Attached files
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EX-32.1 - EXHIBIT 32.1 - Timios National Corp | c96365exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Timios National Corp | c96365exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Timios National Corp | c96365exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Timios National Corp | c96365exv31w1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 |
For the quarterly period ended December 31, 2009
o | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file number
814-00631
814-00631
HOMELAND SECURITY CAPITAL CORPORATION
(Name of small business issuer in its charter)
Delaware | 52-2050585 | |
(State or Other Jurisdiction of Incorporation | (I.R.S. Employer Identification No.) | |
or Organization) | ||
1005 North Glebe Road, Suite 550 | ||
Arlington, VA | 22201 | |
(Address of principal executive offices) | (Zip code) |
(703) 528-7073
(Issuers Telephone Number, Including Area Code)
(Issuers Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of
February 19, 2010, there were 48,864,440 shares of common stock, par value $.001 per
share, issued, 45,294,009 shares of common stock outstanding and 3,570,431 shares of common stock
held in treasury.
Transitional Small Business Disclosure Format (check one): Yes o No þ
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements. |
The accompanying interim condensed consolidated financial statements and notes to the
consolidated financial statements for the interim periods as of December 31, 2009 and for the three
and six month periods ended December 31, 2009 and 2008, are unaudited. The accompanying interim
unaudited financial statements have been prepared by Homeland Security Capital Corporation (the
Company or the Holding Company) in accordance with accounting principles generally accepted in
the United States for interim financial statements and pursuant to the requirements for reporting
on Form 10-Q. Accordingly, these interim unaudited financial statements do not include all the
information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for
the three and six month periods ended December 31, 2009, are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2010. The condensed consolidated
financial statements should be read in conjunction with the financial statements and notes thereto
included in the Companys Annual Report on Form 10-K as of and for the year ended June 30, 2009.
HOMELAND
SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, | June 30 | |||||||
2009 | 2009 | |||||||
(unaudited) | ||||||||
Assets: |
||||||||
Cash |
$ | 1,087,259 | $ | 2,356,534 | ||||
Accounts receivable net |
16,937,245 | 13,425,804 | ||||||
Cost in excess of billings on uncompleted contracts |
5,895,497 | 3,937,086 | ||||||
Other current assets |
547,101 | 613,348 | ||||||
Total current assets |
24,467,102 | 20,332,772 | ||||||
Fixed assets net |
3,548,394 | 4,398,833 | ||||||
Deferred financing costs net |
139,026 | 386,210 | ||||||
Notes receivable related party |
421,453 | 412,127 | ||||||
Securities available for sale |
138,532 | 193,945 | ||||||
Other non-current assets |
327,937 | 319,516 | ||||||
Intangible assets net |
369,093 | 391,372 | ||||||
Goodwill |
6,403,982 | 6,403,982 | ||||||
Total assets |
$ | 35,815,519 | $ | 32,838,757 | ||||
Liabilities and Stockholders Deficit |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 9,263,780 | $ | 10,003,336 | ||||
Current portion of long term debt |
2,907,735 | 1,247,016 | ||||||
Current portion of long term debt related party |
2,500,000 | | ||||||
Notes payable related party |
51,370 | 50,110 | ||||||
Accrued interest and other liabilities |
2,839,065 | 3,257,903 | ||||||
Billings in excess of costs on uncompleted contracts |
1,703,534 | 1,022,125 | ||||||
Income taxes payable |
182,816 | | ||||||
Deferred revenue |
32,562 | 59,636 | ||||||
Total current liabilities |
19,480,862 | 15,640,126 | ||||||
Senior notes payable related party |
11,428,907 | 13,904,870 | ||||||
Interest payable related party |
3,082,392 | 2,210,131 | ||||||
Secured notes payable related party |
250,000 | 250,000 | ||||||
Long term debt, less current maturities |
1,102,621 | 1,421,272 | ||||||
Dividends payable |
2,673,666 | 1,869,107 | ||||||
Total liabilities |
38,018,448 | 35,295,506 | ||||||
Warrants Payable Series H Preferred Stock |
169,768 | 169,768 | ||||||
Stockholders Deficit |
||||||||
Homeland Security Capital Corporation stockholders deficit: |
||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
1,918,080 shares issued and outstanding |
14,268,569 | 14,261,207 | ||||||
Common stock, $0.001 par value, 2,000,000,000 shares
authorized,
48,864,440 and 53,270,160 shares issued and
45,294,009 and 49,699,729 shares outstanding, respectively |
48,864 | 53,270 | ||||||
Additional paid-in capital |
54,679,705 | 54,131,548 | ||||||
Additional paid-in capital warrants |
272,529 | 272,529 | ||||||
Treasury stock - 3,570,431 shares at cost |
(250,000 | ) | (250,000 | ) | ||||
Accumulated deficit |
(71,179,916 | ) | (70,817,549 | ) | ||||
Accumulated comprehensive loss |
(210,214 | ) | (141,591 | ) | ||||
Total Homeland Security Capital Corporation stockholders
deficit |
(2,370,463 | ) | (2,490,586 | ) | ||||
Noncontrolling interest |
(2,234 | ) | (135,931 | ) | ||||
Total stockholders deficit |
(2,372,697 | ) | (2,626,517 | ) | ||||
Total liabilities and stockholders deficit |
$ | 35,815,519 | $ | 32,838,757 | ||||
The accompanying notes are an integral part of these condensed consolidated financial
statements.
HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net contract revenue |
$ | 26,572,415 | $ | 22,212,461 | $ | 47,421,857 | $ | 39,879,692 | ||||||||
Contract costs |
20,801,955 | 18,480,949 | 38,105,195 | 33,313,889 | ||||||||||||
Gross profit on sales |
5,770,460 | 3,731,512 | 9,316,662 | 6,565,803 | ||||||||||||
Operating expenses: |
||||||||||||||||
Marketing |
131,507 | 54,094 | 198,947 | 123,851 | ||||||||||||
Personnel |
2,027,003 | 1,744,094 | 4,215,312 | 4,353,851 | ||||||||||||
Insurance and facility costs |
278,391 | 226,407 | 538,514 | 522,022 | ||||||||||||
Travel and transportation |
92,454 | 109,053 | 190,373 | 272,501 | ||||||||||||
Other operating costs |
269,557 | 225,428 | 486,502 | 458,051 | ||||||||||||
Depreciation and amortization |
375,752 | 468,978 | 722,446 | 616,508 | ||||||||||||
Amortization of intangible assets |
11,140 | 34,274 | 22,279 | 68,548 | ||||||||||||
Professional services |
249,824 | 199,080 | 446,012 | 514,263 | ||||||||||||
Administrative costs |
246,194 | 326,140 | 518,120 | 627,432 | ||||||||||||
Total operating expenses |
3,681,822 | 3,387,548 | 7,338,505 | 7,557,027 | ||||||||||||
Operating income (loss) |
2,088,638 | 343,964 | 1,978,157 | (991,224 | ) | |||||||||||
Other (expense) income: |
||||||||||||||||
Interest expense |
(490,985 | ) | (504,537 | ) | (980,777 | ) | (1,006,189 | ) | ||||||||
Amortization of debt discounts and offering costs |
(138,768 | ) | (135,111 | ) | (286,379 | ) | (270,222 | ) | ||||||||
Other income |
14,344 | 28,633 | 46,534 | 59,494 | ||||||||||||
Total other expense |
(615,409 | ) | (611,015 | ) | (1,220,622 | ) | (1,216,917 | ) | ||||||||
Income (loss) income from continuing operations
before income taxes |
1,473,229 | (267,051 | ) | 757,535 | (2,208,141 | ) | ||||||||||
Income tax expense |
(172,129 | ) | (143,000 | ) | (202,284 | ) | (143,000 | ) | ||||||||
Net income (loss) |
1,301,100 | (410,051 | ) | 555,251 | (2,351,141 | ) | ||||||||||
Less: Net (income) loss attributable to
noncontrolling interests |
(76,524 | ) | 65,799 | (105,697 | ) | 112,269 | ||||||||||
Net income (loss) attributable to Homeland |
||||||||||||||||
Security Capital Corporation stockholders |
1,224,576 | (344,252 | ) | 449,554 | (2,238,872 | ) | ||||||||||
Less preferred dividends and other beneficial
conversion
features associated with preferred stock issuance |
(405,960 | ) | (360,591 | ) | (811,921 | ) | (721,180 | ) | ||||||||
Net income (loss) attributable to common stockholders
of Homeland Security Capital Corporation |
$ | 818,616 | $ | (704,843 | ) | $ | (362,367 | ) | $ | (2,960,052 | ) | |||||
Income (loss) per common share attributable to Homeland
Security Capital Corporation stockholders -
basic and diluted |
||||||||||||||||
Basic |
$ | 0.02 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.06 | ) | |||||
Diluted |
$ | 0.00 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.06 | ) | |||||
Weighted average shares outstanding - |
||||||||||||||||
Basic |
53,270,160 | 47,506,560 | 53,270,160 | 48,183,683 | ||||||||||||
Diluted |
536,203,500 | 47,506,560 | 53,270,160 | 48,183,683 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial
statements.
HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended December 31, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 555,251 | $ | (2,351,141 | ) | |||
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities: |
||||||||
Share-based compensation expense |
543,751 | 1,348,278 | ||||||
Depreciation |
1,022,187 | 886,497 | ||||||
Amortization of intangibles |
22,279 | 68,548 | ||||||
Loss on disposal of assets |
7,556 | | ||||||
Amortization of debt discount |
24,037 | 24,037 | ||||||
Amortization of debt offering costs |
247,184 | 246,185 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(3,511,441 | ) | (6,227,294 | ) | ||||
Costs in excess of billings on uncompleted
contracts |
(1,958,411 | ) | (76,718 | ) | ||||
Other assets |
48,500 | 17,678 | ||||||
Accounts payable |
(739,556 | ) | 936,206 | |||||
Billings in excess of costs on uncompleted
contracts |
681,409 | 2,625,933 | ||||||
Accrued interest and other liabilities |
453,423 | 507,563 | ||||||
Income taxes payable |
182,816 | 143,000 | ||||||
Deferred revenue |
(27,074 | ) | (15,407 | ) | ||||
Net cash used in operating activities |
(2,448,089 | ) | (1,866,635 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of fixed assets |
(200,804 | ) | (313,321 | ) | ||||
Proceeds from sale of assets |
21,500 | | ||||||
Investment received for noncontrolling interest of
subsidiary |
28,000 | | ||||||
Net cash used in investing activities |
(151,304 | ) | (313,321 | ) | ||||
Cash flows from financing activities: |
||||||||
Net borrowings on line of credit |
1,691,000 | 1,178,065 | ||||||
Proceeds from notes payable |
59,270 | | ||||||
Payments on term debt |
(406,942 | ) | (332,107 | ) | ||||
Net cash provided by financing activities |
1,343,328 | 845,958 | ||||||
Effect of exchange rate changes on cash |
(13,210 | ) | (268,534 | ) | ||||
Net decrease in cash |
(1,269,275 | ) | (1,602,532 | ) | ||||
Cash, beginning of period |
2,356,534 | 3,182,357 | ||||||
Cash, end of period |
$ | 1,087,259 | $ | 1,579,825 | ||||
The accompanying notes are an integral part of these condensed consolidated financial
statements.
HOMELAND
SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders Deficit (Unaudited)
Homeland Security Capital Corporation Shareholders | ||||||||||||||||||||||||||||||||||||||||
Additional | ||||||||||||||||||||||||||||||||||||||||
Additional | Paid-In | Accumulated | Total | |||||||||||||||||||||||||||||||||||||
Preferred | Common Stock | Paid-In | Capital - | Treasury | Accumulated | Comprehensive | Noncontrolling | Stockholders | ||||||||||||||||||||||||||||||||
Stock | Shares Issued | Amount | Capital | Warrants | Stock | Deficit | Loss | Interest | (Deficit) | |||||||||||||||||||||||||||||||
Balance, June 30, 2009 |
||||||||||||||||||||||||||||||||||||||||
As previously reported |
$ | 14,261,207 | 53,270,160 | $ | 53,270 | $ | 54,131,548 | $ | 272,529 | $ | (250,000 | ) | $ | (70,953,480 | ) | $ | (141,591 | ) | $ | | $ | (2,626,517 | ) | |||||||||||||||||
Adjustment for adoption of
FASB ASC 810 |
| | | | | 135,931 | | (135,931 | ) | | ||||||||||||||||||||||||||||||
Balance, June 30, 2009 as restated |
14,261,207 | 53,270,160 | 53,270 | 54,131,548 | 272,529 | (250,000 | ) | (70,817,549 | ) | (141,591 | ) | (135,931 | ) | (2,626,517 | ) | |||||||||||||||||||||||||
Amortization of Series H warrants |
| | | | | | (804,559 | ) | | | (804,559 | ) | ||||||||||||||||||||||||||||
Dividends on Series H and Series I |
7,362 | | | | | | (7,362 | ) | | | | |||||||||||||||||||||||||||||
Value of vested stock options |
| | | 543,751 | | | | | | 543,751 | ||||||||||||||||||||||||||||||
Rescission of option exercise |
| (4,405,720 | ) | (4,406 | ) | 4,406 | | | | | | | ||||||||||||||||||||||||||||
Noncontrolling interests
investment in subsidiary |
| | | | | | | | 28,000 | 28,000 | ||||||||||||||||||||||||||||||
Decrease in
value of securities available for sale |
| | | | | | | (55,413 | ) | | (55,413 | ) | ||||||||||||||||||||||||||||
Currency translation |
| | | | | | | (13,210 | ) | | (13,210 | ) | ||||||||||||||||||||||||||||
Net income |
| | | | | | 449,554 | | 105,697 | 555,251 | ||||||||||||||||||||||||||||||
Balance, December 31, 2009 |
$ | 14,268,569 | 48,864,440 | $ | 48,864 | $ | 54,679,705 | $ | 272,529 | $ | (250,000 | ) | $ | (71,179,916 | ) | $ | (210,214 | ) | $ | (2,234 | ) | $ | (2,372,697 | ) | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements. |
HOMELAND SECURITY CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2009
1. Organization and Basis of Presentation of Unaudited Interim Financial Statements.
Organization
Homeland Security Capital Corporation (the Company or the Holding Company) is an
international provider of specialized technology-based radiological, nuclear, environmental
disaster relief and electronic security solutions to government and commercial customers. We are
engaged in the strategic acquisition, operation, development and consolidation of companies
operating in the chemical, biological, radiological, nuclear and explosive (CBRNE) incident
response and security marketplace within the homeland security industry. We are focused on creating
long-term shareholder value by taking a controlling interest in and developing our subsidiary
companies through superior management, operations, marketing and finance. We operate businesses
that provide products and services solutions, growing organically and by acquisitions. The Company
targets emerging companies that are generating revenues but face challenges in scaling their
businesses to capitalize on opportunities in the aforementioned industry sectors.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended December 31,
2009 are not necessarily indicative of the results that may be expected for the fiscal year ending
June 30, 2010.
The condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Safety & Ecology Holdings Corporation (Safety) (including Safetys
wholly-owned Untied Kingdom subsidiary Safety and Ecology Corporation Limited and majority owned
subsidiary Radcon Alliance, LLC) and majority owned subsidiaries Nexus Technologies Group, Inc.
(Nexus) and Polimatrix, Inc. (PMX). The Company controls each of the subsidiary boards of
directors and provides extensive advisory services to the subsidiaries. Accordingly, the Company
believes it exercises sufficient control over the operations and financial results of each company
and consolidates the results of operations. All intercompany balances and transactions have been
eliminated.
In July 2009, the Company adopted FASB ASC Topic 810 Noncontrolling Interest (FASB ASC
810) (formerly known as FASB 160), which amends ARB 51 to establish accounting and reporting
standards for noncontrolling interests in a subsidiary. FASB ASC 810 further clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported in the financial statements. Accordingly, the Company has included the
noncontrolling subsidiary minority interests in the current year financial statements and adjusted
the previous year periods for comparative presentation.
Reclassifications Certain prior period balances have been reclassified to conform with
current period presentation related to the adoption of FASB ASC 810 Noncontrolling Interest.
The Company has evaluated the financial statements for subsequent events through the filing
date of this Form 10-Q.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-15, Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing
(Topic 470). This Accounting Standards Update amends Subtopic 470-20, Debt with Conversion and
Other Options and Subtopic 260-10, Earnings Per Share. This ASU requires that at the date of
issuance of the shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be measured at
fair value and be recognized as an issuance cost, with an offset to additional paid-in
capital. Further, loaned shares are excluded from basic and diluted earnings per share unless
default of the share-lending arrangement occurs, at which time the loaned shares would be included
in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years
beginning on or after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The Company is currently
assessing the impact of this ASU on its consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-02, Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to
Topic 810 clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the
potential conflict between guidance in that Subtopic and asset derecognition and gain or loss
recognition guidance that may exist in other US GAAP. An entity will be required to follow the
amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic
810-10). For those entities that have already adopted FAS 160, the amendments are effective at the
beginning of the first interim or annual reporting period ending on or after December 15, 2009.
This guidance was effective for the Companys interim quarter ended December 31, 2009 and did not
have a material effect on the financial position, results of operations, or cash flows of the
Company.
2. Fair Value Measurements
The Company follows Topic 820 Fair Value Measurements and Disclosures (FASB ASC
820), formerly known as SFAS 157 Fair Value Measurements, which, among other things, requires
enhanced disclosures about assets and liabilities carried at fair value. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (exit price). We utilize market data or
assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These
inputs can be readily observable, market corroborated or generally unobservable. We primarily apply
the market approach for recurring fair value measurements and attempt to utilize the best available
information. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1 measurement) and lowest priority to
unobservable inputs (level 3 measurement). The three levels of fair value hierarchy are as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities as
of the reporting date.
Level 2 Quoted prices for similar assets or liabilities in active markets, or quoted prices
for identical or similar assets or liabilities in markets that are not active, or other observable
inputs other than quoted prices.
Level 3 Unobservable inputs for the asset or liability.
As of December 31, 2009, the Companys securities available for sale had a carrying value of
$138,532, which was measured by quoted prices in active markets for identical assets.
3. Minority Interest in Ultimate Escapes, Inc.
The Company has indirectly acquired a minority equity interest in Ultimate Escapes, Inc., a
luxury destination club (UEI) (NYSE Amex: UEI; formerly known as Secure America Acquisition
Corporation, or SAAC), as a result of the business combination between SAAC and Ultimate Escapes
Holdings, LLC, which was consummated on October 29, 2009. Through its membership interests in
Secure America Acquisition Holdings, LLC (SAAH), the Company is deemed to beneficially own 40,912
shares, or approximately 1.5% of the outstanding capital stock of UEI, at December 31, 2009, and is
entitled to receive such shares of common stock in UEI upon the release of SAAHs shares from
escrow, which is expected in October 2010.
In addition to the Companys ownership in SAAH, our Chief Executive Officer and Chairman
beneficially owns 149,867 membership interests in SAAH, or approximately 50.5% of SAAHs membership
interests; our Chief Financial Officer owns 10,385 membership interests, or approximately 3.5% of
SAAHs membership interests; and two of our directors collectively own 15,735 membership interests
in SAAH, or approximately 5.3% of SAAHs membership interests.
Management of the Company does not believe it is appropriate to measure its investment in SAAH
membership units at the current market price of UEI common shares because the Company will not
receive such shares until October 2010. Management believes there is still uncertainty as to what
market price might be
achievable at the end of the escrow period and therefore has chosen to carry its investment in SAAH
at cost, but will continue to measure any impairment to its investment periodically, using current
market prices.
4. Income Taxes
The Company has not recorded any federal income tax expense or benefit for the three and six
months ended December 31, 2009 and 2008, mainly due to available federal net operating loss
carryforwards. The Company has recorded an income tax valuation allowance equal to the benefit of
any deferred tax asset because of the uncertain nature of realization.
5. Stock Options
Stock Options Awarded Under the 2005 Plan
There are 7,200,000 shares of common stock reserved for issuance upon exercise of options
under the Companys 2005 stock option plan (the 2005 Plan). From August 2005 through October
2006, 6,800,000 options were granted under the 2005 Plan at strike prices ranging from $0.08 to
$0.17. Of the options granted, all have vested through December 31, 2009, and $629,096 of
compensation expense has been recognized in the financial statements of the Company through that
date. During the six month periods ending December 31, 2009 and 2008, the Company recorded $2,500
and $63,187 as compensation expense, respectively, under the 2005 Plan. At December 31, 2009, there
were 400,000 options available for award under the 2005 Plan. There have been no exercises of
vested options under the 2005 Plan.
Stock Options Awarded Under the 2008 Plan
There are 75,000,000 shares of common stock reserved for issuance upon exercise of options
under the Companys 2008 stock option plan (the 2008 Plan). In July 2008, 73,850,000 options were
granted under the 2008 Plan at a strike price of $0.05. Of the options granted, 59,955,238 have
fully vested, 33,360 have been exercised and 66,640 have been forfeited through December 31, 2009
and compensation expense of $2,169,422 has been recognized in the financial statements of the
Company through that date. During the six month periods ending December 31, 2009 and 2008, the
Company recorded $500,288 and $1,168,545 as compensation expense, respectively, under the 2008
Plan. At December 31, 2009, there are 1,216,640 options available for award under the 2008 Plan.
On December 31, 2009, two officers of the Company rescinded their prior exercise of 7,640,626
options, as a result of which 4,405,720 shares of common stock were cancelled by the Company and
the options were reinstated in the respective officers names.
Stock Options Awarded Outside of the 2005 Plan and the 2008 Plan
From December 2005 through May 2007, the Company granted 2,760,000 options to three directors
and one consultant outside of the 2005 Plan and the 2008 Plan at strike prices ranging from $0.12
to $0.17. All of these options have vested through December 31, 2009, and $390,000 in compensation
expense has been recognized in the financial statements of the Company through that date.
The compensation expense related to all previously granted, non-vested options not yet
recognized under all option plans amounted to $500,288 as of December 31, 2009, which compensation
expense is expected to be recognized over the next two quarters.
Additional information about the Companys stock option plans is summarized below:
December 2009 | June 2009 | |||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||
Exercise | Grant Date | Exercise | Grant Date | |||||||||||||||||||||
Options | Price | Fair Value | Options | Price | Fair Value | |||||||||||||||||||
Outstanding at
beginning of period |
75,669,374 | $ | 0.057 | $ | 0.049 | 9,560,000 | $ | 0.103 | $ | 0.107 | ||||||||||||||
Granted |
| 73,850,000 | 0.050 | 0.036 | ||||||||||||||||||||
Rescinded
(Exercised) |
7,640,626 | 0.050 | 0.036 | (7,673,986 | ) | 0.050 | 0.036 | |||||||||||||||||
Forfeited |
| (66,640 | ) | 0.050 | 0.036 | |||||||||||||||||||
Outstanding at
end of year |
83,310,000 | $ | 0.056 | $ | 0.044 | 75,669,374 | $ | 0.057 | $ | 0.049 | ||||||||||||||
Options exercisable
at end of period |
69,481,878 | $ | 0.057 | $ | 0.046 | 47,992,293 | $ | 0.060 | $ | 0.050 | ||||||||||||||
The fair value of each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: risk-free interest rate of between 4.0% and
4.95%, volatility between 60% and 456% and expected lives of ten years. All options granted have a
maximum three year service period.
Not included in the table above, but included in consolidated compensation expense, are
options issued by our subsidiaries to purchase shares of the subsidiaries common stock in the
future or accept cash settlements in exchange for the increased value of any vested subsidiary
options. Compensation expense for these options is calculated by comparing our subsidiaries to
comparable publicly traded companies in their industry for stock volatility purposes and using the
Black-Scholes option-pricing model.
6. Business Segments
The Company analyzes its assets, liabilities, cash flows and results of operations by
operating unit or subsidiary. In the case of our subsidiary companies, the Company relies on local
management to analyze each of its controlled subsidiaries and report to us based on a consolidated
entity. As a result, the Company will make its financial decisions based on the overall performance
of its direct subsidiaries. Our subsidiaries derive their revenues and cash flow from different
activities, (i) engineering and environmental remediation services in the case of Safety, (ii)
design, installation and maintenance of electronic security systems in the case of Nexus, and (iii)
sales of radiological detection products and services in the case of PMX.
The following tables reflect the Companys segments for the three months ended December 31,
2009 and 2008, without regard to minority interests:
For the Three Months Ended December 31, 2009 | ||||||||||||||||||||
Homeland Security | Holding | Services | Services | Products | ||||||||||||||||
Capital Corporation - | Company | Company | Company | Company | ||||||||||||||||
Consolidated | (HSCC) | (Safety) | (Nexus) | (PMX) | Consolidated | |||||||||||||||
Revenues |
$ | | $ | 22,344,769 | $ | 3,209,146 | $ | 1,018,500 | $ | 26,572,415 | ||||||||||
Gross margin |
| 4,457,618 | 1,272,102 | 40,740 | 5,770,460 | |||||||||||||||
Operation expenses |
385,135 | 2,305,371 | 304,263 | 22,699 | 3,017,468 | |||||||||||||||
Depreciation expense |
| 638,687 | 25,667 | | 664,354 | |||||||||||||||
Other income (expense) net |
(536,128 | ) | (67,325 | ) | (11,956 | ) | | (615,409 | ) | |||||||||||
Income tax (benefit) expense |
(469,296 | ) | 641,425 | | | 172,129 | ||||||||||||||
Net income (loss) from
continuing operations |
(451,967 | ) | 804,810 | 930,216 | 18,041 | 1,301,100 | ||||||||||||||
Current assets |
166,912 | 20,166,258 | 3,383,327 | 750,605 | 24,467,102 | |||||||||||||||
Total assets |
101,159 | 31,343,452 | 3,620,303 | 750,605 | 35,815,519 | |||||||||||||||
Interest expense |
(429,955 | ) | (59,325 | ) | (1,705 | ) | | (490,985 | ) | |||||||||||
Capital expenditures |
| 110,108 | 52,013 | | 162,121 |
For the Three Months Ended December 31, 2008 | ||||||||||||||||||||
Homeland Security | Holding | Services | Services | Products | ||||||||||||||||
Capital Corporation - | Company | Company | Company | Company | ||||||||||||||||
Consolidated | (HSCC) | (Safety) | (Nexus) | (PMX) | Consolidated | |||||||||||||||
Revenues |
$ | | $ | 21,096,372 | $ | 1,114,289 | $ | 1,800 | $ | 22,212,461 | ||||||||||
Gross margin |
| 3,461,847 | 267,865 | 1,800 | 3,731,512 | |||||||||||||||
Operation expenses |
744,483 | 1,736,713 | 278,854 | 124,246 | 2,884,296 | |||||||||||||||
Depreciation expense |
2,400 | 478,211 | 22,641 | | 503,252 | |||||||||||||||
Other income (expense) net |
(521,788 | ) | (85,494 | ) | (3,733 | ) | | (611,015 | ) | |||||||||||
Income tax (benefit) expense |
| 143,000 | | | 143,000 | |||||||||||||||
Net income (loss) from
continuing operations |
(1,268,671 | ) | 1,018,429 | (37,363 | ) | (122,446 | ) | (410,051 | ) | |||||||||||
Current assets |
128,954 | 23,664,296 | 1,960,382 | 2,495 | 25,756,127 | |||||||||||||||
Total assets |
827,457 | 34,033,548 | 2,151,187 | 2,495 | 37,014,687 | |||||||||||||||
Interest expense |
(431,093 | ) | (68,652 | ) | (4,792 | ) | | (504,537 | ) | |||||||||||
Capital expenditures |
| 134,289 | | | 134,289 |
The following tables reflect the Companys segments for the six months ended December 31, 2009
and 2008, without regard to minority interests:
For the Six Months Ended December 31, 2009 | ||||||||||||||||||||
Homeland Security | Holding | Services | Services | Products | ||||||||||||||||
Capital Corporation - | Company | Company | Company | Company | ||||||||||||||||
Consolidated | (HSCC) | (Safety) | (Nexus) | (PMX) | Consolidated | |||||||||||||||
Revenues |
$ | | $ | 40,432,354 | $ | 5,292,003 | $ | 1,697,500 | $ | 47,421,857 | ||||||||||
Gross margin |
| 7,398,476 | 1,850,286 | 67,900 | 9,316,662 | |||||||||||||||
Operation expenses |
1,163,042 | 4,615,603 | 514,974 | 22,699 | 6,316,318 | |||||||||||||||
Depreciation expense |
| 988,299 | 33,888 | | 1,022,187 | |||||||||||||||
Other income (expense) net |
(1,083,299 | ) | (127,591 | ) | (9,732 | ) | | (1,220,622 | ) | |||||||||||
Income tax (benefit) expense |
(567,774 | ) | 770,058 | | | 202,284 | ||||||||||||||
Net income (loss) from
continuing operations |
(1,678,567 | ) | 896,925 | 1,291,692 | 45,201 | 555,251 | ||||||||||||||
Current assets |
166,912 | 20,166,258 | 3,383,327 | 750,605 | 24,467,102 | |||||||||||||||
Total assets |
101,159 | 31,343,452 | 3,620,303 | 750,605 | 35,815,519 | |||||||||||||||
Interest expense |
(873,521 | ) | (102,598 | ) | (4,658 | ) | | (980,777 | ) | |||||||||||
Capital expenditures |
| 125,182 | 75,622 | | 200,804 |
For the Six Months Ended December 31, 2008 | ||||||||||||||||||||
Homeland Security | Holding | Services | Services | Products | ||||||||||||||||
Capital Corporation - | Company | Company | Company | Company | ||||||||||||||||
Consolidated | (HSCC) | (Safety) | (Nexus) | (PMX) | Consolidated | |||||||||||||||
Revenues |
$ | | $ | 37,682,248 | $ | 2,184,482 | $ | 12,962 | $ | 39,879,692 | ||||||||||
Gross margin |
| 5,803,021 | 760,199 | 2,583 | 6,565,803 | |||||||||||||||
Operation expenses |
2,305,341 | 3,644,395 | 701,981 | 220,254 | 6,871,971 | |||||||||||||||
Depreciation expense |
4,800 | 653,878 | 26,378 | | 685,056 | |||||||||||||||
Other income (expense) net |
(1,037,578 | ) | (169,439 | ) | (9,900 | ) | | (1,216,917 | ) | |||||||||||
Income tax (benefit) expense |
| 143,000 | | | 143,000 | |||||||||||||||
Net income (loss) from
continuing operations |
(3,347,719 | ) | 1,192,309 | 21,940 | (217,671 | ) | (2,351,141 | ) | ||||||||||||
Current assets |
128,954 | 23,664,296 | 1,960,382 | 2,495 | 25,756,127 | |||||||||||||||
Total assets |
827,457 | 34,033,548 | 2,151,187 | 2,495 | 37,014,687 | |||||||||||||||
Interest expense |
(859,032 | ) | (135,755 | ) | (11,402 | ) | | (1,006,189 | ) | |||||||||||
Capital expenditures |
| 307,514 | 5,807 | | 313,321 |
7. Income (Loss) Per Share
The basic income (loss) per share was computed by dividing the net income or loss applicable
to the Companys common stockholders by the weighted average shares of Common Stock outstanding
during each period.
Diluted earnings per share are computed using outstanding shares of Common Stock plus the
Preferred Shares, Common Stock options and warrants that can be exercised or converted, as
applicable, into Common Stock. Diluted earnings per share are not indicated for the three month
period ending December 31, 2008 and the six month periods ending December 31, 2009 and 2008 because
these periods indicate losses and the computation would be anti-dilutive.
The reconciliations of the basic and diluted income (loss) Per Share for the income (loss)
attributable to the Companys shareholders are as follows:
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Basic and Diluted Earnings (Loss) Per Share: |
||||||||||||||||
Income (Loss) (Numerator) |
$ | 1,224,576 | $ | (344,252 | ) | $ | 449,554 | $ | (2,238,872 | ) | ||||||
Less: Series H Preferred Stock beneficial
conversion feature |
(3,681 | ) | (3,681 | ) | (7,362 | ) | (7,362 | ) | ||||||||
Less: Preferred stock dividends |
(402,279 | ) | (356,910 | ) | (804,559 | ) | (713,818 | ) | ||||||||
Loss attributable to common
stockholders |
$ | 818,616 | $ | (704,843 | ) | $ | (362,367 | ) | $ | (2,960,052 | ) | |||||
Shares (Denominator) |
||||||||||||||||
Weighted-average number of common shares: |
||||||||||||||||
Basic |
53,270,160 | 47,506,560 | 53,270,160 | 48,183,683 | ||||||||||||
Diluted |
536,203,500 | 47,506,560 | 53,270,160 | 48,183,683 | ||||||||||||
Earnings Per Common Share |
||||||||||||||||
Basic income (loss) per share |
$ | 0.02 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.06 | ) | |||||
Diluted loss per share |
$ | 0.00 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.06 | ) | |||||
8. Cash Flows
Supplemental disclosure of cash flow information for the six month periods ending
December 31, 2009 and 2008, are as follows:
Six Months Ended December 31, | ||||||||
2009 | 2008 | |||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 107,256 | $ | 147,157 | ||||
Taxes |
$ | 6,947 | $ | | ||||
Supplemental disclosure for noncash investing and financing activity: | ||||||||
Temporary impairment of value of
securities available for sale |
$ | (55,413 | ) | $ | (1,641,602 | ) | ||
Dividends accrued on Perferred Stock |
$ | (804,559 | ) | $ | (713,818 | ) | ||
Dividends recognized from beneficial
conversion feature |
$ | (7,362 | ) | $ | (7,362 | ) | ||
Purchase of treasury stock for notes |
$ | | $ | (250,000 | ) |
9. Related Party Transactions
Safety leases approximately 21,000 square feet of office space from a company controlled
by our President. The Company recognized rent expense under this agreement of $172,012 and $172,014
during the six month periods ending December 31, 2009 and 2008, respectively.
At December 31, 2009, the Company has a promissory note due to our President in the amount of
$51,370, including accrued interest of $1,370, bearing interest at 5% per annum and is due on or
before February 19, 2010. Interest expense related to this note was $1,260 for the six months ended
December 31, 2009.
On June 1, 2007, the Company loaned $500,000 to SAAH, an entity controlled by our Chairman and
Chief Executive Officer. The loan is evidenced by a note bearing 5% interest per annum and is due
on or before May 31, 2011, with no prepayment penalties. The loan is guaranteed in its entirety by
our Chairman and Chief Executive Officer. At December 31, 2009 and June 30, 2009, the balance of
the note, including interest, was $421,453 and $412,127,
respectively. Interest income related to
this note was $9,326 and $9,593 for the six month periods ended December 31, 2009 and 2008,
respectively.
On October 29, 2007, the Company entered into an agreement with SAAC (now known as UEI),
pursuant to which it received a monthly fee of up to $7,500 for providing SAAC with office space
and certain office and administrative services for 24 months. Certain employees of the Company
performed required services pursuant to such agreement. The Company has earned $30,000 and $45,000
for the aforementioned services in each of the six month periods ended December 31, 2009 and 2008,
respectively. At December 31, 2009, the Company had a receivable due of $40,000 related to these
services. This amount was paid in its entirety on January 6, 2010.
10. Series H Convertible Preferred Stock
In March 2008, the Company entered
into a stock purchase agreement with YA Global Investments, L.P.
(YA) pursuant to which the Company sold to YA 10,000
shares of its Series H Convertible Preferred Stock (Series H
Stock). The Series H Stock is convertible into shares of
Common Stock at an initial ratio of 33,333 shares of Common Stock for each share of Series H Stock, subject to adjustments,
including Safety achieving certain earnings milestones, as defined, for the calendar years ending December 31, 2009 and 2008.
Safety operates its business on a fiscal year ending June 30.
Safety achieved the first milestone for the calendar year ending December 31, 2008. However, based upon information available as of the date
of this filing, the second financial milestone for the calendar year ended December 31, 2009, has not been satisfied, resulting in a
potential adjustment to the conversion ratio yielding approximately 56,300 shares of Common Stock for each share of Series H Stock, or
approximately a potential additional 230,000,000 shares of our Common Stock in the aggregate.
Management is currently discussing with YA the possibility of
a waiver or amendment of any adjustment to the Series H Stock conversion ratio, however there can be no assurances YA
will waive or amend the adjustment, if any, to the Series H Stock conversion ratio. YA has not exercised its conversion
rights as of the date of this filing.
11. Continuing Operations
The primary source of financing for the Company since its inception has been through the
issuance of equity and debt securities. The accompanying financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the realization of assets
and liquidation of liabilities in the normal course of business. As of December 31, 2009, the
Company has a stockholders deficit of $2,372,697. The Company
had net income (loss) of $555,251 and
($2,351,141) during the six months ended December 31, 2009 and 2008, respectively. Management
recognizes that it will be necessary to continue to generate positive cash flow from operations and
have availability to other sources of capital to continue as a going concern and continues to
implement measures to increase profitability in our operations and reduce certain expenses.
12. Subsequent Events
In June 2009 the Company entered into an agreement YA extending
the due date on its senior notes payable, and accrued interest, to YA from March 14, 2010 until
October 1, 2010 for $2,500,000 and April 1, 2011 for $10,560,000. In exchange for the extension
agreement, the Company agreed to an increase in the interest rate, from 13% to 15%, on the senior
notes payable and certain other debt due to YA, effective January 1, 2010, if the Company failed to
secure a certain contract by March 2010. In December 2009, the Company was informed that it had
been eliminated from the award process for this contract. Accordingly, the Company will begin
recording interest expense at the increased rate effective January 1, 2010.
Item 2. 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 and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act). We intend that the forward-looking statements be
covered by the safe harbor for forward-looking statements in the Exchange Act. The forward-looking
information is based on various factors and was derived using numerous assumptions. All statements,
other than statements of historical fact, that address activities, events or developments that we
intend, expect, project, believe or anticipate will or may occur in the future are forward-looking
statements. Such statements are based upon certain assumptions and assessments made by our
management in light of their experience and their perception of historical trends, current
conditions, expected future developments and other factors they believe to be appropriate. These
forward-looking statements are usually accompanied by words such as believe, anticipate,
plan, seek, expect, intend and similar expressions.
Forward-looking statements necessarily involve risks and uncertainties, and our actual results
could differ materially from those anticipated in the forward looking statements due to a number of
factors, including those set forth in Part I, Item 1A, entitled Risk Factors, of our Annual
Report on Form 10-K for the year ended June 30, 2009, as may be updated and supplemented by
Part II, Item 1A, entitled Risk Factors, of this Quarterly Report on Form 10-Q, and elsewhere in
this report. These factors as well as other cautionary statements made in this Quarterly Report on
Form 10-Q, should be read and understood as being applicable to all related forward-looking
statements wherever they appear herein. The forward-looking statements contained in this Quarterly
Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those
descriptions carefully. We caution you not to place undue reliance on the forward-looking
statements contained in this report. These statements, like all statements in this report, speak
only as of the date of this report (unless an earlier date is indicated) and we undertake no
obligation to update or revise the statements except as required by law. Such forward-looking
statements are not guarantees of future performance and actual results will likely differ, perhaps
materially, from those suggested by such forward-looking statements. In this report, the
Company, the Holding Company, we, us, and our refer to Homeland Security Capital
Corporation.
Overview
The Company focuses on the acquisition and development of businesses whose primary operations
are in the CBRNE incident response and security marketplace of the homeland security industry. The
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.
Results of Operations
Three Month Period Ended December 31, 2009 as Compared to the Three Month Period Ended December 31,
2008
Contract revenue
For the three months ended December 31, 2009, the Company recorded contract revenue of
$26,572,415 as compared to $22,212,461 recorded for the three months ended December 31, 2008. The
increase of $4,359,954 is further outlined below:
Three Months Ended December 31, | ||||||||||||||||
2009 | 2008 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | | $ | | $ | | | |||||||||
Safety |
22,344,769 | 21,096,372 | 1,248,397 | 5.9 | % | |||||||||||
Nexus |
3,209,146 | 1,114,289 | 2,094,857 | 188.0 | % | |||||||||||
PMX |
1,018,500 | 1,800 | 1,016,700 | 56,483.3 | % | |||||||||||
$ | 26,572,415 | $ | 22,212,461 | $ | 4,359,954 | 19.6 | % | |||||||||
The overall increase of $4,359,954 or 19.6% reflects increased revenues in all our
subsidiaries attributable to both expanded services within existing contracts and services provided
under new contracts as compared to the prior year. The significant increase in revenues for PMX is
as a result of shipments to a significant customer that started in January 2009.
Contract cost
For the three months ended December 31, 2009, the Company recorded contract cost of
$20,801,955 as compared to $18,480,949 recorded for the three months ended December 31, 2008. The
increase of $2,321,006 is further outlined below:
Three Months Ended December 31, | ||||||||||||||||
2009 | 2008 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | | $ | | $ | | | |||||||||
Safety |
17,887,151 | 17,634,525 | 252,626 | 1.4 | % | |||||||||||
Nexus |
1,937,044 | 846,424 | 1,090,620 | 128.9 | % | |||||||||||
PMX |
977,760 | 0 | 977,760 | | ||||||||||||
$ | 20,801,955 | $ | 18,480,949 | $ | 2,321,006 | 12.6 | % | |||||||||
The overall increase of $2,321,006, or 12.6%, are costs associated with the additional
contract revenues noted above. Our gross profit on contract revenue improved from 17.0% for the
three months ended December 31, 2008 to 21.7% for the three months ended December 31, 2009. This
improved margin is mainly due to a more effective management of contract costs at all our
subsidiaries.
Operating expenses
For the three months ended December 31, 2009, the Company recorded operating expenses of
$3,681,822 as compared to $3,387,548 recorded for the three months ended December 31, 2008. The
increase of 294,274 is further outlined below:
Three Months Ended December 31, | ||||||||||||||||
2009 | 2008 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | 385,135 | $ | 746,883 | $ | (361,747 | ) | (48.4 | %) | |||||||
Safety |
2,944,058 | 2,214,924 | 729,133 | 32.9 | % | |||||||||||
Nexus |
329,930 | 301,495 | 28,435 | 9.4 | % | |||||||||||
PMX |
22,699 | 124,246 | (101,547 | ) | (81.7 | %) | ||||||||||
$ | 3,681,822 | $ | 3,387,548 | $ | 294,274 | 8.7 | % | |||||||||
The overall increase of $294,274, or 8.7%, is primarily due to increased personnel costs
during the three months ended December 31, 2009 due to an increase in the number of employees
required to support increased operating levels at Safety and Nexus partially offset by expense
reduction in the holding company and PMXs reductions of operating expenses due to operating
efficiencies gained because Safety oversees certain operations of PMX.
Other income and expense
For the three months ended December 31, 2009, the Company recorded net other expenses of
$615,409 as compared to $611,015 recorded for the three months ended December 31, 2008. The
increase in net other expenses of $4,394 is further outlined below by operating unit and functional
line item:
Three Months Ended December 31, | ||||||||||||||||
2009 | 2008 | (Increase) Decrease | ||||||||||||||
Holding Company |
$ | (536,128 | ) | $ | (521,788 | ) | $ | (14,340 | ) | (2.7 | %) | |||||
Safety |
(67,325 | ) | (85,494 | ) | 18,169 | 21.3 | % | |||||||||
Nexus |
(11,956 | ) | (3,733 | ) | (8,223 | ) | (220.3 | %) | ||||||||
PMX |
| | | | ||||||||||||
$ | (615,409 | ) | $ | (611,015 | ) | $ | (4,394 | ) | (0.7 | %) | ||||||
Three Months Ended December 31, | ||||||||||||||||
2009 | 2008 | (Increase) Decrease | ||||||||||||||
Interest expense |
$ | (490,985 | ) | $ | (504,537 | ) | $ | 13,552 | 2.7 | % | ||||||
Amortization of debt
offering costs |
(126,750 | ) | (123,092 | ) | (3,658 | ) | (3.0 | %) | ||||||||
Amortization of debt
discount |
(12,018 | ) | (12,019 | ) | 1 | | ||||||||||
Interest and other
income |
14,344 | 28,633 | (14,289 | ) | (49.9 | %) | ||||||||||
$ | (615,409 | ) | $ | (611,015 | ) | $ | (4,394 | ) | (0.7 | %) | ||||||
The overall increase in net other expenses of $4,394, or 0.7%, mainly reflects the consistency
of interest costs, amortization expense and interest and other income between the periods.
Net income (loss)
As a result of the foregoing, the Company recorded net income of $1,301,100 for the three
months ended December 31, 2009 as compared to a net loss of $410,051 for the three months ended
December 31, 2008. These results reflect larger margins on increased contract revenues and
reductions in operating costs during the current period.
Six Month Period Ended December 31, 2009 as Compared to the Six Month Period Ended December 31, 2008
Contract revenue
For the six months ended December 31, 2009, the Company recorded contract revenue of
$47,421,857 as compared to $39,879,692 recorded for the six months ended December 31, 2008. The
increase of $7,542,165 is further outlined below:
Six Months Ended December 31, | ||||||||||||||||
2009 | 2008 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | | $ | | $ | | | |||||||||
Safety |
40,432,354 | 37,682,248 | 2,750,106 | 7.3 | % | |||||||||||
Nexus |
5,292,003 | 2,184,482 | 3,107,521 | 142.3 | % | |||||||||||
PMX |
1,697,500 | 12,962 | 1,684,538 | 12,996.0 | % | |||||||||||
$ | 47,421,857 | $ | 39,879,692 | $ | 7,542,165 | 18.9 | % | |||||||||
The overall increase of $7,542,165, or 18.9%, reflects increased revenues in all our
subsidiaries attributable to both expanded services within existing contracts and services provided
under new contracts as compared to the prior year. The significant increase in revenues for PMX is
as a result of shipments to a significant customer that started in January 2009.
Contract cost
For the six months ended December 31, 2009, the Company recorded contract cost of $38,105,195
as compared to $33,313,889 recorded for the six months ended December 31, 2008. The increase of
$4,791,306 is further outlined below:
Six Months Ended December 31, | ||||||||||||||||
2009 | 2008 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | | $ | | $ | | | |||||||||
Safety |
33,033,878 | 31,879,227 | 1,154,651 | 3.6 | % | |||||||||||
Nexus |
3,441,717 | 1,424,283 | 2,017,434 | 141.6 | % | |||||||||||
PMX |
1,629,600 | 10,379 | 1,619,221 | 15,600.9 | % | |||||||||||
$ | 38,105,195 | $ | 33,313,889 | $ | 4,791,306 | 14.4 | % | |||||||||
The overall increase of $4,791,306, or 14.4%, are costs associated with the additional
contract revenues noted above. Our gross profit on contract revenue improved from 16.5% for the
six months ended December 31, 2008 to 19.6% for the six months ended December 31, 2009. This
improved margin is mainly due to a more effective management of contract costs at all our
subsidiaries.
Operating expenses
For the six months ended December 31, 2009, the Company recorded operating expenses of
$7,338,505 as compared to $7,557,027 recorded for the six months ended December 31, 2008. The
decrease of $218,522 is further outlined below:
Six Months Ended December 31, | ||||||||||||||||
2009 | 2008 | Increase (Decrease) | ||||||||||||||
Holding Company |
$ | 1,163,042 | $ | 2,310,141 | $ | (1,147,099 | ) | (49.7 | %) | |||||||
Safety |
5,603,902 | 4,298,273 | 1,305,629 | 30.4 | % | |||||||||||
Nexus |
548,862 | 728,359 | (179,497 | ) | (24.6 | %) | ||||||||||
PMX |
22,699 | 220,254 | (197,555 | ) | (89.7 | %) | ||||||||||
$ | 7,338,505 | $ | 7,557,027 | $ | (218,522 | ) | (2.9 | %) | ||||||||
The overall decrease of $218,522, or 2.9%, is primarily due to compensation expense associated
with the accelerated vesting of stock options during the period ended December 31, 2008 not present
in 2009 (Holding Company), offset by increased personnel costs during the six months ended December
31, 2009 due to an increase in the number of employees required to support increased operating
levels (Safety). Nexus operating expenses decreased as a result of streamling overhead
expenditures and PMXs operating expense decreased due to operating efficiencies gained because
Safety oversees certain operations of PMX. Operating expenses were 15.5% of contract revenue for
the six months ended December 31, 2009 and 19.0% of contract revenues for the six months ended
December 31, 2008.
Other income and expense
For the six months ended December 31, 2009, the Company recorded net other expenses of
$1,220,622 as compared to $1,216,917 recorded for the six months ended December 31, 2008. The
increase in net other expense of $3,705 is further outlined below by operating unit and functional
line item:
Six Months Ended December 31, | ||||||||||||||||
2009 | 2008 | (Increase) Decrease | ||||||||||||||
Holding Company |
$ | (1,083,299 | ) | $ | (1,037,578 | ) | $ | (45,721 | ) | (4.4 | %) | |||||
Safety |
(127,591 | ) | (169,439 | ) | 41,848 | 24.7 | % | |||||||||
Nexus |
(9,732 | ) | (9,900 | ) | 168 | 1.7 | % | |||||||||
PMX |
| | | | ||||||||||||
$ | (1,220,622 | ) | $ | (1,216,917 | ) | $ | (3,705 | ) | (0.3 | %) | ||||||
Six Months Ended December 31, | ||||||||||||||||
2009 | 2008 | (Increase) Decrease | ||||||||||||||
Interest expense |
$ | (980,777 | ) | $ | (1,006,189 | ) | $ | 25,412 | 2.5 | % | ||||||
Amortization of debt
offering costs |
(262,342 | ) | (246,185 | ) | (16,157 | ) | (6.6 | %) | ||||||||
Amortization of debt
discount |
(24,037 | ) | (24,037 | ) | | | ||||||||||
Currency loss |
(151 | ) | | (151 | ) | | ||||||||||
Interest and other
income |
46,685 | 59,494 | (12,809 | ) | (21.5 | %) | ||||||||||
$ | (1,220,622 | ) | $ | (1,216,917 | ) | $ | (3,705 | ) | (0.3 | %) | ||||||
The overall increase in net other expenses of $3,705, or 0.3%, mainly reflects the consistency
of interest costs, amortization expense and other income between the periods.
Net income (loss)
As a result of the foregoing, the Company recorded net income of $555,251 for the six months
ended December 31, 2009 as compared to a net loss of $2,351,141 for the six months ended December
31, 2008. These results reflect larger margins on increased contract revenues and reductions in
operating costs during the current period.
Liquidity and Capital Resources
The primary source of financing for the Company since its inception has been through the
issuance of common stock, preferred stock and convertible debt. The Company had cash on hand of
$1,087,259, working capital of $4,986,240 and approximately $5,800,000 available for borrowing on
our credit line at December 31, 2009. Our primary needs for cash are to fund our ongoing operations
and to have cash available to make additional acquisitions of businesses that provide products and
services in our target industries. While we believe that we have sufficient cash on hand and
available credit to satisfy our current operating commitments, we will require significant
additional funding in order to make additional acquisitions.
During the six months ended December 31, 2009, we had a net decrease in cash of $1,269,275.
Our sources and uses of funds were as follows:
Cash Flows From Operating Activities
We used net cash of $2,448,089 in our operating activities during the six months ended
December 31, 2009 primarily from income of $2,422,245 (net income of $555,251 adjusted for non-cash
items of $1,866,994) offset by net uses of cash of $4,870,334 due to changes in our operating
assets and liabilities.
Cash Flows From Investing Activities
We used net cash of $151,304 in our investing activities during the six months ended December
31, 2009, related to the purchase of fixed assets of $200,804 reduced by $21,500 in proceeds from
the sale of fixed assets plus net working assets of $28,000 acquired by minority investment in a
controlled subsidiary.
Cash Flows From Financing Activities
We provided net cash of $1,343,328 from our financing activities during the six months ended
December 31, 2009, consisting of proceeds from borrowing for fixed asset purchases of $59,200 and
net borrowing on Safetys line of credit of $1,691,000 to reduce accounts payable, offset by
repayment of installment notes payable of $406,942.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings or other relationships with
unconsolidated entities or other persons, also known as special purpose entities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide information required by this
item.
Item 4(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have
concluded that, based on such evaluation, our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the 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.
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
As of December 31, 2009, we are not subject to any material legal proceedings. From time to
time, however, we and/or our subsidiaries may become involved in litigation and other legal
proceedings relating to claims arising from our operations in the normal course of business
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to provide information required by this
item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibits.
Exhibit | Description | |||
31.1 | Certification of Principal Executive Officer
Pursuant to Securities Exchange Act Rule 13a-14(a)
As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002* |
|||
31.2 | Certification of Principal Financial Officer
Pursuant to Securities Exchange Act Rule 13a-14(a)
As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002* |
|||
32.1 | Certification of Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002* |
|||
32.2 | Certification of Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002* |
* | Exhibit filed with this Quarterly Report |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed in its behalf by the undersigned, thereunto
duly authorized.
HOMELAND SECURITY CAPITAL CORPORATION |
||||
Date: February 22, 2010 | /s/ Michael T. Brigante | |||
Michael T. Brigante | ||||
(Authorized Officer and Principal Financial Officer) | ||||