Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - Timios National Corp | c12405exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Timios National Corp | c12405exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Timios National Corp | c12405exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - Timios National Corp | c12405exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 |
For the quarterly period ended December 31, 2010
o | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file number
000-23279
000-23279
HOMELAND SECURITY CAPITAL CORPORATION
(Name of small business issuer in its charter)
Delaware | 52-2050585 | |
(State or Other Jurisdiction of Incorporation | (I.R.S. Employer Identification No.) | |
or Organization) | ||
1005 North Glebe Road, Suite 550 | ||
Arlington, VA | 22201 | |
(Address of principal executive offices) | (Zip code) |
(703) 528-7073
(Issuers Telephone Number, Including Area Code)
(Issuers Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of February 11, 2011, there were 54,491,449 shares of common stock, par value $.001 per
share, issued, 50,921,018 shares of common stock outstanding and 3,570,431 shares of common stock
held in treasury.
Transitional Small Business Disclosure Format (check one): Yes o No þ
TABLE OF CONTENTS
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements. |
The accompanying interim condensed consolidated financial statements and notes to the
consolidated financial statements for the interim period as of December 31, 2010, are unaudited.
The accompanying interim unaudited financial statements have been prepared by Homeland Security
Capital Corporation (the Company or the Holding Company) in accordance with accounting
principles generally accepted in the United States for interim financial statements and pursuant to
the requirements for reporting on Form 10-Q. Accordingly, these interim unaudited financial
statements do not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three and six month
periods ended December 31, 2010, are not necessarily indicative of the results that may be expected
for the fiscal year ending June 30, 2011. The condensed consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in the Companys
Annual Report on Form 10-K as of and for the year ended June 30, 2010.
2
Table of Contents
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Condensed Consolidated Balance Sheets
December 31, | June 30, | |||||||
2010 | 2010 | |||||||
(Unaudited) | ||||||||
Assets: |
||||||||
Cash |
$ | 3,427,980 | $ | 1,829,429 | ||||
Marketable fixed income securities |
| 872,427 | ||||||
Accounts receivable net |
22,929,795 | 16,764,897 | ||||||
Cost in excess of billings on uncompleted contracts |
5,072,479 | 7,333,931 | ||||||
Other current assets |
199,874 | 447,925 | ||||||
Total current assets |
31,630,128 | 27,248,609 | ||||||
Fixed assets net |
1,022,477 | 1,129,885 | ||||||
Equipment held for sale |
| 1,455,142 | ||||||
Deferred financing costs net |
| 8,000 | ||||||
Notes receivable related party |
439,753 | 430,627 | ||||||
Securities available for sale |
| 110,826 | ||||||
Other non-current assets |
204,977 | 336,499 | ||||||
Intangible assets net |
324,535 | 346,814 | ||||||
Goodwill |
6,403,982 | 6,403,982 | ||||||
Total assets |
$ | 40,025,852 | $ | 37,470,384 | ||||
Liabilities and Stockholders Deficit |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 10,348,140 | $ | 8,457,186 | ||||
Line of credit |
1,772,000 | | ||||||
Current portion of long term debt |
66,000 | 536,025 | ||||||
Current portion of long term debt related party |
18,740,466 | 500,000 | ||||||
Accrued compensation |
2,336,137 | 2,568,857 | ||||||
Accrued other liabilities |
454,730 | 436,906 | ||||||
Billings in excess of costs on uncompleted contracts |
1,070,501 | 1,027,500 | ||||||
Income taxes payable |
597,687 | 551,941 | ||||||
Current portion of deferred revenue |
177,545 | 85,327 | ||||||
Total current liabilities |
35,563,206 | 14,163,742 | ||||||
Line of credit |
| 2,162,000 | ||||||
Long term debt related party, less current maturities |
| 17,755,890 | ||||||
Long term debt, less current maturities |
111,647 | 688,593 | ||||||
Long term deferred revenue, less current portion |
| 124,667 | ||||||
Dividends payable |
4,265,617 | 3,464,934 | ||||||
Total liabilities |
39,940,470 | 38,359,826 | ||||||
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,
1,559,899 and 1,559,985 shares issued and outstanding, respectively |
14,146,472 | 14,225,110 | ||||||
Common stock, $0.001 par value, 2,000,000,000 shares authorized,
54,491,449 and 51,624,725 shares issued and
50,921,018 and 48,054,294 shares outstanding, respectively |
54,492 | 51,625 | ||||||
Additional paid-in capital |
55,405,554 | 55,297,972 | ||||||
Additional paid-in capital warrants |
272,529 | 272,529 | ||||||
Treasury stock 3,570,431 shares at cost |
(250,000 | ) | (250,000 | ) | ||||
Accumulated deficit |
(69,820,483 | ) | (70,509,227 | ) | ||||
Accumulated comprehensive loss |
(121,780 | ) | (301,153 | ) | ||||
Total Homeland Security Capital Corporation stockholders deficit |
(313,216 | ) | (1,213,144 | ) | ||||
Noncontrolling interest |
228,830 | 153,934 | ||||||
Total stockholders deficit |
(84,386 | ) | (1,059,210 | ) | ||||
Total liabilities and stockholders deficit |
$ | 40,025,852 | $ | 37,470,384 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net contract revenue |
$ | 28,207,029 | $ | 26,572,415 | $ | 53,266,167 | $ | 47,421,857 | ||||||||
Contract costs |
22,629,438 | 20,801,955 | 42,700,668 | 38,105,195 | ||||||||||||
Gross profit on contracts |
5,577,591 | 5,770,460 | 10,565,499 | 9,316,662 | ||||||||||||
Operating expenses: |
||||||||||||||||
Marketing |
109,735 | 131,507 | 171,326 | 198,947 | ||||||||||||
Personnel |
1,963,595 | 2,027,003 | 4,057,476 | 4,215,312 | ||||||||||||
Insurance and facility costs |
133,213 | 192,391 | 257,577 | 366,514 | ||||||||||||
Rent expense to related party |
86,000 | 86,000 | 172,000 | 172,000 | ||||||||||||
Travel and transportation |
77,274 | 92,454 | 163,634 | 190,373 | ||||||||||||
Other operating costs |
152,913 | 269,557 | 489,068 | 486,502 | ||||||||||||
Depreciation and amortization |
275,740 | 375,752 | 546,832 | 722,446 | ||||||||||||
Amortization of intangible assets |
11,140 | 11,140 | 22,279 | 22,279 | ||||||||||||
Professional services |
402,074 | 249,824 | 804,127 | 446,012 | ||||||||||||
Administrative costs |
296,981 | 246,194 | 554,993 | 518,120 | ||||||||||||
Total operating expenses |
3,508,665 | 3,681,822 | 7,239,312 | 7,338,505 | ||||||||||||
Operating income |
2,068,926 | 2,088,638 | 3,326,187 | 1,978,157 | ||||||||||||
Other (expense) income: |
||||||||||||||||
Interest expense |
(18,630 | ) | (61,030 | ) | (77,409 | ) | (107,256 | ) | ||||||||
Interest expense to related party |
(492,287 | ) | (429,955 | ) | (984,575 | ) | (873,521 | ) | ||||||||
Amortization of debt discounts and offering costs |
| (138,768 | ) | (8,000 | ) | (286,379 | ) | |||||||||
Impairment losses |
| | (308,213 | ) | | |||||||||||
Other income |
3,181 | 14,344 | 18,847 | 46,534 | ||||||||||||
Total other expense |
(507,736 | ) | (615,409 | ) | (1,359,350 | ) | (1,220,622 | ) | ||||||||
Income from continuing operations before
income taxes |
1,561,190 | 1,473,229 | 1,966,837 | 757,535 | ||||||||||||
Income tax expense |
(186,130 | ) | (172,129 | ) | (330,117 | ) | (202,284 | ) | ||||||||
Net income |
1,375,060 | 1,301,100 | 1,636,720 | 555,251 | ||||||||||||
Less: Net income attributable to
noncontrolling interests |
(162,408 | ) | (76,524 | ) | (139,932 | ) | (105,697 | ) | ||||||||
Net income attributable to Homeland
Security Capital Corporation stockholders |
1,212,652 | 1,224,576 | 1,496,788 | 449,554 | ||||||||||||
Less preferred dividends and other beneficial conversion
features associated with preferred stock issuance |
(402,905 | ) | (405,960 | ) | (808,044 | ) | (811,921 | ) | ||||||||
Net income (loss) attributable to common stockholders
of Homeland Security Capital Corporation |
$ | 809,747 | $ | 818,616 | $ | 688,744 | $ | (362,367 | ) | |||||||
Income (loss) per common share attributable to Homeland
Security Capital Corporation stockholders
basic and diluted |
||||||||||||||||
Basic |
$ | 0.01 | $ | 0.02 | $ | 0.01 | $ | (0.01 | ) | |||||||
Diluted |
$ | 0.01 | $ | 0.00 | $ | 0.01 | $ | (0.01 | ) | |||||||
Weighted average shares outstanding |
||||||||||||||||
Basic |
54,491,449 | 53,270,160 | 53,260,627 | 53,270,160 | ||||||||||||
Diluted |
54,491,449 | 536,203,500 | 53,260,627 | 53,270,160 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial
statements.
4
Table of Contents
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,636,720 | $ | 555,251 | ||||
Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |
||||||||
Share-based compensation expense |
24,449 | 543,751 | ||||||
Depreciation |
620,708 | 1,022,187 | ||||||
Amortization of intangibles |
22,279 | 22,279 | ||||||
(Gain) loss on disposal of assets |
(73,937 | ) | 7,556 | |||||
Impairment losses on securities available for sale |
308,214 | | ||||||
Amortization of debt offering costs and discounts |
8,000 | 271,221 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(6,164,898 | ) | (3,511,441 | ) | ||||
Costs in excess of billings on uncompleted contracts |
2,261,452 | (1,958,411 | ) | |||||
Other assets |
334,570 | 48,500 | ||||||
Accounts payable |
1,890,955 | (739,556 | ) | |||||
Billings in excess of costs on uncompleted contracts |
43,001 | 681,409 | ||||||
Accrued interest due to related party |
975,450 | 453,423 | ||||||
Accrued compensation |
(232,720 | ) | | |||||
Accrued other liabilities |
17,824 | | ||||||
Income taxes payable |
45,746 | 182,816 | ||||||
Deferred revenue |
(32,449 | ) | (27,074 | ) | ||||
Net cash provided by (used in) operating activities |
1,685,364 | (2,448,089 | ) | |||||
Cash flows from investing activities: |
||||||||
Purchase of fixed assets |
(466,494 | ) | (134,209 | ) | ||||
Proceeds from sale of assets |
1,545,725 | 21,500 | ||||||
Sale of marketable fixed income securities |
872,427 | 28,000 | ||||||
Net cash provided by (used in) investing activities |
1,951,658 | (84,709 | ) | |||||
Cash flows from financing activities: |
||||||||
Net (payments) borrowings on line of credit |
(390,000 | ) | 1,691,000 | |||||
Liquidating distribution of noncontrolling interest |
(65,036 | ) | | |||||
Repayment of related party debt |
(500,000 | ) | | |||||
Repayments of debt |
(1,110,423 | ) | (414,267 | ) | ||||
Net cash (used in) provided by financing activities |
(2,065,459 | ) | 1,276,733 | |||||
Effect of exchange rate changes on cash |
26,988 | (13,210 | ) | |||||
Net increase (decrease) in cash |
1,598,551 | (1,269,275 | ) | |||||
Cash, beginning of year |
1,829,429 | 2,356,534 | ||||||
Cash, end of year |
$ | 3,427,980 | $ | 1,087,259 | ||||
The accompanying notes are an integral part of these condensed consolidated financial
statements.
5
Table of Contents
HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders Deficit and Comprehensive Loss
Condensed 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, 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 | ) | ||||||||||||||||||
Amortization of Series H warrants |
7,362 | | | | | | (7,362 | ) | | | | |||||||||||||||||||||||||||||
Dividends on Series H and Series I |
| | | | | | (800,682 | ) | | | (800,682 | ) | ||||||||||||||||||||||||||||
Value of vested stock options |
| | | 24,449 | | | | | | 24,449 | ||||||||||||||||||||||||||||||
Preferred stock converted |
(86,000 | ) | 2,866,724 | 2,867 | 83,133 | | | | | | | |||||||||||||||||||||||||||||
Reduction in value of securities
available for sale |
| | | | | | | (110,825 | ) | | (110,825 | ) | ||||||||||||||||||||||||||||
Realization of impairment in value
of securities available for sale |
| | | | | | | 263,210 | | 263,210 | ||||||||||||||||||||||||||||||
Liquidating distribution of
noncontrolling interest |
| | | | | | | | (65,036 | ) | (65,036 | ) | ||||||||||||||||||||||||||||
Currency translation |
| | | | | | | 26,988 | | 26,988 | ||||||||||||||||||||||||||||||
Net income |
| | | | | | 1,496,788 | | 139,932 | 1,636,720 | ||||||||||||||||||||||||||||||
Balance, December 31, 2010 |
$ | 14,146,472 | 54,491,449 | $ | 54,492 | $ | 55,405,554 | $ | 272,529 | $ | (250,000 | ) | $ | (69,820,483 | ) | $ | (121,780 | ) | $ | 228,830 | (84,386 | ) | ||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial
statements.
6
Table of Contents
HOMELAND SECURITY CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2010
1. Organization and Basis of Presentation of Unaudited Interim Financial Statements.
Organization
Homeland Security Capital Corporation (the Company or the Holding Company) is an
international provider of specialized technology-based radiological, nuclear, environmental,
disaster relief and electronic security solutions to government and commercial customers. We are
engaged in the strategic acquisition, operation, development and consolidation of companies
operating in the chemical, biological, radiological, nuclear and explosive (CBRNE) incident
response and security marketplace within the homeland security industry. We are focused on creating
long-term shareholder value by taking a controlling interest in and developing our subsidiary
companies through superior management, operations, marketing and finance. We operate businesses
that provide products and services solutions, growing organically and by acquisitions. The Company
targets emerging companies that are generating revenues but face challenges in scaling their
businesses to capitalize on opportunities in the aforementioned industry sectors.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended December 31,
2010 are not necessarily indicative of the results that may be expected for the fiscal year ending
June 30, 2011.
The condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Safety & Ecology Holdings Corporation (Safety) (including Safetys
wholly-owned United Kingdom subsidiary Safety and Ecology Corporation Limited and majority owned
subsidiary Radcon Alliance, LLC) and majority owned subsidiaries Nexus Technologies Group, Inc.
(Nexus) and Polimatrix, Inc. (PMX). The Company controls each of the subsidiary boards of
directors and provides extensive advisory services to the subsidiaries. Accordingly, the Company
believes it exercises sufficient control over the operations and financial results of each company
and consolidates the results of operations. All intercompany balances and transactions have been
eliminated.
Reclassifications Certain prior period balances have been reclassified to conform with the
current period presentation.
Recent Accounting Pronouncements
In December 2010, the FASB issued Accounting Standards Updates (ASUs) No. 2010-28,
Intangibles Goodwill and Other (Topic 350). This ASU gives guidance on when to perform step 2 of
the goodwill impairment test for reporting units with zero or negative carrying amounts (a
consensus of the FASB Emerging Issues Task Force). This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted.
Adoption of this ASU is not expected to have a material effect on the financial position, results of operations, or cash flows of the
Company.
In August 2010, the FASB issued Accounting Standards Updates (ASUs) No. 2010-21, Accounting
for Technical Amendments to Various SEC Rules and Schedules Amendments to SEC Paragraphs Pursuant
to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of
Financial Reporting Policies (SEC Update) and No. 2010-22, Accounting for Various
TopicsTechnical Corrections to SEC Paragraphs (SEC Update). Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing (Topic 470). Both of these ASUs
amend, clarify and update various SEC rules, schedules, forms, timing and previous codified
financial reporting policies. This guidance was effective immediately and did not have
a material effect on the financial position, results of operations, or cash flows of the Company.
7
Table of Contents
2. Fair Value Measurements
The Company follows Topic 820 Fair Value Measurements and Disclosures (FASB ASC 820),
which, among other things, requires enhanced disclosures about assets and liabilities carried at
fair value. Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (exit
price). We utilize market data or assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk and the risks inherent in the inputs to the
valuation technique. These inputs can be readily observable, market corroborated or generally
unobservable. We primarily apply the market approach for recurring fair value measurements and
attempt to utilize the best available information. FASB ASC 820 establishes a fair value hierarchy
that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurement) and lowest priority to unobservable inputs (level 3 measurement). The three levels of
fair value hierarchy are as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities
as of the reporting date.
Level 2 Quoted prices for similar assets or liabilities in active markets, or quoted prices
for identical or similar assets or liabilities in markets that are not active, or other observable
inputs other than quoted prices.
Level 3 Unobservable inputs for the asset or liability.
In September 2010, the Companys reduced the carrying value of its securities available for
sale and other investments in minority interests to zero as a result of inactive and illiquid
markets for the securities. Additionally, the Company does not believe the quoted prices represent
the actual value appurtenant to the securities. Consequently, the Company regards the value of
these investments as permanently impaired and has recorded a loss in the amount of $308,213.
3. Income Taxes
The Company has not recorded any federal income tax expense or benefit for the three and six
months ended December 31, 2010, mainly due to available federal net operating loss carryforwards.
The Company has recorded an income tax valuation allowance equal to the benefit of any deferred tax
asset because of the uncertain nature of realization.
The Company has recorded state income tax expense for certain of the jurisdictions in which it
operates.
4. 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). Of these options, 6,800,000 were
previously granted at strike prices ranging from $0.08 to $0.17 and at December 31, 2010, all
granted options have vested. During the three and six month periods ending December 31, 2010, no
options under the 2005 Plan were granted and at December 31, 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). Of these options, 73,850,000 were
previously granted at a strike price of $0.05. Of the options granted, 73,750,000 have fully
vested, 33,360 have been exercised and 66,640 have been forfeited through December 31, 2010. During
the three and six month periods ending December 31, 2010, no options under the 2008 Plan were
granted and at December 31, 2010, there are 1,216,640 options available for award under the 2008
Plan. There have been no exercises of vested options under the 2008 Plan.
Stock Options Awarded Outside of the 2005 Plan and the 2008 Plan
The Company granted 2,760,000 options to three directors and one consultant outside of the
2005 Plan and the 2008 Plan at strike prices ranging from $0.12 to $0.17. All of these options
have vested through December 31, 2010. There have been no exercises of these options.
8
Table of Contents
Additional information about the Companys stock option plans is summarized below:
December 31, 2010 | June 30, 2010 | |||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||
Exercise | Grant Date | Exercise | Grant Date | |||||||||||||||||||||
Options | Price | Fair Value | Options | Price | Fair Value | |||||||||||||||||||
Outstanding at
beginning of period |
83,310,000 | $ | 0.056 | $ | 0.044 | 75,669,374 | $ | 0.057 | $ | 0.049 | ||||||||||||||
Granted |
| | | | | | ||||||||||||||||||
Rescinded
(Exercised) |
| | | 7,640,626 | 0.050 | 0.036 | ||||||||||||||||||
Forfeited |
| | | | | | ||||||||||||||||||
Outstanding at
end of period |
83,310,000 | $ | 0.056 | $ | 0.044 | 83,310,000 | $ | 0.056 | $ | 0.044 | ||||||||||||||
Options exercisable
at end of period |
83,310,000 | $ | 0.056 | $ | 0.044 | 83,310,000 | $ | 0.056 | $ | 0.044 | ||||||||||||||
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.
On February 1, 2011, Safety purchased from certain of its employees, all of the outstanding
options (which at that date were fully vested) originally granted under the Safety 2008 Employee
Option Plan (the Plan) for a total amount of $850,000. There are 85,748 fully vested options
under the Plan that remains outstanding as of February 11, 2011.
5. Business Segments
The Company analyzes its assets, liabilities, cash flows and results of operations by
operating unit or subsidiary. In the case of our subsidiary companies, the Company relies on local
management to analyze each of its controlled subsidiaries and report to us based on a consolidated
entity. As a result, the Company will make its financial decisions based on the overall performance
of its direct subsidiaries. Our subsidiaries derive their revenues and cash flow from different
activities, (i) engineering and environmental remediation services in the case of Safety, (ii)
design, installation and maintenance of electronic security systems in the case of Nexus, and (iii)
sales of radiological detection products and services in the case of PMX.
9
Table of Contents
The following tables reflect the Companys segments for the three and six month periods ended
December 31, 2010 and 2009, without regard to minority interests:
For the Three Months Ended December 31, 2010 | ||||||||||||||||||||
Homeland Security | Holding | Services | Services | Products | ||||||||||||||||
Capital Corporation - | Company | Company | Company | Company | ||||||||||||||||
Consolidated | (HSCC) | (Safety) | (Nexus) | (PMX) | Consolidated | |||||||||||||||
Revenues |
$ | | $ | 26,253,544 | $ | 1,953,485 | $ | | $ | 28,207,029 | ||||||||||
Gross margin |
| 5,063,490 | 514,101 | | 5,577,591 | |||||||||||||||
Operation expenses |
378,542 | 2,768,034 | 362,030 | 59 | 3,508,665 | |||||||||||||||
Other income (expense) net |
(277,624 | ) | (78,848 | ) | (151,264 | ) | | (507,736 | ) | |||||||||||
Income tax benefit (expense) |
646,235 | (839,811 | ) | 7,446 | | (186,130 | ) | |||||||||||||
Net income (loss) |
(9,931 | ) | 1,376,797 | 8,253 | (59 | ) | 1,375,060 | |||||||||||||
Current assets |
988,543 | 27,194,935 | 3,441,948 | 4,702 | 31,630,128 | |||||||||||||||
Total assets |
554,374 | 35,704,108 | 3,762,668 | 4,702 | 40,025,852 | |||||||||||||||
Interest expense |
492,287 | 15,003 | 3,627 | | 510,917 | |||||||||||||||
Depreciation expense |
| 291,193 | 22,020 | | 313,213 | |||||||||||||||
Capital expenditures |
| 273,837 | 2,707 | | 276,544 |
For the Three Months Ended December 31, 2009 | ||||||||||||||||||||
Homeland Security | Holding | Services | Services | Products | ||||||||||||||||
Capital Corporation - | Company | Company | Company | Company | ||||||||||||||||
Consolidated | (HSCC) | (Safety) | (Nexus) | (PMX) | Consolidated | |||||||||||||||
Revenues |
$ | | $ | 22,344,769 | $ | 3,209,146 | $ | 1,018,500 | $ | 26,572,415 | ||||||||||
Gross margin |
| 4,457,618 | 1,272,102 | 40,740 | 5,770,460 | |||||||||||||||
Operation expenses |
385,135 | 2,944,058 | 329,930 | 22,699 | 3,681,822 | |||||||||||||||
Other income (expense) net |
(536,128 | ) | (67,325 | ) | (11,956 | ) | | (615,409 | ) | |||||||||||
Income tax benefit (expense) |
469,296 | (641,425 | ) | | | (172,129 | ) | |||||||||||||
Net income (loss) |
(451,967 | ) | 804,810 | 930,216 | 18,041 | 1,301,100 | ||||||||||||||
Current assets |
166,912 | 20,166,258 | 3,383,327 | 750,605 | 24,467,102 | |||||||||||||||
Total assets |
101,159 | 31,343,452 | 3,620,303 | 750,605 | 35,815,519 | |||||||||||||||
Interest expense |
429,955 | 59,325 | 1,705 | | 490,985 | |||||||||||||||
Depreciation expense |
| 638,687 | 25,667 | | 664,354 | |||||||||||||||
Capital expenditures |
| 110,108 | 52,013 | | 162,121 |
For the Six Months Ended December 31, 2010 | ||||||||||||||||||||
Homeland Security | Holding | Services | Services | Products | ||||||||||||||||
Capital Corporation - | Company | Company | Company | Company | ||||||||||||||||
Consolidated | (HSCC) | (Safety) | (Nexus) | (PMX) | Consolidated | |||||||||||||||
Revenues |
$ | | $ | 49,254,486 | $ | 4,011,681 | $ | | $ | 53,266,167 | ||||||||||
Gross margin |
| 9,539,586 | 1,025,913 | | 10,565,499 | |||||||||||||||
Operation expenses |
1,138,619 | 5,555,452 | 542,407 | 2,834 | 7,239,312 | |||||||||||||||
Other income (expense) net |
(863,662 | ) | (199,981 | ) | (295,707 | ) | | (1,359,350 | ) | |||||||||||
Income tax benefit (expense) |
1,207,010 | (1,471,827 | ) | (65,300 | ) | | (330,117 | ) | ||||||||||||
Net income (loss) |
(795,271 | ) | 2,312,326 | 122,499 | (2,834 | ) | 1,636,720 | |||||||||||||
Current assets |
988,543 | 27,194,935 | 3,441,948 | 4,702 | 31,630,128 | |||||||||||||||
Total assets |
554,374 | 35,704,108 | 3,762,668 | 4,702 | 40,025,852 | |||||||||||||||
Interest expense |
984,575 | 71,952 | 5,457 | | 1,061,984 | |||||||||||||||
Depreciation expense |
| 577,966 | 42,742 | | 620,708 | |||||||||||||||
Capital expenditures |
| 428,734 | 37,760 | | 466,494 |
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For the Six Months Ended December 31, 2009 | ||||||||||||||||||||
Homeland Security | Holding | Services | Services | Products | ||||||||||||||||
Capital Corporation - | Company | Company | Company | Company | ||||||||||||||||
Consolidated | (HSCC) | (Safety) | (Nexus) | (PMX) | Consolidated | |||||||||||||||
Revenues |
$ | | $ | 40,432,354 | $ | 5,292,003 | $ | 1,697,500 | $ | 47,421,857 | ||||||||||
Gross margin |
| 7,398,476 | 1,850,286 | 67,900 | 9,316,662 | |||||||||||||||
Operation expenses |
1,163,042 | 5,603,902 | 548,862 | 22,699 | 7,338,505 | |||||||||||||||
Other income (expense) net |
(1,083,299 | ) | (127,591 | ) | (9,732 | ) | | (1,220,622 | ) | |||||||||||
Income tax benefit (expense) |
567,774 | (770,058 | ) | | | (202,284 | ) | |||||||||||||
Net income (loss) |
(1,678,567 | ) | 896,925 | 1,291,692 | 45,201 | 555,251 | ||||||||||||||
Current assets |
166,912 | 20,166,258 | 3,383,327 | 750,605 | 24,467,102 | |||||||||||||||
Total assets |
101,159 | 31,343,452 | 3,620,303 | 750,605 | 35,815,519 | |||||||||||||||
Interest expense |
873,521 | 102,598 | 4,658 | | 980,777 | |||||||||||||||
Depreciation expense |
| 988,299 | 33,888 | | 1,022,187 | |||||||||||||||
Capital expenditures |
| 125,182 | 75,622 | | 200,804 |
6. Income (Loss) Per Share
The basic income (loss) per share was computed by dividing the net income or loss applicable
to the Companys common stockholders by the weighted average shares of Common Stock outstanding
during each period.
Diluted earnings per share are computed using outstanding shares of Common Stock plus the
Preferred Shares, Common Stock options and warrants that can be exercised or converted, as
applicable, into Common Stock. Diluted earnings per share are not indicated for the three and six
month periods ended December 31, 2010 because the market price of the Companys Common Stock, when
using the treasury method, indicates that conversions or exercises would not be prudent, as the
Preferred Shares and Common Stock options and warrants are out of the money. Diluted earnings per
share are not indicated for the six month period ending December 31, 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 the income (loss)
attributable to the Companys shareholders are as follows:
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic and Diluted Earnings (Loss) Per Share: |
||||||||||||||||
Income (Loss) (Numerator) |
$ | 1,212,652 | $ | 1,224,576 | $ | 1,496,788 | $ | 449,554 | ||||||||
Less: Series H Preferred Stock beneficial
conversion feature |
(3,681 | ) | (3,681 | ) | (7,362 | ) | (7,362 | ) | ||||||||
Less: Preferred stock dividends |
(399,224 | ) | (402,279 | ) | (800,682 | ) | (804,559 | ) | ||||||||
Income (loss) attributable to common stockholders |
$ | 809,747 | $ | 818,616 | $ | 688,744 | $ | (362,367 | ) | |||||||
Shares (Denominator) |
||||||||||||||||
Weighted-average number of common shares: |
||||||||||||||||
Basic |
54,491,449 | 53,270,160 | 53,260,627 | 53,270,160 | ||||||||||||
Diluted |
54,491,449 | 536,203,500 | 53,260,627 | 53,270,160 | ||||||||||||
Earnings Per Common Share |
||||||||||||||||
Basic income (loss) per share |
$ | 0.01 | $ | 0.02 | $ | 0.01 | $ | (0.01 | ) | |||||||
Diluted loss per share |
$ | 0.01 | $ | 0.00 | $ | 0.01 | $ | (0.01 | ) | |||||||
11
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7. Cash Flows
Supplemental disclosure of cash flow information for the six month periods ending
December 31, 2010 and 2009, are as follows:
Six Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 577,409 | $ | 107,256 | ||||
Taxes |
230,952 | 6,947 | ||||||
Supplemental disclosure for noncash investing and financing activity: |
||||||||
Temporary impairment of value of securities available for sale |
$ | (110,825 | ) | $ | (55,413 | ) | ||
Dividends accrued on Perferred Stock |
800,682 | 804,559 | ||||||
Dividends paid with Preferred Stock |
7,362 | 7,362 | ||||||
Conversion of Series H Preferred Stock |
(86,000 | ) | | |||||
Equipment purchased under capital leases |
63,452 | 66,595 |
8. 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 $86,006 and $172,012
during the three and six month periods ending December 31, 2010 and 2009, respectively.
On June 1, 2007, the Company loaned $500,000 to Secure America Acquisition Holdings, LLC, an
entity affiliated with our Chairman and Chief Executive Officer. The loan is evidenced by a note
bearing 5% interest per annum and is due on or before May 31, 2011, with no prepayment penalties.
The loan is guaranteed in its entirety by our Chairman and Chief Executive Officer. At December 31,
2010 and 2009, the balance of the note, including interest, was $439,453 and $421,453,
respectively. Interest income related to this note was $4,663 and $9,326 for each of the three and
six month periods ended December 30, 2010 and 2009, respectively.
9. Continuing Operations
These financial statements have been prepared on a going concern basis which contemplates the
realization of assets and the payment of liabilities in the ordinary course of business. Should
the Company be unable to continue as a going concern it may be unable to realize the carrying value
of its assets and to meet its liabilities.
The Company has related party debt totaling $18,740,466 which is due within the next 12
months. If the Company is unable to repay its debt or extend repayment terms, the Company may
cease operations. The primary source of financing for the Company since its inception has been
through the issuance of equity and debt securities. As of December 31, 2010, the Company has
negative working capital of $3,933,078 and stockholders deficit of $84,386. The Company had net
income attributable to common stockholders of $688,744 for the six month period ended December 31,
2010. Management recognizes that it will be necessary to continue to generate positive cash flow
from operations, gain availability to other sources of capital, and or extend related party debt
terms or possibly sell one or more of its subsidiaries to continue as a going concern. In
addition, Management continues to implement measures to increase profitability in operations and
reduce certain operating expenses.
12
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including, without limitation, Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act). We intend that the
forward-looking statements be covered by the safe harbor for forward-looking statements in the
Exchange Act. The forward-looking information is based on various factors and was derived using
numerous assumptions. All statements, other than statements of historical fact, that address
activities, events or developments that we intend, expect, project, believe or anticipate will or
may occur in the future are forward-looking statements. Such statements are based upon certain
assumptions and assessments made by our management in light of their experience and their
perception of historical trends, current conditions, expected future developments and other factors
they believe to be appropriate. These forward-looking statements are usually accompanied by words
such as believe, anticipate, plan, seek, expect, intend and similar expressions.
Forward-looking statements necessarily involve risks and uncertainties, and our actual results
could differ materially from those anticipated in the forward looking statements due to a number of
factors, including those set forth in Part I, Item 1A, entitled Risk Factors, of our Annual
Report on Form 10-K for the year ended June 30, 2010, as may be updated and supplemented by this
report. These factors as well as other cautionary statements made in this Quarterly Report on Form
10-Q, should be read and understood as being applicable to all related forward-looking statements
wherever they appear herein. The forward-looking statements contained in this Quarterly Report on
Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions
carefully. We caution you not to place undue reliance on the forward-looking statements contained
in this report. These statements, like all statements in this report, speak only as of the date of
this report (unless an earlier date is indicated) and we undertake no obligation to update or
revise the statements except as required by law. Such forward-looking statements are not guarantees
of future performance and actual results will likely differ, perhaps materially, from those
suggested by such forward-looking statements. In this report, the Company, the Holding
Company, we, us, and our refer to Homeland Security Capital Corporation.
Overview
The Company focuses on the acquisition and development of businesses whose primary operations
are in the CBRNE incident response and security marketplace of the homeland security industry. The
Companys near term focus is to grow these businesses both organically and through complementary
acquisitions. The Company targets growth companies that are generating revenues but face challenges
in scaling their businesses to capitalize on homeland security opportunities. The Company will
enhance the operations of these companies by helping them generate new business, grow revenues,
build infrastructure and improve cash flows.
The Company currently conducts its ongoing operations through one wholly owned subsidiary and
two majority-owned subsidiaries. Our wholly owned subsidiary Safety, is a provider of global
environmental, hazardous material and radiological infrastructure remediation and advanced
construction services in the United States and the United Kingdom. Our majority owned subsidiaries
include Nexus, a security integration company having a presence in the Mid-Atlantic region with a
focus on the New York City, New Jersey and Pennsylvania markets and PMX, a company focused on
radiological detection and isotope identification.
In a publically released decision document dated January 12, 2011, the United States Small
Business Administrations Office of Hearing and Appeals (OHA) announced that it has ruled in favor
of Safety concerning a small business size determination protest. The protest, originally filed in
April 2010, claimed that Safety should be considered other than a small business as a result of its
size as determined by headcount. The December 20, 2010 OHA finding removes any impediments, based
on headcount, to Safetys ability to bid on small business set aside contracts for the Federal
Government.
13
Table of Contents
Results of Operations
Three Month Period Ended December 31, 2010 as Compared to the Three Month Period Ended December 31,
2009
Contract revenue
For the three months ended December 31, 2010, the Company recorded contract revenue of
$28,207,029 as compared to $26,572,415 recorded for the three months ended December 31, 2009. The
increase of $1,634,614 is further outlined below:
Three Months Ended December 31, | ||||||||||||||||
2010 | 2009 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | | $ | | $ | | | |||||||||
Safety |
26,253,544 | 22,344,769 | 3,908,775 | 17.5 | % | |||||||||||
Nexus |
1,953,485 | 3,209,146 | (1,255,661 | ) | -39.1 | % | ||||||||||
PMX |
| 1,018,500 | (1,018,500 | ) | -100.0 | % | ||||||||||
$ | 28,207,029 | $ | 26,572,415 | $ | 1,634,614 | 6.2 | % | |||||||||
The overall increase of $1,634,614, or 6.2%, reflects significantly increased revenues in our
Safety subsidiary attributable to both expanded services within existing contracts and services
provided under new contracts, primarily resulting from stimulus funded programs, as compared to the
prior year. The decreased revenues at Nexus and PMX reflect the winding up of several projects
originally started in fiscal year 2010 in regards to Nexus and no new orders from its primary
customer in regards to PMX.
Contract cost
For the three months ended December 31, 2010, the Company recorded contract cost of
$22,629,438 as compared to $20,801,955 recorded for the three months ended December 31, 2009. The
increase of $1,827,483 is further outlined below:
Three Months Ended December 31, | ||||||||||||||||
2010 | 2009 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | | $ | | $ | | | |||||||||
Safety |
21,190,054 | 17,887,151 | 3,302,903 | 18.5 | % | |||||||||||
Nexus |
1,439,384 | 1,937,044 | (497,660 | ) | -25.7 | % | ||||||||||
PMX |
| 977,760 | (977,760 | ) | -100.0 | % | ||||||||||
$ | 22,629,438 | $ | 20,801,955 | $ | 1,827,483 | 8.8 | % | |||||||||
The overall increase of $1,827,483, or 8.8%, are costs associated with the additional contract
revenues noted above for Safety and comparable reductions for Nexus and PMX resulting from reduced
revenue. Our gross profit on contract revenue fell from 21.7% for the three months ended December
31, 2009 to 19.8% for the three months ended December 30, 2010. This lower margin is mainly due to
the initial start-up of new stimulus related projects at our Safety subsidiary and continued work
on lower margin projects at our Nexus subsidiary.
Operating expenses
For the three months ended December 31, 2010, the Company recorded operating expenses of
$3,508,665 as compared to $3,681,822 recorded for the three months ended December 31, 2009. The
decrease of $173,157 is further outlined below:
Three Months Ended December 31, | ||||||||||||||||
2010 | 2009 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | 378,542 | $ | 385,135 | $ | (6,593 | ) | -1.7 | % | |||||||
Safety |
2,768,034 | 2,944,058 | (176,024 | ) | -6.0 | % | ||||||||||
Nexus |
362,030 | 329,930 | 32,100 | 9.7 | % | |||||||||||
PMX |
59 | 22,699 | (22,640 | ) | -99.7 | % | ||||||||||
$ | 3,508,665 | $ | 3,681,822 | $ | (173,157 | ) | -4.7 | % | ||||||||
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Table of Contents
The overall decrease of $173,157, or 4.7%, is primarily due to the reduction of operating
expenses at our Safety subsidiary reflecting dedicated management oversight in containing expense
increases while raising revenue. The Holding Company and Nexus expenses were substantially
consistent with the previous year.
Other income and expense
For the three months ended December 31, 2010, the Company recorded net other expenses of
$507,736 as compared to $615,409 recorded for the three months ended December 31, 2009. The
decrease in net other expenses of $107,673 is further outlined below by operating unit and
functional line item:
Three Months Ended December 31, | ||||||||||||||||
2010 | 2009 | (Increase) Decrease | ||||||||||||||
Holding Company |
$ | (277,624 | ) | $ | (536,128 | ) | $ | 258,504 | -48.2 | % | ||||||
Safety |
(78,848 | ) | (67,325 | ) | (11,523 | ) | 17.1 | % | ||||||||
Nexus |
(151,264 | ) | (11,956 | ) | (139,308 | ) | 1,165.2 | % | ||||||||
PMX |
| | | | ||||||||||||
$ | (507,736 | ) | $ | (615,409 | ) | $ | 107,673 | -17.5 | % | |||||||
Three Months Ended December 31, | ||||||||||||||||
2010 | 2009 | (Increase) Decrease | ||||||||||||||
Interest expense |
$ | (510,917 | ) | $ | (490,985 | ) | $ | (19,932 | ) | 4.1 | % | |||||
Amortization of debt
offering costs |
| (126,750 | ) | 126,750 | -100.0 | % | ||||||||||
Amortization of debt
discount |
| (12,018 | ) | 12,018 | -100.0 | % | ||||||||||
Interest and other
income |
3,181 | 14,344 | (11,163 | ) | -77.8 | % | ||||||||||
$ | (507,736 | ) | $ | (615,409 | ) | $ | 107,673 | -17.5 | % | |||||||
The overall decrease in net other expenses of $107,673, or 17.5%, mainly reflects an increase
in the rate of interest on senior debt, offset by the lack of amortization of debt offerings and
debt discount costs in the current year.
Net income (loss)
As a result of the foregoing, the Company recorded net income, before noncontrolling interests
and preferred dividends of $1,375,060 for the three months ended December 31, 2010 as compared to
net income of $1,301,100 for the three months ended December 31, 2009. The overall increase of
$73,960 reflects the continued growth of the Company, particularly its Safety subsidiary.
Six Month Period Ended December 31, 2010 as Compared to the Six Month Period Ended December 31,
2009
Contract revenue
For the six months ended December 31, 2010, the Company recorded contract revenue of
$53,266,167 as compared to $47,421,857 recorded for the six months ended December 31, 2009. The
increase of $5,844,310 is further outlined below:
Six Months Ended December 31, | ||||||||||||||||
2010 | 2009 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | | $ | | $ | | | |||||||||
Safety |
49,254,486 | 40,432,354 | 8,822,132 | 21.8 | % | |||||||||||
Nexus |
4,011,681 | 5,292,003 | (1,280,322 | ) | -24.2 | % | ||||||||||
PMX |
| 1,697,500 | (1,697,500 | ) | -100.0 | % | ||||||||||
$ | 53,266,167 | $ | 47,421,857 | $ | 5,844,310 | 12.3 | % | |||||||||
15
Table of Contents
The overall increase of $5,844,310, or 12.3%, reflects significantly increased revenues in our
Safety subsidiary attributable to both expanded services within existing contracts and services
provided under new contracts, primarily resulting from stimulus funded programs, as compared to the
prior year. The decreased revenues at Nexus and PMX reflect the winding up of several projects
originally started in fiscal year 2010 in regards to Nexus and no new orders from its primary
customer in regards to PMX.
Contract cost
For the six months ended December 31, 2010, the Company recorded contract cost of $42,700,668
as compared to $38,105,195 recorded for the six months ended December 31, 2009. The increase of
$4,595,473 is further outlined below:
Six Months Ended December 31, | ||||||||||||||||
2010 | 2009 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | | $ | | $ | | | |||||||||
Safety |
39,714,900 | 33,033,878 | 6,681,022 | 20.2 | % | |||||||||||
Nexus |
2,985,768 | 3,441,717 | (455,949 | ) | -13.2 | % | ||||||||||
PMX |
| 1,629,600 | (1,629,600 | ) | -100.0 | % | ||||||||||
$ | 42,700,668 | $ | 38,105,195 | $ | 4,595,473 | 12.1 | % | |||||||||
The overall increase of $4,595,473, or 12.1%, are costs associated with the additional
contract revenues noted above for Safety and comparable reductions for Nexus and PMX resulting from
reduced revenue. Our gross profit on contract revenue remained consistent at 19.6% for the three
months ended December 31, 2009 compared to 19.8% for the three months ended December 30, 2010.
Operating expenses
For the six months ended December 31, 2010, the Company recorded operating expenses of
$7,239,312 as compared to $7,338,505 recorded for the six months ended December 31, 2009. The
decrease of $99,193 is further outlined below:
Six Months Ended December 31, | ||||||||||||||||
2010 | 2009 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | 1,138,619 | $ | 1,163,042 | $ | (24,423 | ) | -2.1 | % | |||||||
Safety |
5,555,452 | 5,603,902 | (48,450 | ) | -0.9 | % | ||||||||||
Nexus |
542,407 | 548,862 | (6,455 | ) | -0.1 | % | ||||||||||
PMX |
2,834 | 22,699 | (19,865 | ) | -87.5 | % | ||||||||||
$ | 7,239,312 | $ | 7,338,505 | $ | (99,193 | ) | -1.4 | % | ||||||||
The overall decrease of $99,193, or 1.4%, is primarily due to the reduction of operating
expenses at our Holding Company and Safety subsidiary. The reduction in PMXs operating expenses
reflects the lack of operating revenues when compared to the prior year.
Other income and expense
For the six months ended December 31, 2010, the Company recorded net other expenses of
$1,359,350 as compared to $1,220,622 recorded for the six months ended December 31, 2009. The
increase in net other expenses of $138,728 is further outlined below by operating unit and
functional line item:
Six Months Ended December 31, | ||||||||||||||||
2010 | 2009 | (Increase) Decrease | ||||||||||||||
Holding Company |
$ | (863,662 | ) | $ | (1,083,299 | ) | $ | 219,677 | -20.3 | % | ||||||
Safety |
(199,981 | ) | (127,591 | ) | (72,390 | ) | 56.7 | % | ||||||||
Nexus |
(295,707 | ) | (9,732 | ) | (285,972 | ) | 2,938.5 | % | ||||||||
PMX |
| | | | ||||||||||||
$ | (1,359,350 | ) | $ | (1,220,622 | ) | $ | (138,728 | ) | 11.4 | % | ||||||
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Six Months Ended December 31, | ||||||||||||||||
2010 | 2009 | (Increase) Decrease | ||||||||||||||
Interest expense |
$ | (1,061,984 | ) | $ | (980,777 | ) | $ | (81,207 | ) | 8.3 | % | |||||
Amortization of debt
offering costs |
(8,000 | ) | (262,342 | ) | 254,342 | -96.7 | % | |||||||||
Amortization of debt
discount |
| (24,037 | ) | 24,037 | -100.0 | % | ||||||||||
Impairment losses |
(308,213 | ) | | (308,213 | ) | 100.0 | % | |||||||||
Interest and other
income |
18,847 | 46,534 | (27,687 | ) | -59.5 | % | ||||||||||
$ | (1,359,350 | ) | $ | (1,220,622 | ) | $ | (138,728 | ) | 11.4 | % | ||||||
The overall increase in net other expenses of $138,728, or 11.4%, mainly reflects an increased
interest expense of $81,207 due to an increase in our interest rate, the permanent impairment
writedown of investments of $308,213 and the reduction of interest and other income of $27,687,
offset by the lack of amortization costs of $278,379 in the current year due to debt offering costs
and debt discounts being fully amortized in fiscal year 2010.
Net income (loss)
As a result of the foregoing, the Company recorded net income, before noncontrolling interests
and preferred dividends of $1,636,720 for the six months ended December 31, 2010 as compared to net
income of $555,251 for the six months ended December 31, 2009. The overall increase of $1,081,469
reflects the growth of the Company, particularly its Safety subsidiary, during the six months ended
December 31, 2010.
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
$3,427,980, a deficit in working capital of $3,993,078 and approximately $6,228,000 available for
borrowing on our credit line at December 31, 2010. Our deficit in working capital is primarily the
result of classifying our related party debt in current liabilities as a result of its due date of
July 15, 2011, which is within twelve months of balance sheet date of this filing.
Our primary needs for cash are to fund our ongoing operations and to have cash available to
make additional acquisitions of businesses that provide products and services in our target
industries. While we believe that we have sufficient cash on hand and available credit to satisfy
our current operating commitments, we will require significant additional funding in order to make
additional acquisitions.
During the six months ended December 31, 2010, we had a net increase in cash of $1,598,551.
Our sources and uses of funds were as follows:
Cash Flows From Operating Activities
We provided net cash of $1,685,364 in our operating activities during the six months ended
December 31, 2010 primarily from income of $2,546,433 (net income of $1,636,720 adjusted for
non-cash items of $909,713) offset by net uses of cash of $861,069 due to changes in our operating
assets and liabilities.
Cash Flows From Investing Activities
We provided net cash of $1,951,658 in our investing activities during the six months ended
December 31, 2010, related to the proceeds from the sale of fixed assets of $1,545,725, plus the
sale of securities of $872,427 reduced by the purchase of fixed assets totaling $466,494.
Cash Flows From Financing Activities
We used net cash of $2,065,459 in our financing activities during the six months ended
December 31, 2010, consisting of repayment of installment debt of $1,110,423, net repayment of
Safetys line of credit of
$390,000, repayment of related party debt of $500,000 and the partial liquidation of a
noncontrolling interest in a subsidiary of $65,036.
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Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings or other relationships with
unconsolidated entities or other persons, also known as special purpose entities.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide information required by this
item.
Item 4(T). | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have
concluded that, based on such evaluation, our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and is accumulated and communicated to our management, including our
principal executive and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
During the most recently completed fiscal quarter, there has been no significant change in our
internal control over financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting as such term is defined in Rule
13a-15 and 15d-15 of the Exchange Act.
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PART II. OTHER INFORMATION.
Item 1. | Legal Proceedings. |
As of December 31, 2010, we are not subject to any material legal proceedings.
From time to time, however, we and/or our subsidiaries may become involved in litigation and other
legal proceedings relating to claims arising from our operations in the normal course of business
Item 1A. | Risk Factors. |
As a smaller reporting company, we are not required to provide information required by this
item.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
Item 5. | Other Information. |
None.
Item 6. | Exhibits |
Exhibits.
Exhibit | Description | |||
31.1 | Certification of Principal Executive Officer
Pursuant to Securities Exchange Act Rule 13a-14(a)
As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002* |
|||
31.2 | Certification of Principal Financial Officer
Pursuant to Securities Exchange Act Rule 13a-14(a)
As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002* |
|||
32.1 | Certification of Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002* |
|||
32.2 | Certification of Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002* |
* | Exhibit filed with this Quarterly Report |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Report to be signed in its behalf by the undersigned, thereunto
duly authorized.
HOMELAND SECURITY CAPITAL CORPORATION |
||||
Date: February 14, 2011 | /s/ Michael T. Brigante | |||
Michael T. Brigante | ||||
(Authorized Officer and Principal Financial Officer) |
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