PINX:HOMS Quarterly Report 10-Q Filing - 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2012

 

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

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)

 

 

 

4601 Fairfax Drive, Suite 1200

 

 

Arlington, VA

 

22203

(Address of principal executive offices)

 

(Zip code)

 

(703) 528-7073

(Issuer’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o  No x

 

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 x  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 x

(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 x

 

As of August 17, 2012, there were 55,159,022, shares of common stock, par value $0.001 per share, issued, 51,588,591,of which were issued and outstanding and 3,570,431shares of common stock held in treasury.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

1

 

 

Item 1. Financial Statements

1

 

 

Condensed Consolidated Balance Sheets

2

 

 

Condensed Consolidated Statements of Operations (Unaudited)

3

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

4

 

 

Notes To Condensed Consolidated Financial Statements (Unaudited)

5

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

8

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

11

 

 

Item 4. Controls and Procedures

12

 

 

PART II. OTHER INFORMATION

13

 

 

Item 1. Legal Proceedings

13

 

 

Item 1A. Risk Factors

13

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

13

 

 

Item 3. Defaults Upon Senior Securities

13

 

 

Item 4. Mine Safety Disclosures

13

 

 

Item 5. Other Information

13

 

 

Item 6. Exhibits

13

 

 

SIGNATURES

14

 

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Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

The accompanying interim condensed consolidated financial statements and notes to the condensed consolidated financial statements for the interim period as of June 30, 2012, are unaudited. The accompanying interim unaudited financial statements have been prepared by Homeland Security Capital Corporation (the “Company” or the “Holding Company”) in accordance with accounting  principles generally accepted in the United States for interim financial statements and pursuant to the requirements for reporting on Form 10-Q. Accordingly, these interim unaudited financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. The condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Transition Report on Form 10-KT as of and for the six months ended December 31, 2011.

 

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HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

Unaudited

 

Audited

 

Assets:

 

 

 

 

 

Cash

 

$

1,775,926

 

$

2,679,057

 

Notes receivable - related party

 

 

458,453

 

Current portion of note receivable

 

778,652

 

633,475

 

Prepaid and other

 

460,659

 

509,515

 

Total current assets

 

3,015,237

 

4,280,500

 

Fixed assets - net

 

261,371

 

157,319

 

Escrow receivable

 

800,000

 

800,000

 

Note receivable

 

679,431

 

1,230,069

 

Intangible assets - net

 

290,870

 

380,573

 

Goodwill

 

3,987,216

 

3,987,216

 

Total assets

 

$

9,034,125

 

$

10,835,677

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

706,449

 

865,227

 

Contingent consideration

 

311,324

 

1,033,627

 

Note payable - related party

 

5,696,283

 

5,553,778

 

Accrued compensation

 

583,718

 

1,141,818

 

Accrued other liabilities

 

86,413

 

98,858

 

State income taxes payable

 

208,700

 

157,400

 

Total current liabilities

 

7,592,887

 

8,850,708

 

Dividends payable

 

4,234,557

 

4,234,557

 

Total liabilities

 

11,827,444

 

13,085,265

 

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, 1,009,899 shares issued and outstanding

 

9,988,558

 

9,981,196

 

Common stock, $0.001 par value, 2,000,000,000 shares authorized, 54,491,449 shares issued and 50,921,018 shares outstanding

 

54,492

 

54,492

 

Additional paid-in capital

 

59,530,761

 

59,530,761

 

Treasury stock - 3,570,431 shares at cost

 

(250,000

)

(250,000

)

Accumulated deficit

 

(73,250,540

)

(72,704,130

)

Total Homeland Security Capital Corporation stockholders’ deficit

 

(3,926,729

)

(3,387,681

)

Noncontrolling interest

 

963,642

 

968,325

 

Total stockholders’ deficit

 

(2,963,087

)

(2,419,356

)

Total liabilities and stockholders’ deficit

 

$

9,034,125

 

$

10,835,677

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

Unaudited

 

Unaudited

 

Unaudited

 

Unaudited

 

Net revenue

 

$

4,577,193

 

$

 

$

9,464,671

 

$

 

Costs of revenue

 

3,988,815

 

 

7,905,975

 

 

Gross profit on revenue

 

588,378

 

 

1,558,696

 

 

Selling, general and administrative expenses

 

971,527

 

1,388,473

 

1,927,227

 

1,808,777

 

Operating loss

 

(383,149

)

(1,388,473

)

(368,531

)

(1,808,777

)

Other expense

 

(28,187

)

(489,761

)

(94,465

)

(994,662

)

Loss from continuing operations before income taxes

 

(411,336

)

(1,878,234

)

(462,996

)

(2,803,439

)

State income tax expense

 

(36,435

)

 

(80,735

)

 

Loss from continuing operations

 

(447,771

)

(1,878,234

)

(543,731

)

(2,803,439

)

Loss from discontinued operations

 

 

(3,030,652

)

 

(2,822,664

)

Net loss

 

(447,771

)

(4,908,886

)

(543,731

)

(5,626,103

)

Less: Net (loss) income attributable to noncontrolling interests

 

(23,900

)

255,800

 

(4,683

)

255,800

 

Net loss attributable to Homeland Security Capital Corporation stockholders

 

(423,871

)

(5,164,686

)

(539,048

)

(5,881,903

)

Less preferred dividends and other beneficial conversion features associated with preferred stock issuance

 

(3,681

)

(398,462

)

(7,362

)

(792,689

)

Net loss attributable to common stockholders of Homeland Security Capital Corporation

 

$

(427,552

)

$

(5,563,148

)

$

(546,410

)

$

(6,674,592

)

Loss per common share attributable to Homeland Security Capital Corporation stockholders - basic and diluted

 

 

 

 

 

 

 

 

 

Basic - continuing operations

 

 

 

$

(0.05

)

 

 

$

(0.07

)

Diluted - continuing operations

 

 

 

$

(0.05

)

 

 

$

(0.07

)

Basic - discontinued operations

 

 

 

$

(0.05

)

 

 

$

(0.05

)

Diluted - discontinued operations

 

 

 

$

(0.05

)

 

 

$

(0.05

)

Basic - net loss

 

$

(0.01

)

$

(0.10

)

$

(0.01

)

$

(0.12

)

Diluted - net loss

 

$

(0.01

)

$

(0.10

)

$

(0.01

)

$

(0.12

)

Weighted average shares outstanding -

 

 

 

 

 

 

 

 

 

Basic

 

54,491,449

 

54,491,449

 

54,491,449

 

54,491,449

 

Diluted

 

54,491,449

 

54,491,449

 

54,491,449

 

54,491,449

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

Unaudited

 

Unaudited

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(443,722

)

$

2,427,654

 

Net cash used in investing activities

 

(476,208

)

(247,368

)

Net cash provided by (used in) financing activities

 

16,799

 

(2,117,576

)

Effect of exchange rate changes on cash

 

 

3,565

 

Net (decrease) increase in cash

 

(903,131

)

66,275

 

Cash, beginning of period

 

2,679,057

 

3,427,981

 

Cash, end of period

 

$

1,775,926

 

$

3,494,256

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

HOMELAND SECURITY CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

June 30, 2012

 

1.              Organization and Basis of Presentation of Unaudited Interim Financial Statements.

 

Organization

 

Homeland Security Capital Corporation (the “Company” or the “Holding Company”) is a consolidator of companies, whose current subsidiaries provide title, settlement, escrow, appraisal and asset management real estate services. We are focused on creating long term value by taking a controlling interest in and developing our subsidiary companies through superior operations and management. We intend to operate businesses that provide real estate services, 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 sector.

 

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 June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 

The condensed consolidated financial statements include the accounts of the Company, its 80% owned subsidiary, Fiducia Real Estate Solutions, Inc. (“FRES”) and FRES’s wholly owned-subsidiaries, Timios, Inc. (“Timios”), Timios Appraisal Management, Inc. (“TAM”) and Default Servicing USA, Inc. (“DSUSA”). The Company controls each of the subsidiary boards of directors and provides extensive advisory services to each of the subsidiaries. Accordingly, the Company believes it exercises sufficient control over the operations and financial results of each of those companies and consolidates the results of operations, eliminating minority interests when such minority interests have a basis in the consolidated entity.  All intercompany balances and transactions have been eliminated.

 

2.              Going Concern

 

The primary source of financing for the Company since its inception has been through the issuance of equity and debt securities. The accompanying financial statements have been prepared assuming the Company will continue as a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of June 30, 2012, the Company has a stockholders’ deficit of $2,963,087.  Management recognizes it will be necessary to continue to generate positive cash flow from operations and have availability to other sources of capital to continue as a going concern and has implemented measures to increase profitability.  Additionally, management believes the acquisition of new, more profitable operations in new lines of business and the further reduction of certain operating expenses will have a positive impact on cash flow. As of June 30, 2012, the Company has outstanding debt of approximately $5,696,283 in the form of notes payable, all of which was owed to YA Global Investments, L.P. (“YA”).

 

Forbearance Agreement with YA Global Investments, L.P.

 

On October 26, 2011, YA and the Company entered into the Amended and Restated Forbearance Agreement, pursuant to which the forbearance period was extended until April 30, 2012 on the balance of the remaining debt owed them. On May 11, 2012, YA and the Company entered into the First Amendment to the Amended and Restated Forbearance Agreement, pursuant to which YA agreed to extend again the forbearance period until June 29, 2012.  On June 15, 2012, YA and the Company entered into the Second Amended and Restated

 

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Forbearance Agreement, pursuant to which YA agreed to further extend the forbearance period until August 31, 2012. Upon the expiration of the forbearance period, as extended, the Company’s assets are subject to foreclosure by YA without notice. As of the date of this filing, YA has not notified the Company that it intends to enforce its foreclosure rights. If the Company is unable to repay this debt or reach an agreement with YA as to other alternatives to satisfy this debt, and a foreclosure were to take place, it would have a material adverse effect on the Company’s operations, its liquidity, its capital resources and its stockholders.

 

3.              Income Taxes

 

The Company has not recorded any federal income tax expense or benefit for the three and six months ended June 30, 2012, mainly due to available federal net operating loss carryforwards.  The Company has recorded an income tax valuation allowance equal to the benefit of any deferred tax asset because of the uncertain nature of realization. The Company has recorded state income tax expense for certain of the jurisdictions in which it operates.

 

4.              Earnings (Loss) Per Share

 

The basic earnings (loss) per share was computed by dividing the net income or loss applicable to the Company’s common stockholders by the weighted average shares of common stock outstanding during each period.

 

Diluted earnings per share are computed using outstanding shares of common stock plus the Company’s Series F and H convertible preferred stock (the “Preferred Shares”) and common stock options and warrants that can be exercised or converted, as applicable, into common stock, par value $0.001 per share (the “Common Stock”) at June  30, 2012 and 2011. Diluted earnings per share are not indicated for the three and six month periods ended June 30, 2012 and 2011 because the market price of the Company’s common stock, when using the treasury method, indicates that conversions or exercises would not be prudent, as the Preferred Shares and common stock options and warrants were “out of the money.”

 

The reconciliations of the basic and diluted income (loss) per share for the income (loss) attributable to the Company’s shareholders are as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(447,771

)

$

(1,878,234

)

$

(543,731

)

$

(2,803,439

)

Less: Income (loss) attributable to noncontrolling interests

 

23,900

 

(255,800

)

4,683

 

(255,800

)

Less: Series H Preferred Stock beneficial conversion feature

 

(3,681

)

(3,681

)

(7,362

)

(7,362

)

Less: Preferred stock dividends

 

 

(394,781

)

 

(785,327

)

Loss attributable to common stockholders

 

$

(427,552

)

$

(2,532,496

)

$

(546,410

)

$

(3,851,928

)

Income from discontinued operations

 

$

 

$

(3,030,652

)

$

 

$

(2,822,664

)

Net loss

 

$

(427,552

)

$

(5,563,148

)

$

(546,410

)

$

(6,674,592

)

 

 

 

 

 

 

 

 

 

 

Shares (Denominator)

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares:

 

 

 

 

 

 

 

 

 

Basic

 

54,491,449

 

54,491,449

 

54,491,449

 

54,491,449

 

Diluted

 

54,491,449

 

54,491,449

 

54,491,449

 

54,491,449

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

 

Basic — continuing operations

 

 

 

$

(0.05

)

 

 

$

(0.07

)

Diluted — continuing operations

 

 

 

$

(0.05

)

 

 

$

(0.07

)

Basic — discontinued operations

 

 

 

$

(0.05

)

 

 

$

(0.05

)

Diluted — discontinued operations

 

 

 

$

(0.05

)

 

 

$

(0.05

)

Basic — net loss

 

$

(0.01

)

$

(0.10

)

$

(0.01

)

$

(0.12

)

Diluted — net loss

 

$

(0.01

)

$

(0.10

)

$

(0.01

)

$

(0.12

)

 

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5.              Cash Flows

 

Supplemental disclosure of cash flow information for the three and six month periods ending June 30, 2012 and 2011, are as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

 

$

19,086

 

Taxes

 

 

551,718

 

 

 

 

 

 

 

Supplemental disclosure for noncash investing and financing activity:

 

 

 

 

 

Dividends accrued on Preferred Stock

 

$

 

$

785,432

 

Dividends recognized from beneficial conversion feature

 

7,362

 

7,362

 

Settlement of related party note receivable

 

458,453

 

 

Equipment acquired under capital leases

 

 

4,728

 

 

6.              Contingency

 

Subsequent to June 30, 2012, the Company received notification alleging that the Company breached certain representations and warranties with regard to the sale of one of its former subsidiaries. The claim alleges that the Company misrepresented the estimate of the costs to complete a certain contract that was included in the sale.  The Company is currently in discussions with the claimant regarding its allegation. Given the early stages of discussion and pending the receipt of further information from the claimant regarding its claim, we cannot predict with any degree of certainty the outcome of this claim or determine the extent of potential liabilities.

 

7.              Corporate Actions

 

On June 13, 2012, the Board of Directors (the “Board”) of the Company proposed an amendment to execute a 500 to 1 reverse stock split, change the authorized capital of the Company and a corporate name change. These actions were approved by a majority stockholders vote on June 15, 2012. However, as of August 20, 2012, the Board has not instructed the Company to complete the corporate actions approved by the stockholders. It is expected however, that these actions will be completed in the third quarter.

 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including, without limitation, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. The forward-looking information is based on various factors and was derived using numerous assumptions. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as “believe,” “anticipate,” “plan,” “seek,” “expect,” “intend” and similar expressions.

 

Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including those set forth in Part I, Item 1A, entitled “Risk Factors,” of our Transition Report on Form 10-K for the six months ended December 31, 2011, 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

 

Homeland Security Capital Corporation was incorporated in Delaware on August 12, 1997 under the name “Celerity Systems, Inc.” In August 2005, we changed our name to “Homeland Security Capital Corporation” and changed our business plan to seek acquisitions of and joint ventures with companies operating in the homeland security business sector and, until July 2011, operated soley as a provider of specialized, technology-based, radiological, nuclear, environmental, disaster relief and electronic security solutions to government and commercial customers. Our corporate headquarters is located in Arlington, Virginia.

 

In early 2011, we had announced that we were considering strategic alternatives to retire part or all of our debt, including the sale of one or all of our subsidiaries. On August 19, 2011, we completed the sale of substantially all of the assets of Corporate Security Solutions, Inc., the operating subsidiary of our 93%-owned Nexus Technologies Group, Inc. subsidiary and on October 31, 2011, we completed the sale of our wholly-owned subsidiary, Safety& Ecology Holdings Corporation.  The proceeds from these sales were used to retire debt.

 

In July 2011, we expanded the scope of operations to include companies operating in the real estate services industry through our acquisition of a majority interest in a subsidiary holding company that owns, through an intermediary company, three operating companies:  1) Timios, Inc., or “Timios”, which is engaged nationally in title and escrow services for mortgage origination, refinance, reverse mortgages and deed-in-lieu transactions; 2) Timios Appraisal Management, Inc. , or “TAM”, which is engaged nationally in residential property appraisals;  and 3) and Default Servicing USA, Inc., or “DSUSA”,which is engaged nationally in real estate-owned liquidation services to institutional real estate owned, or REO, customers.

 

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We currently conduct our operations through one majority-owned subsidiary, Fiducia Holdings Corporation.  On July 6, 2011, the Company formed Fiducia Holdings LLC (the assets of which, as of December 30, 2011, were contributed to Fiducia Holdings Corporation) and, through this subsidiary, on July 19, 2011, acquired eighty percent (80%) of Fiducia Real Estate Solutions, Inc., or FRES, a company involved in the real estate services industry. On July 5, 2011 and on July 29, 2011, FRES, through two newly-formed subsidiaries, Default Servicing USA, Inc., or DSUSA, acquired substantially all the assets of Default Servicing, Inc. and, Timios Acquisition Corporation, all of the capital stock of Timios, respectively.

 

The Company expects to grow these businesses both organically and through acquisitions. The Company continues to target growth companies that are generating revenues but face challenges in scaling their businesses to capitalize on growth opportunities. The Company plans to enhance the operations of these companies by helping them generate new business, grow revenues, develop superior management, build infrastructure and improve cash flows.

 

Results of Operations

 

The discussion below reflects the consolidated accounts of the Company’s operations for the three and six months ended June 30, 2012. As a result of the acquisitions of DSUSA and Timios and the formation of TAM during the second half of 2011 and the reporting of the Company’s former subsidiaries as discontinued operations in 2011, comparison to the previous year’s three and six months results of operations would be misleading to the reader and generally not reflective of the current operations of the Company.

 

Where appropriate, management has attempted to add expanded discussion as to our current businesses reflected in the results of operations. These discussions may include certain details concerning each operating entity prior to their acquisition by the Company. Where this is the case, it will be noted.

 

Management considers Timios, DSUSA and TAM all to be operating in the same industry, real estate services. As a result, management does not measure each company as if it were its own segment.

 

Three Month Period Ended June 30, 2012

 

Revenue

 

For the three months ended June 30, 2012, the Company recorded revenue of $4,577,193. Of this revenue Timios recorded $4,541,336, DSUSA recorded $24,047 and TAM recorded $11,810. Timios’ main source of revenue is derived from title insurance fees and escrow fees. DSUSA derives its revenue from fees associated with the management of properties, which are owned by banks or other mortgage lenders. TAM derives its revenue from residential property appraisals.

 

Cost of Revenue

 

For the three months ended June 30, 2012, the Company recorded cost of revenue of $3,988,815. Of this cost of revenue, Timios recorded $3,726,318, DSUSA recorded $42,589 and TAM recorded $219,908.

 

Operating expenses

 

For the three months ended June 30, 2012, the Company recorded operating expenses of $971,527.  The Holding Company incurred operating expenses of $388,937 during this period compared to $1,388,473 for the three months ended June 30, 2011.  The decrease was primarily due to lower professional fees, including director fees. Also for the three months ended June 30, 2012, Timios recorded operating expenses of $514,175, DSUSA recorded operating expenses of $18,797 and TAM recorded operating expenses of $49,618.

 

Operating expenses consist of personnel costs, including fringe benefits, insurance and facility costs, travel and entertainment, depreciation and amortization, marketing, professional services such as legal and accounting costs and general administrative costs. To the extent possible, the Company has eliminated costs associated with redundant services carried on separately at each location by centralizing such activities.

 

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Other income and expense

 

For the three months ended June 30, 2012, the Company recorded net other expense of $28,187. The Holding Company incurred net other expense of $34,441, which primarily consisted of interest expense reduced by interest income, compared to net other expense of $489,761 for the three months ended June 30, 2011. During the three months ended June 30, 2012, Timios recorded other income of $6,352 and DSUSA incurred other expense of $98.

 

Net loss

 

As a result of the foregoing, the Company recorded a net loss of $447,771, before losses of non-controlling interests and preferred dividends of $20,219 for the three months ended June 30, 2012. The total net loss attributable to common shareholders was $427,552 for the period.

 

Six Month Period Ended June 30, 2012

 

Revenue

 

For the six months ended June 30, 2012, the Company recorded revenue of $9,464,671. Of this revenue Timios recorded $9,403,305, DSUSA recorded $49,556 and TAM recorded $11,810.

 

DSUSA’s contract with its only client at the time of acquisition expired late in 2011 and management has been in negotiations with several potential clients to replace this business.

 

Cost of Revenue

 

For the six months ended June 30, 2012, the Company recorded cost of revenue of $7,905,975. Of this cost of revenue, Timios recorded $7,380,295, DSUSA recorded $305,772 and TAM recorded $219,908.

 

Operating expenses

 

For the six months ended June 30, 2012, the Company recorded operating expenses of $1,927,227.  The Holding Company incurred operating expenses of $759,455 during this period compared to $1,808,777 for the six months ended June 30, 2011.  The decrease was primarily due to lower professional fees, including director fees. Also for the six months ended June 30, 2012, Timios recorded operating expenses of $1,043,559, DSUSA recorded operating expenses of $74,595 and TAM recorded operating expenses of $49,618.

 

Other income and expense

 

For the six months ended June 30, 2012, the Company recorded net other expense of $94,465. The Holding Company incurred net other expense of $73,628, which primarily consisted of interest expense reduced by interest income, compared to net other expense of $994,662 for the six months ended June 30, 2011. The decrease was primarily related to the reduction in accrued interest expense on the Company’s senior debt, which was reduced by the proceeds from the sale of the Company’s homeland security subsidiaries. Timios incurred other expense of $20,764 and DSUSA incurred other expense of $73 for the six months ending June 30, 2012.

 

Net loss

 

As a result of the foregoing, the Company recorded a net loss of $543,731, before losses of non-controlling interests and preferred dividends of $2,679, for the six months ended June 30, 2012. The total net loss attributable to common shareholders was $546,410 for the six month period.

 

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Liquidity and Capital Resources

 

From August 2005 through March 2008, the Company operated and acquired businesses using funding from issuance of its Common Stock, Preferred Stock and convertible debt to YA Global Investments, L.P. (formerly known as Cornell Capital, L.P.), or YA, totaling approximately $23,250,000.  At June 30, 2012, the Company owed YA approximately $5,696,283, including accrued interest. In March 2008, the total debt was consolidated into three notes, each with a maturity date of March 14, 2010. The maturity date was initially extended to October 1, 2010, and then subsequently extended to July 15, 2011, by which time the Company had expected to sell its homeland security subsidiaries and retire the debt. Since none of the subsidiaries were sold by this date, YA agreed to forbearance until August 31, 2011 and then subsequently agreed to an extension of the forbearance period until September 14, 2011. On August 19, 2011, Nexus was sold and $1,733,917 of the proceeds from the sale was paid to YA. On October 31, 2011, Safety was sold and $12,651,910 of the proceeds from the sale was paid to YA. On October 26, 2011, YA agreed to an extension of the forbearance period until April 30, 2012 on the balance of the remaining debt owed them, which date was extended to June 29, 2012 on May 11, 2012. On June 15, 2012, YA agreed to an additional extension of the forbearance period until August 31, 2012. YA and the Company are continuing discussions as to different alternatives to satisfy this outstanding debt.

 

The Company had cash on hand of $1,775,926 at June 30, 2012. Our primary needs for cash are to repay debt owed to YA and fund our ongoing operations. Our secondary need for cash is to make additional acquisitions of businesses that provide products and services in our target industries. We do not have sufficient capital on hand to repay our debt to YA nor are we able to internally generate sufficient capital to repay such debt in full at this time. We will require significant additional capital in order to repay our debt, fund our operations and make additional acquisitions.

 

During the six months ended June 30, 2012, the Company had a net decrease in cash of $903,131. The Company’s sources and uses of cash were as follows:

 

Cash Flows From Operating Activities

 

We used net cash of $443,722 in our operating activities during the six months ended June 30, 2012, consisting of a loss of $273,008 (net loss of $543,731 less adjustment for non-cash items of approximately $270,723), offset by net uses of cash totaling approximately $170,714 due to changes in our operating assets and liabilities.

 

Cash Flows From Investing Activities

 

We used net cash of $476,208 in our investing activities during the six months ended June 30, 2012, consisting of collections of notes receivable of $405,461. Cash was used to purchase fixed assets of $159,366 and payments on contingent consideration of $722,303.

 

Cash Flows From Financing Activities

 

We provided cash of $16,799 in our financing activities during the six months ended June 30, 2012, consisting of the net repayment of related party debt.

 

As of June 30, 2012, the Company had a net working capital deficit of $4,577,650.

 

Off-Balance Sheet Arrangements

 

The Company was not a party to any off-balance sheet arrangements during the quarter ended June 30, 2012.

 

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.

 

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Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

During the most recently completed fiscal quarter, there has been no significant change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act.

 

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PART II.  OTHER INFORMATION.

 

Item 1.  Legal Proceedings.

 

As of June 30, 2012, 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.  Mine Safety Disclosures.

 

Not applicable.

 

Item 5.  Other Information.

 

None.

 

Item 6.  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*

 

 

 

101**

 

The following materials from the Quarterly Report on Form 10-Q of Homeland Security Capital Corporation for the period ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Stockholders’ Deficits and Comprehensive Loss; and (v) Notes to Consolidated Financial Statements.

 


* Exhibit filed with this Quarterly Report on Form 10-Q.

 

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is no subject to liability under these sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

HOMELAND SECURITY CAPITAL CORPORATION

 

 

Date: August 20, 2012

/s/ Michael T. Brigante

 

Michael T. Brigante

 

(Authorized Officer and Principal Financial Officer)

 

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PINX:HOMS Quarterly Report 10-Q Filling

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