Attached files
file | filename |
---|---|
EX-32.2 - EXHIBIT 32.2 - Timios National Corp | c17241exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Timios National Corp | c17241exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Timios National Corp | c17241exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Timios National Corp | c17241exv31w1.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 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
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
(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 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
TABLE OF CONTENTS
Page | ||||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
14 | ||||||||
21 | ||||||||
21 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
23 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
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 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 Companys Annual Report
on Form 10-K as of and for the year ended June 30, 2010.
3
Table of Contents
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.
4
Table of Contents
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.
5
Table of Contents
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.
6
Table of Contents
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.
7
Table of Contents
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 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 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 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
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.
8
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.
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 SAAHs 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 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 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 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 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.
9
Table of Contents
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 Companys 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.
10
Table of Contents
The following tables reflect the Companys 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 |
11
Table of Contents
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 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
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 Companys 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 Companys 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 | ||||||
12
Table of Contents
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.
13
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.
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 Companys interest in the net fair
value of the identifiable assets, liabilities and contingent liabilities. The Companys 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 Companys consolidated balance sheet is allocated to Safety.
14
Table of Contents
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 segments 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 managements 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.
15
Table of Contents
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 | % | |||||||||
16
Table of Contents
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 years 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.
17
Table of Contents
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.
18
Table of Contents
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 Safetys 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 Safetys 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 Safetys 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 Companys 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 Companys
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.
19
Table of Contents
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 Safetys 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 Safetys 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 Safetys behalf will
require collateralization of their potential liability for posting the bond. Through March 31,
2011, Safetys CEO has guaranteed this potential liability.
The Company recognizes the potential exposure to Safetys 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 Safetys bonding requirements. At March 31, 2011, the amount of
possible indemnification to the CEO and his spouse was approximately $13,000,000.
20
Table of Contents
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 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.
21
Table of Contents
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. |
22
Table of Contents
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) |
23