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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011
     
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
HOMELAND SECURITY CAPITAL CORPORATION
(Name of small business issuer in its charter)
     
Delaware
(State or Other Jurisdiction of Incorporation
or Organization)
  52-2050585
(I.R.S. Employer Identification No.)
     
1005 North Glebe Road, Suite 550
Arlington, VA
(Address of principal executive offices)
  22201
(Zip code)
(703) 528-7073
(Issuer’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of May 10, 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
 
 

 

 


 

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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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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 March 31, 2011, 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 nine month periods ended March 31, 2011, 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 Company’s Annual Report on Form 10-K as of and for the year ended June 30, 2010.

 

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HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
                 
    March 31,     June 30,  
    2011     2010  
    (Unaudited)        
Assets:
               
Cash
  $ 3,323,515     $ 1,829,429  
Marketable fixed income securities
          872,427  
Accounts receivable — net
    20,593,465       16,764,897  
Cost in excess of billings on uncompleted contracts
    3,955,522       7,333,931  
Other current assets
    212,758       447,925  
 
           
Total current assets
    28,085,260       27,248,609  
 
           
Fixed assets — net
    935,455       1,129,885  
Equipment held for sale
          1,455,142  
Notes receivable — related party
    444,515       430,627  
Securities available for sale
          110,826  
Other non-current assets
    107,049       344,499  
Intangible assets — net
    313,395       346,814  
Goodwill
    6,403,982       6,403,982  
 
           
Total assets
  $ 36,289,656     $ 37,470,384  
 
           
Liabilities and Stockholders’ Deficit
               
Current liabilities:
               
Accounts payable
  $ 9,513,765     $ 8,457,186  
Line of credit
    2,000        
Current portion of long term debt
    66,000       536,025  
Current portion of long term debt — related party
    19,232,753       500,000  
Accrued compensation
    2,878,037       2,568,857  
Accrued other liabilities
    381,462       436,906  
Billings in excess of costs on uncompleted contracts
    186,997       1,027,500  
Income taxes payable
    303,416       551,941  
Current portion of deferred revenue
    213,348       85,327  
 
           
Total current liabilities
    32,777,778       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
    94,274       688,593  
Long term deferred revenue, less current portion
          124,667  
Dividends payable
    4,656,163       3,464,934  
 
           
Total liabilities
    37,528,215       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
    14,150,153       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
    55,189,354       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
    (70,931,927 )     (70,509,227 )
Accumulated comprehensive loss
    (116,630 )     (301,153 )
 
           
Total Homeland Security Capital Corporation stockholders’ deficit
    (1,632,029 )     (1,213,144 )
 
           
Noncontrolling interest
    223,702       153,934  
 
           
Total stockholders’ deficit
    (1,408,327 )     (1,059,210 )
 
           
 
               
Total liabilities and stockholders’ deficit
  $ 36,289,656     $ 37,470,384  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
                                 
    Three Months Ended March 31,     Nine Months Ended March 31,  
    2011     2010     2011     2010  
Net contract revenue
  $ 24,640,585     $ 23,684,204     $ 77,906,752     $ 71,106,061  
 
                       
 
               
Contract costs
    19,936,541       17,933,739       62,637,209       56,038,934  
 
                       
 
               
Gross profit on contracts
    4,704,044       5,750,465       15,269,543       15,067,127  
 
                       
Operating expenses:
                               
Marketing
    213,953       151,253       385,279       350,200  
Personnel
    2,906,582       1,969,050       6,964,058       6,184,362  
Insurance and facility costs
    168,644       178,229       426,221       544,743  
Rent expense to related party
    86,000       86,000       258,000       258,000  
Travel and transportation
    84,876       90,889       248,510       281,262  
Other operating costs
    512,263       229,448       1,001,331       715,950  
Depreciation and amortization
    250,399       304,771       797,231       1,027,217  
Amortization of intangible assets
    11,140       11,140       33,419       33,419  
Professional services
    253,961       428,178       1,058,088       874,190  
Administrative costs
    323,660       263,623       878,653       781,743  
 
                       
 
               
Total operating expenses
    4,811,478       3,712,581       12,050,790       11,051,086  
 
                       
Operating (loss) income
    (107,434 )     2,037,884       3,218,753       4,016,041  
Other (expense) income:
                               
Interest expense
    (9,698 )     (65,382 )     (87,107 )     (173,899 )
Interest expense to related party
    (492,288 )     (492,288 )     (1,476,863 )     (1,364,548 )
Amortization of debt discounts and offering costs
          (103,596 )     (8,000 )     (389,975 )
Impairment losses
                (308,213 )      
Other income (expense)
    8,733       (57,146 )     27,580       (10,612 )
 
                       
Total other expense
    (493,253 )     (718,412 )     (1,852,603 )     (1,939,034 )
 
                       
(Loss) income from continuing operations before income taxes
    (600,687 )     1,319,472       1,366,150       2,077,007  
Income tax expense
    (38,814 )     (73,819 )     (368,931 )     (276,103 )
 
                       
Net (loss) income
    (639,501 )     1,245,653       997,219       1,800,904  
 
                       
Less: Net income attributable to noncontrolling interests
    (77,716 )     (124,443 )     (217,648 )     (230,140 )
 
                       
Net (loss) income attributable to Homeland Security Capital Corporation stockholders
    (717,217 )     1,121,210       779,571       1,570,764  
 
                       
Less preferred dividends and other beneficial conversion features associated with preferred stock issuance
    (394,227 )     (397,215 )     (1,202,271 )     (1,209,136 )
 
                       
Net (loss) income attributable to common stockholders of Homeland Security Capital Corporation
  $ (1,111,444 )   $ 723,995     $ (422,700 )   $ 361,628  
 
                       
(Loss) income per common share attributable to Homeland Security Capital Corporation stockholders — basic and diluted
                               
Basic
  $ (0.02 )   $ 0.01     $ (0.01 )   $ 0.01  
 
                       
Diluted
  $ (0.02 )   $ 0.00     $ (0.01 )   $ 0.00  
 
                       
Weighted average shares outstanding —
                               
Basic
    54,491,449       48,864,440       53,664,912       51,823,026  
 
                       
Diluted
    54,491,449       787,615,123       53,664,912       790,573,709  
 
                       
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
                 
    Nine Months Ended March 31,  
    2011     2010  
Cash flows from operating activities:
               
Net income
  $ 997,219     $ 1,800,904  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Sale of marketable fixed income securities
    872,427        
Share-based compensation expense
    24,449       798,794  
Depreciation
    905,667       1,505,561  
Amortization of intangibles
    33,419       33,419  
(Gain) loss on disposal of assets
    (82,252 )     7,556  
Impairment losses on securities available for sale
    308,214       67,358  
Amortization of debt offering costs and discounts
    8,000       389,975  
Changes in operating assets and liabilities:
               
Accounts receivable
    (3,828,568 )     (3,828,527 )
Costs in excess of billings on uncompleted contracts
    3,378,409       (2,202,938 )
Other assets
    419,614       (1,537 )
Accounts payable
    1,056,580       (2,105,263 )
Billings in excess of costs on uncompleted contracts
    (840,503 )     180,193  
Accrued interest due to related party
    1,462,975       1,364,548  
Accrued compensation
    309,180       (488,641 )
Accrued other liabilities
    (55,444 )     817,148  
Income taxes payable
    (248,525 )     260,649  
Deferred revenue
    3,354       156,486  
 
           
Net cash provided by (used in) operating activities
    4,724,215       (1,244,315 )
Cash flows from investing activities:
               
Purchase of fixed assets
    (665,916 )     (244,571 )
Proceeds from sale of assets
    1,555,525       21,500  
 
           
Net cash provided by (used in) investing activities
    889,609       (223,071 )
Cash flows from financing activities:
               
Net (payments) borrowings on line of credit
    (2,160,000 )     2,331,000  
Proceeds from sale of noncontrolling interest in subsidiary
          28,000  
Distributions to noncontrolling interest
    (147,880 )      
Repayment of related party debt
    (500,000 )      
Repayment of debt
    (1,127,796 )     (505,657 )
Repurchase of stock options outstanding
    (216,200 )      
 
           
Net cash (used in) provided by financing activities
    (4,151,876 )     1,853,343  
Effect of exchange rate changes on cash
    32,138       (33,949 )
 
           
Net increase in cash
    1,494,086       352,008  
Cash, beginning of period
    1,829,429       2,356,534  
 
           
Cash, end of period
  $ 3,323,515     $ 2,708,542  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
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
    11,043                                     (11,043 )                  
Dividends on Series H and Series I
                                        (1,191,228 )                 (1,191,228 )
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
                                                    (147,880 )     (147,880 )
Repurchase of stock options
                      (216,200 )                                   (216,200 )
Currency translation
                                              32,138             32,138  
Net income
                                        779,571             217,648       997,219  
 
                                                           
Balance, March 31, 2011
  $ 14,150,153       54,491,449     $ 54,492     $ 55,189,354     $ 272,529     $ (250,000 )   $ (70,931,927 )   $ (116,630 )   $ 223,702       (1,408,327 )
 
                                                           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HOMELAND SECURITY CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2011
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 nine months ended March 31, 2011 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 Safety’s 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 was effective immediately and did not have a material effect on the financial position, results of operations, or cash flows of the Company.
In August 2010, the FASB issued ASU 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 Topics—Technical 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 will be effective as of July 1, 2011 and is not expected to have a material effect on the financial position, results of operations, or cash flows of the Company.

 

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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.
As of September 30, 2010, the Company reduced the carrying value of its securities available for sale in Vuance, Ltd (692,058 ordinary shares of Vuance, Ltd; OTCQB — VUNCF, the “Vuance Shares”) to zero as a result of inactive and illiquid markets for the Vuance Shares. The Company does not believe the quoted prices represent the actual value appurtenant to Vuance Shares. Consequently, the Company regards the value of the Vuance Shares available for sale as permanently impaired and has recorded a loss in the amount of $263,210 for the nine month period ended March 31, 2011.
Additionally, as of March 31, 2011, the Company reduced the carrying value of its securities available for sale in Ultimate Escapes, Inc. (NYSE Amex: UEI; formerly known as Secure America Acquisition Corporation, or “SAAC;” referred to herein as “UEI”) as a result of inactive and illiquid markets and filing for bankruptcy protection by UEI on September 20, 2010. The Company is the beneficial owner of 40,912 shares of common stock of UEI through its membership interests in Secure America Acquisition Holdings, LLC (“SAAH”). Accordingly, the Company considers its investment in SAAH’s membership units permanently impaired and has recorded a loss in the amount of $45,004 for the period ended March 31, 2011.
3. Income Taxes
The Company has not recorded any federal income tax expense or benefit for the three and nine months ended March 31, 2011, 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 $38,814 and $368,931 for the three and nine month periods ending March 31, 2011, respectively, in 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 Company’s 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 March 31, 2011, all granted options have vested. During the three and nine month periods ending March 31, 2011, no options under the 2005 Plan were granted and at March 31, 2011, there were 400,000 options available for award under the 2005 Plan. There have been no exercises of vested options under the 2005 Plan.
Stock Options Awarded Under the 2008 Plan
There are 75,000,000 shares of common stock reserved for issuance upon exercise of options under the Company’s 2008 stock option plan (the “2008 Plan”). 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 March 31, 2011. During the three and nine month periods ending March 31, 2011, no options under the 2008 Plan were granted and at March 31, 2011, 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.

 

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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 March 31, 2011. There have been no exercises of these options.
Additional information about the Company’s stock option plans is summarized below:
                                                 
    March 31, 2011     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 and March 9, 2011, Safety purchased from its current and former employees, all of the outstanding options (which at those dates were fully vested) originally granted under the Safety 2008 Employee Option Plan (the “Plan”) for a total amount of $1,003,000. The total amount of the purchase price is included in compensation expense for the three months ended March 31, 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.

 

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The following tables reflect the Company’s segments for the three and nine month periods ended March 31, 2011 and 2010, without regard to minority interests:
                                         
For the Three Months Ended March 31, 2011  
Homeland Security   Holding     Services     Services     Products        
Capital Corporation -   Company     Company     Company     Company        
Consolidated   (HSCC)     (Safety)     (Nexus)     (PMX)     Consolidated  
 
                                       
Revenues
  $     $ 23,351,175     $ 1,289,410     $     $ 24,640,585  
Gross margin
          4,635,067       68,977             4,704,044  
Operating expenses
    420,303       4,028,471       362,643       61       4,811,478  
Other income (expense) — net
    (277,526 )     (67,962 )     (147,765 )           (493,253 )
Income tax benefit (expense)
    23,976       (115,830 )     53,040             (38,814 )
Net income (loss)
    (673,853 )     422,804       (388,391 )     (61 )     (639,501 )
Current assets
    1,608,359       23,350,285       3,121,974       4,642       28,085,260  
 
                                       
Total assets
    1,178,952       31,683,519       3,422,543       4,642       36,289,656  
Interest expense
    492,288       7,962       1,736             501,986  
Depreciation expense
          263,815       21,144             284,959  
Capital expenditures
          198,431       991             199,422  
                                         
For the Three Months Ended March 31, 2010  
Homeland Security   Holding     Services     Services     Products        
Capital Corporation -   Company     Company     Company     Company        
Consolidated   (HSCC)     (Safety)     (Nexus)     (PMX)     Consolidated  
 
                                       
Revenues
  $     $ 20,898,415     $ 2,514,583     $ 271,206     $ 23,684,204  
Gross margin
          4,901,978       837,732       10,755       5,750,465  
Operating expenses
    662,340       2,807,960       237,915       4,366       3,712,581  
Other income (expense) — net
    (663,900 )     (58,731 )     4,219             (718,412 )
Income tax benefit (expense)
    554,659       (628,478 )                 (73,819 )
Net income (loss)
    (771,581 )     1,406,809       604,036       6,389       1,245,653  
Current assets
    71,124       21,887,136       4,345,527       369,966       26,673,753  
 
                                       
Total assets
    683,680       31,805,154       4,587,446       369,966       37,446,246  
Interest expense
    492,904       63,338       1,428             557,670  
Depreciation expense
          465,967       17,407             483,374  
Capital expenditures
          80,687       22,350             103,037  
                                         
For the Nine Months Ended March 31, 2011  
Homeland Security   Holding     Services     Services     Products        
Capital Corporation -   Company     Company     Company     Company        
Consolidated   (HSCC)     (Safety)     (Nexus)     (PMX)     Consolidated  
 
                                       
Revenues
  $     $ 72,605,661     $ 5,301,091     $     $ 77,906,752  
Gross margin
          14,174,653       1,094,890             15,269,543  
Operating expenses
    1,558,922       9,583,923       905,050       2,895       12,050,790  
Other income (expense) — net
    (1,141,188 )     (267,943 )     (443,472 )           (1,852,603 )
Income tax benefit (expense)
    1,230,986       (1,587,657 )     (12,260 )           (368,931 )
Net income (loss)
    (1,469,124 )     2,735,130       (265,892 )     (2,895 )     997,219  
Current assets
    1,608,359       23,350,285       3,121,974       4,642       28,085,260  
 
                                       
Total assets
    1,178,952       31,688,519       3,422,543       4,642       36,289,656  
Interest expense
    1,476,863       79,914       7,193             1,563,970  
Depreciation expense
          841,781       63,886             905,667  
Capital expenditures
          627,165       38,751             665,916  

 

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For the Nine Months Ended March 31, 2010  
Homeland Security   Holding     Services     Services     Products        
Capital Corporation -   Company     Company     Company     Company        
Consolidated   (HSCC)     (Safety)     (Nexus)     (PMX)     Consolidated  
 
                                       
Revenues
  $     $ 61,330,769     $ 7,806,586     $ 1,968,706     $ 71,106,061  
Gross margin
          12,300,454       2,688,018       78,655       15,067,127  
Operating expenses
    1,825,382       8,411,862       786,777       27,065       11,051,086  
Other income (expense) — net
    (1,747,199 )     (186,322 )     (5,513 )           (1,939,034 )
Income tax benefit (expense)
    1,122,433       (1,398,536 )                 (276,103 )
Net income (loss)
    (2,450,148 )     2,303,734       1,895,728       51,590       1,800,904  
Current assets
    71,124       21,887,136       4,345,527       369,966       26,673,753  
 
               
Total assets
    683,680       31,805,154       4,587,446       369,966       37,446,246  
Interest expense
    1,366,425       165,936       6,086             1,538,447  
Depreciation expense
          1,454,266       51,295             1,505,561  
Capital expenditures
          205,869       97,972             303,841  
6. Income (Loss) Per Share
The basic income (loss) per share was computed by dividing the net income or loss applicable to the Company’s common stockholders by the weighted average shares of common stock outstanding during each period.
Diluted earnings per share are computed using outstanding shares of common stock plus the outstanding shares of preferred stock, 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 nine month periods ended March 31, 2011 because the market price of the Company’s common stock, when using the treasury method, indicates that conversions or exercises would not be prudent, as the shares of preferred stock and common stock options and warrants are “out of the money.” Diluted earnings per share are not indicated for the nine month period ending March 31, 2010 because this period indicates a loss and the computation would be anti-dilutive.
The reconciliations of the basic and diluted (loss) income Per Share for the (loss) income attributable to the Company’s shareholders are as follows:
                                 
    Three Months Ended March 31,     Nine Months Ending March 31,  
    2011     2010     2011     2010  
 
               
Basic and Diluted (Loss) Earnings Per Share:
                               
(Loss) Income (Numerator)
  $ (717,217 )   $ 1,121,210     $ 779,571     $ 1,570,764  
Less: Series H Preferred Stock beneficial conversion feature
    (3,681 )     (3,681 )     (11,043 )     (11,043 )
Less: Preferred stock dividends
    (390,546 )     (393,534 )     (1,191,228 )     (1,198,093 )
 
                       
Loss attributable to common stockholders
  $ (1,111,444 )   $ 723,995     $ (422,700 )   $ 361,628  
 
                       
 
                               
Shares (Denominator)
                               
Weighted-average number of common shares:
                               
Basic
    54,491,449       48,864,440       53,664,912       51,823,026  
Diluted
    54,491,449       787,615,123       53,664,912       790,573,709  
 
                       
 
                               
Earnings Per Common Share
                               
Basic (loss) earnings per share
  $ (0.02 )   $ 0.01     $ (0.01 )   $ 0.01  
 
                       
Diluted (loss) earnings per share
  $ (0.02 )   $ 0.00     $ (0.01 )   $ 0.00  
 
                       

 

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7. Cash Flows
Supplemental disclosure of cash flow information for the nine month periods ending March 31, 2011 and 2010, are as follows:
                 
    Nine Months Ended March 31,  
    2011     2010  
 
               
Cash paid during the period for:
               
Interest
  $ 587,107     $ 172,022  
Taxes
    431,168       6,947  
 
               
Supplemental disclosure for noncash investing and financing activity:
               
Temporary impairment of value of securities available for sale
  $     $ (90,046 )
Dividends accrued on Preferred Stock
    1,191,228       1,198,093  
Dividends recognized from beneficial conversion feature
    11,043       11,043  
Conversion of Series H Preferred Stock
    (86,000 )      
Equipment purchased under capital leases
    63,452       87,469  
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 $258,018 during the three and nine month periods ending March 31, 2011 and 2010, respectively.
On June 1, 2007, the Company loaned $500,000 to SAAH, an entity controlled by two of our directors, and the initial stockholder and founder of SAAC. SAAC was formed for the purpose of acquiring, or acquiring control of, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination, one or more domestic or international operating businesses. SAAH, in turn, loaned the $500,000 to SAAC. SAAC ultimately consummated its initial business combination with UEI. 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. The Company expected repayment of the loan from the proceeds of the sale by SAAH of its founder warrants and ultimately by UEI. On September 20, 2010, UEI filed for bankruptcy protection. At March 31, 2011 and 2010, the balance of the note, including interest, was $444,515 and $426,015, respectively. Interest income related to this note was $4,562 and $13,888 for each of the three and nine month periods ended March 31, 2011 and 2010, respectively. Our Chairman and Chief Executive Officer has the ability to satisfy any obligations under this note and is in discussions with our Board of Directors on repayment options.
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 $19,232,753 which is due July 15, 2011. 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 March 31, 2011, the Company has negative working capital of $4,735,670 and stockholders’ deficit of $1,451,479. The Company had net income attributable to common stockholders of $779,571 for the nine month period ended March 31, 2011. 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.

 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including, without limitation, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act 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 Company’s near term focus is to grow these businesses both organically and through complementary acquisitions. The Company targets growth companies that are generating revenues but face challenges in scaling their businesses to capitalize on homeland security opportunities. The Company will enhance the operations of these companies by helping them generate new business, grow revenues, build infrastructure and improve cash flows.
The Company currently conducts its ongoing operations through one wholly owned subsidiary and two majority-owned subsidiaries. Our wholly owned subsidiary Safety, is a provider of global environmental, hazardous material and radiological infrastructure remediation and advanced construction services in the United States and the United Kingdom. Our majority owned subsidiaries include Nexus, a security integration company having a presence in the Mid-Atlantic region with a focus on the New York City, New Jersey and Pennsylvania markets and PMX, a company focused on radiological detection and isotope identification.
In a publically released decision document dated January 12, 2011, the United States Small Business Administration’s 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 Safety’s ability to bid on small business set aside contracts for the Federal Government.
Critical Accounting Policies and Estimates
Goodwill
Goodwill on acquisition is initially measured as the excess of the cost of the business acquired, including directly related professional fees, over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. The Company’s acquisition of Safety in March of 2008 resulted in the recording of $6,403,982 as goodwill after the final allocation of the purchase price of the acquisition. All of the goodwill recorded on the Company’s consolidated balance sheet is allocated to Safety.

 

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The Company performs impairment tests of goodwill at its operating segment level. Goodwill is tested for impairment at least annually, usually in the fourth quarter or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired. The impairment test requires management to undertake certain judgments and consists of a two step process, if necessary. The first step is to compare the fair value of the operating segment to its carrying value, including goodwill. The Company typically uses a discounted cash model to determine the fair value of an operating segment, using assumptions in the model it believes to be consistent with those used by hypothetical market participants.
If the fair value of the operating segment is less than its carrying value, a second step of the impairment test must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the operating segment goodwill with the carrying amount of that goodwill. If the carrying amount of the operating segment’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal the carrying amount of the goodwill less its implied fair value.
Any impairment of goodwill based on the above calculations is recognized immediately in the income statement and is not subsequently reversed. At March 31, 2011, no goodwill impairment has been recognized.
Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (GAAP) requires management to make estimates and judgements that affect reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities.
Estimates are used when accounting for amounts recorded in revenue when applying percentage of completion accounting, fair value determination of assets and liabilities, impairment of long-lived assets ( including goodwill and other intangible assets), collectability of accounts receivable, share based compensation assumptions and valuation allowance related to deferred tax assets.
The estimates we make are subject to several factors including management’s judgement, the industry in which we conduct our operations, the overall economy, market valuations concerning certain assets and liabilities and the government. Although we believe our estimates take into consideration the effect of these various factors, uncertainty still exists in such estimates and actual results may differ from our estimates.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned less estimated future allowances for doubtful accounts. The Company considers revenue realized or realizable and earned when all of the following criteria are met:
  (i)   persuasive evidence of an arrangement exists,
 
  (ii)   the services have been rendered and all required milestones achieved,
 
  (iii)   the sales price is fixed or determinable, and
 
  (iv)   collectability is reasonably assured.
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 the products have been delivered and accepted by the customer.
Other accounting policies the Company considers critical are included in its Form 10-K/A, filed with the Securities and Exchange Commission on March 11, 2011 for our year ended June 30, 2010.

 

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Results of Operations
Three Month Period Ended March 31, 2011 as Compared to the Three Month Period Ended March 31, 2010
Contract revenue
For the three months ended March 31, 2011, the Company recorded contract revenue of $24,640,585 as compared to $23,684,204 recorded for the three months ended March 31, 2010. The increase of $956,381 is further outlined below:
                                 
    Three Months Ended March 31,  
    2011     2010     Increase (Decrease)  
Holding Company
  $     $     $          
Safety
    23,351,175       20,898,415       2,452,760       11.7 %
Nexus
    1,289,410       2,514,583       (1,225,173 )     -48.7 %
PMX
          271,206       (271,206 )     -100.0 %
 
                       
 
  $ 24,640,585     $ 23,684,204     $ 956,381       4.0 %
 
                       
The overall increase of $956,381 or 4.0%, reflects 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 a trend toward working on fewer, less profitable projects in regards to Nexus and no new orders from its primary customer in regards to PMX.
Contract cost
For the three months ended March 31, 2011, the Company recorded contract cost of $19,936,541 as compared to $17,933,739 recorded for the three months ended March 31, 2010. The increase of $2,002,802 is further outlined below:
                                 
    Three Months Ended March 31,  
    2011     2010     Increase (Decrease)  
 
               
Holding Company
  $     $     $          
Safety
    18,716,108       15,996,437       2,719,671       17.0 %
Nexus
    1,220,433       1,676,851       (456,418 )     -27.2 %
PMX
          260,451       (260,451 )     -100.0 %
 
                       
 
  $ 19,936,541     $ 17,933,739     $ 2,002,802       11.2 %
 
                       
The overall increase of $2,002,802, or 11.2%, 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 decreased 5.2% from 24.3% for the three months ended March 31, 2010 to 19.1% for the three months ended March 31, 2011. The decrease in gross profit is mainly due to the initial start-up of new stimulus related projects at our Safety subsidiary and lower margin work on shorter term projects at our Nexus subsidiary.
Operating expenses
For the three months ended March 31, 2011, the Company recorded operating expenses of $4,811,478 as compared to $3,712,581 recorded for the three months ended March 31, 2010. The increase of $1,098,897 is further outlined below:
                                 
    Three Months Ended March 31,  
    2011     2010     Increase (Decrease)  
 
               
Holding Company
  $ 420,303     $ 662,340     $ (242,037 )     -36.5 %
Safety
    4,028,471       2,807,960       1,220,511       43.5 %
Nexus
    362,643       237,915       124,728       52.4 %
PMX
    61       4,366       (4,305 )     -98.6 %
 
                       
 
  $ 4,811,478     $ 3,712,581     $ 1,098,897       29.6 %
 
                       

 

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The overall increase of $1,098,897, or 29.6%, is primarily due to the increase of operating expenses at our Safety subsidiary reflecting a one time charge to repurchase employee options (See Note 4), allocation of corporate expenses and additional expenses in starting work on new projects. The increase in expenses at Nexus result from allocation of corporate expenses not previously charged to Nexus. The decrease in expenses at the Holding Company were due to the allocation of certain expenses to both Safety and Nexus.
Other income and expense
For the three months ended March 31, 2011, the Company recorded net other expenses of $493,253 as compared to $718,412 recorded for the three months ended March 31, 2010. The decrease in net other expenses of $225,159 is further outlined below by operating unit and functional line item:
                                 
    Three Months Ended March 31,  
    2011     2010     (Increase) Decrease  
Holding Company
  $ (277,526 )   $ (663,900 )   $ 386,374       -58.2 %
Safety
    (67,962 )     (58,731 )     (9,231 )     15.7 %
Nexus
    (147,765 )     4,219       (151,984 )     -3602.4 %
PMX
                      0.0 %
 
                       
 
  $ (493,253 )   $ (718,412 )   $ 225,159       -31.3 %
 
                       
                                 
    Three Months Ended March 31,  
    2011     2010     (Increase) Decrease  
Interest expense
  $ (501,986 )   $ (557,670 )   $ 55,684       -10.0 %
Amortization of debt offering costs
          (103,596 )     103,596       -100.0 %
Amortization of debt discount
                      0.0 %
Impairment losses
          (67,358 )     67,358       -100.0 %
Interest and other Income
    8,733       10,212       (1,479 )     -14.5 %
 
                       
 
  $ (493,253 )   $ (718,412 )   $ 225,159       -31.3 %
 
                       
The overall decrease in net other expenses of $225,159, or 31.3%, mainly reflects the lack of amortization costs of $103,596 in the current quarter due to debt offering costs and debt discounts being fully amortized in fiscal year 2010, a decrease in impairment losses of $67,358 (Vuance) when compared to last year’s quarter and a decrease in interest expense of $55,684.
Net income (loss)
As a result of the foregoing, the Company recorded net loss, before noncontrolling interests and preferred dividends of $639,501 for the three months ended March 31, 2011 as compared to net income of $1,245,653 for the three months ended March 31, 2010. The overall decrease of $1,885,154 reflects weaker than expected quarterly results specifically in gross margin and operating expenses.

 

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Nine Month Period Ended March 31, 2011 as Compared to the Nine Month Period Ended March 31, 2010
Contract revenue
For the nine months ended March 31, 2011, the Company recorded contract revenue of $77,906,752 as compared to $71,106,061 recorded for the nine months ended March 31, 2010. The increase of $6,800,691 is further outlined below:
                                 
    Nine Months Ended March 31,  
    2011     2010     Increase (Decrease)  
Holding Company
  $     $     $          
Safety
    72,605,661       61,330,769       11,274,892       18.4 %
Nexus
    5,301,091       7,806,586       (2,505,495 )     -32.1 %
PMX
          1,968,706       (1,968,706 )     -100.0 %
 
                       
 
  $ 77,906,752     $ 71,106,061     $ 6,800,691       9.6 %
 
                       
The overall increase of $6,800,691, or 9.6%, reflects 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 a trend toward working on fewer, less profitable projects in regards to Nexus and no new orders from its primary customer in regards to PMX.
Contract cost
For the nine months ended March 31, 2011, the Company recorded contract cost of $62,637,209 as compared to $56,038,934 recorded for the nine months ended March 31, 2010. The increase of $6,598,275 is further outlined below:
                                 
    Nine Months Ended March 31,  
    2011     2010     Increase (Decrease)  
 
               
Holding Company
  $     $     $          
Safety
    58,431,008       49,030,315       9,400,693       19.2 %
Nexus
    4,206,201       5,118,568       (912,367 )     -17.8 %
PMX
          1,890,051       (1,890,051 )     -100.0 %
 
                       
 
               
 
  $ 62,637,209     $ 56,038,934     $ 6,598,275       11.8 %
 
                       
The overall increase of $6,598,275, or 11.8%, 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 decreased 1.2% from 21.2% for the nine months ended March 31, 2010 to 20.0% for the nine months ended March 31, 2011. The decrease in gross profit is mainly due to the initial start-up of new stimulus related projects at our Safety subsidiary and lower margin work on shorter term projects at our Nexus subsidiary.
Operating expenses
For the nine months ended March 31, 2011, the Company recorded operating expenses of $12,05,790 as compared to $11,051,086 recorded for the nine months ended March 31, 2010. The increase of $999,704 is further outlined below:
                                 
    Nine Months Ended March 31,  
    2011     2010     Increase (Decrease)  
 
               
Holding Company
  $ 1,558,922     $ 1,825,382     $ (266,460 )     -14.6 %
Safety
    9,583,923       8,411,862       1,172,061       13.9 %
Nexus
    905,050       786,777       118,273       15.0 %
PMX
    2,895       27,065       (24,170 )     -89.3 %
 
                       
 
               
 
  $ 12,050,790     $ 11,051,086     $ 999,704       9.0 %
 
                       
The overall increase of $999,704, or 9.0%, is primarily due to the increase of operating expenses at our Safety subsidiary reflecting a one time charge to repurchase employee options (See Note 4), allocation of corporate expenses and additional administrative expenses in starting work on new projects. The increase in expenses at Nexus result from allocation of corporate expenses not previously charged to Nexus. The decrease in expenses at the Holding Company were due to the allocation of certain expenses to both Safety and Nexus.

 

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Other income and expense
For the nine months ended March 31, 2011, the Company recorded net other expenses of $1,852,603 as compared to $1,939,034 recorded for the nine months ended March 31, 2010. The decrease in net other expenses of $86,431 is further outlined below by operating unit and functional line item:
                                 
    Nine Months Ended March 31,  
    2011     2010     (Increase) Decrease  
 
               
Holding Company
  $ (1,141,188 )   $ (1,747,199 )   $ 606,011       -34.7 %
Safety
    (267,943 )     (186,322 )     (81,621 )     43.8 %
Nexus
    (443,472 )     (5,513 )     (437,959 )     7944.1 %
PMX
                      0.0 %
 
                       
 
               
 
  $ (1,852,603 )   $ (1,939,034 )   $ 86,431       -4.5 %
 
                       
                                 
    Nine Months Ended March 31,  
    2011     2010     (Increase) Decrease  
 
               
Interest expense
  $ (1,563,970 )   $ (1,538,447 )   $ (25,523 )     1.7 %
Amortization of debt offering costs
    (8,000 )     (355,922 )     347,922       -97.8 %
Amortization of debt discount
          (34,053 )     34,053       -100.0 %
Impairment losses
    (308,213 )     (67,358 )     (240,855 )     0.0 %
Interest and other income
    27,580       56,746       (29,166 )     -51.4 %
 
                       
 
               
 
  $ (1,852,603 )   $ (1,939,034 )   $ 86,431       -4.5 %
 
                       
The overall decrease in net other expenses of $86,431, or 4.5%, mainly reflects the lack of amortization costs of $381,975 in the current year due to debt offering costs and debt discounts being fully amortized in fiscal year 2010, offset by increases in interest expense of $25,523 and imparment losses of $240,855 (Vuance and UEI), coupled with a reduction in interest and other income of $29,166.
Net income (loss)
As a result of the foregoing, the Company recorded net income, before noncontrolling interests and preferred dividends of $997,219 for the nine months ended March 31, 2011 as compared to net income of $1,800,904 for the nine months ended March 31, 2010. The overall decrease of $806,685 reflects slower growth at Safety in the current year and a contraction in business in the current year at both Nexus and PMX.
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 $3,323,515, a working capital deficit of $4,649,366 (primarily resulting from Senior Debt maturing on July 15, 2011 and recorded as a current liability) and approximately $7,998,000 available for borrowing on Safety’s line of credit at March 31, 2011. Our primary needs for cash are to fund our ongoing operations at Safety, Nexus, Polimatrix and the Holding Company, repay amounts borrowed on Safety’s line of credit and repay the Senior Debt obligations of the Holding Company and to the extent opportunities present themselves, have cash available to make additional acquisitions of businesses that provide products and services in our target industries.
As mentioned above, the Company has two primary debt obligations. Safety has a secured revolving line of credit with a major U.S. bank with a maximum borrowing base of $8,000,000. This credit facility is secured by Safety’s accounts receivable and there was $2,000 outstanding at March 31, 2011. The Holding Company has a Senior Debt obligation secured by all the assets of the Holding Company, Nexus and the Holdings Company’s equity interests in Safety and Polimatrix and there was $19,232,753 outstanding at March 31, 2011. While we believe Safety has sufficient cash on hand and available credit to satisfy its current operating commitments, the Holding Company is not currently able to repay its debt obligation, which is scheduled to mature on July 15, 2011. As a result, the Company will seek to negotiate an extension of time to repay its debt and accrued interest, sell or otherwise dispose of assets, including the possible sale of one or more of its subsidiaries, and/or attempt to find other sources of capital to satisfy its current financial obligations. If the Company is not successful in extending the due date of the Holding Company’s debt or it is unable to sell assets, including its subsidiaries, or cannot find new sources of capital, the Company faces possible foreclosure from the holder of its debt.

 

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The Company recognizes that a large portion of its current assets and thereby a material component of its working capital are made up of accounts receivable and costs in excess of billing. At March 31, 2011, the Company reported consolidated accounts receivables and costs in excess of billings of $21,354,501 and $3,955,522, respectively. During the period of April 1, 2011 and May 11, 2011, the Company collected $12,616,796 of the March 31, 2011 outstanding accounts receivable and billed $608,820 of the March 31, 2011 costs in excess of billing, respectively.
The Company believes that its reserves for uncollectable accounts receivable were appropriate at March 31, 2011 and reflected historical levels. At March 31, 2011, the Company had $1,087,553 of accounts receivables due past 120 days or greater. This amount reflects historical levels and the Company believes these amounts are collectable and do not require an increase to its reserve for uncollectable accounts at this time.
Costs in excess of billings at March 31, 2011, reflected amounts of costs expended by the Company that were not yet billed to twenty-seven (27) customers. These expenditures are a normal part of our project accounting and reflect the invoicing agreements with various customers.
During the nine months ended March 31, 2011, we had a net increase in cash of $1,494,086. Our sources and uses of funds were as follows:
Cash Flows From Operating Activities
We provided net cash of $4,724,215 in our operating activities during the nine months ended March 31, 2011 primarily from income of $3,067,143 (net income of $997,219 adjusted for non-cash items of $2,069,924) plus net cash of $1,657,072 provided by changes in our operating assets and liabilities.
Cash Flows From Investing Activities
We provided net cash of $889,609 in our investing activities during the nine months ended March 31, 2011, related to proceeds from the sale of fixed assets of $1,555,525 previously used on a completed project, reduced by the purchase of fixed assets totaling $665,916.
Cash Flows From Financing Activities
We used net cash of $4,151,876 in our financing activities during the nine months ended March 31, 2011, consisting of repayment of debt of $1,127,796; net repayment of Safety’s line of credit of $2,160,000; repayment of related party debt of $500,000; the partial liquidation of a noncontrolling interest in a subsidiary of $147,880; and the repurchase of Safety’s incentive stock options of $216,200.
Off-Balance Sheet Arrangements
Safety, in the normal course of business, is required to post a performance bond on certain projects. Typically, the bonding or surety company who posts the bond on Safety’s behalf will require collateralization of their potential liability for posting the bond. Through March 31, 2011, Safety’s CEO has guaranteed this potential liability.
The Company recognizes the potential exposure to Safety’s CEO and, on January 1, 2011,entered into an agreement with him and his spouse, indemnifying them against any liabilities they may endure as a result of collaterizing Safety’s bonding requirements. At March 31, 2011, the amount of possible indemnification to the CEO and his spouse was approximately $13,000,000.

 

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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.   Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
During the most recently completed fiscal quarter, there has been no significant change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act.

 

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PART II. OTHER INFORMATION.
Item 1.   Legal Proceedings.
As of March 31, 2011, we were 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.   (Removed and Reserved)
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: May 13, 2011  /s/ Michael T. Brigante    
  Michael T. Brigante, Chief Financial Officer   
  (Authorized Officer and Principal Financial Officer)   

 

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