations.
19
If our consolidation strategy is not successful, our operations and financial condition will be
adversely affected.
One of the Companys strategies is to increase its revenues, the range of products and
services that it offers and the markets that it serves through the acquisition of additional
homeland security businesses. To date, the Company has completed three acquisitions and divested
one of those acquisitions. Investors have no basis on which to evaluate the possible merits or
risks of any future acquisition candidates operations and prospects that management may identify.
Although management of the Company will endeavor to evaluate the risks inherent in any particular
acquisition candidate, the Company may not properly ascertain all of such risks. Additionally,
management of the Company has significant flexibility in identifying and selecting prospective
acquisition candidates. Management may not succeed in selecting acquisition candidates that will be
profitable or that can be integrated successfully. Although the Company intends to scrutinize
closely the management of a prospective acquisition candidate in connection with evaluating the
desirability of effecting a business combination, the Companys assessment of management may not
prove to be correct. The Company may enlist the assistance of other persons to assess the
management of acquisition candidates. Finally, the Company will seek to improve the profitability
and increase the revenues of acquired businesses by various means, including combining
administrative functions, eliminating redundant facilities, implementing system and technology
improvements, purchasing products and services in large quantities and cross-selling products and
services. The Companys ability to increase revenues will be affected by various factors, including
the Companys ability to expand the products and services offered to the customers of acquired
companies, develop national accounts and attract and retain a sufficient number of employees to
perform the Companys services. There can be no assurance that the Companys internal growth
strategies will be successful.
Competition and industry consolidation may limit our ability to implement our business strategies.
The Company expects to face significant competition to acquire homeland security businesses
from larger companies that currently pursue, or are expected to pursue, acquisitions as part of
their growth strategies and as the industry undergoes continuing consolidation. Such competition
could lead to higher prices being paid for acquired companies. The Company believes that the
homeland security industry will undergo considerable consolidation during the next several years.
The Company expects that, in response to such consolidation and in light of the Companys financial
resources, it will consider from time to time additional strategies to enhance stockholder value.
These include, among others, strategic alliances and joint ventures; purchase, sale and merger
transactions with other large companies; and other similar transactions. In considering any of
these strategies, the Company will evaluate the consequences of such strategies, including, among
other things, the potential for leverage that would result from such a transaction, the tax effects
of the transaction, and the accounting consequences of the transaction. In addition, such
strategies could have various other significant consequences, including changes in management,
control or operational or acquisition strategies of the Company. There can be no assurance that any
one of these strategies will be undertaken, or that, if undertaken, any such strategy will be
completed successfully.
Failure to qualify for investment company act exemptions could adversely affect our growth and
financial condition.
The regulatory scope of the Investment Company Act of 1940, as amended, or the Investment
Company Act, extends generally to companies engaged primarily in the business of investing,
reinvesting, owning, holding or trading in securities. The Investment Company Act also may apply to
a company which does not intend to be characterized as an investment company but which,
nevertheless, engages in activities that bring it within the Investment Company Acts definition of
an investment company. The Company believes that its principal activities, which involve acquiring
control of operating companies and providing managerial and consulting services, will not subject
the Company to registration and regulation under the Investment Company Act. The Company intends to
remain exempt from investment company regulation
either by not engaging in investment company activities or by qualifying for the exemption from
investment company regulation available to any company that has no more than 45% of its total
assets invested in, and no more than 45% of its income derived from, investment securities, as
defined in the Investment Company Act.
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There can be no assurance that the Company will be able to avoid registration and regulation
as an investment company. In the event the Company is unable to avail itself of an exemption or
safe harbor from the Investment Company Act, the Company may become subject to certain restrictions
relating to the Companys activities, as noted below, and contracts entered into by the Company at
such time that it was an unregistered investment company may be unenforceable. The Investment
Company Act imposes substantial requirements on registered investment companies including
limitations on capital structure, restrictions on certain investments, prohibitions on transactions
with affiliates and compliance with reporting, record keeping, voting, proxy disclosure and other
rules and regulations. Registration as an investment company could have a material adverse effect
on the Company.
Potential tax consequences of our acquisitions may adversely affect our financial conditions.
As a general rule, federal and state tax laws and regulations have a significant impact upon
the structuring of business combinations. The Company will evaluate the possible tax consequences
of any prospective business combination and will endeavor to structure the business combination so
as to achieve the most favorable tax treatment to the Company, the acquisition candidate and their
respective stockholders. Nonetheless, the Internal Revenue Service, or the IRS, or appropriate
state tax authorities may not ultimately agree with the Companys tax treatment of a consummated
business combination. To the extent that the IRS or state tax authorities ultimately prevail in
re-characterizing the tax treatment of a business combination, there may be adverse tax
consequences to the Company, the acquisition candidate and/or their respective stockholders.
Our financial condition could be harmed if businesses we acquire failed to comply with applicable
laws or have other undisclosed liabilities.
Any business that we acquire may have been subject to many of the same laws and regulations to
which our business is subject and possibly to others, including laws and regulations impacting
companies that do business with federal, state and local governments. If any business that we
acquire has not conducted its business in compliance with applicable laws and regulations, we may
be held accountable or otherwise suffer adverse consequences, such as significant fines or
unexpected termination of contracts. Businesses we acquire may have other undisclosed liabilities
we do not discover during the acquisition process that could result in liability to us or other
unanticipated problems, such as product liability claims. Unexpected liabilities such as these
could materially adversely affect our business, financial condition and results of operations.
We may need to raise additional capital on terms unfavorable to our stockholders.
Based on our current level of operations, we believe that our cash flow from operations,
together with amounts we are able to borrow under our existing lines of credit, will be adequate to
meet our anticipated operating, capital expenditure and debt service requirements for at least the
next twelve months. However, we do not have complete control over our future performance because it
is subject to economic, political, financial, competitive, regulatory and other factors affecting
the defense and security industries. Further, our acquisition strategy will likely require
additional equity or debt financings. Such financings could also be required to support our
traditional and recently required operating units. There is no assurance that we will be able to
obtain such financings to fuel our growth strategy and support our existing businesses.
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Business Risks
As a government contractor, we are subject to extensive government regulation, and our failure to
comply with applicable regulations could subject us to penalties that may restrict our ability to
conduct our business.
Our government contracts are a significant part of our business. Allowable costs under U.S.
government contracts are subject to audit by the U.S. government. Similarly, some U.K. contracts
are subject to audit by U.K. regulatory authorities. These audits could result in the disallowance
of certain fees and costs, if, the auditing agency asserts, in its discretion, that certain costs
and expenses were not warranted or were excessive. Disallowance of costs and expenses, if pervasive
or significant, could have a material adverse effect on our business.
Government contracts are often subject to specific procurement regulations, contract
provisions and a variety of other requirements relating to the formation, administration,
performance and accounting of these contracts. Many of these contracts include express or implied
certifications of compliance with applicable regulations and contractual provisions. For example,
we must comply with the Federal Acquisition Regulation, the Truth in Negotiations Act, the Cost
Accounting Standards, the Service Contract Act, and Department of Defense security regulations. We
may be subject to qui tam litigation brought by private individuals on behalf of the government
under the Federal Civil False Claims Act, which could include claims for up to treble damages.
Additionally, we may be subject to the Truth in Negotiations Act, which requires certification and
disclosure of all factual costs and pricing data in connection with contract negotiations. If we
fail to comply with any regulations, requirements or statutes, our existing government contracts
could be terminated or we could be suspended from government contracting or subcontracting. If one
or more of our government contracts are terminated for any reason, or if we are suspended or
debarred from government work, we could suffer a significant reduction in expected revenues and
profits. Furthermore, as a result of our government contracting, claims for civil or criminal fraud
may be brought by the government for violations of these regulations, requirements or statutes.
Economic downturns, reductions or diversions in government funding could have a negative impact on
our businesses.
Demand for our services has been, and we expect that demand will continue to be, subject to
significant fluctuations due to a variety of factors beyond our control, including economic
conditions. During economic downturns, the ability of private and government entities to make
expenditures on radiological, security and environmental services may decline significantly. We
cannot be certain that economic or political conditions will be generally favorable or that there
will not be significant fluctuations adversely affecting our industry as a whole. In addition, our
operations depend, in part, upon government funding, and more recently funding under the American
Recovery and Reinvestment Act, particularly within the funding levels of the environmental programs
at the DOE and DoD. Significant changes in the level of government funding or specifically mandated
levels for different programs that are important to our business could have an unfavorable impact
on our business, financial position, results of operations and cash flows.
We and our customers operate in regulated industries that require us and them to obtain, and to
comply with, national, state and local government licenses, permits and approvals.
We and our customers operate in a highly regulated environment. Our projects are often
required to obtain, and to comply with, national, state and local government licenses, permits and
approvals. Any of these may be subject to denial, revocation or modification under various
circumstances. Failure to obtain or comply with the conditions of a license, permit or approval may
adversely affect our operations by temporarily suspending our activities or curtailing our work and
may subject us to penalties and other sanctions. Although existing licenses are routinely renewed
by various regulators, renewal could be denied or jeopardized by various factors, including:
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failure to provide adequate financial assurance for decommissioning or closure; |
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failure to comply with environmental and safety laws and regulations or permit conditions; |
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local community, political or other opposition; |
In addition, if new environmental or other legislation or regulations are enacted or existing
legislation or regulations are amended or are interpreted or enforced differently, we or our
customers may be required to obtain additional operating permits or approvals. Changes in
requirements imposed by our environmental or other permits may lead us to incur additional expenses
by requiring us to change or improve our waste management technologies and services to achieve and
maintain compliance. There can be no assurance that we will be able to meet all potential
regulatory changes.
We and our customers operate in a politically sensitive environment, and the public perception of
radioactive materials can affect our customers and us.
We and our customers operate in a politically sensitive environment. The risks associated with
radioactive materials and the public perception of those risks can affect our business. Public
criticisms of our business resulting from political activism could harm our reputation. Opposition
by third parties to particular projects can delay or prohibit the handling, transportation, and
disposal of radioactive materials. Adverse public reaction to developments in the use of nuclear
power or the disposal of radioactive materials, including any high profile incident involving the
discharge of radioactive materials, could directly affect our customers and indirectly affect our
business. Adverse public reaction also could lead to increased regulation or outright prohibition,
limitations on the activities of our customers, more onerous operating requirements or other
conditions that could have a material adverse impact on our customers and our business.
The elimination or any modification of the Price-Anderson Acts indemnification authority could
have adverse consequents for our business.
The Atomic Energy Act of 1954, as amended, or the AEA, comprehensively regulates the
manufacture, use and storage of radioactive materials. Section 170 of the AEA, which is known as
the Price-Anderson Act, supports the nuclear services industry by offering broad indemnification to
commercial nuclear power plant operators and DOE contractors for liabilities arising out of nuclear
incidents at power plants licensed by the NRC and at DOE nuclear facilities. That indemnification
protects not only the NRC licensee or DOE prime contractor, but also companies like us that work
under contract or subcontract at a DOE facility under a DOE prime contractor transporting
radioactive material to or from a site. The indemnification authority of the NRC and DOE under the
Price-Anderson Act was extended through 2025 by the Energy Policy Act of 2005.
We are subject to liability under environmental laws and regulation.
When we perform our services, our personnel and equipment may be exposed to radioactive and
hazardous materials and conditions. We may be subject to liability claims by employees, customers
and third parties as a result of such exposures. In addition, we may be subject to fines, penalties
or other liabilities arising under environmental or safety laws. Although to date we have been able
to obtain liability insurance for the operation of our business, there can be no assurance that our
existing liability insurance is adequate or that it will be able to be maintained or that all
possible claims that may be asserted against us will be covered by insurance. A partially or
completely uninsured claim, if successful and of sufficient magnitude, could have a material
adverse effect on our results of operations and financial condition.
23
Construction sites and maintenance sites are inherently dangerous workplaces. If we fail to
maintain safe work sites, we can be exposed to significant financial losses as well as civil and
criminal proceedings.
Construction sites and maintenance sites are inherently dangerous workplaces. Construction and
maintenance projects often require putting our employees in close proximity with large pieces of
mechanized equipment, moving vehicles, chemical and manufacturing processes, and highly-regulated
materials. On those projects where we are responsible for site safety, we are obligated to
implement procedures to ensure that workers are not injured. In the event we either fail to
implement such procedures or if the procedures we implement are ineffective, our employees and
other may become injured, and we could incur significant financial losses. In addition, the Company
could be found liable for failing to comply with government regulations dealing with occupational
health and safety. Regulations dealing with occupational health and safety are continually
evolving. We maintain functional groups within the Company whose primary purpose is to ensure that
effective health, safety, and environmental (HSE) work procedures are implemented throughout our
organization, including construction sites and maintenance sites. In spite of these efforts, the
Company could suffer losses relating to safety issues at our construction and maintenance sites, or
fail to comply with all HSE regulations applicable to our business.
Our business has inherent operational risks that cannot be adequately covered by insurance or
indemnity, and our products and technologies may not qualify for protection under the SAFETY Act.
We may face unanticipated risks of legal liability for damages caused by the actual or alleged
failure of technologies or services that we supply. Our products may be deployed in response to an
emergency or terrorist attack, which may increase our exposure to third-party claims. Many of our
technologies are unproven, or have yet to be deployed for actual end-user activities. We may face
liabilities related to these products. While we have attempted to secure appropriate insurance
coverage at appropriate cost, it is impossible to insure against all risks that inhere in our
industry, nor can we assure you that our insurers will pay a particular claim, or that we will be
able to maintain coverage at reasonable rates in the future. Substantial claims resulting from an
accident in excess or not otherwise covered by indemnity or insurance could harm our financial
condition and operating results. Our insurance policies also contain deductibles, limitations and
exclusions which increase our costs in the event of a claim.
Under the SAFETY Act provisions of The Homeland Security Act of 2002, the federal government
provides liability limitations and the government contractor defense applies if the Department of
Homeland Security designates or certifies technologies or products as qualified anti-terrorism
technologies, and if certain other conditions apply. We may seek to qualify some or all of our
products and technologies under the SAFETY Acts provisions in order to obtain such liability
protections, but there is no guarantee that the U.S. Department of Homeland Security will designate
or certify our products and technologies as a qualified anti-terrorism technology. Any
indemnification that the U.S. government may provide may not cover certain potential claims.
Our failure to maintain our safety record could have an adverse effect on our business.
Our safety record is critical to our reputation. In addition, many of our government and
commercial customers require that we maintain certain specified safety record guidelines to be
eligible to bid for contracts with these customers. Furthermore, contract terms may provide for
automatic termination in the event that our safety record does not comply with agreed standards
during the performance of the contract. A failure to maintain our safety record could have a
material adverse effect on our business, financial condition and results of operation.
24
We are engaged in highly competitive businesses and typically must bid against other competitors to
obtain major contracts.
We are engaged in highly competitive businesses in which most of our government contracts and
some of our commercial contracts are awarded through competitive bidding processes. The extent of
such competition varies according to the industries and markets in which our clients operate as
well as the geographic areas in which we operate. The degree and type of competition we face is
also often influenced by the type of projects for which we compete. Some of our competitors are
larger and may possess greater resources than we do, which may give them an advantage when bidding
for certain projects. Competition
also places downward pressure on our contract prices and profit margins. Intense competition is
expected to continue for government environmental service contracts, challenging our ability to
maintain strong growth rates and acceptable profit margins. If we are unable to meet these
competitive challenges, we could lose market share and experience an overall reduction in our
profits. Part of our business strategy includes bidding on government contracts as a lead prime
contractor in a consortium. In the past, we have operated as a subcontractor or in a minority
position on a prime contractor team. In pursuing a lead prime contractor role, we will be competing
directly with a number of large national and regional services firms that may possess or develop
technologies superior to our technologies and have greater financial, management and marketing
resources than we do. Many of these companies also have long-established customer relationships and
reputations. We must be successful in the competitive process with our government and commercial
customers to replace revenues from projects that are nearing completion and to increase our
revenues. Our business and operating results can be adversely affected by the size and timing of a
single material contract.
Our ability to compete depends on our ability to innovate successfully and quickly.
We may lose our competitive position if we fail to innovate and develop new products quickly.
Advanced security technologies are evolving rapidly, product life cycles are short and technologies
can become obsolete. Our ability to compete will depend on our ability to design, develop,
manufacture, assemble, test, market, sell and support new products and enhancements quickly and
cost effectively. Our business will depend on how well we respond to evolving government and
industry standards, and changing customer requirements. The lack of standardization in our industry
may impede market acceptance of innovative products that we successfully develop. If, for any of
these or other reasons, any of our technologies fail to gain acceptance in the market, we will not
recoup our development costs, and we will have to attempt to develop new technologies and products.
We cannot assure that we can do so successfully, cost effectively or quickly enough.
Our products compete in markets that are subject to rapid technological change, and one or more of
the technologies underlying our products could be made obsolete by new technology.
The market for discovery and analysis tools is characterized by rapid technological change and
frequent new product introductions. Rapidly changing technology could make some or all of our
product lines obsolete unless we are able to continually improve our existing products and develop
new products. Because substantially all of our products are based on our core technology platforms,
including X-ray technologies, magnetic resonance technologies, mass spectrometry technologies,
vibrational spectroscopy and superconducting magnet technologies, we are particularly vulnerable to
any technological advances that would make certain of these techniques obsolete as the basis for
analytical systems in any of our markets. To meet the evolving needs of our customers, we must
rapidly and continually enhance our current and planned products and services and develop and
introduce new products and services. In addition, our product lines are based on complex
technologies which are subject to rapid change as new technologies are developed and introduced in
the marketplace. We may have difficulty in keeping abreast of the rapid changes affecting each of
the different markets we serve or intend to serve. If we fail to develop and introduce products in
a timely manner in response to changing technology, market demands or the requirements of our
customers, our product sales may decline, and we could experience significant losses.
Our CBRNE detection products are subject to a number of risks, including lengthy product
development and contract negotiation periods and certain risks inherent in long-term government
contracts.
Our CBRNE detection products are subject to many risks, including vulnerability to rapid
technological change, dependence on mass spectrometry and other technologies and substantial
competition. In addition, our CBRNE detection products are generally sold to government agencies
under long-term contracts. These contracts generally involve lengthy pre-contract negotiations and
product development. We may be required to devote substantial working capital and other resources
prior to obtaining product orders. As a result, we may incur substantial costs before we recognize
revenue from
these products. Moreover, in return for larger, longer-term contracts, our customers for these
products often demand more stringent acceptance criteria. These criteria may also cause delays in
our ability to recognize revenue from sales of these products. Furthermore, we may not be able to
accurately predict in advance our costs to fulfill our obligations under these long-term contracts.
If we fail to accurately predict our costs, due to inflation or other factors, we could incur
significant losses. Also, the presence or absence of such contracts may cause substantial variation
in our results of operations between fiscal periods and, as a result, our results of operations for
any given fiscal period may not be predictive of our results for subsequent fiscal periods. The
resulting uncertainty may have an adverse impact on our stock price.
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Our business qualifies as a small business for significant opportunities which would be negatively
impacted if our small business status were to change to other than small.
Our small business status provides us with certain competitive advantages including allowing
us to compete for certain government set asides for which larger businesses are ineligible. Loss of
this status could significantly affect our ability to compete for future contracts. For instance,
even if we are qualified to work on a new government contract, we might not be awarded the contract
because of existing government policies designed to protect small businesses and underrepresented
minority contractors. Failure to continue to qualify as a small business could have a material
adverse effect on our financial position and results from operations.
If our teaming members or partners fail to perform their contractual obligations on a project or if
we fail to coordinate effectively with our partners or subcontractors, we could be exposed to legal
liability, loss of reputation and reduced profit on the project.
We often work jointly with contractual partners or with subcontractors to perform certain
projects. Success on these projects depends in part on whether our partners fulfill their
contractual obligations satisfactorily. If any of our partners or subcontractors fails to perform
its contractual obligations satisfactorily, we may be required to make additional investments and
provide additional services in order to compensate for that partners failure. If we are unable to
adequately address our partners performance issues, then our customer may exercise its right to
terminate a joint project, exposing us to legal liability, loss of reputation and reduced profit.
Our collaborative arrangements also involve risks that participating parties may disagree on
business decisions and strategies. These disagreements could result in delays, additional costs and
risks of litigation. Our inability to successfully maintain existing collaborative relationships or
enter into new collaborative arrangements could have a material adverse effect on our results of
operations.
Our operating results are difficult to predict and may fluctuate significantly in the future.
The following factors, many of which are outside our control, can cause fluctuations in our
operating results:
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the seasonality of the spending cycle of our government customers and the
spending patterns of our commercial customers; |
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the number and significance of projects commenced and completed during a quarter; |
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unanticipated changes in contract performance, particularly with contracts that
have funding limits; |
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the timing of resolutions of change orders, requests for equitable adjustments
and other contract adjustments; |
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decisions by customers to terminate our contracts; |
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seasonal variations in shipments of radioactive materials; |
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weather conditions that delay work at project sites; |
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staff levels and utilization rates; |
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changes in the prices of services offered by our competitors; and |
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general economic or political conditions. |
The deferral or loss of one or more significant contracts could materially adversely affect
our operating results, particularly if there are significant sales and marketing expenses
associated with the deferred or lost contracts. Additionally, we base our current and future
expense levels on our internal operating plans and sales forecasts, and our operating costs are to
a large extent fixed. As a result, we may not be able to sufficiently reduce our costs to
compensate for an unexpected near-term shortfall in revenues.
Our business depends on the development of markets for detection and surveillance products and
solutions.
Our products and services are designed to address the markets for detection, surveillance and
integrated solutions. Our products and services are targeted to both governmental and private
sector markets. These markets and the types of products and services sold in these markets are
emerging. Our ability to grow will depend in part on the rate at which markets for our products
develop and on our ability to adapt to emerging demands in these markets. In particular, our
business depends on our ability to offer a broader range of products and services to meet demand
for integrated solutions. In addition, geopolitical developments, terrorist attacks and government
mandates may cause sharp fluctuations in the demand for our products.
Some of our new products are still undergoing trials, or have too short of a history of
operation in the field to establish evidence that they meet long-term customer needs. This may slow
the adoption of these products by security conscious customers that demand proof of long term
reliability. Some of our products could encounter unanticipated problems in deployment and use, or
when attempts are made to integrate them into existing systems and operations. Our ability to
maintain or grow our revenues will be significantly limited if our new products fail to gain market
acceptance.
The contracts in our backlog may be adjusted, cancelled or suspended by our clients. Additionally,
even if fully performed, our backlog may not be a good indicator of our future gross margins.
At June 30, 2010, our backlog totaled approximately $376.0 million, of which, $89.1 million is
funded. The remaining $286.9 million of unfunded backlog represents contracts signed on a
contingent basis that are subject to cancellation or termination at the discretion of the client.
In addition, our backlog is subject to changes in the scope of services to be provided as well as
adjustments to the costs relating to the contracts. Accordingly, there is no assurance that the
amount of backlog in-hand at June 30, 2010 will actually be realized as revenues. Gross margins
(i.e., contract revenue less direct costs of contracts) can vary considerably between contracts.
One aspect of our business that can have a significant effect on the gross margins we realize on
our contracts and projects is the amount of pass-through costs incurred. Since pass-through costs
typically do not bring significant margins with them, it is not unusual for us to experience an
increase or decrease in revenues without experiencing a corresponding change in our gross margins.
Additionally, the way we perform on our individual contracts can affect greatly our gross
margins and hence, future profitability. In some of the markets we serve there is an increasing
trend towards cost-reimbursable contracts with incentive-fee arrangements. Typically, our incentive
fees are based on such things as achievement of target completion dates or target costs; overall
safety performance; overall client satisfaction; and/or other performance criteria. If we fail to
meet such targets or achieve the expected performance standards, we may receive a lower, or even
zero, incentive fee resulting in lower gross
margins. Accordingly, there is no assurance that the contracts in backlog, assuming they produce
the revenues currently expected, will generate gross margins at the rates we have realized in the
past.
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The loss of one or a few customers could have an adverse effect on us.
One or a few government and commercial customers have in the past, and may in the future
account for a significant portion of our revenues in any one year or over a period of several
consecutive years. For the fiscal year ending June 30, 2010, our Safety subsidiary generated
approximately 94% of total revenues from prime contracts or subcontracts with the U.S. Government.
Safety generated 10% or more of consolidated revenue over the last year from each of the U.S.
Department of Energy, Bechtel Jacobs Company, Washington Group International and Clauss
Construction. For the year ended June 30, 2010, our Nexus subsidiary generated approximately 75% of
total revenues from three customers. Because these customers generally contract with us for
specific projects, we may lose significant customers from year to year as their projects with us
are completed. Our inability to replace this business with other projects could have an adverse
effect on our business and results of operations.
We bear the risk of cost overruns in fixed-price contracts. We may experience reduced profits or,
in some cases, losses under these contracts if costs increase above our estimates.
A percentage of our revenues are earned under contracts that are fixed-price in nature.
Fixed-price contracts expose us to a number of risks not inherent in cost-reimbursable contracts.
Under fixed price and guaranteed maximum-price contracts, contract prices are established in part
on cost and scheduling estimates which are based on a number of assumptions, including assumptions
about future economic conditions, prices and availability of labor, equipment and materials, and
other exigencies. If these estimates prove inaccurate, or if circumstances change such as
unanticipated technical problems, difficulties in obtaining permits or approvals, changes in local
laws or labor conditions, weather delays, cost of raw materials or our suppliers or
subcontractors inability to perform, cost overruns may occur and we could experience reduced
profits or, in some cases, a loss for that project. Errors or ambiguities as to contract
specifications can also lead to cost-overruns.
Our use of level of effort or percent complete performance accounting could result in reduction or
elimination of previously reported profits.
A significant portion of our revenues are recognized using the level of effort or percent
complete performance method of accounting. Generally, the performance accounting practices we use
result in recognizing contract revenues and earnings based on output measures, where estimable, or
on other measures such as the proportion of costs incurred to total estimated contract costs. For
some of our long-term contracts, completion is measured on estimated physical completion or units
of production. The cumulative effect of revisions to contract revenues and estimated completion
costs, including incentive awards, penalties, change orders, claims and anticipated losses, is
recorded in the accounting period in which the amounts are known or can be reasonably estimated.
Due to uncertainties inherent in the estimation process, it is possible that actual completion
costs may vary from estimates, and such variances could be material to our operating results.
The outcome of pending and future claims and litigation could have a material adverse effect on our
business.
The nature of our business occasionally results in clients, subcontractors and vendors
presenting claims against us for recovery of costs they incurred in excess of what they expected to
incur, or for which they believe they are not contractually responsible. Similarly, and in the
normal course of business, we may present claims and change orders to our clients for costs we have
incurred for which we believe we are not contractually responsible or for services provided that
were either requested by the client or were otherwise required by the nature of the project. If we
fail to document properly the nature of our claims and change orders or are otherwise unsuccessful
in negotiating reasonable settlements with our clients, subcontractors, and vendors, we could incur
cost overruns and experience reduced profits or, in some cases, suffers a loss for that project.
Additionally, irrespective of how well we document the nature of our claims and change-
orders, the cost to prosecute and defend claims and change-orders can be significant. In the normal
course of business, we are subject to certain contractual guarantees and litigation. Litigation in
which we could be involved in as a defendant includes, but is not limited to, workers
compensation, personal injury, environmental, employment/labor, professional liability, and other
similar lawsuits. We maintain insurance coverage for various aspects of our business and
operations. However, we have elected to retain a portion of losses that may occur through the use
of various deductibles, limits, and retentions under our insurance programs which may subject us to
some future liability for which we are only partially insured, or completely uninsured.
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Adequate bonding is necessary for us to win certain types of new work.
We are often required to provide performance bonds or other financial assurances to customers
under fixed-price contracts. These surety instruments indemnify the customer if we fail to perform
our obligations under the contract. If a bond is required for a particular project and we are
unable to obtain it due to insufficient liquidity or other reasons, we will not be able to pursue
that project. We currently have a bonding facility but, as is typically the case, the issuance of
bonds under that facility is at the suretys sole discretion. Moreover, due to events that affect
the insurance and bonding markets generally, bonding may be more difficult to obtain in the future
or may only be available at significant additional cost. There can be no assurance that bonds will
continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and,
as a result, to bid on new work could have a material adverse effect on our business, financial
condition and results of operations. As of June 30, 2010, we had approximately $7.3 million of
bonds or surety contracts outstanding.
We have substantial financial assurance and insurance requirements, and increases in the costs of
obtaining adequate financial assurance, or the inadequacy of our insurance coverage, could
negatively impact our liquidity and increase our liabilities.
The amount of insurance we are required to maintain for environmental liability is governed by
statutory requirements. We believe that the cost for such insurance is high relative to the
coverage it would provide, and therefore, our coverage is generally maintained at the minimum
statutorily required levels. We face the risk of incurring liabilities for environmental damage if
our insurance coverage is ultimately inadequate to cover those damages. We also carry a broad range
of insurance coverage that is customary for a company our size. We use these programs to mitigate
risk of loss, thereby allowing us to manage our self-insurance exposure associated with claims. To
the extent our insurers were unable to meet their obligations, or our own obligations for claims
were more than we estimated, there could be a material adverse effect to our financial results. In
addition, to fulfill our financial assurance obligations with respect to environmental closure and
post-closure liabilities, we generally obtain letters of credit or surety bonds; rely on insurance,
including captive insurance, or fund trust and escrow accounts. We currently have in place all
financial assurance instruments necessary for our operations. We do not anticipate any unmanageable
difficulty in obtaining financial assurance instruments in the future. However, in the event we are
unable to obtain sufficient surety bonding, letters of credit or third-party insurance coverage at
reasonable cost, or one or more states cease to view captive insurance as adequate coverage, we
would need to rely on other forms of financial assurance. These types of financial assurance could
be more expensive to obtain, which could negatively impact our liquidity and capital resources and
our ability to meet our obligations as they become due.
Unforeseen circumstances could result in a need for additional capital.
We currently have sufficient cash to fund forecasted operations excluding unforeseen
circumstances. However, materially adverse events could reduce our cash flows from operations. If
our cash flows from operations were negatively affected, we could be forced to reduce capital
expenditures, acquisition activity, or other additional financings. In these circumstances we
instead may elect to incur more indebtedness. If we made such an election, there can be no
assurances that we would be able to obtain additional financings on acceptable terms. In these
circumstances, we would likely use our revolving credit facility to meet our cash needs. In the
event of a default under our credit facility, we could be required to immediately repay all
outstanding borrowings and make cash deposits as collateral for all obligations the
facility supports, which we may not be able to do. Additionally, any such default could cause a
default under many of our other credit agreements and debt instruments. Any such default would have
a material adverse effect on our ability to operate.
29
Armed hostilities could constrain our ability to conduct business internationally and could also
disrupt our U.S. operations.
The current world unrest, or the responses of the United States, may lead to further acts of
terrorism and civil disturbances in the United States or elsewhere, which may further contribute to
the economic instability in the United States. These attacks or armed conflicts may affect our
physical facilities or those of our suppliers or customers and could have an impact on our domestic
and international sales, our supply chain, our production capability, our insurance premiums or the
ability to purchase insurance and our ability to deliver our products to our customers. The
consequences of these risks are unpredictable, and their long-term effect upon us is uncertain.
A substantial portion of our revenues depends on sales to the U.S. government and could be affected
by changes in federal funding levels.
Agencies and departments of the U.S. government account for a substantial portion of our
revenues from product sales and substantially all of our revenues from research and development
contracts. We and other U.S. defense contractors have benefited from an upward trend in overall
U.S. defense spending in the last few years and are counting on significant revenues from U.S.
government contracts for the foreseeable future. This trend continued with the former Presidents
budget request for fiscal year 2009, which reflected the continued commitment to modernize the
Armed Forces and sustain current capabilities while prosecuting the war on terrorism.
However, U.S. government programs are limited by budgetary constraints and are subject to
uncertain future funding levels that could result in the termination of programs. Future defense
budgets and appropriations for our programs and contracts may be affected by differing priorities
of the new Administration, including budgeting constraints stemming from the economic recovery and
stimulus plans. A decline in security-related government spending, or a shift away from our
offerings or programs that we address, could hurt our sales, put pressure on our prices and reduce
our revenues and margins.
We may not realize anticipated benefits from stimulus packages.
Many governments around the world, including the U.S. federal government, have enacted various
stimulus packages that are intended to increase investment and business activity, and in particular
to provide funding for life science research, equipment and facilities. Although we believe there
is opportunity for the Company to benefit from these economic stimulus spending programs, including
the American Recovery and Reinvestment Act of 2009, there is no assurance that any of these
programs will have a material positive impact on our revenues and profits. The magnitude and timing
of any benefits that we might realize from stimulus funding initiatives are uncertain and are
subject to a number of factors beyond our control, including government appropriations processes in
various countries in which we and our customers do business, governmental determinations regarding
the allocation of stimulus funds to the academic institutions, not-for-profit research
organizations and businesses that may utilize our products and technologies, the success of our
customers in obtaining stimulus grants, and our customers decisions to use any stimulus funds they
receive to purchase products from us. It is not possible to predict whether or when we will realize
benefits from stimulus packages enacted in the U.S. or elsewhere, or what impact, if any, stimulus
packages will have on our business, results of operations or financial condition or the trading
price of our common stock.
30
Our operating results may be adversely impacted by worldwide political and economic uncertainties
and specific conditions in the markets we address.
General worldwide economic conditions have recently experienced a downturn due to the lack of
available credit, slower economic activity, concerns about inflation and deflation, increased
energy costs, decreased consumer confidence, reduced corporate profits and capital spending, and
adverse business conditions. These conditions make it extremely difficult for our customers, our
vendors and us to accurately forecast and plan future business activities and could cause
businesses to slow spending on services. We cannot predict the timing, strength or duration of any
economic slowdown or subsequent economic recovery worldwide or in our industry. If the economy or
markets in which we operate continue at the level experienced in fiscal 2010, our business,
financial condition and results of operations may be materially and adversely affected.
We derive a majority of our revenue from government agencies, and any disruption in government
funding or in our relationship with those agencies could adversely affect our business.
In fiscal 2010, we generated approximately 84% of our revenue, net of subcontractor costs,
from contracts with federal, state and local government agencies. U.S. federal government agencies
are among our most significant clients. A significant amount of this revenue is derived under
multi-year contracts, many of which are appropriated on an annual basis. As a result, at the
beginning of a project, the related contract may be only partially funded, and additional funding
is normally committed only as appropriations are made in each subsequent year. These
appropriations, and the timing of payment of appropriated amounts, may be influenced by numerous
factors as noted below. Our backlog includes only the projects that have funding appropriated.
The demand for our government-related services is generally driven by the level of government
program funding. Accordingly, the success and further development of our business depends, in large
part, upon the these programs. There are several factors that could materially affect our
government contracting business, including the following:
|
|
|
Changes in and delays or cancellations of government programs, requirements or
appropriations; |
|
|
|
Budget constraints or policy changes resulting in delay or curtailment of
expenditures related to the services we provide; |
|
|
|
Re-competes of government contracts; |
|
|
|
The timing and amount of tax revenue received by federal, state and local
governments, and the overall level of government expenditures; |
|
|
|
Curtailment of the use of government contracting firms; |
|
|
|
Delays associated with a lack of a sufficient number of government staff to
oversee contracts; |
|
|
|
The increasing preference by government agencies for contracting with small and
disadvantaged businesses; |
|
|
|
Competing political priorities and changes in the political climate with regard
to the funding or operation of the services we provide; |
|
|
|
The adoption of new laws or regulations affecting our contracting relationships
with the federal, state or local governments; |
|
|
|
Unsatisfactory performance on government contracts by us or one of our
subcontractors, negative government audits, or other events that may impair our
relationship with the federal, state or local governments; |
|
|
|
A dispute with or improper activity by any of our subcontractors; and |
|
|
|
General economic or political conditions. |
31
These and other factors could cause government agencies to delay or cancel programs, to reduce
their orders under existing contracts, to exercise their rights to terminate contracts or not to
exercise contract options for renewals or extensions. Any of these actions could have a material
adverse effect on our revenue or timing of contract payments from these agencies.
A delay in the completion of the budget process of the U.S. government could delay procurement of
our services and have an adverse effect on our future revenues.
When the U.S. government does not complete its budget process before its fiscal year-end on
September 30, government operations are typically funded by means of a continuing resolution that
authorizes agencies of the U.S. government to continue to operate, but does not authorize new
spending initiatives. When the U.S. government operates under a continuing resolution, government
agencies may delay the procurement of services, which could reduce our future revenues.
Our failure to win new contracts and renew existing contracts with private and public sector
clients could adversely affect our profitability.
Our business depends on our ability to win new contracts and renew existing contracts with
private and public sector clients. Contract proposals and negotiations are complex and frequently
involve a lengthy bidding and selection process that is affected by a number of factors. These
factors include market conditions, financing arrangements and required governmental approvals. For
example, a client may require us to provide a bond or letter of credit to protect the client should
we fail to perform under the terms of the contract. If negative market conditions arise, or if we
fail to secure adequate financial arrangements or the required governmental approval, we may not be
able to pursue particular projects, which could adversely affect our profitability.
Restrictive covenants in our credit agreement may restrict our ability to pursue certain business
strategies.
Our credit agreement restricts our ability to, among other things:
|
|
|
Incur additional indebtedness; |
|
|
|
Create liens securing debt or other encumbrances on our assets; |
|
|
|
Make loans or advances; |
|
|
|
Pay dividends or make distributions to our stockholders; |
|
|
|
Purchase or redeem our stock; |
|
|
|
Repay indebtedness that is junior to indebtedness under our credit agreement; |
|
|
|
Acquire the assets of, or merge or consolidate with, other companies; and |
|
|
|
Sell, lease or otherwise dispose of assets. |
Our credit agreement also requires that we maintain certain financial ratios each fiscal
quarter, which we may not be able to achieve. If we do not have access to this credit facility or a
comparable credit facility, our business, financial condition and results of operations may be
materially and adversely affected.
32
Because our operating results may fluctuate significantly and may be below the expectations of
analysts and investors, the market price for our stock may be volatile.
Our operating results are difficult to predict and may fluctuate significantly in the future.
As a result, our stock price may be volatile. The following factors, many of which are outside our
control, can cause fluctuations in our operating results and volatility in our stock price:
|
|
|
expenses incurred in pursuing and closing acquisitions and in follow-up
integration efforts; |
|
|
|
changes in customers budgets and procurement policies and priorities, and
funding delays, particularly with respect to government contracts; |
|
|
|
new competitors and the introduction of enhanced products from new or
existing competitors; |
|
|
|
unforeseen legal expenses, including litigation and bid protest costs; |
|
|
|
unanticipated delays or problems in releasing new products and services; and |
|
|
|
the amount and timing of our investments in research and development
activities and manufacturing improvements. |
The deferral or loss of one or more significant contracts could materially adversely affect
our operating results, particularly if there are significant sales and marketing expenses
associated with the deferred or lost contracts. Additionally, we base our current and future
expense levels on our internal operating plans and sales forecasts, and our operating costs are to
a large extent fixed. As a result, we may not be able to sufficiently reduce our costs to
compensate for an unexpected near-term shortfall in revenues, with such shortfalls resulting in
fluctuations in our operating results which could cause our stock price to decline.
Our common stock is deemed to be penny stock, which may make it more difficult for investors to
sell their shares due to suitability requirements.
Our common stock is deemed to be penny stock as that term is defined in Rule 3a51-1
promulgated under the Securities Exchange Act of 1934, as amended. Penny stocks are stock:
|
|
|
with a price of less than $5.00 per share; |
|
|
|
that are not traded on a recognized national exchange; |
|
|
|
whose price is not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stock must still have a price of not less than
$5.00 per share); or |
|
|
|
stock in issuers with net tangible assets less than $2,000,000 (if
the issuer has been in continuous operation for at least three
years) or $5,000,000 (if in continuous operation for less than
three years), or with average revenues of less than $6,000,000 for
the last three years. |
In addition to the penny stock rules promulgated by the Commission, the Financial Industry
Regulatory Authority, Inc., or FINRA, has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending speculative low priced securities
to their non-institutional customers, broker-dealers must make reasonable efforts to obtain
information about the customers financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes that there is a high probability
that speculative low priced securities will not be suitable for at least some customers. FINRA
requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may limit your ability to buy and sell
our stock.
33
Stockholders should be aware that, according to the Commission, the market for penny stocks
has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of
the market for the security by one or a few broker-dealers that are often related to the promoter
or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) boiler room practices involving high-pressure sales
tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and
undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale
dumping of the same securities by promoters and broker-dealers after prices have been manipulated
to a desired degree. The Companys management is aware of the abuses that have occurred
historically in the penny stock market. Although the Company does not expect to be in a position to
dictate the behavior of the market or of broker-dealers who participate in the market, management
will strive within the confines of practical limitations to prevent the described patterns from
being established with respect to our securities.
We do not expect to pay dividends with respect to our common stock which may hinder our ability to
attract additional capital.
The Company has not paid any dividends on its common stock to date. The payment of any
dividends will be within the discretion of the Companys Board of Directors. The Board of Directors
expects to retain all earnings, if any, for use in the Companys business operations and,
accordingly, the Board of Directors does not anticipate declaring any dividends on its common stock
in the foreseeable future.
We have historically had severe working capital shortages, even following significant financing
transactions.
Although we have raised capital totaling approximately $21,300,000 (net of expenses) since
February 2006, we have had working capital shortages in the past. Our consolidated financial
statements for our fiscal year ended June 30, 2010, indicate that we have a working capital deficit
of $6,111,797. Based on the amount of capital we have remaining, we anticipate that we may have
working capital shortages in the future unless we are able to substantially increase our revenue or
reduce our expenses, thereby generating continuous positive cash flow from operations and
(ultimately) operating income. As a result of our recent operating activities, we believe we have
sufficient working capital to finance our anticipated operations and throughout our FY2011.
We have raised capital and issued securities during the years ended June 30, 2008 and December 31,
2007 and 2006, which has resulted (and will in the future when warrant exercises or conversions
occur) result in dilution to our existing stockholders; this was accomplished to provide necessary
working capital or obtain assets and services. We will likely issue more securities to raise
additional capital or to obtain other services or assets, any of which may result in substantial
additional dilution.
Since February, 2006, we have raised capital of approximately $21,300,000 to finance our
business operations and acquisitions. We have raised this capital by issuing convertible
debentures, shares of common stock, convertible preferred stock and common stock warrants to
accredited investors and as compensation to investment bankers making introductions to the
accredited investors and the exercise of previously issued common stock warrants and stock options.
During this same period of time, we issued common stock warrants and shares of common stock to
several persons in exchange for their promises to perform investment banking and financial advisory
services to us. In many cases, these issuances were below the then-current market prices and can be
considered dilutive to our existing stockholders both as a reduction of their percentage ownership
in the Company and because of issuances that will be, when warrants are exercised or debentures are
converted, at prices below the market. Our Series F Preferred Stock (the Series F Stock), our
Series H Convertible Preferred Stock (the Series H Stock) and our Series I Convertible Preferred
Stock (the Series I Stock and collectively with the Series F and H Stock, the Preferred Stock)
have significant restrictions on our ability to raise any additional capital. If we raise
additional working capital, we will likely have to issue additional shares of our common stock and
common stock warrants at prices that may dilute the interests of our existing stockholders.
34
If demand for any of our products grows suddenly, we may lack the resources to meet demand or we
may be required to increase our capital spending significantly.
If we are able to develop and market our products successfully, we may experience periods of
rapid growth that place a significant strain on our financial and managerial resources. Through our
research and development efforts we are also attempting to develop additional products and lines of
business. Our ability to manage growth effectively, particularly given our increasing scope of
operations, will require us to continue to implement and improve our management, operational and
financial information systems, and will require us to develop the management skills of our
personnel and to train, motivate and manage our employees. Our failure to effectively manage growth
could increase our costs of operations and reduce our margins and liquidity, which could have a
material adverse effect on our business, financial condition and results of operations.
Our common stock is vulnerable to pricing and purchasing actions that are beyond our control and,
therefore, persons acquiring or holding our shares may be unable to resell their shares at a profit
as a result of this volatility.
The trading price of our securities has been subject to wide fluctuations in response to
quarter-to-quarter variations in our operating results, our announcements of new contracts or
products by us or our competitors, and other events and factors. The securities markets themselves
have from time to time and recently experienced significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. Announcements of delays in our
work schedules, new contracts or products by us or our competitors and developments or disputes
concerning patents or proprietary rights could have a significant and adverse impact on such market
prices. Regulatory developments in the United States and foreign countries, public concern as to
the safety of products containing radioactive compounds, and economic and other external factors
all affect the market price of our securities.
The conversion ratio of our Series H Stock is subject to adjustment based on the performance of our
Safety subsidiary in 2008 and 2009.
Although the number of shares issuable upon the conversion of our Series H Stock could
increase by 230,000,000 shares (the Additional Shares) based upon our Safety subsidiary not
achieving an agreed EBITDA target in 2009, the exact additional number of shares issuable upon the
conversion of our Series H Stock is still the subject of negotiations. Unless the negotiations end
with the agreement of no additional shares issuable upon the conversion of the Series H Stock, the
interests of our existing common stockholders will be diluted.
Outstanding Preferred Stock, options and warrants may make it difficult for us to obtain additional
capital on reasonable terms.
As of June 30, 2010, we had Preferred Stock outstanding that is convertible into approximately
a minimum of 452,833,333 shares of common stock and approximately a maximum of 682,833,333 shares
of common stock, depending on certain negotiations currently underway concerning the Additional
Shares. The holders rights to convert the Series F Stock, Series H Stock, including the Additional
Shares and Series I Stock and related warrants are, however, subject to certain share issuance
limitations. In addition, we have outstanding options and warrants for the purchase of up to
83,310,000 shares of common stock and 107,533,333 shares of common stock, respectively, at exercise
prices of between $0.03 and $1.00 per share respectively. If all of the outstanding options,
Preferred Stock, Additional Shares and common stock warrants were to be converted, they would
represent approximately 95% of our outstanding common stock on a fully diluted basis. Future
investors will likely recognize that the holders of the options and warrants will only exercise
their rights to acquire our common stock when it is to their economic advantage to do so.
Therefore, even with lower current market prices for our common stock, the market overhang of such
a large number of warrants, options, and convertible preferred stock, including the Additional
Shares may
adversely impact our ability to obtain additional capital because any new investors will perceive
that the securities offer a risk of substantial potential future dilution.
35
If we fail to effect and maintain registration of the common stock issued or issuable pursuant to
conversion of our Preferred Stock, the Additional Shares or certain of our outstanding common stock
warrants, we may be obligated to pay the investors of those securities liquidated damages.
We have an obligation to file upon request of holders of our preferred stock and obtain the
effectiveness of a registration statement which would include certain outstanding common stock and
common stock underlying outstanding Preferred Stock, the Additional Shares and warrants. Once
effective, the prospectus contained within a registration statement can only be used for a period
of time as specified by statute without there being a post-effective amendment filed that has
become effective under the Securities Act of 1933. If we are unable to meet these filing
obligations (or effectiveness obligations), we would be obligated to pay the holder of these
securities liquidated damages for each 30 day period after the applicable date as the case may be.
The liquidated damages may be paid in cash or shares of our common stock if registered, at the
holders option. We cannot offer any assurances that we will be able to maintain the required
current information contained in a prospectus or to obtain the effectiveness of any registration
statement or post-effective amendments that we may file.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company subleases approximately 2,260 square feet of office space, which serves as its and
PMXs executive offices and Safety and Nexus regional offices, at 1005 North Glebe Road, Suite 550,
Arlington, VA 22201 from Defense Holdings, Inc. The sublease is comprised of a one-year lease with
four one-year extensions, having a final expiration on December 31, 2011. Lease payments were
$7,569 per month from July 1, 2009 through December 31, 2009 and $7,756 from January 1, 2010
through June 30, 2010, including taxes and utilities. The annual lease payment for fiscal year 2011
will be approximately $94,208.
Nexus leases approximately 2,000 square feet of office space at 7 West Cross Street,
Hawthorne, NY 10532, which serves as its executive and administrative offices. Lease payments were
$2,926 per month from July 2009 through February 2010 and $3,096 per month from March 2010 through
June 2010. The lease payments are inclusive of taxes and utilities. The cumulative lease payment
for the remainder of the lease will be approximately $24,768. The lease expires on February 28,
2011, and we are currently searching for another property that would be suitable for our purposes.
Nexus also leases approximately 940 square feet of office space at 3466 Progress Drive, Suite
200, Bensalem, PA 19020, which serves as a regional sales office. Lease payments were $1,292.50
per month from July 2009 through February 2010 and $1,421.75 per month from March 2010 through June
2010. The lease payments are inclusive of taxes and utilities. The cumulative lease payment for the
remainder of the lease will be approximately $11,374. The lease expires on February 28, 2011, and
we are currently searching for another property that would be suitable for our purposes.
36
Safety currently leases properties in the following locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of |
|
Square |
|
|
Annual Rent |
|
Location |
|
Lease |
|
Footage |
|
|
Cost |
|
Knoxville, TN (HQ) |
|
May 31, 2018 |
|
|
20,850 |
|
|
$ |
344,028 |
|
Knoxville, TN (Tech Bldg.) |
|
September 20, 2011 |
|
|
11,000 |
|
|
$ |
79,094 |
|
Blaydon On Tyne, England
(Safety Ltd. HQ) |
|
Monthly |
|
|
1,000 |
|
|
$ |
10,848 |
(1) |
Sandusky, OH |
|
January 31, 2011 |
|
|
1,100 |
|
|
$ |
9,300 |
|
Oakridge, TN |
|
February 28, 2011 |
|
|
6,338 |
|
|
$ |
62,885 |
|
Albany, NY |
|
March 31, 2011 |
|
|
1,000 |
|
|
$ |
11,720 |
|
Richland, WA |
|
Monthly |
|
|
1,970 |
|
|
$ |
10,836 |
|
Pittsburgh, PA |
|
Monthly |
|
|
640 |
|
|
$ |
10,500 |
|
|
|
|
(1) |
|
Based on a conversion ratio of pounds to dollars of £0.664 as of June 30, 2010. |
We believe that our existing facilities are adequate to accommodate our business needs.
ITEM 3. LEGAL PROCEEDINGS
We are subject to certain claims and lawsuits typically filed against the engineering,
consulting and construction businesses, alleging primarily professional errors or omissions. We
carry professional liability insurance, subject to certain deductibles and policy limits, against
such claims. However, in some actions, parties may seek damages that exceed our insurance coverage
or for which we are not insured. Managements opinion is that the resolution of our current claims
will not have a material adverse effect on our financial position, results of operations or cash
flows.
ITEM 4. RESERVED
37
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock is currently traded on the OTC Electronic Bulletin Board under the symbol
HOMS.OB. The following table sets forth, for the fiscal periods indicated, the high and low
closing bid prices of a share of our common stock for the last eight quarterly periods. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions. This information was obtained from Bloomberg L.P.
|
|
|
|
|
|
|
|
|
Fiscal Year 2010 |
|
High |
|
|
Low |
|
4th
Quarter (April June 2010) |
|
$ |
0.065 |
|
|
$ |
0.035 |
|
3rd
Quarter (January March 2010) |
|
$ |
0.090 |
|
|
$ |
0.059 |
|
2nd Quarter (October December 2009) |
|
$ |
0.190 |
|
|
$ |
0.141 |
|
1st Quarter (July September 2009) |
|
$ |
0.240 |
|
|
$ |
0.115 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2009 |
|
High |
|
|
Low |
|
4th Quarter (April June 2009) |
|
$ |
0.125 |
|
|
$ |
0.070 |
|
3rd Quarter (January March 2009) |
|
$ |
0.115 |
|
|
$ |
0.070 |
|
2nd Quarter (October December 2008) |
|
$ |
0.105 |
|
|
$ |
0.075 |
|
1st Quarter (July September 2008) |
|
$ |
0.080 |
|
|
$ |
0.030 |
|
Dividends
We have not paid dividends on our common stock since inception and do not intend to pay any
dividends to our common stock holders in the foreseeable future. We currently intend to reinvest
our earnings, if any, for the development and expansion of our business. Any declaration of
dividends on any class of our stock in the future will be at the election of our Board of Directors
and will depend upon our earnings, capital requirements and financial position, general economic
conditions and other factors our Board of Directors deems relevant.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information as of June 30, 2010, concerning our equity
compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
securities |
|
|
|
Number of |
|
|
|
|
|
remaining |
|
|
|
securities to |
|
|
Weighted |
|
|
available for |
|
|
|
be issued |
|
|
average |
|
|
future |
|
|
|
upon exercise |
|
|
exercise price |
|
|
issuance under |
|
|
|
of |
|
|
of |
|
|
equity compensation |
|
|
|
outstanding |
|
|
outstanding |
|
|
plans (excluding |
|
|
|
options, warrants and |
|
|
options, warrants and |
|
|
securities reflected |
|
Plan category |
|
rights |
|
|
rights |
|
|
in column (a)) |
|
Equity compensation plans approved by security holders |
|
|
6,800,000 |
|
|
$ |
0.088 |
|
|
|
400,000 |
(1) |
Equity compensation plans not approved by security
holders (2)(3) |
|
|
76,510,000 |
|
|
$ |
0.054 |
|
|
|
1,216,640 |
(1) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
83,310,000 |
|
|
$ |
0.057 |
|
|
|
1,616,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
400,000 options available for future issuance pursuant to the Companys 2005 Stock Option Plan (the
2005 Plan) and 1,216,640 options available for future issuance pursuant to the Companys 2008 Stock
Option Plan (the 2008 Plan). |
|
(2) |
|
Includes 73,750,000 non-qualified options to purchase common stock pursuant to the Companys 2008 Plan. |
|
(3) |
|
Includes 2,760,000 non-qualified options to purchase common stock issued to each of our non-employee
directors and one consultant. |
38
Additional information regarding our stock-based compensation awards outstanding and available
for future grants as of June 30, 2010 is presented in the Notes to Consolidated Financial
Statements.
Purchases of Equity Securities by the Registrant and Affiliated Purchasers
None.
Holders of our Common Stock
As of September 24, 2010, there were approximately 357 holders of record of our common stock.
ITEM 6. SELECTED FINANCIAL DATA
This item is not applicable to smaller reporting companies.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto appearing elsewhere in this filing. Statements in
this Managements Discussion and Analysis and Results of Operation and elsewhere in this annual
report that are not statements of historical or current fact constitute forward-looking
statements.
Overview
Homeland Security Capital Corporation was incorporated in Delaware on August 12, 1997 and its
corporate headquarters is located in Arlington, Virginia. The Company focuses on the acquisition
and development of businesses whose primary operations are in the CBRNE incident response and
electronic security marketplace within the homeland security industry.
The Companys original business from 1997 through 2003, operating under the name of Celerity
Systems, Inc. was to develop and manufacture, at third party facilities, digital set top boxes and
digital video servers for the interactive television and high speed Internet markets.
On September 3, 2003, the Company elected to become a business development company, or BDC, to
be regulated pursuant to Section 54 of the Investment Company Act of 1940, as amended. On December
30, 2005, at a special stockholders meeting, the stockholders of the Company voted to amend the
Certificate of Incorporation of the Company to change the name to Homeland Security Capital
Corporation and voted to withdraw the Companys election as a BDC. Accordingly, the Company
changed its business plan to primarily seek acquisition of companies that provide homeland security
products and services.
The Company currently conducts its ongoing operations through one wholly owned subsidiary, one
majority-owned subsidiary and one joint venture. On February 7, 2006, the Company, through its
majority-owned Nexus subsidiary, acquired 100% of the common stock of Corporate Security Solutions,
a security integration firm with operations in the Mid-Atlantic region with a focus on the New York
City market. On September 15, 2006, the Company formed PMX and on September 18, 2006 PMX became a
U.S.-based joint venture, 51% controlled by the Company, with Polimaster, Inc., a company focused
on the field of radiological detection and isotope identification. On March 13, 2008, the Company
acquired 100% of Safety, a provider of global environmental, hazardous and radiological
infrastructure remediation and advanced construction services in the United States and the United
Kingdom.
39
The Company expects to grow these businesses both organically and by acquisitions. The Company
continues to target 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, develop
superior management, build infrastructure and improve cash flows.
Results of Operations
The discussion below reflects the consolidated accounts of the Company and its wholly-owned
subsidiary, Safety (including Safetys wholly-owned United Kingdom subsidiary, Safety and Ecology
Corporation Limited, or SECL, its majority-owned subsidiary, Radcon Alliance, LLC), majority-owned
subsidiary, Nexus (including Nexus wholly-owned subsidiary, Corporate Security Solutions, Inc.)
and majority-owned joint venture, PMX. The Company controls each of the subsidiary and joint
venture boards of directors and provides extensive advisory services to each of the companies.
Accordingly, the Company believes it exercises sufficient control over the operations and financial
results of each company and consolidates the results of operations, eliminating minority interests
when such minority interests have a basis in the consolidated entity. All intercompany balances and
transactions have been eliminated.
The Company has measured the impact of inflation and changing prices on contract revenue,
contract costs, operating expenses and net income for 2010 and 2009, the financial periods included
in this Annual Report. We have concluded that there has not been a material impact to our financial
position, results of operations or cash flows from inflation or changing prices during 2010 or
2009.
Year Ended June 30, 2010 as Compared to the Year Ended June 30, 2009
Contract revenue
For the twelve months ended June 30, 2010, the Company recorded contract revenue of
$97,899,868 as compared to $80,839.347 recorded for the twelve months ended June 30, 2009. The
increase of $17,060,521 is further outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Increase (Decrease) |
|
Holding Company |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
Safety |
|
|
85,723,970 |
|
|
|
72,106,878 |
|
|
|
13,617,092 |
|
|
|
18.9 |
% |
Nexus |
|
|
10,207,192 |
|
|
|
6,462,511 |
|
|
|
3,744,681 |
|
|
|
57.9 |
% |
PMX |
|
|
1,968,706 |
|
|
|
2,269,958 |
|
|
|
(301,252 |
) |
|
|
-13.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
97,899,868 |
|
|
$ |
80,839,847 |
|
|
$ |
17,060,521 |
|
|
|
21.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall increase of $17,060,521, or 21.1%, reflects increased revenues at Safety and
Nexus, attributable to both expanded services within existing contracts and services provided under
new contracts as compared to the prior year. The decrease in revenues for PMX is a result of fewer
units shipped to a significant customer that has started to deploy previously purchased products
into field operations.
40
Contract cost
For the twelve months ended June 30, 2010, the Company recorded contract cost of $77,807,174
as compared to $69,156,496 recorded for the twelve months ended June 30, 2009. The increase of
$8,650,678 is further outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Increase (Decrease) |
|
Holding Company |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
Safety |
|
|
68,698,494 |
|
|
|
62,175,026 |
|
|
|
6,523,468 |
|
|
|
10.5 |
% |
Nexus |
|
|
7,218,629 |
|
|
|
4,803,989 |
|
|
|
2,414,640 |
|
|
|
50.3 |
% |
PMX |
|
|
1,890,051 |
|
|
|
2,177,481 |
|
|
|
(287,430 |
) |
|
|
-13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,807,174 |
|
|
$ |
69,156,496 |
|
|
$ |
8,650,678 |
|
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall increase of $8,650,678, or 12.5%, are costs associated with the additional
contract revenues noted above for Safety and Nexus. Our gross profit on contract revenue improved
from 14.7% for the twelve months ended June 30, 2009 to 20.5% for the twelve months ended June 30,
2010. This significantly improved gross profit is mainly due to the movement to more cost plus
contracts at Safety and more effective management of fixed contract costs at both Safety and Nexus.
Operating expenses
For the twelve months ended June 30, 2010, the Company recorded operating expenses of
$14,299,238 as compared to $15,017,503 recorded for the twelve months ended June 30, 2009. The
decrease of $718,265 is further outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Increase (Decrease) |
|
Holding Company |
|
$ |
2,480,103 |
|
|
$ |
4,099,586 |
|
|
$ |
(1,619,483 |
) |
|
|
-39.5 |
% |
Safety |
|
|
10,743,617 |
|
|
|
9,479,019 |
|
|
|
1,264,598 |
|
|
|
13.3 |
% |
Nexus |
|
|
1,045,631 |
|
|
|
1,154,272 |
|
|
|
(108,641 |
) |
|
|
-9.4 |
% |
PMX |
|
|
29,887 |
|
|
|
284,626 |
|
|
|
(254,739 |
) |
|
|
-89.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,299,238 |
|
|
$ |
15,017,503 |
|
|
$ |
(718,265 |
) |
|
|
-4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall decrease of $718,265, or 4.8%, is primarily due to the decreased in non cash
compensation at the Holding Company offset in part by increased personnel costs at Safety during
the twelve months ended June 30, 2010 due to an increase in the number of employees required to
support its increased operating levels. Additionally, expenses decreased at both Nexus and PMX
reflecting effective management oversight of operating costs at these subsidiaries.
Other income and expense
For the twelve months ended June 30, 2010, the Company recorded net other expenses of
$3,022,489 as compared to net other expenses of $6,195,998 recorded for the twelve months ended
June 30, 2009. The decrease in net other expenses of $3,173,506 are further outlined below by
operating unit and functional line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
(Increase) Decrease |
|
Holding Company |
|
$ |
(1,882,547 |
) |
|
$ |
(5,428,250 |
) |
|
$ |
3,545,703 |
|
|
|
-65.3 |
% |
Safety |
|
|
(754,365 |
) |
|
|
(749,965 |
) |
|
|
(4,400 |
) |
|
|
0.6 |
% |
Nexus |
|
|
(385,577 |
) |
|
|
(17,780 |
) |
|
|
(367,797 |
) |
|
|
2068.6 |
% |
PMX |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,022,489 |
) |
|
$ |
(6,195,995 |
) |
|
$ |
3,173,506 |
|
|
|
-51.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
(Increase) Decrease |
|
Interest expense |
|
$ |
(2,093,910 |
) |
|
$ |
(2,011,991 |
) |
|
$ |
(81,919 |
) |
|
|
4.1 |
% |
Amortization of debt
offering costs |
|
|
(378,210 |
) |
|
|
(504,869 |
) |
|
|
126,659 |
|
|
|
-25.1 |
% |
Amortization of debt
discount |
|
|
(34,053 |
) |
|
|
(48,074 |
) |
|
|
14,021 |
|
|
|
-29.2 |
% |
Currency loss |
|
|
(59,085 |
) |
|
|
(405,821 |
) |
|
|
346,736 |
|
|
|
-85.4 |
% |
Impairment losses |
|
|
(530,264 |
) |
|
|
(3,317,837 |
) |
|
|
2,787,573 |
|
|
|
-84.0 |
% |
Interest and other
income |
|
|
73,033 |
|
|
|
92,597 |
|
|
|
(19,564 |
) |
|
|
-21.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,022,489 |
) |
|
$ |
(6,195,995 |
) |
|
$ |
3,173,506 |
|
|
|
-51.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall decrease in net other expenses of $3,173,506, or 51.2%, mainly reflects the
absence in 2010 of the impairment charge on Vuance Ltd. common stock recorded in 2009 and the
improvement in foreign exchange translation transactions. Additionally, the amortization for debt
offering costs and debt discount mostly expired in 2010.
Net income (loss)
As a result of the foregoing, the Company recorded net income before minority interests of
$2,180,737 for the twelve months ended June 30, 2010 as compared to a net loss before minority
interests of $9,530,647 for the twelve months ended June 30, 2009.
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
$1,829,429 at June 30, 2010 and $2,356,534 at June 30, 2009. Our primary needs for cash are to fund
our ongoing operations until such time as they begin to generate sufficient cash flow to fund
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 to satisfy our operating commitments for at least the next twelve months, we will require
significant additional funding in order to make additional acquisitions.
During the year ended June 30, 2010, the Company had a net decrease in cash of $527,105. Our
sources and uses of funds were as follows:
Cash Flows From Operating Activities
We provided net cash of $209,969 in our operating activities during the year ended June 30,
2010, primarily provided by our subsidiaries Safety and Nexus in their ongoing operations.
Cash Flows From Investing Activities
We used net cash of $1,198,152 in our investing activities during the year ended June 30,
2010, consisting of the purchase of fixed assets of $382,206 mainly by SEC and Nexus, less the
proceeds from the disposal of fixed assets in the amount of $29,481. Nexus also used $872,427 cash
in the purchase of marketable fixed income securities. Cash was increased by investment proceeds
from a non-controlling investment in a subsidiary and was decreased by the advancement of funds for
notes receivable from a related party.
42
Cash Flows From Financing Activities
We provided cash of $537,521 in financing activities during the year ended June 30, 2010,
consisting of net borrowings on Safetys line of credit of $1,650,000. We used funds for repayments
on a note to a related party of $50,110 and repayment of bank notes of $1,062,369 by Safety
($970,175) and Nexus ($92,194).
As of June 30, 2010, we had net working capital of $11,768,761.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet arrangements.
Critical Accounting Policies And Estimates
Revenue Recognition Safety recognizes revenue on their environmental and remediation
services performed under time and material and fixed fee contracts. Revenues and costs associated
with fixed price contracts are recognized using the percentage of completion (efforts expended)
method. Revenue and cost associated with time and material contracts are recognized as revenue when
earned and costs are incurred. Nexus recognizes revenue on their security system installation and
integration contracts using the percentage of completion (efforts expended) method. PMX recognizes
revenue and cost based on the sale (transfer of title) of its products and delivery of its
services.
Contract costs include all direct labor, material and other non-labor costs and those indirect
costs related to contract support, such as depreciation, fringe benefits, overhead labor, supplies,
tools, repairs and equipment rental. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in job performance, job conditions
and estimated profitability, including those arising from contract penalty provisions and final
contract settlements may result in revisions to costs and income and are recognized in the period
in which the revisions are determined.
The asset, costs in excess of billings on uncompleted contracts represents revenues
recognized in excess of billed amounts. The liability, billings in excess of costs on uncompleted
contracts represents billings in excess of revenues recognized.
Foreign Operations SECL, a United Kingdom corporation, is wholly owned by Safety. The
financial statements of SECL are included in the consolidated financial statements of the Company.
The financial statements of SECL are translated into U.S. dollars using exchange rates in effect at
period-end for assets and liabilities and average exchange rates during the period for results of
operations. The related translation adjustments are reported as a separate component of
shareholders equity.
Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments The carrying amount of items included in working
capital approximates fair value because of the short maturity of those instruments. The carrying
value of the Companys debt approximates fair value because it bears interest at rates that are
similar to current borrowing rates for loans of comparable terms, maturity and credit risk that are
available to the Company.
Recognition of Losses on Receivables Trade accounts receivable are recorded at their
estimated net realizable values using the allowance method. The Company generally does not require
collateral from customers. Management periodically reviews accounts for collectability, including
accounts determined to be delinquent based on contractual terms. An allowance for doubtful accounts
is maintained at the level management deems necessary to reflect anticipated credit losses. When
accounts are determined to be uncollectible, they are charged off against the allowance for bad
debts.
43
Investments in Assets Held for Sale The Company classifies certain investments in
marketable securities as assets held for sale under the provisions of SFAS No. 115. Under this
classification securities are carried at fair value (period end market closing prices) with
unrealized gains and losses excluded from earnings and reported as a separate component of
shareholders equity until the gains or losses are realized or a provision for impairment is
recognized.
Investment Valuation Investments in equity securities are recorded at fair value,
represented as cost, plus or minus unrealized appreciation or depreciation, respectively. The fair
value of investments that have no ready market, are recorded at the lower of cost or a value
determined in good faith by management, and approved by the Board of Directors, based upon assets
and revenues of the underlying investee companies as well as the general market trends for
businesses in the same industry. Because of the inherent uncertainty of valuations, management
estimates of the value of the investments may differ significantly from the values that would have
been used had a ready market for the investments existed and the differences could be material.
Periodically management makes an assessment as to impairment of the Companys investment and
accordingly adjusts the investment to record other than a temporary change in value.
Valuation of Stock Options and Warrants The valuation of stock options and warrants granted
to unrelated parties for services are measured the earlier of: (i) the dates at which a commitment
for performance by the counterparty to earn the equity instrument is reached, or (ii) the date the
counterpartys performance is complete. Pursuant to the requirements of EITF 96-18, the stock
options and warrants will continue to be revalued in situations where they are granted prior to the
completion of the performance.
Goodwill The Company records goodwill on acquisitions where the purchase price exceeds the
fair value of the assets acquired and the liabilities assumed. The Company, on a routine basis,
measures goodwill to determine if any amount recorded is impaired. If impairment is determined, the
Company adjusts the value of goodwill on the date impairment is first recognized.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the Appendix attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of
June 30, 2010, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, as well as other key members of our management, of the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, accumulated, processed, summarized, reported and communicated on a timely
basis within the time periods specified in the Commissions rules and forms.
44
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13A-15(f) and 15d-15(f) under the Securities Exchange Act.
Our internal control over financial reporting is designed to provide reasonable assurance regarding
the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles (GAAP). Our internal control
over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect transactions involving our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. GAAP, and that our receipts and
expenditures are being made only in accordance with the authorization of our management, and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of
June 30, 2010. In making this assessment, management used the framework set forth in the reporting
entitled Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a
companys internal control system, including (i) the control environment, (ii) risk assessment,
(iii) control activities, (iv) information and communication, and (v) monitoring.
This Annual Report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. The Company, as a result of the passage
of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Security and Exchange
Commissions (SEC) September 15, 2010 rulemaking release, believes it is not subject to attestation
by our registered public accounting firm as a non-accelerated filer. Non-accelerated filers
remain subject to the requirements of Section 404(a) of Sarbanes Oxley and related rules that
require a management report on internal control over financial reporting in annual reports filed
with the SEC.
Changes in Internal Control over Financial Reporting
In the ordinary course of business, we routinely enhance our information systems by either
upgrading our current systems or implementing new systems. No change occurred in our internal
controls over financial reporting during the year ended June 30, 2010 that has materially affected,
or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names of our executive officers and directors, their ages, their
offices in the Company, if any, their principal occupations or employment for the past five years,
the length of their tenure as directors and the names of other public companies in which such
persons hold or have held directorships during the past five years. In addition, the following
paragraphs include specific information about each directors experience, qualifications,
attributes or skills that led the Board of Directors to the conclusion that the individual is
qualified to serve on the Board of Directors as of the time of this filing, in light of our
business and structure.
|
|
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
|
Period Served |
|
|
|
|
|
|
|
C. Thomas McMillen
|
|
|
58 |
|
|
Chief Executive Officer and Chairman of the Board
|
|
August 30, 2005 to Present |
|
|
|
|
|
|
|
Christopher P. Leichtweis
|
|
|
51 |
|
|
President and Director
|
|
March 19, 2008 to Present |
|
|
|
|
|
|
|
Michael T. Brigante
|
|
|
56 |
|
|
Vice President of Finance and Chief Financial Officer
|
|
July 14, 2006 to Present |
|
|
|
|
|
|
|
Zev E. Kaplan
|
|
|
58 |
|
|
Director, Compensation Committee Chairman
|
|
December 30, 2005 to Present |
|
|
|
|
|
|
|
Philip A. McNeill
|
|
|
51 |
|
|
Director, Audit Committee Chairman
|
|
December 30, 2005 to Present |
|
|
|
|
|
|
|
Brian C. Griffin
|
|
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57 |
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Director
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May 16, 2007 to Present |
C. Thomas McMillen, Chief Executive Officer and Chairman of the Board
Mr. McMillen has served as the Companys Chief Executive Officer and Chairman of the Board
since August 30, 2005 and served as the Companys President from August 30, 2005 until March 19,
2008. Since March 12, 2010, Mr. McMillen has been the sole member and manager of NVT License
Holdings, LLC, a Delaware limited liability company, which is the indirect parent and controlling
entity of several other limited liability companies which hold the Federal Communications
Commission licenses for eight full power and three low power television stations in eight different
television markets, Since October 2009, he has served as a director of Dominion Funds, Inc., a
publicly traded mutual fund. From December 2004 until January 2007, Mr. McMillen served as the
Chairman of Fortress America Acquisition Corporation (now Fortress International Group, Inc.,
FIGI.PK), and from January 2007 until August 2009, he served as Vice Chairman and director. From
October 2007 until October 2009, Mr. McMillen served as Chairman and Co-Chief Executive Officer of
Secure America Acquisition Corporation, (now Ultimate Escapes, Inc. OTCBB: ULEI) and from October
2009 to September 2010 as a director and from November 2009 to September 2010 as Vice Chairman.
Ultimate Escapes, Inc. filed for bankruptcy protection in September 2010. In March 2003, Mr.
McMillen co-founded Global Secure Corp., a homeland security company providing integrated products
and services for critical incident responders, and served as its Chief Executive Officer until
February 2004. From February 2004 until February 2005, Mr. McMillen served as a consultant to
Global Secure Corp. From December 2003 to February 2004, Mr. McMillen served as Vice Chairman and
Director of Sky Capital Enterprises, Inc., a venture firm, and until February 2005 served as a
consultant. From March 2003 to February 2004, Mr. McMillen served as Chairman of Sky Capital
Holdings, Ltd, Sky Capital Enterprises London stock exchange listed brokerage affiliate. Mr.
McMillen has also been Chief Executive Officer of Washington Capital Advisors, a merchant bank and
one of our stockholders since 2003. Mr. McMillen also served as Chairman of TPF Capital, its
predecessor company, from 2001 through 2002. Mr. McMillen has also been an independent consultant
throughout his career. Mr.
McMillen received a Bachelor of Science in Chemistry from the University of Maryland and a
Bachelor and Master of Arts from Oxford University as a Rhodes Scholar.
46
Mr. McMillen is qualified for service on our Board of Directors based on his many years of
senior executive experience in the homeland security industry, including his experiences as a
successful businessman, Congressman and Presidential appointee.
Christopher P. Leichtweis, President and Director
Mr. Leichtweis has served as the Companys President and as a director of the Company since
March 19, 2008. In addition, Mr. Leichtweis has been serving as chairman and chief executive
officer of Safety & Ecology Holdings Corporation since 1991. Mr. Leichtweis founded Safety in 1991
and over the last decade has grown the Company to its present state of over $70 million in revenue.
Prior to founding Safety, Mr. Leichtweis served in various engineering and management positions at
Bechtel National and Bechtel Environmental, Inc. a global Engineering and Construction Company
starting in 1985 and was a key contributor to the environmental clean-up of major federal nuclear
legacy programs. He currently serves on the board of directors of his undergraduate Universitys
Foundation Board (SUNY Brockport). Mr. Leichtweis received a Bachelor of Science in Physics from
SUNY Brockport and a Masters of Business Administration from the University of Tennessee and is a
Certified Industrial Hygienist. Mr. Leichtweis was nationally recognized as the Southeast United
States 2005 Ernst & Young Entrepreneur of the Year award.
Mr. Leichtweis is qualified for service on our Board of Directors based on his 25 years of
environmental remediation experience, including his extensive background in managing a growing
company for 19 years.
Michael T. Brigante, Vice President of Finance and Chief Financial Officer
Mr. Brigante has served as the Companys Vice President of Finance since July 14, 2006 and the
Companys Chief Financial Officer since May 10, 2007. In addition, Mr. Brigante has served as the
Chief Executive Officer of Nexus from May 13, 2009 and served as Nexus President from July 1, 2008
to May 12, 2009. Mr. Brigante is a director of each of the Companys subsidiary boards of
directors. In January 2003, Mr. Brigante joined Sky Capital Enterprises, a venture firm, and Sky
Capital Holdings, a NASD registered broker dealer, which were both London Stock Exchange listed
companies and served as their Chief Financial Officer until June 2006. From July 1999 until
December 2002, Mr. Brigante was the Managing Partner of Pilot Rock Consulting, a diversified
financial consulting practice to public and private companies, which he founded. From December 1995
until December 1996, Mr. Brigante served as the Controller and from January 1997 until June 1999
served as Chief Financial Officer of Complete Wellness Centers, Inc. a publicly held healthcare
services company. Prior to his position with Complete Wellness Centers, Inc. Mr. Brigante served in
a variety of Senior Financial positions with public and private companies. Mr. Brigante received a
Bachelor of Science degree in Accounting and Economics from James Madison University and is a
Certified Public Accountant.
Zev. E. Kaplan, Director
Mr. Kaplan has served as a director of the Company since December 30, 2005. Mr. Kaplan is the
founder of a law firm concentrating its practice in the areas of transportation, infrastructure,
government relations, business and administrative law. Mr. Kaplan was Associate General Counsel to
Global Cash Assess, Inc., a NYSE traded company from August 2008 to August 2009. Mr. Kaplan
previously served as General Counsel to Cash Systems Inc., a publicly traded company in the
financial services business, a position he has held from March 2005 to August 2008. From April 1995
to the present, Mr. Kaplan has been General Counsel to the Regional Transportation Commission of
Southern Nevada, where he played a key policy role in the start-up of the local transit systems and
their facilities. In addition, Mr. Kaplan has had a key role in the planning and financing of
numerous major public infrastructure projects in Las Vegas. Prior to starting his law firm, Mr.
Kaplan spent 15 years in government service in the following capacities: Senior Deputy District
Attorney with the Clark County District Attorneys Office-Civil Division; General
Counsel to the Nevada Public Service Commission; and Staff Attorney to the U.S. Senate
Committee on Commerce, Science and Transportation. Mr. Kaplan received his Juris Doctor from
Southwestern University School of Law and attended Georgetown University for post-graduate legal
studies; received a Masters of Business Administration from the University of Nevada, Las Vegas;
and received a Bachelor of Science from the Smith School of Business at the University of Maryland
in 1974.
47
Mr. Kaplan is qualified for service on our Board of Directors based on his extensive legal
experience, which includes various positions serving governmental agencies at the federal and state
level.
Philip A. McNeill, Director
Mr. McNeill has served as a director of the Company since December 30, 2005. Mr. McNeill is
the Managing Partner and Chief Investment Officer of SPP Mezzanine Partners II, LLC the Manager of
SPP Mezzanine Funding, LP, SPP Mezzanine Funding II, LP and SPP Mezzanine II-A, LP, a position he
has held since November 2003, including SPP Management, LLC, the predecessor company to SPP
Mezzanine Partners II, LLC. Prior to forming SPP Mezzanine Partners, Mr. McNeill served as
Managing Director of Allied Capital Corporation, where he was co-head of its Private Finance and
Mezzanine activities and a member of its Investment Committee. From the time of his appointment as
Managing Director in 1998 until he left Allied Capital in 2002, the company grew from approximately
$740 million in assets to nearly $2.4 billion. Mr. McNeill joined Allied Capital directly from M&T
Capital, the SBIC investment division of M&T Bank, where he was a Vice President of M&T Capital/M&T
Bank and an investment professional from 1988 to 1993. From October 2007 until October 2009, Mr.
McNeill also served as a director of Secure America Acquisition Corporation, (now Ultimate Escapes,
Inc. OTCBB: ULEI). Mr. McNeill graduated from Syracuse University in 1981 with a Bachelor of
Science in Business Administration, with concentrations in Accounting, Finance, and Law & Public
Policy. Mr. McNeill earned his Masters Business Administration from Harvard Business School in
1985.
Mr. McNeill is qualified for service on our Board of Directors based on his experience with
start-up companies, his financial background and his current position serving as managing partner
and investment officer for an investment fund.
Brian C. Griffin, Director
Dr. Griffin has served as a director of the Company since May 16, 2007. In addition, Dr.
Griffin has served since January 2006 as Chairman of the Board of Clean Energy Systems, Inc. Dr.
Griffin served two terms as Oklahomas Secretary of Environment from April 1997 to January 2003.
During that time, he chaired and was a member of several committees sponsored by the U.S.
Environmental Protection Agency, the U.S. Department of Energy and the Southern States Energy
Board. Also, he was a member of the Biomass & Bio-Energy Research and Development Federal Advisory
Committee, which was sponsored by the U.S. Department of Energy and the U.S. Department of
Agriculture. Dr. Griffin also served as a member of the Coal & Advanced Power Systems Committee
sponsored by the U.S. Department of Energy and the Southern States Energy Board from January 1999
to January 2003. In addition, he served as the National Chairman of the Interstate Technology and
Regulatory Council from March 2001 to October 2003. In April 2003, President Bush appointed Dr.
Griffin to serve as the Federal Representative to the Southern States Energy Board. Dr. Griffin
received a Bachelor of Arts degree from Harvard University in 1974 and was selected as a Rhodes
Scholar. As a Rhodes Scholar, he attended Oxford University where he received his Master of
Jurisprudence degree. He also earned a Juris Doctor degree from the University of Oklahoma College
of Law and a Master of Laws degree from Southern Methodist University College of Law.
Dr. Griffin is qualified for service on our Board of Directors based on his service as
Secretary of the Environment, his numerous governmental appointments and his extensive experience
as a board member of numerous listed companies.
48
Term of Office
Each director holds office until our annual meeting of stockholders and until his successor is
duly elected and qualified. Officers are elected by our Board of Directors and hold office at the
discretion of our Board of Directors.
Family Relationships
To our knowledge, there are no family relationships, as such term is defined in item 401(d) of
Regulation S-K, among any of the directors or executive officers of the Company.
Involvement in Certain Legal Proceedings
To our knowledge, none of the Companys directors or executive officers has been involved in
legal proceedings over the past ten years that are material to an evaluation of his ability or
integrity to serve as a director or executive officer of the Company.
Committees of the Board of Directors and Meetings
Audit Committee. Philip A. McNeill (Committee Chairman), Zev E. Kaplan and Brian C. Griffin
serve as members of the Audit Committee. All are independent members of the Board and our Board
has determined that Mr. McNeill satisfies the criteria for an audit committee financial expert
under Rule 401(e) of Regulation S-K of the rules of the Commission. Each Audit Committee member is
able to read and understand fundamental financial statements, including our companys consolidated
balance sheet, statement of operations and statement of cash flows. The functions of the Audit
Committee are primarily to: (i) provide advice to the Board in selecting, evaluating or replacing
outside auditors, (ii) review the fees charged by the outside auditors for audit and non-audit
services, (iii) ensure that the outside auditors prepare and deliver annually a Statement as to
Independence, (iv) meet with outside auditors to discuss the results of their examination and their
evaluation of internal controls and the overall quality of financial reporting, and (v) meet with
the outside auditors to discuss the scope of the annual audit and to discuss the audited financial
statements.
The charter for our Audit Committee can be found on our website at www.hscapcorp.com under the
tab, Investor Relations.
AUDIT COMMITTEE REPORT
The members of the Audit Committee, which is comprised of three directors, have been appointed by
the Board of Directors. The current members of the Committee are Messrs. Philip A. McNeill
(Chairman), Zev E. Kaplan and Brian C. Griffin.
The Audit Committee reviews the scope and timing of the independent registered public accounting
firms audit and other services, and their report on our financial statements following completion
of their audits. The Audit Committee also makes annual recommendations to the Board of Directors
regarding the appointment of independent registered public accounting firms for the ensuing year.
Management is responsible for the preparation of our financial statements and the independent
registered public accounting firm has the responsibility for the examination of those statements.
The Audit Committee reviewed our audited financial statements for the year ended June 30, 2010 and
met with both management and our external accountants to discuss those financial statements.
Management and the independent registered public accounting firm have represented to the Audit
Committee that the financial statements were prepared in accordance with generally accepted
accounting principles. The Audit Committee also considered taxation matters and other areas of
oversight relating to the financial reporting and audit process that the Audit Committee deemed
appropriate.
The Audit Committee has received from the independent registered public accounting firm their
written disclosure and letter regarding their independence from us as required by applicable
requirements of the Public Company Accounting Oversight Board, and has discussed with the
independent registered public
accounting firm their independence. The Audit Committee also discussed with the independent
registered public accounting firm any matters required to be discussed by Statement on Auditing
Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board in Rule
3200T, as may be modified or supplemented.
49
Based upon the reviews and discussions described in this Audit Committee Report, the Audit
Committee has recommended to the Board of Directors that the audited financial statements be
included in our Annual Report on Form 10-K for the year ended June 30, 2010 for filing with the
Securities and Exchange Commission.
RESPECTFULLY SUBMITTED,
THE AUDIT COMMITTEE
Philip C. McNeill, Chairman
Zev E. Kaplan
Brian C. Griffin
Compensation Committee. Zev E. Kaplan (Committee Chairman), Brian C. Griffin and Philip A.
McNeill serve as members of the Compensation Committee. All are independent members of the Board.
The Compensation Committee met four times in fiscal year 2010. The charter for our Compensation
Committee can be found on our website at www.hscapcorp.com under the tab, Investor Relations.
Meeting Attendance. During the fiscal year ended June 30, 2010, there were thirteen meetings
of our Board of Directors, and the various committees of the Board of Directors met a total of
eight times. No director attended fewer than 75% of the total number of meetings of the Board of
Directors and of committees on which he served during the fiscal year ended June 30, 2010.
We have no formal policy regarding board diversity. Our Board of Directors may therefore
consider a broad range of factors relating to the qualifications and background of nominees, which
may include diversity, which is not only limited to race, gender or national origin. Our Board of
Directors priority in selecting members is identification of persons who will further the
interests of our stockholders through his or her established record of professional accomplishment,
the ability to contribute positively to the collaborative culture among board members and
professional and personal experiences and expertise relevant to our growth strategy.
Board Leadership Structure
Mr. McMillen serves as the Chairman of our Board of Directors and Chief Executive officer and
Mr. Leichtweis serves as our President. We believe that this structure is
the most effective structure for us and our stockholders at this time because a separate chairman
(i) can provide the President with guidance and feedback on his performance, (ii) provides a more
effective channel for the Board of Directors to express its views on management, (iii) allows the
Chairman to focus on stockholder interests and corporate governance while providing Mr. Leichtweis
with the ability to focus his attention on managing our day-to-day operations. As Mr. McMillen has
significant senior level homeland security industry experience, he is particularly well-suited to
serve as Chairman.
We recognize that different board leadership structures may be appropriate for companies in
different situations. We will continue to re-examine our corporate governance policies and
leadership structures on an ongoing basis to ensure that they continue to meet the Companys needs.
50
Role in Risk Oversight
Management is responsible for managing the risks that we face. The Board of Directors is
responsible for overseeing managements approach to risk management that is designed to support the
achievement of organizational objectives, including strategic objectives and risks associated with
our growth strategy, to improve long-term organizational performance and enhance stockholder value.
The involvement of the full Board of Directors in reviewing our strategic objectives and plans is a
key part of the Board of Directors assessment of managements approach and tolerance to risk. A
fundamental part of risk management is not only understanding the risks a company faces and what
steps management is taking to manage those risks, but also understanding what level of risk is
appropriate for us. In setting our business strategy, our Board of Directors assesses the various
risks being mitigated by management and determines what constitutes an appropriate level of risk
for us.
While the Board of Directors has ultimate oversight responsibility for overseeing managements
risk management process, various committees of the Board of Directors assist it in fulfilling that
responsibility.
The Audit Committee assists the Board of Directors in its oversight of risk management in the
areas of financial reporting, internal controls and compliance with legal and regulatory
requirements and the Compensation Committee assists the Board of Directors in its oversight of the
evaluation and management of risks related to our compensation policies and practices.
Compensation Committee Interlocks and Insider Participation
During the twelve months ended June 30, 2010, the Compensation Committee consisted of Mr.
Kaplan (Chairman), Dr. Griffin and Mr. McNeill, none of whom has been an officer or employee of the
Company. There are no other relationships among the Companys executive officers, members of the
Compensation Committee or entities whose executives serve on the Board of Directors or the
Compensation Committee that require disclosure under applicable Commission regulations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires the Companys Directors and executive officers,
and persons who beneficially own more than 10% of a registered class of the Companys equity
securities, to file with the Commission initial reports of ownership and reports of changes in
ownership of common stock and the other equity securities of the Company. Officers, Directors, and
persons who beneficially own more than 10% of a registered class of the Companys equity securities
are required by the regulations of the Commission to furnish the Company with copies of all Section
16(a) forms they file. Based solely on our review of these forms and written representations from
the executive officers and directors, we believe that all Section 16(a) filing requirements were
met during the twelve-month period ended June 30, 2010.
Code of Ethics
On March 16, 2004, the Board of Directors of the Company adopted a written Code of Ethics that
applies, among others, to our principal executive officer and principal financial officer and is
designed, among other things, to deter wrongdoing and promote honest and ethical conduct, full,
fair and accurate disclosure, compliance with laws, prompt internal reporting and accountability to
adherence to the Code of Ethics. The Code of Ethics can be found on our website at
www.hscapcorp.com under the tab, Investor Relations.
Stockholder Communications to the Board of Directors
Generally, stockholders who have questions or concerns should contact the Chief Financial
Officer at (703) 528-7073 or email at MBrigante@hsccap.com. Stockholders wishing to submit
written communications directly to the Board of Directors should send their communications to our
Chairman, Homeland Security Capital Corporation, 1005 North Glebe Road, Suite 550, Arlington,
Virginia, 22201. All stockholder communications will be considered by the independent members of
our Board of Directors.
Where You Can Find More Information
Statements contained in this annual report as to the contents of any contract, agreement or
other document referred to include those terms of such documents that we believe are material,
whenever a reference is made in this annual report to any contract or other document of ours, you
should refer to the exhibits that are a part of the annual report for a copy of the contract or
document.
You may read and copy all or any portion of the annual report or any other information that
the Company files at the Commissions public reference room at One Station Place, 100 F Street NE,
Washington, DC 20549. You can request copies of these documents, upon payment of a duplicating fee,
by writing to the Commission. Please call the Commission at 1-800-SEC-0330 for further information
on the operation of the public reference room. Our Commission filings, including this annual
report, are also available to you on the Commissions website at www.sec.gov.
51
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation paid or accrued during the last two fiscal years
ended June 30, 2009 and 2010 to (1) our Chief Executive Officer, (2) our Vice President of Finance
and Chief Financial Officer, and (3) our next most highly compensated executive officer, other than
our Chief Executive Officer and our Vice President of Finance and Chief Financial Officer, who
earned more than $100,000 during the year ended June 30, 2010.
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Non- |
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Non- |
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Equity |
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qualified |
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Incentive |
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Deferred |
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Plan |
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Compen- |
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Stock |
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Options |
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Compen- |
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sation |
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All Other |
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Name and Principal Position |
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Year |
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Salary |
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Bonus |
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Awards |
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Awards(1) |
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sation(2) |
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Earnings |
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Compensation(3) |
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Total |
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C. Thomas McMillen, |
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2010 |
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|
$ |
300,000 |
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|
|
|
$ |
678,356 |
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|
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|
|
|
|
|
|
$ |
8,122 |
|
|
$ |
987,478 |
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Chairman of the Board and Chief Executive Officer |
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2009 |
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|
$ |
300,000 |
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|
$ |
75,000 |
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|
|
|
|
|
$ |
1,808,950 |
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|
|
|
|
|
|
|
|
|
$ |
7,648 |
|
|
$ |
2,191,598 |
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Michael T. Brigante |
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2010 |
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|
$ |
222,500 |
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|
|
|
|
|
|
|
|
|
$ |
118,712 |
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|
|
|
|
|
|
|
|
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$ |
|
|
|
$ |
341,212 |
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Vice President of Finance and Chief Financial Officer |
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2009 |
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|
$ |
217,500 |
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|
$ |
25,000 |
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|
|
|
|
|
$ |
316,600 |
|
|
|
|
|
|
|
|
|
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$ |
|
|
|
$ |
599,100 |
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Christopher P. Leichtweis |
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2010 |
|
|
$ |
312,000 |
|
|
$ |
100,000 |
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|
|
|
|
|
$ |
|
|
|
$ |
6,111 |
|
|
|
|
|
|
$ |
17,354 |
|
|
$ |
435,465 |
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President and Chief Executive Officer of Safety & Ecology |
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2009 |
|
|
$ |
311,308 |
|
|
$ |
50,000 |
|
|
|
|
|
|
$ |
|
|
|
$ |
5,200 |
|
|
|
|
|
|
$ |
21,699 |
|
|
$ |
388,207 |
|
|
|
|
1. |
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These amounts represent the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS Rule 123R. A discussion of the
assumptions used in determining grant date fair value may be found in Note 11 to our consolidated financial statements included elsewhere in this annual report. |
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2. |
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Reflects Company contributions to a 401(k) plan. |
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3. |
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Reflects Company-paid health, life and disability insurance. |
Narrative Disclosure to Summary Compensation Table
The Compensation Committee of our Board of Directors makes decisions regarding the
compensation of our executive officers and directors. The Compensation Committee is composed
entirely of independent directors, and it is authorized to engage and retain independent
third-party compensation advisors to obtain advice and assistance on all matters related to
executive compensation and benefit plans. During fiscal 2010, the Compensation Committee engaged
Total Compensation Solutions as an independent compensation consultant to the Compensation
Committee to assess our fiscal 2010 executive compensation program. The compensation consultant
assisted the Compensation Committee by compiling and analyzing compensation data of comparable
companies in terms of size as well as our peers within our industry. Upon completion, the
consultant gave the compensation committee a report, which included recommendations as to how the
subject individuals should be compensated.
We have also entered into employment agreements with three of our executive officers: C.
Thomas McMillen, Michael T. Brigante and Christopher Leichtweis.
C. Thomas McMillen Employment Agreement. On August 29, 2005, the Company and Mr. McMillen
entered into an employment agreement pursuant to which Mr. McMillen agreed to serve as the
Companys Chief Executive Officer and President for a term of two years, such agreement being
renewable by mutual agreement of the Company and Mr. McMillen. Mr. McMillens initial annual salary
under this agreement was $120,000 with the possibility of a performance bonus. Pursuant to this
agreement, Mr. McMillen was also awarded options to acquire a total of 5,800,000 shares of common
stock, as described below in more detail. Mr. McMillen also received a sign-on bonus of $125,000.
52
Effective September 1, 2007, the Company and Mr. McMillen agreed to a two-year extension of
his employment agreement. Under the terms of the extension, Mr. McMillens annual salary was
increased to $200,000 with the possibility of a performance bonus. Additionally, the base salary
would be increased by $20,000, or pro rata, for every $10,000,000 of equity the Company sells
during the term of the employment agreement (except for any equity securities (i) issued to
employees or consultants as compensation, (ii) issued in acquisition or merger or (iii) purchased
by employees, consultants or directors upon the exercise or conversion of any Company stock option
or other security issued for compensatory purposes).
In connection with the successful completion of the Safety acquisition, Mr. McMillens base
salary was increased to $300,000 effective March 1, 2008 and, on July 30, 2008, he was granted
options to
purchase 50,000,000 shares of common stock, as described below in more detail, without any
changes to the remaining terms of his employment agreement as then in effect.
On September 1, 2009, Mr. McMillens employment agreement was automatically extended for a
one-year period without any changes to the terms of the agreement then in effect. On September 1,
2010, Mr. McMillens employment agreement was again automatically extended for a one-year period
without any change to the terms of the agreement as then in effect.
Michael T. Brigante Employment Agreement. On May 10, 2007, the Company and Mr. Brigante
entered into an employment agreement pursuant to which Mr. Brigante agreed to serve as the
Companys Chief Financial Officer for a term of three years, such agreement being renewable by
mutual agreement of the Company and Mr. Brigante. Mr. Brigantes initial annual salary under this
agreement was $190,000 with the possibility of a performance bonus. Pursuant to this agreement, Mr.
Brigante was awarded options to acquire a total of 519,210 shares of common stock, as described in
more detail below. Mr. Brigante also received a sign-on bonus of $5,000.
In connection with the successful completion of the Safety acquisition, Mr. Brigantes base
salary was increased to $217,500 effective March 1, 2008 and, on July 30, 2008, he was granted
230,790 options without any changes to the remaining terms of his employment agreement as currently
in effect.
On February 1, 2010, Mr. Brigantes base salary was increased to $227,500 effective January 1,
2010. The increase was in connection with Mr. Brigantes continued service as Chief Executive
Officer of Nexus. No other terms in his employment agreement were changed as then in effect.
On May 10, 2010, Mr. Brigantes employment agreement was automatically extended for a one-year
period without any changes to the terms of the agreement as then in effect.
Christopher Leichtweis Employment Agreement. On March 14, 2008, Safety and Mr. Leichtweis
entered into an employment agreement pursuant to which Mr. Leichtweis agreed to serve as Safetys
Chief Executive Officer for a term of three years, such agreement being renewable by mutual
agreement of Safety and Mr. Leichtweis. Mr. Leichtweis initial salary under this agreement was
$300,000 annually, subject to annual cost of living increases and an annual minimum bonus of
$100,000 if Safetys annual revenues exceed $50,000,000. Mr. Leichtweis, at his discretion, may
choose to receive less than the annual minimum bonus and allocate a portion thereof to any
employee(s) he may choose. Additionally, Mr. Leichtweis serves as President of the Company, but on
an at-will basis.
Equity Compensation Plan Information
The 2005 Stock Option Plan. On August 29, 2005, the Board adopted a stock option plan, or the
2005 Plan, under which the Company reserved 7,200,000 shares of common stock for issuance.
Participants eligible under the 2005 Plan are officers and key employees. There were a total of
6,800,000 options issued and outstanding under the 2005 Plan at June 30, 2010.
53
The 2008 Stock Option Plan. On July 30, 2008, the Board adopted a stock option plan, or the
2008 Plan, under which the Company reserved 75,000,000 shares of common stock for issuance.
Participants eligible under the 2008 Plan are officers, key employees and directors. There were a
total of 73,750,000 options issued and outstanding under the 2008 Plan at June 30, 2010.
The table below reflects the activity and assumptions with respect to the 2005 Plan and the
2008 Plan through June 30, 2011:
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Vesting |
|
|
Expected to |
|
|
Options |
|
|
|
Total |
|
|
Options |
|
|
Options |
|
|
Options |
|
|
Options |
|
|
Quarterly Next |
|
|
be |
|
|
Available |
|
Option |
|
Options in |
|
|
Vested at |
|
|
Forfeited |
|
|
Exercised |
|
|
Outstanding |
|
|
4 Quarters |
|
|
outstanding |
|
|
for Grant |
|
Plan |
|
the Plan |
|
|
6/30/10 |
|
|
at 6/30/10 |
|
|
at 6/30/10 |
|
|
at 6/30/10 |
|
|
Through 6/30/11 |
|
|
at 6/30/11 |
|
|
at 6/30/10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Plan |
|
|
7,200,000 |
|
|
|
6,800,000 |
|
|
|
|
|
|
|
|
|
|
|
6,800,000 |
|
|
|
|
|
|
|
6,800,000 |
|
|
|
400,000 |
|
2008 Plan |
|
|
75,000,000 |
|
|
|
73,850,000 |
|
|
|
(67,640 |
) |
|
|
(33,360 |
) |
|
|
73,750,000 |
|
|
|
|
|
|
|
73,750,000 |
|
|
|
1,216,640 |
|
For additional information on the Companys option plans, please refer to Note 11 to
Consolidated Financial Statements.
Outstanding Equity Awards at Fiscal Year-End
The following table shows grants of stock options outstanding on the last day of the fiscal
year ended June 30, 2010, including non-performance based awards, to each of the executive officers
named in the Summary Compensation Table. Senior management did not have any outstanding stock
awards at June 30, 2010.
|
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|
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|
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|
|
|
|
|
|
|
|
Option Awards |
|
|
|
Number of |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
Equity Incentive Plan |
|
|
Option |
|
|
|
|
|
|
Underlying |
|
|
Underlying |
|
|
Awards: Number of |
|
|
Exercise |
|
|
|
|
|
|
Unexercised |
|
|
Unexercised |
|
|
Securities Underlying |
|
|
Price ($ |
|
|
Option |
|
|
|
Options - # |
|
|
Options - # |
|
|
Unexercised or Unearned |
|
|
per |
|
|
Expiration |
|
Name |
|
Exercisable |
|
|
Unexercisable |
|
|
Options - Number |
|
|
share) |
|
|
Date |
|
|
|
C. Thomas Mcmillen |
|
|
5,800,000 |
(1) |
|
|
|
|
|
|
|
|
|
$ |
0.08 |
|
|
|
8/29/2015 |
|
Chief Executive Officer |
|
|
50,000,000 |
(2) |
|
|
|
|
|
|
|
|
|
$ |
0.05 |
|
|
|
7/30/2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael T. Brigante |
|
|
230,790 |
(3) |
|
|
|
|
|
|
|
|
|
$ |
0.17 |
|
|
|
7/10/2016 |
|
Vice President and |
|
|
519,210 |
(4) |
|
|
|
|
|
|
|
|
|
$ |
0.12 |
|
|
|
5/10/2017 |
|
Chief Financial Officer |
|
|
8,750,000 |
(5) |
|
|
|
|
|
|
|
|
|
$ |
0.05 |
|
|
|
7/30/2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher P.
Leichtweis
President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These options were granted to Mr. McMillen under the 2005 Plan in connection with his
employment by the Company and appointment to the Board on August 29, 2005. These options vest
as follows: (i) options to acquire 1,160,000 shares of common stock vested on August 29, 2005,
and (ii) options to acquire 1,160,000 shares of common stock vested at the end of each of the
first, second, third and fourth calendar quarters following the initial vesting date. At June
30, 2010, these options were fully vested. These options expire on August 29, 2015. |
|
(2) |
|
These options were granted to Mr. McMillen in connection with the successful completion of
the Safety acquisition under the 2008 Plan. These options vested as follows: (i) options to
acquire 12,500,000 shares of common stock vested on July 30, 2008, and (ii) options to acquire
4,687,500 additional shares of common stock vest at the end of each of the following eight
calendar quarters after the initial vesting date. At June 30, 2010, all of these options were
fully vested. These options expire on July 30, 2018. |
|
(3) |
|
These options were granted to Mr. Brigante in connection with his consulting agreement with
the Company. On July 5, 2006, Mr. Brigante was granted options to purchase 750,000 shares of
common stock under the 2005 Plan. These options vested as follows: (i) options to acquire
57,720 shares of common stock vested on July 10, 006, and (ii) options to acquire 57,690
additional shares of common stock vested at the end of each of the following twelve calendar
quarters following the initial vesting date. At June 30, 2010, these options were fully
vested. These options expire on July 10, 2016. |
|
(4) |
|
These options were granted to Mr. Brigante in connection to his appointment as Chief
Financial Officer of the Company. On May 15, 2007, Mr. Brigante was granted options to
purchase 519,210 shares of common stock under the 2005 Plan, and the Company cancelled 519,210
unvested options from his July 5, 2006 grant. These options vested as follows (i) options to
57,690 additional shares of common stock vested on June 30, 2007, and (ii) options to acquire
57,690 additional shares of common stock vested at the end of each of the following eight
calendar quarters following the initial vesting date. At June 30, 2010, these options were
fully vested. These options expire on May 10, 2017. |
|
(5) |
|
These options were granted to Mr. Brigante in connection with the successful completion of
the Safety acquisition under the 2008 Plan. These options vested as follows: (i) options to
acquire 2,187,500 shares of common stock vested on July 30, 2008, and (ii) options to acquire
820,313 additional shares of common stock vest at the end of each of the following eight
calendar quarters after the initial vesting date. At June 30, 2010, all of these options were
fully vested. These options expire on July 30, 2018. |
54
Potential Payments Upon Termination or Change-in-Control
There are no agreements providing for payments to any of our executives upon their termination
or a change in control of our Company.
Director Compensation
The following table shows the total compensation paid or accrued during the fiscal year ended
June 30, 2010 to each of our non-employee directors:
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|
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|
|
|
Fees |
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
|
Nonqualified |
|
|
|
|
|
|
|
|
|
Earned or |
|
|
|
|
|
|
|
|
|
|
Incentive |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
Paid in |
|
|
Stock |
|
|
Option |
|
|
Plan |
|
|
Compensation |
|
|
All Other |
|
|
|
|
Name |
|
Cash |
|
|
Awards |
|
|
Awards(1) |
|
|
Compensation |
|
|
Earnings |
|
|
Compensation |
|
|
Total |
|
Philip A. McNeill |
|
$ |
29,000 |
|
|
$ |
|
|
|
$ |
67,836 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
96,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zev E. Kaplan |
|
$ |
28,000 |
|
|
$ |
|
|
|
$ |
67,836 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
95,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian C. Griffin |
|
$ |
27,000 |
|
|
$ |
|
|
|
$ |
67,836 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
94,836 |
|
|
|
|
(1) |
|
These amounts represent the dollar amount recognized for financial statement reporting
purposes with respect to the fiscal year in accordance with FAS 123R. A discussion of the
assumptions used in determining grant date fair value may be found in Note 11 to our
consolidated financial statements included elsewhere in this annual report. |
Each Director of the Company, except Mr. McMillen and Mr. Leichtweis, is entitled to receive a
quarterly fee for his service as a Director. Each Director of the Company will be reimbursed for
reasonable expenses incurred in connection with their service on the Board. The following table
reflects each directors fee per quarter during the years ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Fees Received Per Quarter |
|
Director |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Philip McNeill |
|
$ |
7,250 |
|
|
$ |
7,250 |
|
|
|
|
|
|
|
|
|
|
Zev Kaplan |
|
$ |
7,000 |
|
|
$ |
7,000 |
|
|
|
|
|
|
|
|
|
|
Brian C. Griffin |
|
$ |
6,750 |
|
|
$ |
6,750 |
|
55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
Principal Stockholders
The following table sets forth, information with respect of the beneficial ownership as of
September 24, 2010, for any person who is known to the Company to be the beneficial owner of more
than five percent (5%) of the Companys common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
Beneficially |
|
|
Percent |
|
Name and Address |
|
Title of Class |
|
|
Owned |
|
|
of Class(1) |
|
|
|
|
|
|
|
|
|
|
|
|
YA Global Investments, L.P.
101 Hudson St
Jersey City,
NJ 07302 |
|
common stock |
|
|
5,414,007 |
(2) |
|
|
9.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Titan Global Holdings, Inc.
1700 Jay Ell Drive, Suite 200
Richardson, TX 75081 |
|
common stock |
|
|
3,000,303 |
|
|
|
5.54 |
% |
|
|
|
(1) |
|
Applicable percentage of ownership is based on 54,194,268 shares of common stock outstanding as of September 24, 2010 together with securities
convertible or exercisable into shares of common stock within 60 days for the stockholder, taking into consideration the 9.99% blocker in YAs
Series H Preferred Stock (see footnote 2 below). Beneficial ownership is determined in accordance with the rules of the Commission and
generally includes voting or investment power with respect to securities. Shares of common stock subject to securities that are currently
exercisable or exercisable within 60 days of September 24, 2010, are deemed to be beneficially owned by the person holding such securities for
the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. |
|
(2) |
|
YA Global Investments, L.P. (YA) does not directly own any shares of common stock as of September 24, 2010. Yorkville Bhn S.p.A., a
subsidiary of YA, directly owns 1,200,000 shares of common stock and a senior officer of Yorkville Advisors, LLC, which is the portfolio
manager to YA, directly owns 6,250 shares of common stock. |
|
|
|
YA also holds warrants to purchase 81,166,666, 1,000,000 and 800,000 shares of
our common stock at a price of $0.03, $1.00 and $0.15 per share, respectively.
In addition, YA holds 1,000,000 shares of our Series F Preferred Stock
convertible into approximately 10,000,000 shares of our common stock at $0.10
per share and 9,660 shares of our Series H Stock convertible into a minimum of
319,139,716 (maximum approximately 549,139,716) shares of our common stock. YA
cannot convert either our warrants or preferred stock into shares of common
stock that would cause YA to own more than 9.99% of the issued and outstanding
common stock. The Series H Stock vote on an as-converted basis but YAs voting
power may not exceed 9.99% with respect it its Series H Stock. The Series F
Stock has no voting rights. The remaining shares of common stock beneficially
owned by YA were acquired from us through various private placement
transactions. |
Management
The following table shows the amount of common stock beneficially owned by the Companys
directors, executive officers named in the Summary Compensation Table and by all directors and
executive officers as a group as of September 24, 2010.
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Beneficially |
|
|
|
|
Name and Address |
|
Owned |
|
|
Percent of Class |
|
|
|
|
|
|
|
|
|
|
C. Thomas McMillen |
|
|
81,300,000 |
(1) |
|
|
60.00 |
% |
|
|
|
|
|
|
|
|
|
Christopher P. Leichtweis |
|
|
121,313,523 |
(2) |
|
|
69.12 |
% |
|
|
|
|
|
|
|
|
|
Michael T. Brigante |
|
|
9,500,000 |
(3) |
|
|
14.92 |
% |
|
|
|
|
|
|
|
|
|
Zev E. Kaplan |
|
|
5,720,000 |
(4) |
|
|
9.55 |
% |
|
|
|
|
|
|
|
|
|
Philip A. McNeill |
|
|
5,720,000 |
(5) |
|
|
9.55 |
% |
|
|
|
|
|
|
|
|
|
Brian C. Griffin |
|
|
5,720,000 |
(6) |
|
|
9.55 |
% |
|
|
|
|
|
|
|
|
|
All Officers and Directors as Group (6) |
|
|
229,273,523 |
|
|
|
80.88 |
% |
56
The applicable percentage of beneficial ownership is based on 54,194,268 shares of common
stock outstanding as of September 24, 2010, together with securities convertible or exercisable
into shares of common stock within 60 days for each stockholder, taking into consideration the
9.99% blocker in YAs Series H Preferred Stock (see footnote 2 below). Shares of common stock
subject to securities that are currently exercisable or exercisable within 60 days of September 24,
2010 are deemed to be beneficially owned by the person holding such securities for the purpose of
computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Beneficial ownership, which is determined in accordance with the
rules and regulations of the Commission, means the sole or shared power to vote or direct the
voting or to dispose or direct the disposition of our common stock. Unless otherwise indicated, all
of the shares are owned directly, and the person has sole voting and dispositive power. Except as
otherwise indicated, the business address for each of the following persons is 1005 North Glebe
Road, Suite 550, Arlington, Virginia 22201.
|
|
|
(1) |
|
Mr. McMillen owns 12,500,000 shares of common stock and 325 shares of
Series H Stock which are convertible into 10,833,333 shares of common
stock. On August 30, 2005, McMillen was granted option to purchase
5,800,000 shares of common stock pursuant to the McMillen Employment
Agreement, all of which were exercisable on September 24, 2010, and
these options have an exercise price of $0.08. Mr. McMillen also owns
warrants to purchase 2,166,667 shares of common stock at $0.03 per
share. On July 30, 2008, Mr. McMillen was granted options to purchase
50,000,000 shares of common stock, all of which were exercisable on
September 24, 2010 and these options have an exercise price of $0.05. |
|
(2) |
|
Mr. Leichtweis owns 505,473 shares of Series I
Convertible Preferred Stock convertible into
101,094,600 shares of common stock. Mr. Leichtweis
also owns warrants to purchase 20,218,923 shares of
common stock at $0.03 per share. Mr. Leichtweis
ownership in Series I Preferred Stock and the warrants
is a result of the sale of his ownership Safety to the
Company in March 2008. |
|
(3) |
|
Mr. Brigante was granted options, on July 10, 2006, to
purchase 750,000 shares of common stock, of which
519,210 were cancelled on May 10, 2007 and 230,790
were exercisable on September 17, 2010. On May 10,
2007, Mr. Brigante was separately granted options to
purchase 519,210 shares of common stock, all of which
were exercisable on September 24, 2010. On July 30,
2008, Mr. Brigante was granted options to purchase
8,750,000 shares of common stock, all of which were
exercisable on September 24, 2010. |
|
(4) |
|
Mr. Kaplan was granted options to purchase 720,000
shares of common stock in December 2005. All of these
options were exercisable on September 24, 2010. On
July 30, 2008, Mr. Kaplan was granted options to
purchase 5,000,000 shares of common stock, all of
which were exercisable on September 24, 2010. |
|
(5) |
|
Mr. McNeill was granted options to purchase 720,000
shares of common stock in December 2005. All of these
options were exercisable at September 24, 2010. On
July 30, 2008, Mr. McNeill was granted options to
purchase 5,000,000 shares of common stock, all of
which were exercisable on September 24, 2010. |
|
(6) |
|
Mr. Griffin was granted options to purchase 720,000
shares of common stock in May 2007, all of which were
exercisable on September 24, 2010. On July 30, 2008,
Mr. Griffin was granted options to purchase 5,000,000
shares of common stock, all of which were exercisable
on September 24, 2010. |
57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 1, 2007, the Company loaned five hundred thousand dollars ($500,000) to Secure America
Acquisition Holdings, LLC (SAAH) an entity controlled by our Chairman and Chief Executive
Officer. The loan was for working capital purposes and 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. As of June 30, 2010 the
amount due on the note is $430,627, including $60,627 in accrued interest.
Safety leases approximately 21,000 square feet of office space from a company controlled by
our President. The space, in Knoxville, Tennessee, serves as the headquarters for Safety. The total
rent paid
during the twelve months ended June 30, 2010 and June 30, 2009 was $344,000 and $344,000,
respectively.
We believe that each of the above referenced transactions was made on terms no less or more
favorable to us than could have been obtained from an unaffiliated third party. Furthermore, any
future transactions between us and officers, directors, principal stockholders or affiliates, will
be on terms no less favorable to us than could be obtained from an unaffiliated third party, and
will be approved by a majority of our directors, including a majority of our independent and
disinterested directors who have access at our expense to our legal counsel.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Coulter & Justus, P.C. audited our financial statements for the fiscal periods ended June 30,
2010 and 2009.
Audit Fees. During the period ended June 30, 2010, Coulter & Justus P.C. billed us an
aggregate of $218,022 for professional services rendered for:
|
|
|
Audit of our annual financial statements included in our Annual
Report on Form 10-K for the year ended June 30, 2009. |
|
|
|
Review of our financial statements included in our Quarterly
Report on Form 10-Q for the year ended June 30, 2010. |
During the period ended June 30, 2009; Coulter & Justus P.C. billed us an aggregate of
$263,000 for professional services rendered for:
|
|
|
Audit of our annual financial statements included in our Annual
Report on Form 10-K for the six month transition ended June 30,
2008. |
|
|
|
Review of our financial statements included in our Quarterly
Reports on Form 10-Q for the year ended June 30, 2009. |
Audit-Related Fees. During the periods ended June 30, 2010 and 2009, Coulter & Justus, P.C.
billed us an aggregate of $0 for services rendered other than those described above under the
heading of Audit Fees.
Tax Fees. During the periods ended June 30, 2010 and 2009, Coulter & Justus, P.C. billed us an
aggregate of $0 for services rendered other than those described above under the heading of Audit
Fees.
58
All Other Fees. During the period ended June 30, 2010 and 2009, Coulter & Justus, P.C.
billed us an aggregate of $0 for services rendered other than those described above under the
heading of Audit Fees.
All services provided by Coulter & Justus, P.C. have been pre-approved by the Audit Committee
before any work began to perform those services.
No services were rendered by Coulter & Justus, P.C. pursuant to paragraph (c)(7)(ii)C of Rule
2-01 of Regulation S-X.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
Effective May 6, 2003, the Commission adopted rules that require that before an independent
registered public accounting firm is engaged by us to render any auditing or permitted non-audit
related service, the engagement must first be:
|
|
|
approved by our audit committee; or |
|
|
|
entered into pursuant to pre-approval policies and procedures
established by the audit committee, provided the policies and
procedures are detailed as to the particular service, the audit
committee is informed of each service, and such policies and
procedures do not include delegation of the audit committees
responsibilities to management. |
Our audit committee was formed in February 2006, and has assumed responsibility for the
pre-approval of audit and permitted non-audit services to be performed by our companys independent
auditor. The audit committee will, on an annual basis, consider and, if appropriate, approve the
provision of audit and non-audit services by Counter & Justus, P.C. Thereafter, the audit committee
will, as necessary, consider and, if appropriate, approve the provision of additional audit and
non-audit services by Coulter & Justus, P.C. which are not encompassed by the audit committees
annual pre-approval and are not prohibited by law. The audit committee has delegated to the chair
of the audit committee the authority to pre-approve, on a case-by-case basis, non-audit services to
be performed by Coulter & Justus, P.C.
Since we did not have an audit committee in 2005, our full board of directors considered the
nature of services performed by HJ & Associates, LLC, our audit firm at that time, and found them
to be compatible with maintaining HJ & Associates independence. Subsequently, following the
acquisition of Safety, our full board of directors considered the nature of services performed by
Coulter & Justus, P.C. and found them to be compatible with maintaining Coulter & Justus, P.C.s
independence.
59
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
See index to Consolidated Financial Statements attached, which are filed as part of this
report.
(b) Exhibits:
|
|
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
|
2.1 |
|
|
Agreement and Plan Of Merger and Stock Purchase
Agreement dated March 13, 2008, among Homeland Security
Capital Corp., HSCC Acquisition Corp., Safety & Ecology
Holdings Corp., and certain individuals named therein
(previously filed as Exhibit 2.1 to the Registrants
Registration Current Report on Form 8-K, originally
filed with the SEC on March 19, 2008 and incorporated
herein by reference). |
|
2.2 |
|
|
First Amendment to the Agreement and Plan of Merger and
Stock Purchase Agreement, dated March 13, 2008, among
Homeland Security Capital Corp., Safety & Ecology
Holdings Corp., and Christopher Leichtweis and John H.
Macrae (previously filed as Exhibit 2.2 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on May 7, 2008 and
incorporated herein by reference). |
|
3.1 |
|
|
Bylaws of Celerity Systems, Inc. (previously filed as
Exhibit 3.2 to the Registrants Registration Statement
on Form SB-2, originally filed with the SEC on August
13, 1997, and incorporated herein by reference). |
|
3.2 |
|
|
Certificate of Designation of Series C Preferred Stock
(incorporated by reference to the Registrants
Registration Statement on Form SB-2, originally filed
with the SEC on October 18, 2001). |
|
3.3 |
|
|
Certificate of Designation of Series D Preferred Stock
(previously filed as Exhibit 3.4 to the Registrants
Annual Report on Form 10-K, originally filed with the
SEC on March 27, 2002, and incorporated herein by
reference). |
|
3.4 |
|
|
Certificate of Designation of Series E Preferred Stock
(previously filed as Exhibit 3.4 to the Registrants
Annual Report on Form 10-K, originally filed with the
SEC on April 15, 2005, and incorporated herein by
reference). |
|
3.5 |
|
|
Certificate of Amendment to Certificate of Incorporation
of Celerity Systems, Inc., dated April 17, 2002
(previously filed as Exhibit 3.7 to the Registrants
Annual Report on Form 10-K, originally filed with the
SEC on April 15, 2005, and incorporated herein by
reference). |
|
3.6 |
|
|
Certificate of Amendment to Certificate of Incorporation
of Celerity Systems, Inc., dated August 23, 2002
(previously filed as Exhibit 3.6 to the Registrants
Annual Report on Form 10-K, originally filed with the
SEC on April 15, 2005, and incorporated herein by
reference). |
|
3.7 |
|
|
Certificate of Designation of Series F Preferred Stock
(previously filed as Exhibit 99.2 to the Registrants
Registration Current Report on Form 8-K, originally
filed with the SEC on October 7, 2005, and incorporated
herein by reference). |
|
3.8 |
|
|
Certificate of Amendment to Certificate of Incorporation
of Celerity Systems, Inc. (previously filed as Exhibit
3.1 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on February 6,
2006, and incorporated herein by reference). |
|
3.9 |
|
|
Certificate of Designation, Series G Convertible
Preferred Stock (previously filed as Exhibit 3.1 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on February 14, 2006, and
incorporated herein by reference). |
60
|
|
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
|
3.10 |
|
|
Certificate of Designation of Relative Rights and
Preferences, Series I Convertible Preferred Stock of
Homeland Security Capital Corp. (previously filed as
Exhibit 3.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
March 19, 2008 and incorporated herein by reference). |
|
3.11 |
|
|
Certificate of Designation of Relative Rights and
Preferences, Series H Convertible Preferred Stock Of
Homeland Security Capital Corp. (previously filed as
Exhibit 3.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
March 19, 2008 and incorporated herein by reference). |
|
3.12 |
|
|
Certificate of Amendment to Certificate of Incorporation
(previously filed Exhibit A to Scheduled 14C, originally
filed with the SEC on June 23, 2008 and incorporated
herein by reference). |
|
4.1 |
|
|
Secured Convertible Debenture (previously filed as
Exhibit 4.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
February 14, 2006, and incorporated herein by
reference). |
|
4.2 |
|
|
Form of Warrant to purchase shares of Homeland Security
Capital Corp. Common Stock (previously filed as Exhibit
4.1 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on March 19,
2008 and incorporated herein by reference). |
|
4.3 |
|
|
Warrant to purchase shares of Homeland Security Capital
Corp. Common Stock held by YA Global Investments, L.P.,
dated March 14, 2008 (previously filed as Exhibit 4.2 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on March 19, 2008 and
incorporated herein by reference). |
|
10.1 |
|
|
Indemnification Agreement by and between C. Thomas
McMillen and Celerity Systems, Inc. (previously filed as
Exhibit 99.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
October 7, 2005 and incorporated herein by reference). |
|
10.2 |
|
|
Escrow Agreement, dated as of October 6, 2005, by and
between Celerity Systems, Inc. and Cornell Capital
Partners, L.P. (previously filed as Exhibit 99.3 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on October 7, 2005 and
incorporated herein by reference). |
|
10.3 |
|
|
Securities Purchase Agreement dated as of October 6,
2005, by and between the Celerity Systems, Inc. and
Cornell Capital Partners, LP (previously filed as
Exhibit 99.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
October 7, 2005 and incorporated herein by reference). |
|
10.4 |
|
|
Securities Purchase Agreement, dated February 6, 2006,
by and among Homeland Security Capital Corp., and
Cornell Capital Partners, L.P. (previously filed as
Exhibit 10.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
February 14, 2006, and incorporated herein by
reference). |
|
10.5 |
|
|
Registration Rights Agreement, dated February 6, 2006,
by and among Homeland Security Capital Corp., and
Cornell Capital Partners, L.P. (previously filed as
Exhibit 10.2 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
February 14, 2006, and incorporated herein by
reference). |
|
10.6 |
|
|
Investment Agreement, dated February 6, 2006, by and
between Cornell Capital Partners, L.P., and Homeland
Security Capital Corp. (previously filed as Exhibit 10.3
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on February 14, 2006,
and incorporated herein by reference). |
|
10.7 |
|
|
Security Agreement, dated February 6, 2006, by and
between Homeland Security Capital Corp. and Cornell
Capital Partners, (previously filed as Exhibit 10.4 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on February 14, 2006,
and incorporated herein by reference). |
|
10.8 |
|
|
Agreement And Plan Of Merger, dated February 8, 2006, by
and among Nexus Technologies Group, Inc., CSS
Acquisition, Inc., and shareholders of Corporate
Security Solutions, Inc. (previously filed as Exhibit
10.1 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on February 14,
2006, and incorporated herein by reference). |
61
|
|
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
|
10.9 |
|
|
Series A Convertible Preferred Stock Purchase Agreement,
dated February 8, 2006 by and among Nexus Technologies
Group, Inc. and Homeland Security Capital Corp.
(previously filed as Exhibit 10.2 to the Registrants
Registration Current Report on Form 8-K, originally
filed with the SEC on February 14, 2006, and
incorporated herein by reference). |
|
10.10 |
|
|
Celerity Systems, Inc. 2005 Stock Option Plan
(previously filed as Exhibit 10.8 to the Registrants
Optional Form for Quarterly and Transition Reports of
Small Business Issuers on Form 10QSB, originally filed
with the SEC on May 22, 2006, and incorporated herein by
reference). |
|
10.11 |
|
|
Securities Purchase Agreement, dated August 21, 2006, by
and among Homeland Security Capital Corp. and Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.1
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on August 24, 2006,
and incorporated herein by reference). |
|
10.12 |
|
|
Registration Rights Agreement, dated August 21, 2006, by
and among Homeland Security Capital Corp. and Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.2
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on August 24, 2006,
and incorporated herein by reference). |
|
10.13 |
|
|
Pledge And Security Agreement, dated August 21, 2006, by
and between Homeland Security Capital Corp. and Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.3
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on August 24, 2006,
and incorporated herein by reference). |
|
10.14 |
|
|
Secured Convertible Debenture issued by Homeland
Security Capital Corp. to Cornell Capital Partners, L.P.
on August 21, 2006 (previously filed as Exhibit 10.4 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on August 24, 2006,
and incorporated herein by reference). |
|
10.15 |
|
|
Warrant to purchase shares of Homeland Security Capital
Corp. Common Stock, dated August 21, 2006, held by
Cornell Capital Partners, L.P., (previously filed as
Exhibit 10.5 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
August 24, 2006, and incorporated herein by reference). |
|
10.16 |
|
|
Agreement And Plan Of Merger, dated August 21, 2006, by
and among Security Holding Corp., and Security Holding
Enterprises, Inc. and its stockholders (previously filed
as Exhibit 10.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
August 29, 2006, and incorporated herein by reference). |
|
10.17 |
|
|
Series A Convertible Preferred Stock Purchase Agreement
dated August 21, 2006 by and among Security Holding
Corp. and Homeland Security Capital Corp. (previously
filed as Exhibit 10.2 to the Registrants Registration
Current Report on Form 8-K, originally filed with the
SEC on August 29, 2006, and incorporated herein by
reference). |
|
10.18 |
|
|
Employment Agreement, dated May 15, 2007, by and between
Homeland Security Capital Corp., and Michael T. Brigante
(previously filed as Exhibit 10.1 to the Registrants
Optional Form For Quarterly and Transition Reports of
Small Business Issuers on Form 10QSB, originally filed
with the SEC on May 15, 2007, and incorporated herein by
reference). |
|
10.19 |
|
|
Securities Purchase Agreement, dated June 1, 2007, by
and among Homeland Security Capital Corp. And Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.1
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on June 6, 2007, and
incorporated herein by reference). |
|
10.20 |
|
|
Registration Rights Agreement, dated June 1, 2007, by
and among Homeland Security Capital Corp. and Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.2
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on June 6, 2007, and
incorporated herein by reference). |
|
10.21 |
|
|
Security Agreement dated June 1, 2007, by and among
Homeland Security Capital Corp. and Cornell Capital
Partners, L.P. (previously filed as Exhibit 10.3 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on June 6, 2007, and
incorporated herein by reference). |
62
|
|
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
|
10.22 |
|
|
Pledge And Escrow Agreement, dated June 1, 2007 by and
among Homeland Security Capital Corp., Cornell Capital
Partners, L.P., and David Gonzalez, Esq., as escrow
agent (previously filed as Exhibit 10.4 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on June 6, 2007, and
incorporated herein by reference). |
|
10.23 |
|
|
Secured Convertible Debenture issued by Homeland
Security Capital Corp. to Cornell Capital Partners, L.P,
dated June 1, 2007 (previously filed as Exhibit 10.5 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on June 6, 2007, and
incorporated herein by reference). |
|
10.24 |
|
|
Warrant to purchase shares of Homeland Security Capital
Corp. Common Stock held by Cornell Capital Partners,
L.P., dated June 1, 2007 (previously filed as Exhibit
10.6 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on June 6, 2007,
and incorporated herein by reference). |
|
10.25 |
|
|
Letter Agreement, dated June 1, 2007, in connection with
the Purchase Agreement dated February 6, 2006 between
Homeland Security Capital Corp. and Cornell Capital
Partners (previously filed as Exhibit 10.7 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on June 6, 2007, and
incorporated herein by reference). |
|
10.26 |
|
|
Purchase Agreement, dated July 3, 2007 by and between
Supercom Inc. and the Shareholders of Security Holding
Corp. (previously filed as Exhibit 10.1 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on July 10, 2007, and
incorporated herein by reference). |
|
10.27 |
|
|
Securities Purchase Agreement, dated March 13, 2008, by
and among Homeland Security Capital Corp., and YA Global
Investments, L.P. (previously filed as Exhibit 10.1 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on March 19, 2008 and
incorporated herein by reference). |
|
10.28 |
|
|
Registration Rights Agreement, dated March 14, 2008, by
and among Homeland Security Capital Corp., and YA Global
Investments, L.P. (previously filed as Exhibit 10.2 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on March 19, 2008 and
incorporated herein by reference). |
|
10.29 |
|
|
Security Agreement, dated March 14, 2008, by and among
Homeland Security Capital Corp., and YA Global
Investments, L.P. (previously filed as Exhibit 10.3 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on March 19, 2008 and
incorporated herein by reference). |
|
10.30 |
|
|
Form of Senior Secured Note between Homeland Security
Capital Corp. and YA Global Investments, L.P.
(previously filed as Exhibit 10.4 to the Registrants
Registration Current Report on Form 8-K, originally
filed with the SEC on March 19, 2008 and incorporated
herein by reference). |
|
10.31 |
|
|
Guaranty Agreement, dated March 14, 2008, in favor of YA
Global Investments, L.P. (previously filed as Exhibit
10.6 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on March 19,
2008 and incorporated herein by reference). |
|
10.32 |
|
|
Executive Employment Agreement, dated September 1, 2007,
by and between Homeland Security Capital Corp. and C.
Thomas McMillen (previously filed as Exhibit 10.3 to the
Registrants Optional Form for Annual and Transition
Reports of Small Business Issuers on Form 10KSB,
originally filed with the SEC on March 31, 2008 and
incorporated herein by reference). |
|
10.33 |
|
|
Homeland Security Capital Corp. 2008 Stock Incentive
Plan (previously filed as Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q, originally
filed with the SEC on February 17, 2009 and incorporated
herein by reference). |
|
10.34 |
|
|
Common Stock Purchase Agreement, dated November 26,
2008, by and between YA Global Investments, L.P. and
Homeland Security Capital Corp. (previously filed as
Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q, originally filed with the SEC on February 17,
2009 and incorporated herein by reference). |
|
10.35 |
|
|
Common Stock Purchase Agreement, dated November 28,
2008, by and between YA Global Investments, L.P. and
Homeland Security Capital Corp. (previously filed as
Exhibit 10.3 to the Registrants Quarterly Report on
Form 10-Q, originally filed with the SEC on February 17,
2009 and incorporated herein by reference). |
63
|
|
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
|
21 |
* |
|
Subsidiaries of Homeland Security Capital Corp. |
|
31.1 |
* |
|
Certificate of C. Thomas McMillen, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
* |
|
Certification of Michael T. Brigante, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
* |
|
Certification of C. Thomas McMillen, pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 (Subsections (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code). |
|
32.2 |
* |
|
Certification of Michael T. Brigante, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code). |
|
|
|
|
|
Indicates management compensatory plan, contract or arrangement. |
|
* |
|
Filed herewith. |
64
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
HOMELAND SECURITY CAPITAL
CORPORATION
|
|
|
|
|
/s/ C. Thomas McMillen
C. Thomas McMillen, Chief Executive Officer
|
|
|
|
September 28, 2010 |
|
|
|
|
|
/s/ Michael T. Brigante
|
|
|
|
|
|
|
|
|
|
Michael T. Brigante, Vice President and Chief Financial Officer
|
|
September 28, 2010 |
In accordance with the Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ C. Thomas McMillen
C. Thomas McMillen
|
|
Chief
Executive Officer
and
Chairman of the Board
(Principal Executive Officer)
|
|
September 28, 2010 |
|
|
|
|
|
/s/ Michael T. Brigante
Michael T. Brigante
|
|
Vice
President and Chief
Financial Officer
(Principal Accounting Officer)
|
|
September 28, 2010 |
|
|
|
|
|
/s/ Christopher P. Leichtweis
Christopher P. Leichtweis
|
|
President
and Director
|
|
September 28, 2010 |
|
|
|
|
|
/s/ Brian C. Griffin
Brian C. Griffin
|
|
Director
|
|
September 28, 2010 |
|
|
|
|
|
/s/ Zev E. Kaplan
Zev E. Kaplan
|
|
Director
|
|
September 28, 2010 |
|
|
|
|
|
/s/ Philip A. McNeill
Philip A. McNeill
|
|
Director
|
|
September 28, 2010 |
65
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
|
F-1 |
|
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Homeland Security Capital Corporation
We have audited the accompanying consolidated balance sheets of Homeland Security Capital
Corporation and subsidiaries (the Company) as of June 30, 2010 and 2009, and the related
consolidated statements of operations, stockholders deficit and comprehensive loss, and cash flows
for each of the years in the two-year period ended June 30, 2010. The Companys management is
responsible for these financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial statements of Safety and
Ecology Corporation Limited (SECL), a wholly owned subsidiary, which statements reflect total
assets of $214,137 and $622,804 as of June 30, 2010 and 2009, respectively, and total revenues of
$419,640 and $526,437 for the years then ended. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to the amounts
included for SECL, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Homeland Security Capital Corporation and subsidiaries as of
June 30, 2010 and 2009, and the results of its operations and its cash flows for each of the years
in the two-year period ended June 30, 2010 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Coulter & Justus, P.C.
Knoxville, Tennessee
September 27, 2010
F-2
BALANCE SHEETS
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
|
|
2010 |
|
|
2009 |
|
Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
1,829,429 |
|
|
$ |
2,356,534 |
|
Marketable fixed income securities |
|
|
872,427 |
|
|
|
|
|
Accounts receivable net |
|
|
16,764,897 |
|
|
|
13,425,804 |
|
Cost in excess of billings on uncompleted contracts |
|
|
7,333,931 |
|
|
|
3,937,086 |
|
Other current assets |
|
|
447,925 |
|
|
|
613,348 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
27,248,609 |
|
|
|
20,332,772 |
|
|
|
|
|
|
|
|
Fixed assets net |
|
|
1,129,885 |
|
|
|
4,398,833 |
|
Equipment held for sale |
|
|
1,455,142 |
|
|
|
|
|
Deferred financing costs net |
|
|
8,000 |
|
|
|
386,210 |
|
Notes receivable related party |
|
|
430,627 |
|
|
|
412,127 |
|
Securities available for sale |
|
|
110,826 |
|
|
|
193,945 |
|
Other non-current assets |
|
|
336,499 |
|
|
|
319,516 |
|
Intangible assets net |
|
|
346,814 |
|
|
|
391,372 |
|
Goodwill |
|
|
6,403,982 |
|
|
|
6,403,982 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
37,470,384 |
|
|
$ |
32,838,757 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
8,457,186 |
|
|
$ |
10,003,336 |
|
Line of credit |
|
|
|
|
|
|
512,000 |
|
Current portion of long term debt |
|
|
536,025 |
|
|
|
735,016 |
|
Current portion of long term debt related party |
|
|
500,000 |
|
|
|
|
|
Notes payable related party |
|
|
|
|
|
|
50,110 |
|
Accrued compensation |
|
|
2,568,857 |
|
|
|
2,664,662 |
|
Accrued other liabilities |
|
|
436,906 |
|
|
|
593,241 |
|
Billings in excess of costs on uncompleted contracts |
|
|
1,027,500 |
|
|
|
1,022,125 |
|
Income taxes payable |
|
|
551,941 |
|
|
|
|
|
Current portion of deferred revenue |
|
|
85,327 |
|
|
|
59,636 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
14,163,742 |
|
|
|
15,640,126 |
|
|
|
|
|
|
|
|
Line of credit |
|
|
2,162,000 |
|
|
|
|
|
Long term debt related party, less current maturities |
|
|
17,755,890 |
|
|
|
16,365,001 |
|
Long term debt, less current maturities |
|
|
688,593 |
|
|
|
1,421,272 |
|
Long term deferred revenue, less current portion |
|
|
124,667 |
|
|
|
|
|
Dividends payable |
|
|
3,464,934 |
|
|
|
1,869,107 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
38,359,826 |
|
|
|
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,
1,559,985 and 1,918,080 shares issued and outstanding, respectively |
|
|
14,225,110 |
|
|
|
14,261,207 |
|
Common stock, $0.001 par value, 2,000,000,000 shares authorized,
51,624,725 and 53,270,160 shares issued and
48,054,294 and 49,699,729 shares outstanding, respectively |
|
|
51,625 |
|
|
|
53,270 |
|
Additional paid-in capital |
|
|
55,297,972 |
|
|
|
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 |
|
|
(70,509,228 |
) |
|
|
(70,817,549 |
) |
Accumulated comprehensive loss |
|
|
(301,153 |
) |
|
|
(141,591 |
) |
|
|
|
|
|
|
|
Total Homeland Security Capital Corporation stockholders deficit |
|
|
(1,213,145 |
) |
|
|
(2,490,586 |
) |
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
153,935 |
|
|
|
(135,931 |
) |
|
|
|
|
|
|
|
Total stockholders deficit |
|
|
(1,059,210 |
) |
|
|
(2,626,517 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders deficit |
|
$ |
37,470,384 |
|
|
$ |
32,838,757 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
STATEMENTS OF OPERATIONS
HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Net contract revenue |
|
$ |
97,899,868 |
|
|
$ |
80,839,347 |
|
|
|
|
|
|
|
|
Contract costs |
|
|
77,807,174 |
|
|
|
69,156,496 |
|
|
|
|
|
|
|
|
Gross profit on contracts |
|
|
20,092,694 |
|
|
|
11,682,851 |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Marketing |
|
|
278,298 |
|
|
|
308,499 |
|
Personnel |
|
|
7,976,068 |
|
|
|
8,881,940 |
|
Insurance and facility costs |
|
|
718,484 |
|
|
|
683,224 |
|
Rent expense to related party |
|
|
344,000 |
|
|
|
344,000 |
|
Travel and transportation |
|
|
436,749 |
|
|
|
502,888 |
|
Other operating costs |
|
|
609,533 |
|
|
|
939,776 |
|
Depreciation and amortization |
|
|
1,374,456 |
|
|
|
1,285,756 |
|
Amortization of intangible assets |
|
|
44,558 |
|
|
|
106,250 |
|
Professional services |
|
|
1,120,406 |
|
|
|
711,776 |
|
Administrative costs |
|
|
1,396,686 |
|
|
|
1,253,394 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
14,299,238 |
|
|
|
15,017,503 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
5,793,456 |
|
|
|
(3,334,652 |
) |
Other (expense) income: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(235,160 |
) |
|
|
(294,810 |
) |
Interest expense to related party |
|
|
(1,858,750 |
) |
|
|
(1,717,181 |
) |
Amortization of debt discounts and offering costs |
|
|
(412,263 |
) |
|
|
(552,943 |
) |
Currency loss |
|
|
(59,085 |
) |
|
|
(405,821 |
) |
Impairment losses |
|
|
(530,264 |
) |
|
|
(3,317,837 |
) |
Other income |
|
|
73,033 |
|
|
|
92,597 |
|
|
|
|
|
|
|
|
Total other expense |
|
|
(3,022,489 |
) |
|
|
(6,195,995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,770,967 |
|
|
|
(9,530,647 |
) |
Income tax expense |
|
|
(590,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
2,180,737 |
|
|
|
(9,530,647 |
) |
|
|
|
|
|
|
|
Less: Net (income) loss attributable to
noncontrolling interests |
|
|
(261,864 |
) |
|
|
74,180 |
|
|
|
|
|
|
|
|
Net income (loss) attributable to Homeland
Security Capital Corporation stockholders |
|
|
1,918,873 |
|
|
|
(9,456,467 |
) |
Less preferred dividends and other beneficial conversion
features associated with preferred stock issuance |
|
|
(1,610,551 |
) |
|
|
(2,082,998 |
) |
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
of Homeland Security Capital Corporation |
|
$ |
308,322 |
|
|
$ |
(11,539,465 |
) |
|
|
|
|
|
|
|
Income (loss) per common share attributable to Homeland
Security Capital Corporation stockholders
basic and diluted |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
Diluted |
|
$ |
0.00 |
|
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
51,291,270 |
|
|
|
47,664,614 |
|
|
|
|
|
|
|
|
Diluted |
|
|
699,666,666 |
|
|
|
47,664,614 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
STATEMENTS OF CASH FLOWS
HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,180,737 |
|
|
$ |
(9,530,647 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
1,075,625 |
|
|
|
2,150,773 |
|
Stock issued for services |
|
|
38,333 |
|
|
|
|
|
Depreciation |
|
|
1,863,333 |
|
|
|
1,842,723 |
|
Amortization of intangibles |
|
|
44,558 |
|
|
|
106,250 |
|
Loss on disposal of assets |
|
|
9,630 |
|
|
|
5,843 |
|
Impairment losses on securities available for sale |
|
|
104,997 |
|
|
|
3,317,837 |
|
Impairment loss on equipment held for sale |
|
|
425,267 |
|
|
|
|
|
Write off of note receivable related party |
|
|
|
|
|
|
90,400 |
|
Amortization of debt offering costs and discounts |
|
|
412,263 |
|
|
|
552,943 |
|
Accrued interest on notes receivable related parties |
|
|
(18,500 |
) |
|
|
|
|
Accrued interest due to related parties |
|
|
1,856,836 |
|
|
|
1,799,291 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,339,093 |
) |
|
|
(1,448,066 |
) |
Costs in excess of billings on uncompleted contracts |
|
|
(3,396,845 |
) |
|
|
1,722,131 |
|
Other assets |
|
|
43,443 |
|
|
|
(514,004 |
) |
Accounts payable |
|
|
(1,546,149 |
) |
|
|
3,801,201 |
|
Billings in excess of costs on uncompleted contracts |
|
|
5,375 |
|
|
|
197,723 |
|
Accrued compensation |
|
|
(95,805 |
) |
|
|
295,263 |
|
Accrued other liabilities |
|
|
(156,335 |
) |
|
|
(238,967 |
) |
Income taxes payable |
|
|
551,941 |
|
|
|
|
|
Deferred revenue |
|
|
150,358 |
|
|
|
16,472 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
209,969 |
|
|
|
4,167,166 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of fixed assets |
|
|
(383,206 |
) |
|
|
(741,008 |
) |
Proceeds from sale of assets |
|
|
29,481 |
|
|
|
45,141 |
|
Purchase of marketable fixed income securities |
|
|
(1,656,471 |
) |
|
|
|
|
Sales of marketable fixed income securities |
|
|
784,044 |
|
|
|
|
|
Investment in equity of subsidiaries |
|
|
|
|
|
|
(113,403 |
) |
Investment received for noncontrolling interest of subsidiary |
|
|
28,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,198,152 |
) |
|
|
(809,270 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowings (payments) on line of credit |
|
|
1,650,000 |
|
|
|
(1,853,935 |
) |
Debt offering costs |
|
|
|
|
|
|
(50,000 |
) |
Repayments of debt |
|
|
(1,062,369 |
) |
|
|
(647,333 |
) |
Proceeds from notes payable related parties |
|
|
|
|
|
|
50,000 |
|
Repayment of notes payable related parties |
|
|
(50,110 |
) |
|
|
(1,608,247 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
537,521 |
|
|
|
(4,109,515 |
) |
Effect of exchange rate changes on cash |
|
|
(76,443 |
) |
|
|
(74,204 |
) |
|
|
|
|
|
|
|
Net decrease in cash |
|
|
(527,105 |
) |
|
|
(825,823 |
) |
Cash, beginning of year |
|
|
2,356,534 |
|
|
|
3,182,357 |
|
|
|
|
|
|
|
|
Cash, end of year |
|
$ |
1,829,429 |
|
|
$ |
2,356,534 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
STATEMENTS OF STOCKHOLDERS EQUITY
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Deficit and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, July 1, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported |
|
$ |
12,346,482 |
|
|
|
48,846,244 |
|
|
$ |
48,846 |
|
|
$ |
51,385,199 |
|
|
$ |
148,652 |
|
|
$ |
|
|
|
$ |
(59,339,836 |
) |
|
$ |
(1,521,971 |
) |
|
$ |
|
|
|
$ |
3,067,372 |
|
Adjustment for adoption of
FASB ASC 810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,750 |
|
|
|
|
|
|
|
(61,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 1, 2008 as restated |
|
|
12,346,482 |
|
|
|
48,846,244 |
|
|
|
48,846 |
|
|
|
51,385,199 |
|
|
|
148,652 |
|
|
|
|
|
|
|
(59,278,086 |
) |
|
|
(1,521,971 |
) |
|
|
(61,750 |
) |
|
|
3,067,372 |
|
Amortization of Series H warrants |
|
|
14,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250,000 |
) |
Dividends on Series H and Series I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,468,272 |
) |
|
|
|
|
|
|
|
|
|
|
(1,468,272 |
) |
Value of vested stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,929,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,929,577 |
|
Stock options exercised |
|
|
|
|
|
|
4,423,916 |
|
|
|
4,424 |
|
|
|
216,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,196 |
|
Reduction in value of securities
available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,863,253 |
) |
|
|
|
|
|
|
(1,863,253 |
) |
Realization of impairment in value
of securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,317,837 |
|
|
|
|
|
|
|
3,317,837 |
|
Value of Series I shares released
from escrow |
|
|
1,900,000 |
|
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
123,877 |
|
|
|
|
|
|
|
(600,000 |
) |
|
|
|
|
|
|
|
|
|
|
2,023,877 |
|
Currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,204 |
) |
|
|
|
|
|
|
(74,204 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,456,467 |
) |
|
|
|
|
|
|
(74,180 |
) |
|
|
(9,530,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
|
14,261,207 |
|
|
|
53,270,160 |
|
|
|
53,270 |
|
|
|
54,131,548 |
|
|
|
272,529 |
|
|
|
(250,000 |
) |
|
|
(70,817,550 |
) |
|
|
(141,591 |
) |
|
|
(135,930 |
) |
|
|
(2,626,517 |
) |
Dividends on Series H and Series I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,595,826 |
) |
|
|
|
|
|
|
|
|
|
|
(1,595,826 |
) |
Amortization of Series H warrants |
|
|
14,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series G to common |
|
|
(35,808 |
) |
|
|
1,611,360 |
|
|
|
1,612 |
|
|
|
34,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series H to common |
|
|
(15,013 |
) |
|
|
500,010 |
|
|
|
500 |
|
|
|
14,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of vested stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,075,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,075,625 |
|
Rescission of option exercise |
|
|
|
|
|
|
(4,405,720 |
) |
|
|
(4,406 |
) |
|
|
4,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for services |
|
|
|
|
|
|
648,915 |
|
|
|
649 |
|
|
|
37,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,333 |
|
Noncontrolling interests
investment in subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,000 |
|
|
|
28,000 |
|
Decrease in value of securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,119 |
) |
|
|
|
|
|
|
(83,119 |
) |
Currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,443 |
) |
|
|
|
|
|
|
(76,443 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,918,873 |
|
|
|
|
|
|
|
261,864 |
|
|
|
2,180,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010 |
|
$ |
14,225,110 |
|
|
|
51,624,725 |
|
|
$ |
51,625 |
|
|
$ |
55,297,972 |
|
|
$ |
272,529 |
|
|
$ |
(250,000 |
) |
|
$ |
(70,509,227 |
) |
|
$ |
(301,153 |
) |
|
$ |
153,934 |
|
|
$ |
(1,059,210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization and Nature of Business
Homeland Security Capital Corporation (together with any subsidiaries shall be referred to as
the Company, we, us and our) is a consolidator of companies providing specialized
technology-based radiological, nuclear, environmental disaster relief and technology driven
electronic security solutions to government and commercial customers within the fragmented homeland
security industry. We are focused on creating long-term value by taking a controlling interest in
and developing our subsidiary companies through superior operations and management. We intend to
operate businesses that provide homeland security products and services solutions, growing
organically and by acquisitions. The Company is targeting emerging companies that are generating
revenues but face challenges in scaling their businesses to capitalize on homeland security
opportunities.
The Company was incorporated in Delaware in August 1997 under the name Celerity Systems Inc.
In December 2005, the Company amended its Certificate of Incorporation to change its name to
Homeland Security Capital Corporation.
The Company owns 93% of Nexus Technologies Group, Inc. (Nexus) and its wholly owned
subsidiary Corporate Security Solutions, Inc. (CSS). Nexus provides integrated electronic
security systems for the commercial and government security markets, through engineering, design
and installation of open-ended technologically advanced applications.
The Company has a US-based joint venture with Polimaster, Inc., an Arlington, Virginia company
involved in the field of nuclear and radiological detection and isotope identification. The joint
venture operates as Polimatrix, Inc. (PMX) and is owned 51% by the Company. PMX uses technology
licensed from Polimaster, Inc. in the development and sale of hand-held, networked detection
devices intended to be sold to government and commercial customers.
On March 13, 2008, the Company, entered into a merger agreement with Safety & Ecology Holdings
Corporation (Safety) and certain persons named therein whereby the Company acquired 100% of
Safety. Safety, through its subsidiaries, is a provider of global environmental, hazardous and
radiological infrastructure remediation and advanced construction services in the United States and
the United Kingdom. Safetys main core business areas and service offerings include: (1)
decommissioning and remediation environmental and remedial consultancy services, (2) environmental
and consultancy services, (3) nuclear energy design, build, refurbishment and operational support
services; and (4) instrumentation and measurement technologies.
The Company owns a majority of the outstanding capital stock of its subsidiaries controls each
of the subsidiary boards of directors and provides extensive management and 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,
eliminating minority interests when such minority interests have a basis in the consolidated
entity.
2. Summary of Significant Accounting Policies
Fiscal Year-End The Companys fiscal year ends on June 30. During 2010, Safety changed its
year end from June 30 to the Sunday closest to June 30 (June 27 in 2010). All references in these
consolidated financial statements refer to the fiscal year end (June 30), unless otherwise
specified.
F-7
Principles of Consolidation The consolidated financial statements include the accounts of
Homeland Security Capital Corporation and wholly owned subsidiary Safety (including Safetys wholly
owned United Kingdom subsidiary SECL and majority owned subsidiary Radcon Alliance, LLC) and
majority owned subsidiaries Nexus (including its wholly owned subsidiary CSS) and PMX. All
significant inter-company transactions and balances have been eliminated in consolidation. 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.
Foreign Operations SECL, a United Kingdom corporation, which is wholly owned by Safety, has
total assets of $214,137 and $622,804, total liabilities of $0 and $30,999 and a net loss of
$254,317 and $662,234 as of and for the periods ending June 30, 2010 and 2009, respectively, which
are included in the Companys consolidated financial statements for those periods.
The financial statements of SECL are translated using exchange rates in effect at year-end for
assets and liabilities and average exchange rates during the year for results of operations. The
related translation adjustments are reported as a separate component of shareholders equity.
Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments The carrying amount of items included in working capital
approximate fair value as a result of the short maturity of those instruments. The carrying value
of the Companys debt approximates fair value because it bears interest at rates that are similar
to current borrowing rates for loans of comparable terms, maturity and credit risk that are
available to the Company.
Revenue Recognition Revenues are derived primarily from services performed under time and
materials and fixed fee contracts and products sold. Revenues and costs derived from fixed price
contracts are recognized using the percentage of completion (efforts expended) method. Revenue and
costs derived from time and material contracts are recognized when revenue is earned and costs are
incurred. Revenue and costs based on sale of products are derived when title to the products is
transferred.
Deferred Revenue Revenue from service contracts, for which the Company is obligated to
perform, is recorded as deferred revenue and subsequently recognized over the term of the contract.
Contract costs include all direct labor, materials, and other non-labor costs and those
indirect costs related to contract support, such as depreciation, fringe benefits, overhead labor,
supplies, tools, repairs and equipment rental. General and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job conditions and
estimated profitability, including those arising from contract penalty provisions, and final
contract settlements may result in revisions to costs and income and are recognized in the period
in which the revisions are determined. Because of inherent uncertainties in estimating costs, it is
at least reasonably possible the estimates used will change within the near term.
The asset, costs in excess of billings on uncompleted contracts, represents revenues
recognized in excess of billed amounts. The liability, billings in excess of costs on uncompleted
contracts, represents billings in excess of revenues recognized.
F-8
Cash and Cash Equivalents - The Company considers all investments with a maturity of three
months or less when purchased to be cash equivalents. Cash consists of cash on hand and deposits in
banks. The Company has approximately $200,000 at risk for funds held in non-collateralized accounts
subject to the Federal Deposit Insurance Corporation (FDIC) Guarantee.
Marketable Fixed-Income Securities The Company owns shares of mutual funds which hold
various marketable fixed income securities. The shares of the mutual funds are recorded at fair
value based upon market prices. Realized and unrealized gains and losses are included in the
consolidated statement of operations.
Recognition of Losses on Receivables - Trade accounts receivable are recorded at their
estimated net realizable values using the allowance method. The Company generally does not require
collateral from customers. Management periodically reviews accounts for collectability, including
accounts determined to be delinquent based on contractual terms. An allowance for doubtful accounts
is maintained at the level management deems necessary to reflect anticipated credit losses. When
accounts are determined to be uncollectible, they are charged off against the allowance for bad
debts. At June 30, 2010 and 2009 the Company had a consolidated bad debt allowance of $229,340 and
$234,826, respectively.
Property and Equipment Fixed assets are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the underlying assets, generally five
years. Leasehold improvements are amortized using the straight-line method over the shorter of the
estimated useful lives of the improvements or the term of the lease. Routine repair and maintenance
costs are expensed as incurred. Costs of major additions, replacements and improvements are
capitalized. Gains and losses from disposals are included in income. The Company periodically
evaluates the carrying value by considering the future cash flows generated by the assets.
Management believes that the carrying value reflected in the consolidated financial statements is
fairly stated based on these criteria.
Debt Offering Costs Debt offering costs are related to private placements and are amortized
on a straight line basis over the term of the related debt, most of which is in the form of senior
secured notes. Should there be an early extinguishment of the debt prior to the stated maturity
date; the remaining unamortized cost is expensed. Amortization expense amounted to $378,210 and
$504,869 in 2010 and 2009, respectfully. At June 30, 2010 all debt offering costs were fully
amortized.
Investments in Assets Held for Sale As of June 30, 2010 and 2009 the shares in Vuance Ltd.
held by the Company were classified as assets held for sale. Under this classification, securities
are carried at fair value (period end market closing prices) with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders equity until the gains
or losses are realized or a provision for impairment is recognized.
The table below reflects the value of our assets held for sale as of June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Recognized |
|
|
Estimated |
|
|
|
Cost |
|
|
Loss |
|
|
Impairment Loss |
|
|
Fair Value |
|
June 30, 2010 |
|
$ |
3,581,047 |
|
|
$ |
152,384 |
|
|
$ |
3,317,837 |
|
|
$ |
110,826 |
|
June 30, 2009 |
|
$ |
3,581,047 |
|
|
$ |
69,265 |
|
|
$ |
3,317,837 |
|
|
$ |
193,945 |
|
Investment Valuation Investments in equity securities are recorded at fair value,
represented as cost, plus or minus unrealized appreciation or depreciation, respectively. The fair
value of investments that have no ready market, are recorded at the lower of cost or a value
determined in good faith by management and approved by the Board of Directors, based on assets and
revenues of the underlying investee companies as well as the general market trends for businesses
in the same industry. Because of the inherent uncertainty of valuations, managements estimates of
the value of our investments may differ significantly from the values that would have been used had
a ready market for the investment existed and the differences could be material. At June 30, 2010,
the Companys membership interests in Secure America Acquisition
Holdings, LLC (SAAH) reflect the market value of the securities underlying the membership
interests. (See Note 6 to the Consolidated Financial Statements)
F-9
Income Taxes Deferred income taxes are provided using the liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating loss and tax credit
carryforwards and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in
tax laws and rates as of the date of enactment.
When tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to uncertainty about the
merits of the position taken or the amount of the position that would be ultimately sustained. The
benefit of a tax position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not that the position
will be sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet
the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit
that is more than 50 percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional
income taxes in the statement of income.
Stock Based Compensation Share based payments are measured at fair value on the awards
grant date, based on the estimated number of awards that are expected to vest and are reflected as
compensation cost in the financial statements.
Valuation of Options and Warrants The valuation of options and warrants granted to unrelated
parties for services are measured as of the earlier of: (1) the date at which a commitment for
performance by the counterparty to earn the equity instrument is reached, or (2) the date the
counterpartys performance is complete. The options and warrants will continue to be revalued in
situations where they are granted prior to the completion of the performance.
Employee Benefit Plans - Safety has a 401(k) profit sharing plan covering substantially all
its employees. Employees are allowed to make before-tax contributions to the plan, through salary
reductions, up to the legal limits as described under the Internal Revenue Code. Any company match
is discretionary. Safety contributed $332,307 and $516,078 to its plan during 2010 and 2009,
respectively.
SECL, a wholly owned subsidiary of Safety, has a group stakeholder pension scheme for the
benefit of its employees. The plan covers substantially all SECL employees and provides for SECL to
contribute at least three percent of the eligible employees compensation to the plan. SECL
contributed $582 and $4,549 to their plan during 2010 and 2009, respectively.
The holding company and Nexus both have salary deferral plans which allow each company to make
a discretionary match to their plan. Neither the holding company nor Nexus made contributions to
their plans during 2010 or 2009.
F-10
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) 2010-06, Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This
update provides amendments to Subtopic 820-10 requiring new disclosures for transfers in and out of
Level I and Level II fair value measurements by separately disclosing the amounts of significant
transfers in and out of Level I and Level II fair value measurements and describes the reasons for
the transfers. Also this update provides that a reporting entity should present separately
information about purchases, sales, issuances and settlements (present information on a gross
basis) in the reconciliation for fair value measurements using significant unobservable inputs
(Level III). This update additionally provides for a level of disaggregation of fair value
measurement disclosures for each set of assets and liabilities and requires a reporting entity to
provide disclosures about valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements that fall within either Level II or Level III.
The new disclosures and clarifications of existing disclosures was effective for interim and annual
reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level III fair value measurements and
has not had a material effect on the financial position, results of operations, cash flows of the
Company or previous or current disclosures. The remaining disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those fiscal years. The
Company does not expect this ASU to have a material effect on the financial position, results of
operations or the cash flows of the Company.
Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying
amount of an asset to estimated undiscounted future net cash flows expected to be generated by the
asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value
of the asset.
Advertising The Company follows the policy of charging the costs of advertising to expense
as incurred. Expenses incurred were $278,298 and $443,402 in 2010 and 2009, respectively.
Net Earnings (Loss) Per Share The Company computes basic earnings (loss) per share by
dividing net income (loss) attributable to common stockholders, by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share are computed by
dividing net income attributable to common stockholders, by diluted weighted average shares
outstanding. Potentially dilutive shares include the assumed exercise of stock options and
warrants, the assumed conversion of preferred stock and the assumed vesting of stock option grants
(using the treasury stock method), if dilutive.
Reclassifications During the current year it was determined that transactions previously
recognized as agent transactions are actual obligations of Safety and the revenues and related
costs should have been recorded gross. As a result, $1,349,838 has been added to net contract
revenue and contract costs for 2009. In addition, certain other prior years balances have been
reclassified to conform to the current year presentation.
F-11
3. Fixed Assets, net
Cost and related accumulated depreciation of the fixed assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Office equipment |
|
$ |
398,599 |
|
|
$ |
382,293 |
|
|
|
|
|
|
|
|
|
|
Operating equipment |
|
|
1,026,496 |
|
|
|
3,622,584 |
|
|
|
|
|
|
|
|
|
|
Computer equipment |
|
|
2,166,648 |
|
|
|
1,951,472 |
|
|
|
|
|
|
|
|
|
|
Vehicles |
|
|
930,706 |
|
|
|
908,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost |
|
|
4,522,449 |
|
|
|
6,864,473 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
(3,392,564 |
) |
|
|
(2,465,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
$ |
1,129,885 |
|
|
$ |
4,398,833 |
|
|
|
|
|
|
|
|
Depreciation expense was $1,863,333 (including $488,877 recorded in cost of contracts) in 2010
and $1,842,723 (including $556,970 recorded in cost of contracts) in 2009.
During 2010, Safety completed a contract and began to seek buyers for certain equipment used
for the completed contract. The equipment has been classified as held for sale on the accompanying
consolidated balance sheet at fair value and an impairment loss of $425,268 has been recognized on
the accompanying consolidated statement of operations. Subsequent to June 30, 2010, the equipment
was sold for approximately $1,550,000 and the related equipment note of $1,058,860 was satisfied
with the proceeds from the sale.
4. Intangible Assets, net
The components of intangible assets derived from the acquisition of Safety consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Depreciable intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
$ |
92,665 |
|
|
$ |
92,665 |
|
|
|
|
|
|
|
|
|
|
Contracts |
|
|
445,823 |
|
|
|
445,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
538,488 |
|
|
|
538,488 |
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization |
|
|
(196,674 |
) |
|
|
(152,116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341,814 |
|
|
|
386,372 |
|
|
|
|
|
|
|
|
|
|
Non-depreciable intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net of amortization |
|
$ |
346,814 |
|
|
$ |
391,372 |
|
|
|
|
|
|
|
|
F-12
Amortization expense for intangibles was $44,558 and $106,250 in 2010 and 2009, respectively.
Amortization expense for contracts, the only remaining amortizable intangible asset, is $44,558 for
each of the next five years through June 30, 2015 and $119,024 in total thereafter.
5. Goodwill
Goodwill is calculated as the difference between the cost of acquisition and the fair value of
the net assets acquired of any business that is acquired. The Company performs impairment tests of
the intangible assets at least annually and impairment losses are recognized if the carrying value
of the
intangible asset exceeds its fair value. During 2010 and 2009, the Company did not incur any
charges for impairment of goodwill.
6. Minority Interest in Ultimate Escapes, Inc.
The Company has indirectly acquired a minority equity interest in Ultimate Escapes, Inc., a
luxury destination club (UEI) (OTCBB: ULEI; 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 June 30, 2010, and is
entitled to receive such shares of common stock in UEI upon the release of SAAHs shares from
escrow, which is expected in October 2010.
In addition to the Companys ownership in SAAH, our Chief Executive Officer and Chairman
beneficially owns 149,867 membership interests in SAAH, or approximately 50.5% of SAAHs membership
interests; our Chief Financial Officer beneficially owns 10,385 membership interests, or
approximately 3.5% of SAAHs membership interests; and two of our directors collectively
beneficially own 15,735 membership interests in SAAH, or approximately 5.3% of SAAHs membership
interests.
Management of the Company believes it is appropriate to measure its investment in SAAH
membership units at the current market price of UEI common shares, only if such measurement results
in an impairment of the carrying value of its investment. Since 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 the lower of its cost or current market price of the UEI common shares.
During 2010, the Company recognized an impairment of $104,997 because the current market price of
UEI was below its cost of $150,000. The membership interests are valued at $45,003 and $150,000 at
June 30, 2010 and 2009, respectively and are included in the accompanying consolidated balance
sheets. Subsequent to June 30, 2010 UEI filed bankruptcy. See Note 23 for further discussion.
7. Income Taxes
The Company and certain of its subsidiaries file income tax returns in the US and in various
state jurisdictions. With few exceptions, the Company is no longer subject to US federal, state and
local, or non-US income tax examinations by tax authorities for years before 2006.
The Internal Revenue Service (IRS) has not notified the Company of any scheduled examination
of the Companys US income tax returns for 2006 through 2009. As of September 27, 2010, the IRS has
proposed no adjustments to the Companys tax positions.
There are no amounts included in the balance at June 30, 2010 or 2009 for which the ultimate
deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than interest and penalties,
the disallowance of the shorter deductibility period would not affect the annual effective tax rate
but would accelerate the payment of cash to the taxing authority to an earlier period.
F-13
It is the Companys policy to recognize any interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses. During 2010 and 2009, the Company
recognized no interest or penalties.
The tax effects of temporary differences giving rise to the Companys deferred tax assets
(liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss, capital loss and
research credit carryforwards |
|
$ |
14,002,792 |
|
|
$ |
16,332,874 |
|
Related party accruals |
|
|
1,557,242 |
|
|
|
846,259 |
|
Allowance for doubtful accounts |
|
|
87,526 |
|
|
|
89,915 |
|
Vacation and workers compensation |
|
|
231,528 |
|
|
|
109,850 |
|
Impairment loss on assets held for sale |
|
|
1,310,603 |
|
|
|
1,270,400 |
|
Other temporary differences |
|
|
7,620 |
|
|
|
21,388 |
|
Valuation allowance |
|
|
(16,574,871 |
) |
|
|
(17,714,926 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
622,440 |
|
|
|
(955,760 |
) |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation and amortization expenses |
|
|
(440,298 |
) |
|
|
(745,236 |
) |
Amortization of intangible assets |
|
|
(130,874 |
) |
|
|
(147,945 |
) |
Other temporary differences |
|
|
(51,268 |
) |
|
|
(62,579 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(622,440 |
) |
|
|
955,760 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
As a result of significant historical pretax losses, management cannot conclude that it is
more likely than not that the deferred tax asset will be realized. Accordingly, a full valuation
allowance has been established against the total net deferred tax asset. Prior to 2010, the
Companys income tax position had been that during the period ended June 30, 2008, the Company
decreased its valuation allowance by $10,729,865 primarily due to loss limitations from a change in
control of a subsidiary. As of June 30, 2010, the Company has made the determination that a change
in control had not taken place and has restored the $10,729,865 valuation allowance previously
reduced. The above reconciliation of deferred tax assets and liabilities has been restated for the
year ended June 30, 2009 to reflect a change in position. Approximately $874,000 of the valuation
allowance was allocated to reduce the goodwill of Safety, related to its acquisition. Because the
benefit of the deferred tax assets offset any provision for income tax purposes, the entire
provision for income tax expense represents amounts currently due state tax jurisdictions. The
valuation allowance decreased by $1,140,055 to $16,574,871 in 2010 and increased by $3,006,453 to
$6,985,061 in 2009 before the restatement discussed above.
F-14
The Companys income tax provision (benefit) differs from that obtained by using the federal
statutory rate of 35% as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Federal income taxes at 34% |
|
$ |
942,129 |
|
|
$ |
(3,335,726 |
) |
Effect of permanent differences |
|
|
506,500 |
|
|
|
376,289 |
|
Other |
|
|
(107,896 |
) |
|
|
|
|
State income tax |
|
|
389,552 |
|
|
|
(47,016 |
) |
Change in valuation allowance current year |
|
|
(1,140,055 |
) |
|
|
3,006,453 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax expense (benefit) |
|
$ |
590,230 |
|
|
$ |
|
|
|
|
|
|
|
|
|
At June 30, 2010, the Company had an available net operating loss carryforward of
approximately $41,184,682. This amount is available to reduce the Companys future taxable income
and expires in the years 2014 through 2028 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of |
|
Capital Loss |
|
|
NOL |
|
|
Total |
|
Expiration |
|
Carryover |
|
|
Carryover |
|
|
Carryover |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
$ |
90,400 |
|
|
$ |
|
|
|
$ |
90,400 |
|
2017 |
|
|
|
|
|
|
3,171,774 |
|
|
|
3,171,774 |
|
2018 |
|
|
|
|
|
|
7,017,587 |
|
|
|
7,017,587 |
|
2019 |
|
|
|
|
|
|
5,878,720 |
|
|
|
5,878,720 |
|
2020 |
|
|
|
|
|
|
4,942,777 |
|
|
|
4,942,777 |
|
2021 |
|
|
|
|
|
|
4,434,157 |
|
|
|
4,434,157 |
|
2022 |
|
|
|
|
|
|
3,438,195 |
|
|
|
3,438,195 |
|
2023 |
|
|
|
|
|
|
14,695 |
|
|
|
14,695 |
|
2024 |
|
|
|
|
|
|
4,031,488 |
|
|
|
4,031,488 |
|
2025 |
|
|
|
|
|
|
1,055,115 |
|
|
|
1,055,115 |
|
2026 |
|
|
|
|
|
|
3,066,650 |
|
|
|
3,066,650 |
|
2027 |
|
|
|
|
|
|
2,415,265 |
|
|
|
2,415,265 |
|
2028 |
|
|
|
|
|
|
1,627,859 |
|
|
|
1,627,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
90,400 |
|
|
$ |
41,094,282 |
|
|
$ |
41,184,682 |
|
|
|
|
|
|
|
|
|
|
|
F-15
8. Long-Term Debt
The Companys long term debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Safety Promissory Note payable due in monthly
installments of $38,296 including interest at 5.22%
until March 20102 when the unpaid balance is due,
collateralized by equipment with an original cost of
$1,993,212. Repaid in its entirety subsequent to
June 30, 2010. (See Note 3). |
|
$ |
1,058,860 |
|
|
$ |
1,452,342 |
|
|
|
|
|
|
|
|
|
|
Safety Promissory Note payable due in monthly
installments of $20,870 including interest at 5.85%
until May 2011, when the unpaid balance is due,
collateralized by equipment with an original cost of
$648,000. Repaid in 2010. |
|
|
|
|
|
|
576,693 |
|
|
|
|
|
|
|
|
|
|
Safety Revolving Line of Credit |
|
|
2,162,000 |
|
|
|
512,000 |
|
|
|
|
|
|
|
|
|
|
Nexus vehicle purchase obligations, due in
aggregate monthly installments of approximately
$7,700 including interest at rates averaging approximately
6% until August 2014, collateralized by
vehicles with an original cost of approximately $284,000 |
|
|
165,758 |
|
|
|
106,545 |
|
|
|
|
|
|
|
|
|
|
Other notes payable, repaid in 2010 |
|
|
|
|
|
|
20,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable |
|
|
3,386,618 |
|
|
|
2,668,288 |
|
Less revolving line of credit |
|
|
(2,162,000 |
) |
|
|
(512,000 |
) |
Less current portion of term debt |
|
|
(536,025 |
) |
|
|
(735,016 |
) |
|
|
|
|
|
|
|
Long term portion |
|
$ |
688,593 |
|
|
$ |
1,421,272 |
|
|
|
|
|
|
|
|
Safety maintains a bank line of credit, which has subsequent to June 30, 2010 been renewed
through September 2011, and among other features includes:
(a) An $8,000,000 Revolving Line of Credit (duration of one year) available for working
capital financing for Safety and all of its current and future subsidiaries including an
inter-company facility for credit to foreign operations.
(b) A monthly borrowing base determination based upon domestic accounts receivable
(availability at June 27, 2010 was approximately $5,838,000).
(c) Interest rate determined as the greater of LIBOR plus applicable margin in effect from
time to time based on funded debt ratio to domestic EBITDA ratio and 3.00%. Margin range is 2.15%
to 2.75% for an EBITDA ratio of over 2.25:1. Maximum ratio is 2.25:1.
(d) The ability to issue letters of credit in an aggregate principal amount not to exceed
$4,000,000 subject to certain provisions.
(e) Requirement that consolidated net income of Safety and its subsidiaries shall not be
less than $1 for each fiscal year and for each of the first three fiscal quarters of each fiscal
year of Safety.
Principal maturities for the next five years as of June 30 are as follows:
|
|
|
|
|
2011 |
|
$ |
536,025 |
|
2012 |
|
|
662,322 |
|
2013 |
|
|
24,655 |
|
2014 |
|
|
1,616 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,224,618 |
|
|
|
|
|
F-16
9. Related Party Senior Notes Payable
In June 2009 the Company entered into an agreement with YA extending the due date on its
senior notes payable, and accrued interest, to YA from March 14, 2010 until October 1, 2010 with
respect to $2,500,000 and April 1, 2011 for the balance of the principal and accrued interest
through that date. 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 began recording interest expense at the increased rate effective
January 1, 2010.
In September 2010, the Company entered into a debt extension agreement with YA to extend the
due dates for all senior notes payable and all accrued interest to July 15, 2011. As part of the
agreement, the
Company agreed to prepay $500,000 of the accrued interest due at June 30, 2010. The table
below reflects the elements of the Companys outstanding senior notes payable.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Senior Secured Notes Payable (the New Notes) |
|
$ |
6,310,000 |
|
|
$ |
6,310,000 |
|
Senior Secured Notes Payable (the Exchange
Notes) |
|
|
6,750,000 |
|
|
|
6,750,000 |
|
Less debt discount |
|
|
|
|
|
|
(34,053 |
) |
Debenture interest conversion note |
|
|
878,923 |
|
|
|
878,923 |
|
Treasury stock purchase note |
|
|
250,000 |
|
|
|
250,000 |
|
Accrued interest on above notes |
|
|
4,066,967 |
|
|
|
2,210,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable |
|
|
18,255,890 |
|
|
|
16,365,001 |
|
Less current portion of term debt |
|
|
(500,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Long term portion |
|
$ |
17,755,890 |
|
|
$ |
16,365,001 |
|
|
|
|
|
|
|
|
10. Convertible Preferred Stock
At June 30, 2010, the Company had three series of convertible preferred stock outstanding. The
information below sets out certain information about each series.
Series F
On October 6, 2005, the Company issued 1,000,000 shares of Series F Convertible Preferred
Stock, par value $0.01 per share (the Series F Preferred Stock), to YA, a related party, pursuant
to a securities purchase agreement. Proceeds from the issuance amounted to $1,000,000 less costs of
$154,277, or $845,723. The Series F Preferred Stock provides for preferential liquidating dividends
at an annual rate of 12%. Also, the Series F Preferred Stock has a preferential liquidation amount
of $0.10 per share or $100,000. The Series F Preferred Stock is convertible into shares of common
stock at a conversion price equal to $0.10 per share, subject to availability. In 2005, the Company
recorded a $1,000,000 dividend relative to the beneficial conversion feature. As of June 30, 2010,
none of the Series F Preferred Stock has been converted into shares of common stock.
Series G
During 2010, 358,080 shares of our Series G Convertible Preferred Stock representing the
entire amount outstanding under that series, were converted into 1,611,360 shares of our Common
Stock.
Series H
On March 17, 2008, the Company issued 10,000 shares of Series H Convertible Preferred Stock,
par value $0.01 per share (the Series H Preferred Stock), to YA, a related party, pursuant to a
securities purchase agreement. Proceeds from the issuance amounted to $10,000,000. The Series H
Preferred Stock provides for preferential dividends at an annual rate of 12%. Also, the Series H
Preferred Stock has a preferential liquidation amount of $1,000 per share or $10,000,000, plus all
accumulated and unpaid dividends, which at June 30, 2010 amounted to $2,745,033. Each share of
Series H Preferred Stock is initially convertible into 33,334 shares of common stock at a
conversion price equal to $0.03 per share, subject to availability. In 2008, the Company recorded a
$2,740,540 dividend relative to the beneficial conversion feature. As of June 30, 2010, 15 shares
of the Series H Preferred Stock have been converted into 500,010 shares of common stock and 9,985
shares of Series H Preferred Stock are outstanding.
F-17
As described above, the Series H Stock was convertible into shares of common stock at an
initial ratio of 33,334 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 near
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 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 any of its
conversion rights pertaining to the adjusted conversion ratio as of the date of this filing.
Series I
On March 13, 2008, the Company issued 550,000 shares of Series I Convertible Preferred Stock,
par value $0.01 per share (the Series I Preferred Stock), to Safety and certain named individuals
pursuant to a merger agreement. The initial value of the stock issued as merger consideration was
$3,300,000. Upon issuance, a portion of the Series I Preferred Stock was placed in escrow to offset
any indemnification claims or purchase price adjustments pursuant to the merger agreement. As of
June 30, 2010, all of the Series I Preferred Stock has been released from escrow. The Series I
Preferred Stock provides for preferential dividends at an annual rate of 12%. Also, the Series I
Preferred Stock has a preferential liquidation amount of $6.00 per share or $3,303,300, plus all
accumulated and unpaid dividends, which at June 30, 2010 amounted to $719,901. Each share of Series
I Preferred Stock is convertible into 200 shares of common stock at a conversion price of $0.03 per
share, subject to availability. As of June 30, 2010, none of the Series I Preferred Stock has been
converted into shares of common stock.
The table below reflects the number of shares of common stock that would potentially be
outstanding if: i) all series of preferred stock were to be converted into common stock; and ii)
the Company was unable to obtain a waiver or amendment in the Series H Preferred Stock conversion
ratio for the years ended June 30, 2010 and 2009, respectively, including accrued but unpaid
dividends as of those dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
Potential |
|
|
Accrued |
|
|
Potential |
|
|
Accrued |
|
Preferred Stock |
|
Common Shares |
|
|
Dividends |
|
|
Common Shares |
|
|
Dividends |
|
Series F |
|
|
10,000,000 |
|
|
|
|
|
|
|
10,000,000 |
|
|
|
|
|
Series G |
|
|
|
|
|
|
|
|
|
|
1,611,360 |
|
|
|
|
|
Series H |
|
|
562,833,323 |
|
|
$ |
2,745,033 |
|
|
|
333,333,333 |
|
|
$ |
1,545,206 |
|
Series I |
|
|
110,000,000 |
|
|
$ |
719,901 |
|
|
|
110,000,000 |
|
|
$ |
323,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
682,833,323 |
|
|
$ |
3,464,934 |
|
|
|
454,944,693 |
|
|
$ |
1,869,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
11. 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 Companys 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 fully vested through June 30, 2010, and $629,096 of total
compensation expense has been recognized in the financial statements of the Company through that
date. During the years ended June 30, 2010 and 2009, the Company recorded $2,500 and $49,175 as
compensation expense, respectively, under the 2005 Plan. At June 30, 2010, 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 Companys 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, all have fully
vested, 33,360 have been exercised and 66,640 have been forfeited through June 30, 2010 and
$2,669,709 of total compensation expense has been recognized in the financial statements of the
Company through that date. During the years ended June 30, 2010 and 2009, the Company recorded
$1,000,575 and $1,669,134 as compensation expense, respectively, under the 2008 Plan. At June 30,
2010, there are 1,216,640 options available for award under the 2008 Plan.
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 June 30, 2010, and $390,000 of total
compensation expense has been recognized in the financial statements of the Company through that
date.
As of June 30, 2010, all previously granted options under all option plans have fully vested
and $3,688,805 of total compensation expense has been recognized in the financial statements of the
Company through that date.
Additional information about the Companys stock option plans is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
June 30, 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 period |
|
|
83,310,000 |
|
|
$ |
0.056 |
|
|
$ |
0.044 |
|
|
|
75,669,374 |
|
|
$ |
0.057 |
|
|
$ |
0.049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
at end of period |
|
|
83,310,000 |
|
|
$ |
0.056 |
|
|
$ |
0.044 |
|
|
|
47,992,293 |
|
|
$ |
0.060 |
|
|
$ |
0.050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
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.
12. Common Stock Warrants
On March 14, 2008, in connection with a securities purchase agreement with YA Global
Investments, L.P., the Company issued to YA a warrant to purchase up to 83,333,333 shares of its
common stock. The YA warrant vested when granted and has an exercise price equal to $0.03 with a
term of five years from the date of issuance of March 14, 2008.
On March 17, 2008, the Company issued warrants to purchase up to 22,000,000 shares of its
common stock as part of the purchase consideration in the acquisition of Safety. A portion of the
warrants were held in escrow, along with the Series I Preferred Stock to offset any indemnification
claims or purchase price adjustments. As of June 30, 2010, all of the warrants have been released
from escrow. The warrants have an exercise price of $0.03 with a term of five years from the date
of issuance of March 17, 2008.
During 2007 and 2006, the Company issued 800,000 and 1,400,000 warrants, respectively, to two
entities and one consultant. These warrants vested when granted and were issued in connection with
our debenture financing, financial advisory services and investor relations consultation. The
exercise price of these warrants range from $0.11 to $1.00.
All warrants were valued using the Black Scholes pricing model with the following assumptions;
risk-free interest rate of between 2.2% and 4.95%, volatility of between 60% and 456% and expected
life of five years.
13. Fair Value Measurements
The Company follows Topic 820 Fair Value Measurements and Disclosures (FASB ASC 820),
formerly known 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 measurements). 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.
F-20
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 June 30, 2010, the Companys assets held for sale, consisting entirely of Vuance common
stock and the Companys indirect minority investment in UEI and the Companys marketable
fixed-income securities had carrying values of $110,825, $45,003 and $872,427, respectively, all of
which were measured by quoted prices in active markets for identical assets.
14. Business Segments
The Company analyzes its assets, liabilities, cash flows and results of operations by
operating unit or subsidiary. In the case of our platform companies, which are our first level
subsidiaries, the Company relies on local management to analyze each of its 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 a first level subsidiary. 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 table reflects the Companys segments at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2010 |
|
Homeland Security |
|
Holding |
|
|
Services |
|
|
Services |
|
|
Products |
|
|
|
|
Capital Corporation - |
|
Company |
|
|
Company |
|
|
Company |
|
|
Company |
|
|
|
|
Consolidated |
|
(HSCC) |
|
|
(Safety) |
|
|
(Nexus) |
|
|
(PMX) |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
85,723,970 |
|
|
$ |
10,207,192 |
|
|
$ |
1,968,706 |
|
|
$ |
97,899,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
|
|
|
|
17,025,476 |
|
|
|
2,988,563 |
|
|
|
78,655 |
|
|
|
20,092,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
2,480,103 |
|
|
|
10,743,617 |
|
|
|
1,045,631 |
|
|
|
29,887 |
|
|
|
14,299,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense net |
|
|
(1,882,547 |
) |
|
|
(754,365 |
) |
|
|
(385,577 |
) |
|
|
|
|
|
|
(3,022,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense |
|
|
(1,696,641 |
) |
|
|
2,184,100 |
|
|
|
102,771 |
|
|
|
|
|
|
|
590,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(2,666,009 |
) |
|
|
3,343,394 |
|
|
|
1,454,584 |
|
|
|
48,768 |
|
|
|
2,180,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
243,276 |
|
|
|
22,730,459 |
|
|
|
4,162,952 |
|
|
|
111,922 |
|
|
|
27,248,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
829,732 |
|
|
|
32,087,825 |
|
|
|
4,440,905 |
|
|
|
111,922 |
|
|
|
37,470,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
1,858,747 |
|
|
|
227,486 |
|
|
|
7,677 |
|
|
|
|
|
|
|
2,093,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
|
|
|
|
1,793,143 |
|
|
|
70,190 |
|
|
|
|
|
|
|
1,863,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
350,949 |
|
|
|
162,956 |
|
|
|
|
|
|
|
513,905 |
|
F-21
The following table reflects the Companys segments at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2009 |
|
Homeland Security |
|
Holding |
|
|
Services |
|
|
Services |
|
|
Products |
|
|
|
|
Capital Corporation - |
|
Company |
|
|
Company |
|
|
Company |
|
|
Company |
|
|
|
|
Consolidated |
|
(HSCC) |
|
|
(Safety) |
|
|
(Nexus) |
|
|
(PMX) |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
72,106,878 |
|
|
$ |
6,462,511 |
|
|
$ |
2,269,958 |
|
|
$ |
80,839,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
|
|
|
|
9,931,852 |
|
|
|
1,658,522 |
|
|
|
92,477 |
|
|
|
11,682,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
4,099,586 |
|
|
|
9,763,645 |
|
|
|
1,154,272 |
|
|
|
|
|
|
|
15,017,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense net |
|
|
(5,396,764 |
) |
|
|
(795,173 |
) |
|
|
(4,058 |
) |
|
|
|
|
|
|
(6,195,995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(9,496,350 |
) |
|
|
(342,340 |
) |
|
|
500,192 |
|
|
|
(192,149 |
) |
|
|
(9,530,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
413,578 |
|
|
|
16,890,714 |
|
|
|
2,279,900 |
|
|
|
748,580 |
|
|
|
20,332,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
631,412 |
|
|
|
28,954,567 |
|
|
|
2,504,198 |
|
|
|
748,580 |
|
|
|
32,838,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
1,717,435 |
|
|
|
276,776 |
|
|
|
17,780 |
|
|
|
|
|
|
|
2,011,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
7,593 |
|
|
|
1,792,014 |
|
|
|
43,116 |
|
|
|
|
|
|
|
1,842,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
737,979 |
|
|
|
61,165 |
|
|
|
|
|
|
|
799,144 |
|
15. Earnings (Loss) Per Share
The basic earnings (loss) per share was computed by dividing the net income or loss applicable
to 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
Convertible Preferred Shares, common stock options and warrants that can be exercised or converted,
as applicable, into common stock at June 30, 2010. Diluted earnings per share are not indicated for
the year ending June 30, 2009, because this period indicates a loss and the computation would be
anti-dilutive.
The reconciliations of the basic and diluted income (loss) per share for income (loss)
attributable to the Companys stockholders are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Basic and Diluted Earnings (Loss) Per Share: |
|
|
|
|
|
|
|
|
Income (Loss) (Numerator) |
|
$ |
1,918,873 |
|
|
$ |
(9,456,467 |
) |
Less: Series H Preferred Stock beneficial
conversion feature |
|
|
(14,724 |
) |
|
|
(14,724 |
) |
Less: Preferred stock dividends |
|
|
(1,595,827 |
) |
|
|
(1,468,274 |
) |
Less: Series I Preferred Stock beneficial
conversion feature |
|
|
|
|
|
|
(600,000 |
) |
|
|
|
|
|
|
|
Income (Loss) attributable to common
stockholders |
|
$ |
308,322 |
|
|
$ |
(11,539,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (Denominator) |
|
|
|
|
|
|
|
|
Weighted-average number of common
shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
51,291,270 |
|
|
|
47,664,614 |
|
Diluted |
|
|
699,666,666 |
|
|
|
47,664,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share |
|
|
|
|
|
|
|
|
Basic income (loss) per share |
|
$ |
0.01 |
|
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
Diluted income (loss) per share |
|
$ |
0.00 |
|
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
F-22
16. Cash Flows
Supplemental disclosure of cash flow information for the twelve months ended June 30, 2010 and
2009 are as follows:
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Year Ended June 30, |
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2010 |
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2009 |
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Cash paid during the period for: |
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Interest |
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$ |
227,486 |
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$ |
294,556 |
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Taxes |
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7,677 |
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Supplemental disclosure for noncash investing
and financing activity: |
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Preferred stock released from escrow |
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$ |
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$ |
2,023,877 |
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Temporary impairment of value of securities
available for sale |
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83,119 |
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1,863,253 |
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Dividends accrued on Preferred Stock |
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1,595,827 |
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1,468,274 |
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Dividends paid with Preferred Stock |
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14,724 |
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14,724 |
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Reverse cashless exercise of stock option |
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(4,406 |
) |
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Conversion of Series G Preferred Stock |
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35,808 |
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Conversion of Series H Preferred Stock |
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15,013 |
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Purchase of treasury stock for notes |
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250,000 |
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Equipment purchased under capital leases |
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130,699 |
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58,136 |
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F-23
17. Commitments and Contingencies
Leases
The Company and its subsidiaries routinely enter into lease agreements for office space used
in the normal course of business. Certain leases include escalation clauses that adjust rental
expense to reflect changes in price indices, as well as renewal options. In addition to minimum
rental payments, certain of our leases require additional payments to reimburse the lessor for
operating expenses such as real estate taxes, maintenance and utilities. At June 30, 2010 the
Company occupied office and warehouse space under 11 separate leases. The following table shows the
future minimum obligations under lease commitments in effect at June 30, 2010:
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Year Ended June 30, |
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2011 |
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$ |
548,092 |
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2012 |
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391,703 |
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2013 |
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344,028 |
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2014 |
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344,028 |
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2015 |
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344,028 |
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Thereafter |
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1,003,775 |
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$ |
2,975,654 |
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Rent expense, including related party amounts discussed in Note 18 below, for the years ended
June 30, 2010 and 2009 was $645,257 and $560,164, respectively. Our leases have various termination
dates between June 2011 and May 2018.
Commitments
The Company and its subsidiaries, in the normal course of business, routinely enter into
consulting agreements for services to be provided to the Company. These agreements are generally
short term and are terminable by either party on sixty (60) days notice. As a result, the Company
does not believe it has any material commitments to consultants.
Claims
During the ordinary course of business, the Company and its subsidiaries are subject to
various disputes and claims and there are uncertainties surrounding the ultimate resolutions of
these matters. Because of the uncertainties, it is at least reasonably possible that any amount
recorded may change within the near term.
18. 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 $344,000 in 2010 and
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 June 30, 2010 and 2009, the balance of the note,
including interest was $430,627 and $412,127, respectively.
19. Concentration of Customers and Suppliers
Significant Customers
For the year ending June 30, 2010, our Safety subsidiary generated approximately 94% of total
revenues from prime contracts or subcontracts with the U.S. Government. Safety generated 10% or
more of consolidated revenue over the last year from three significant customers, Safety had
accounts receivable from three significant customers each with a balance greater than 10% that
comprised 45% of consolidated accounts receivable. For the year ended June 30, 2010, our Nexus
subsidiary generated approximately 86% of total revenues from two customers and 72% of their
outstanding receivables from two customers. For the year ended June 30, 2010, our PMX joint
venture generated approximately 100% of total revenues from a contract with ILEAS.
F-24
For the year ending June 30, 2009, our Safety subsidiary generated approximately 75% of total
revenues from contracts or subcontracts with the U.S. Government. Safety generated 10% or more of
consolidated revenue during this period from three significant customers. Safety had accounts
receivable from five significant customers each with a balance greater than 10% that comprised 73%
of consolidated accounts receivable. For the year ended June 30, 2009, our Nexus subsidiary
generated approximately 78% of the total revenues from two customers. For the year ended June 30,
2009, our PMX joint venture generated approximately 98% of total revenues from a contract with
ILEAS.
Significant Suppliers
As of June 30, 2010, except for PMX which purchases all of its products from Polimaster, we
did not have a concentration of suppliers in any of our subsidiaries that upon the termination of
the relationship or the inability to purchase products from them, for any reason, would have a
material adverse effect on our business.
20. Changes in Estimates
Revisions in contract profits are made in the period in which circumstances requiring the
revision become known. The effect of changes in estimates of contract profits was to decrease net
income by approximately $800,000 in 2010 from that which would have been reported had the revised
estimates been used as the basis of recognition of contract profits in the preceding period.
21. 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 June 30, 2010, the Company
has a stockholders deficit of $1,059,211. Management recognizes 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 has implemented measures to increase profitability on our
operations and reduce certain expenses.
During the course of fiscal year 2011, it remains managements intention to continue to
explore all options available to the Company, which include among other things, additional
acquisitions, private placements, sale of subsidiaries and significant expense reductions where
ever possible.
22. Contingencies
On April 12, 2010, Safety received a protest on an active project it is working on for the
DOE. The protest, made by the unsuccessful bidder for the project, is disputing SECs business size
under the rules of the Small Business Administration (SBA). On August 5, 2010 the SBA ruled that
Safety is other than small for the captioned size standard by finding that Safety is affiliated
with its mentor protégé and, therefore, its mentor protégés headcount should be included in
Safetys headcount. It is Safetys strongly held position that the SBA determination is incorrect
and, as such, on August 20, 2010 appealed the determination to the SBAs Office of Hearings and
Appeals. As of the date of this filing, there have been no further determinations from the SBA as
to the appeal. If Safety is determined to be other than small for the captioned size standard it
may be excluded from future contracts requiring a small business designation.
23. Subsequent Events
Conversion of Series H Convertible Preferred Shares
On September 17, 2010, YA converted eighty six (86) Series H Convertible Preferred Shares into
2,866,724 shares of common stock (5.3% of Common Shares outstanding). At September 24, 2010 YA has
ownership in 9,574 Series H Convertible Preferred Shares.
F-25
Ultimate Escapes, Inc. Bankruptcy Filing
On September 20, 2010 Ultimate Escapes, Inc. (UEI) filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. The Company has an indirect minority interest in UEI as a result of its
membership interests in Secure America Acquisition Holdings, LLC (SAAH), the original investor in
Secure America Acquisition Corporation, which merged with UEI in October 2009. The Company is
deemed to have distribution rights to 40,912 shares of UEI common stock, in October 2010, and
currently carries its investment in such shares at $45,003 (see Note 6 to the Consolidated
Financial Statements).
As of September 24, 2010, the Company believes it cannot make a definitive determination as to
a value in its indirect interest in UEI. Since the date of UEIs Chapter 11 filing and through the
date of this filing, no plan of reorganization has been made public and the Companys value in its
indirect interest as measured by the market price of the underlying UEI common stock is
approximately $7,000. Additionally, the Company cannot determine with any degree of certainty if
its loan to SAAH in the amount of $430,627 at June 30, 2010 is collectable under the circumstances,
but believes its interests are secured by alternate means of payment (see Note 18 to the
Consolidated Financial Statements).
F-26