##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2011
 o
    
    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to .
 Commission file number  000-23279
 HOMELAND SECURITY CAPITAL CORPORATION
  Delaware
(State or Other Jurisdiction of Incorporation 
or Organization)
    
    52-2050585
(I.R.S. Employer Identification No.)1005 North Glebe Road, Suite 550
Arlington, VA
(Address of principal executive offices)
    
    22201
(Zip code)
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
  o þ




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##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
    
    
    4Condensed Consolidated Statements of Operations (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    6Condensed Consolidated Statements of Changes in
Stockholders Deficit and Comprehensive Loss
    
    
    7NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATION
    
    
    22Item 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. (Removed and Reserved)
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURES
    
    
    23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements.
   3




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##### Table of Contents



March 31,
    
    
    June 30,2011
    
    
    2010(Unaudited)Assets:Cash
    
    $
    3,323,515
    
    
    $
    1,829,429Marketable fixed income securities
    
    
    
    
    
    
    872,427Accounts receivable  net
    
    
    20,593,465
    
    
    
    16,764,897Cost in excess of billings on uncompleted contracts
    
    
    3,955,522
    
    
    
    7,333,931Other current assets
    
    
    212,758
    
    
    
    447,925Total current assets
    
    
    28,085,260
    
    
    
    27,248,609Fixed assets  net
    
    
    935,455
    
    
    
    1,129,885Equipment held for sale
    
    
    
    
    
    
    1,455,142Notes receivable  related party
    
    
    444,515
    
    
    
    430,627Securities available for sale
    
    
    
    
    
    
    110,826Other non-current assets
    
    
    107,049
    
    
    
    344,499Intangible assets  net
    
    
    313,395
    
    
    
    346,814Goodwill
    
    
    6,403,982
    
    
    
    6,403,982Total assets
    
    $
    36,289,656
    
    
    $
    37,470,384Liabilities and Stockholders DeficitCurrent liabilities:Accounts payable
    
    $
    9,513,765
    
    
    $
    8,457,186Line of credit
    
    
    2,000
    
    
    
    Current portion of long term debt
    
    
    66,000
    
    
    
    536,025Current portion of long term debt  related party
    
    
    19,232,753
    
    
    
    500,000Accrued compensation
    
    
    2,878,037
    
    
    
    2,568,857Accrued other liabilities
    
    
    381,462
    
    
    
    436,906Billings in excess of costs on uncompleted contracts
    
    
    186,997
    
    
    
    1,027,500Income taxes payable
    
    
    303,416
    
    
    
    551,941Current portion of deferred revenue
    
    
    213,348
    
    
    
    85,327Total current liabilities
    
    
    32,777,778
    
    
    
    14,163,742Line of credit
    
    
    
    
    
    
    2,162,000Long term debt  related party, less current maturities
    
    
    
    
    
    
    17,755,890Long term debt, less current maturities
    
    
    94,274
    
    
    
    688,593Long term deferred revenue, less current portion
    
    
    
    
    
    
    124,667Dividends payable
    
    
    4,656,163
    
    
    
    3,464,934Total liabilities
    
    
    37,528,215
    
    
    
    38,359,826Warrants Payable  Series H Preferred Stock
    
    
    169,768
    
    
    
    169,768Stockholders DeficitHomeland Security Capital Corporation stockholders deficit:Preferred stock, $0.01 par value, 10,000,000 shares authorized,
1,559,899 and 1,559,985 shares issued and outstanding,
respectively
    
    
    14,150,153
    
    
    
    14,225,110Common stock, $0.001 par value, 2,000,000,000 shares
authorized,
54,491,449 and 51,624,725 shares issued and
50,921,018 and 48,054,294 shares outstanding, respectively
    
    
    54,492
    
    
    
    51,625Additional paid-in capital
    
    
    55,189,354
    
    
    
    55,297,972Additional paid-in capital  warrants
    
    
    272,529
    
    
    
    272,529Treasury stock  3,570,431 shares at cost
    
    
    (250,000
    )
    
    
    (250,000
    )Accumulated deficit
    
    
    (70,931,927
    )
    
    
    (70,509,227
    )Accumulated comprehensive loss
    
    
    (116,630
    )
    
    
    (301,153
    )Total Homeland Security Capital Corporation stockholders
deficit
    
    
    (1,632,029
    )
    
    
    (1,213,144
    )Noncontrolling interest
    
    
    223,702
    
    
    
    153,934Total stockholders deficit
    
    
    (1,408,327
    )
    
    
    (1,059,210
    )Total liabilities and stockholders deficit
    
    $
    36,289,656
    
    
    $
    37,470,384
   4




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##### Table of Contents



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




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##### Table of Contents



Nine Months Ended March 31,2011
    
    
    2010Cash flows from operating activities:Net income
    
    $
    997,219
    
    
    $
    1,800,904Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Sale of marketable fixed income securities
    
    
    872,427
    
    
    
    Share-based compensation expense
    
    
    24,449
    
    
    
    798,794Depreciation
    
    
    905,667
    
    
    
    1,505,561Amortization of intangibles
    
    
    33,419
    
    
    
    33,419(Gain) loss on disposal of assets
    
    
    (82,252
    )
    
    
    7,556Impairment losses on securities available for sale
    
    
    308,214
    
    
    
    67,358Amortization of debt offering costs and discounts
    
    
    8,000
    
    
    
    389,975Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,828,568
    )
    
    
    (3,828,527
    )Costs in excess of billings on uncompleted
contracts
    
    
    3,378,409
    
    
    
    (2,202,938
    )Other assets
    
    
    419,614
    
    
    
    (1,537
    )Accounts payable
    
    
    1,056,580
    
    
    
    (2,105,263
    )Billings in excess of costs on uncompleted
contracts
    
    
    (840,503
    )
    
    
    180,193Accrued interest due to related party
    
    
    1,462,975
    
    
    
    1,364,548Accrued compensation
    
    
    309,180
    
    
    
    (488,641
    )Accrued other liabilities
    
    
    (55,444
    )
    
    
    817,148Income taxes payable
    
    
    (248,525
    )
    
    
    260,649Deferred revenue
    
    
    3,354
    
    
    
    156,486Net cash provided by (used in) operating
activities
    
    
    4,724,215
    
    
    
    (1,244,315
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    (665,916
    )
    
    
    (244,571
    )Proceeds from sale of assets
    
    
    1,555,525
    
    
    
    21,500Net cash provided by (used in) investing
activities
    
    
    889,609
    
    
    
    (223,071
    )Cash flows from financing activities:Net (payments) borrowings on line of credit
    
    
    (2,160,000
    )
    
    
    2,331,000Proceeds from sale of noncontrolling interest in subsidiary
    
    
    
    
    
    
    28,000Distributions to noncontrolling interest
    
    
    (147,880
    )
    
    
    Repayment of related party debt
    
    
    (500,000
    )
    
    
    Repayment of debt
    
    
    (1,127,796
    )
    
    
    (505,657
    )Repurchase of stock options outstanding
    
    
    (216,200
    )
    
    
    Net cash (used in) provided by financing
activities
    
    
    (4,151,876
    )
    
    
    1,853,343Effect of exchange rate changes on cash
    
    
    32,138
    
    
    
    (33,949
    )Net increase in cash
    
    
    1,494,086
    
    
    
    352,008Cash, beginning of period
    
    
    1,829,429
    
    
    
    2,356,534Cash, end of period
    
    $
    3,323,515
    
    
    $
    2,708,542
   6




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##### Table of Contents



Homeland Security Capital Corporation ShareholdersAdditionalAdditional
    
    
    Paid-In
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    TotalPreferred
    
    
    Common Stock
    
    
    Paid-In
    
    
    Capital -
    
    
    Treasury
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Noncontrolling
    
    
    StockholdersStock
    
    
    Shares Issued
    
    
    Amount
    
    
    Capital
    
    
    Warrants
    
    
    Stock
    
    
    Deficit
    
    
    Loss
    
    
    Interest
    
    
    (Deficit)Balance, July 1, 2010
    
    $
    14,225,110
    
    
    
    51,624,725
    
    
    $
    51,625
    
    
    $
    55,297,972
    
    
    $
    272,529
    
    
    $
    (250,000
    )
    
    $
    (70,509,227
    )
    
    $
    (301,153
    )
    
    $
    153,934
    
    
    
    (1,059,210
    )Amortization of Series H warrants
    
    
    11,043
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,043
    )
    
    
    
    
    
    
    
    
    
    
    Dividends on Series H and Series I
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,191,228
    )
    
    
    
    
    
    
    
    
    
    
    (1,191,228
    )Value of vested stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,449Preferred stock converted
    
    
    (86,000
    )
    
    
    2,866,724
    
    
    
    2,867
    
    
    
    83,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reduction in value of securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110,825
    )
    
    
    
    
    
    
    (110,825
    )Realization of impairment in value
of securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    263,210
    
    
    
    
    
    
    
    263,210Liquidating distribution of
noncontrolling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147,880
    )
    
    
    (147,880
    )Repurchase of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (216,200
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (216,200
    )Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,138
    
    
    
    
    
    
    
    32,138Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    779,571
    
    
    
    
    
    
    
    217,648
    
    
    
    997,219Balance, March 31, 2011
    
    $
    14,150,153
    
    
    
    54,491,449
    
    
    $
    54,492
    
    
    $
    55,189,354
    
    
    $
    272,529
    
    
    $
    (250,000
    )
    
    $
    (70,931,927
    )
    
    $
    (116,630
    )
    
    $
    223,702
    
    
    
    (1,408,327
    )
   7




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##### Table of Contents



HOMELAND SECURITY CAPITAL CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   1. Organization and Basis of Presentation of Unaudited Interim Financial Statements.
 Organization
  Basis of Presentation
    Recent Accounting Pronouncements
    8




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##### Table of Contents



2. Fair Value Measurements
 Fair Value Measurements and Disclosures
      3. Income Taxes
   4. Stock Options
 Stock Options Awarded Under the 2005 Plan
  Stock Options Awarded Under the 2008 Plan
   9




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##### Table of Contents



Stock Options Awarded Outside of the 2005 Plan and the 2008 Plan
   March 31, 2011
    
    
    June 30, 2010Weighted Average
    
    
    
    
    
    
    Weighted AverageExercise
    
    
    Grant Date
    
    
    
    
    
    
    Exercise
    
    
    Grant DateOptions
    
    
    Price
    
    
    Fair Value
    
    
    Options
    
    
    Price
    
    
    Fair ValueOutstanding at beginning of period
    
    
    83,310,000
    
    
    $
    0.056
    
    
    $
    0.044
    
    
    
    75,669,374
    
    
    $
    0.057
    
    
    $
    0.049Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rescinded (Exercised)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,640,626
    
    
    
    0.050
    
    
    
    0.036Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of period
    
    
    83,310,000
    
    
    $
    0.056
    
    
    $
    0.044
    
    
    
    83,310,000
    
    
    $
    0.056
    
    
    $
    0.044Options exercisable at end of period
    
    
    83,310,000
    
    
    $
    0.056
    
    
    $
    0.044
    
    
    
    83,310,000
    
    
    $
    0.056
    
    
    $
    0.044
    5. Business Segments
   10




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##### Table of Contents



For the Three Months Ended March 31, 2011Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    23,351,175
    
    
    $
    1,289,410
    
    
    $
    
    
    
    $
    24,640,585Gross margin
    
    
    
    
    
    
    4,635,067
    
    
    
    68,977
    
    
    
    
    
    
    
    4,704,044Operating expenses
    
    
    420,303
    
    
    
    4,028,471
    
    
    
    362,643
    
    
    
    61
    
    
    
    4,811,478Other income (expense)  net
    
    
    (277,526
    )
    
    
    (67,962
    )
    
    
    (147,765
    )
    
    
    
    
    
    
    (493,253
    )Income tax benefit (expense)
    
    
    23,976
    
    
    
    (115,830
    )
    
    
    53,040
    
    
    
    
    
    
    
    (38,814
    )Net income (loss)
    
    
    (673,853
    )
    
    
    422,804
    
    
    
    (388,391
    )
    
    
    (61
    )
    
    
    (639,501
    )Current assets
    
    
    1,608,359
    
    
    
    23,350,285
    
    
    
    3,121,974
    
    
    
    4,642
    
    
    
    28,085,260Total assets
    
    
    1,178,952
    
    
    
    31,683,519
    
    
    
    3,422,543
    
    
    
    4,642
    
    
    
    36,289,656Interest expense
    
    
    492,288
    
    
    
    7,962
    
    
    
    1,736
    
    
    
    
    
    
    
    501,986Depreciation expense
    
    
    
    
    
    
    263,815
    
    
    
    21,144
    
    
    
    
    
    
    
    284,959Capital expenditures
    
    
    
    
    
    
    198,431
    
    
    
    991
    
    
    
    
    
    
    
    199,422
 For the Three Months Ended March 31, 2010Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    20,898,415
    
    
    $
    2,514,583
    
    
    $
    271,206
    
    
    $
    23,684,204Gross margin
    
    
    
    
    
    
    4,901,978
    
    
    
    837,732
    
    
    
    10,755
    
    
    
    5,750,465Operating expenses
    
    
    662,340
    
    
    
    2,807,960
    
    
    
    237,915
    
    
    
    4,366
    
    
    
    3,712,581Other income (expense)  net
    
    
    (663,900
    )
    
    
    (58,731
    )
    
    
    4,219
    
    
    
    
    
    
    
    (718,412
    )Income tax benefit (expense)
    
    
    554,659
    
    
    
    (628,478
    )
    
    
    
    
    
    
    
    
    
    
    (73,819
    )Net income (loss)
    
    
    (771,581
    )
    
    
    1,406,809
    
    
    
    604,036
    
    
    
    6,389
    
    
    
    1,245,653Current assets
    
    
    71,124
    
    
    
    21,887,136
    
    
    
    4,345,527
    
    
    
    369,966
    
    
    
    26,673,753Total assets
    
    
    683,680
    
    
    
    31,805,154
    
    
    
    4,587,446
    
    
    
    369,966
    
    
    
    37,446,246Interest expense
    
    
    492,904
    
    
    
    63,338
    
    
    
    1,428
    
    
    
    
    
    
    
    557,670Depreciation expense
    
    
    
    
    
    
    465,967
    
    
    
    17,407
    
    
    
    
    
    
    
    483,374Capital expenditures
    
    
    
    
    
    
    80,687
    
    
    
    22,350
    
    
    
    
    
    
    
    103,037
 For the Nine Months Ended March 31, 2011Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    72,605,661
    
    
    $
    5,301,091
    
    
    $
    
    
    
    $
    77,906,752Gross margin
    
    
    
    
    
    
    14,174,653
    
    
    
    1,094,890
    
    
    
    
    
    
    
    15,269,543Operating expenses
    
    
    1,558,922
    
    
    
    9,583,923
    
    
    
    905,050
    
    
    
    2,895
    
    
    
    12,050,790Other income (expense)  net
    
    
    (1,141,188
    )
    
    
    (267,943
    )
    
    
    (443,472
    )
    
    
    
    
    
    
    (1,852,603
    )Income tax benefit (expense)
    
    
    1,230,986
    
    
    
    (1,587,657
    )
    
    
    (12,260
    )
    
    
    
    
    
    
    (368,931
    )Net income (loss)
    
    
    (1,469,124
    )
    
    
    2,735,130
    
    
    
    (265,892
    )
    
    
    (2,895
    )
    
    
    997,219Current assets
    
    
    1,608,359
    
    
    
    23,350,285
    
    
    
    3,121,974
    
    
    
    4,642
    
    
    
    28,085,260Total assets
    
    
    1,178,952
    
    
    
    31,688,519
    
    
    
    3,422,543
    
    
    
    4,642
    
    
    
    36,289,656Interest expense
    
    
    1,476,863
    
    
    
    79,914
    
    
    
    7,193
    
    
    
    
    
    
    
    1,563,970Depreciation expense
    
    
    
    
    
    
    841,781
    
    
    
    63,886
    
    
    
    
    
    
    
    905,667Capital expenditures
    
    
    
    
    
    
    627,165
    
    
    
    38,751
    
    
    
    
    
    
    
    665,916
  11




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##### Table of Contents



For the Nine Months Ended March 31, 2010Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    61,330,769
    
    
    $
    7,806,586
    
    
    $
    1,968,706
    
    
    $
    71,106,061Gross margin
    
    
    
    
    
    
    12,300,454
    
    
    
    2,688,018
    
    
    
    78,655
    
    
    
    15,067,127Operating expenses
    
    
    1,825,382
    
    
    
    8,411,862
    
    
    
    786,777
    
    
    
    27,065
    
    
    
    11,051,086Other income (expense)  net
    
    
    (1,747,199
    )
    
    
    (186,322
    )
    
    
    (5,513
    )
    
    
    
    
    
    
    (1,939,034
    )Income tax benefit (expense)
    
    
    1,122,433
    
    
    
    (1,398,536
    )
    
    
    
    
    
    
    
    
    
    
    (276,103
    )Net income (loss)
    
    
    (2,450,148
    )
    
    
    2,303,734
    
    
    
    1,895,728
    
    
    
    51,590
    
    
    
    1,800,904Current assets
    
    
    71,124
    
    
    
    21,887,136
    
    
    
    4,345,527
    
    
    
    369,966
    
    
    
    26,673,753Total assets
    
    
    683,680
    
    
    
    31,805,154
    
    
    
    4,587,446
    
    
    
    369,966
    
    
    
    37,446,246Interest expense
    
    
    1,366,425
    
    
    
    165,936
    
    
    
    6,086
    
    
    
    
    
    
    
    1,538,447Depreciation expense
    
    
    
    
    
    
    1,454,266
    
    
    
    51,295
    
    
    
    
    
    
    
    1,505,561Capital expenditures
    
    
    
    
    
    
    205,869
    
    
    
    97,972
    
    
    
    
    
    
    
    303,841
 6. Income (Loss) Per Share
    Three Months Ended March 31,
    
    
    Nine Months Ending March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Basic and Diluted (Loss) Earnings
Per Share:(Loss) Income (Numerator)
    
    $
    (717,217
    )
    
    $
    1,121,210
    
    
    $
    779,571
    
    
    $
    1,570,764Less: Series H Preferred Stock
beneficial
conversion feature
    
    
    (3,681
    )
    
    
    (3,681
    )
    
    
    (11,043
    )
    
    
    (11,043
    )Less: Preferred stock dividends
    
    
    (390,546
    )
    
    
    (393,534
    )
    
    
    (1,191,228
    )
    
    
    (1,198,093
    )Loss attributable to common
stockholders
    
    $
    (1,111,444
    )
    
    $
    723,995
    
    
    $
    (422,700
    )
    
    $
    361,628Shares (Denominator)Weighted-average number of
common shares:Basic
    
    
    54,491,449
    
    
    
    48,864,440
    
    
    
    53,664,912
    
    
    
    51,823,026Diluted
    
    
    54,491,449
    
    
    
    787,615,123
    
    
    
    53,664,912
    
    
    
    790,573,709Earnings Per Common ShareBasic (loss) earnings per share
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    0.01Diluted (loss) earnings per share
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    0.00
  12




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##### Table of Contents



7. Cash Flows
  Nine Months Ended March 31,2011
    
    
    2010Cash paid during the period for:Interest
    
    $
    587,107
    
    
    $
    172,022Taxes
    
    
    431,168
    
    
    
    6,947Supplemental disclosure for noncash investing
and financing activity:Temporary impairment of value
of securities available for sale
    
    $
    
    
    
    $
    (90,046
    )Dividends accrued on Preferred Stock
    
    
    1,191,228
    
    
    
    1,198,093Dividends recognized from beneficial conversion feature
    
    
    11,043
    
    
    
    11,043Conversion of Series H Preferred Stock
    
    
    (86,000
    )
    
    
    Equipment purchased under capital leases
    
    
    63,452
    
    
    
    87,469
 8. Related Party Transactions
   9. Continuing Operations
    13




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 This Quarterly Report on Form 10-Q , including, without limitation, Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act). We intend that the
forward-looking statements be covered by the safe harbor for forward-looking statements in the
Exchange Act. The forward-looking information is based on various factors and was derived using
numerous assumptions. All statements, other than statements of historical fact, that address
activities, events or developments that we intend, expect, project, believe or anticipate will or
may occur in the future are forward-looking statements. Such statements are based upon certain
assumptions and assessments made by our management in light of their experience and their
perception of historical trends, current conditions, expected future developments and other factors
they believe to be appropriate. These forward-looking statements are usually accompanied by words
such as believe, anticipate, plan, seek, expect, intend and similar expressions.
 Forward-looking statements necessarily involve risks and uncertainties, and our actual results
could differ materially from those anticipated in the forward looking statements due to a number of
factors, including those set forth in Part I, Item 1A, entitled Risk Factors, of our Annual
Report on Form 10-K for the year ended June 30, 2010, as may be updated and supplemented by this
report. These factors as well as other cautionary statements made in this Quarterly Report on Form
10-Q, should be read and understood as being applicable to all related forward-looking statements
wherever they appear herein. The forward-looking statements contained in this Quarterly Report on
Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions
carefully. We caution you not to place undue reliance on the forward-looking statements contained
in this report. These statements, like all statements in this report, speak only as of the date of
this report (unless an earlier date is indicated) and we undertake no obligation to update or
revise the statements except as required by law. Such forward-looking statements are not guarantees
of future performance and actual results will likely differ, perhaps materially, from those
suggested by such forward-looking statements. In this report, the Company, the Holding
Company, we, us, and our refer to Homeland Security Capital Corporation.
 Overview
    Critical Accounting Policies and Estimates
 Goodwill
   14




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##### Table of Contents



Estimates
    Revenue Recognition
  (i)
    
    persuasive evidence of an arrangement exists,(ii)
    
    the services have been rendered and all required milestones achieved,(iii)
    
    the sales price is fixed or determinable, and(iv)
    
    collectability is reasonably assured.
    15




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##### Table of Contents



Results of Operations
 Three Month Period Ended March 31, 2011 as Compared to the Three Month Period Ended March 31, 2010
 Contract revenue
  Three Months Ended March 31,2011
    
    
    2010
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    Safety
    
    
    23,351,175
    
    
    
    20,898,415
    
    
    
    2,452,760
    
    
    
    11.7
    %Nexus
    
    
    1,289,410
    
    
    
    2,514,583
    
    
    
    (1,225,173
    )
    
    
    -48.7
    %PMX
    
    
    
    
    
    
    271,206
    
    
    
    (271,206
    )
    
    
    -100.0
    %$
    24,640,585
    
    
    $
    23,684,204
    
    
    $
    956,381
    
    
    
    4.0
    %
  Contract cost
  Three Months Ended March 31,2011
    
    
    2010
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    Safety
    
    
    18,716,108
    
    
    
    15,996,437
    
    
    
    2,719,671
    
    
    
    17.0
    %Nexus
    
    
    1,220,433
    
    
    
    1,676,851
    
    
    
    (456,418
    )
    
    
    -27.2
    %PMX
    
    
    
    
    
    
    260,451
    
    
    
    (260,451
    )
    
    
    -100.0
    %$
    19,936,541
    
    
    $
    17,933,739
    
    
    $
    2,002,802
    
    
    
    11.2
    %
  Operating expenses
  Three Months Ended March 31,2011
    
    
    2010
    
    
    Increase (Decrease)Holding Company
    
    $
    420,303
    
    
    $
    662,340
    
    
    $
    (242,037
    )
    
    
    -36.5
    %Safety
    
    
    4,028,471
    
    
    
    2,807,960
    
    
    
    1,220,511
    
    
    
    43.5
    %Nexus
    
    
    362,643
    
    
    
    237,915
    
    
    
    124,728
    
    
    
    52.4
    %PMX
    
    
    61
    
    
    
    4,366
    
    
    
    (4,305
    )
    
    
    -98.6
    %$
    4,811,478
    
    
    $
    3,712,581
    
    
    $
    1,098,897
    
    
    
    29.6
    %
  16




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##### Table of Contents



Other income and expense
  Three Months Ended March 31,2011
    
    
    2010
    
    
    (Increase) DecreaseHolding Company
    
    $
    (277,526
    )
    
    $
    (663,900
    )
    
    $
    386,374
    
    
    
    -58.2
    %Safety
    
    
    (67,962
    )
    
    
    (58,731
    )
    
    
    (9,231
    )
    
    
    15.7
    %Nexus
    
    
    (147,765
    )
    
    
    4,219
    
    
    
    (151,984
    )
    
    
    -3602.4
    %PMX
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %$
    (493,253
    )
    
    $
    (718,412
    )
    
    $
    225,159
    
    
    
    -31.3
    %
 Three Months Ended March 31,2011
    
    
    2010
    
    
    (Increase) DecreaseInterest expense
    
    $
    (501,986
    )
    
    $
    (557,670
    )
    
    $
    55,684
    
    
    
    -10.0
    %Amortization of debt offering costs
    
    
    
    
    
    
    (103,596
    )
    
    
    103,596
    
    
    
    -100.0
    %Amortization of debt discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Impairment losses
    
    
    
    
    
    
    (67,358
    )
    
    
    67,358
    
    
    
    -100.0
    %Interest and other Income
    
    
    8,733
    
    
    
    10,212
    
    
    
    (1,479
    )
    
    
    -14.5
    %$
    (493,253
    )
    
    $
    (718,412
    )
    
    $
    225,159
    
    
    
    -31.3
    %
  Net income (loss)
   17




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##### Table of Contents



Nine Month Period Ended March 31, 2011 as Compared to the Nine Month Period Ended March 31, 2010
 Contract revenue
  Nine Months Ended March 31,2011
    
    
    2010
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    Safety
    
    
    72,605,661
    
    
    
    61,330,769
    
    
    
    11,274,892
    
    
    
    18.4
    %Nexus
    
    
    5,301,091
    
    
    
    7,806,586
    
    
    
    (2,505,495
    )
    
    
    -32.1
    %PMX
    
    
    
    
    
    
    1,968,706
    
    
    
    (1,968,706
    )
    
    
    -100.0
    %$
    77,906,752
    
    
    $
    71,106,061
    
    
    $
    6,800,691
    
    
    
    9.6
    %
  Contract cost
  Nine Months Ended March 31,2011
    
    
    2010
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    Safety
    
    
    58,431,008
    
    
    
    49,030,315
    
    
    
    9,400,693
    
    
    
    19.2
    %Nexus
    
    
    4,206,201
    
    
    
    5,118,568
    
    
    
    (912,367
    )
    
    
    -17.8
    %PMX
    
    
    
    
    
    
    1,890,051
    
    
    
    (1,890,051
    )
    
    
    -100.0
    %$
    62,637,209
    
    
    $
    56,038,934
    
    
    $
    6,598,275
    
    
    
    11.8
    %
  Operating expenses
  Nine Months Ended March 31,2011
    
    
    2010
    
    
    Increase (Decrease)Holding Company
    
    $
    1,558,922
    
    
    $
    1,825,382
    
    
    $
    (266,460
    )
    
    
    -14.6
    %Safety
    
    
    9,583,923
    
    
    
    8,411,862
    
    
    
    1,172,061
    
    
    
    13.9
    %Nexus
    
    
    905,050
    
    
    
    786,777
    
    
    
    118,273
    
    
    
    15.0
    %PMX
    
    
    2,895
    
    
    
    27,065
    
    
    
    (24,170
    )
    
    
    -89.3
    %$
    12,050,790
    
    
    $
    11,051,086
    
    
    $
    999,704
    
    
    
    9.0
    %
   18




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##### Table of Contents



Other income and expense
  Nine Months Ended March 31,2011
    
    
    2010
    
    
    (Increase) DecreaseHolding Company
    
    $
    (1,141,188
    )
    
    $
    (1,747,199
    )
    
    $
    606,011
    
    
    
    -34.7
    %Safety
    
    
    (267,943
    )
    
    
    (186,322
    )
    
    
    (81,621
    )
    
    
    43.8
    %Nexus
    
    
    (443,472
    )
    
    
    (5,513
    )
    
    
    (437,959
    )
    
    
    7944.1
    %PMX
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %$
    (1,852,603
    )
    
    $
    (1,939,034
    )
    
    $
    86,431
    
    
    
    -4.5
    %
 Nine Months Ended March 31,2011
    
    
    2010
    
    
    (Increase) DecreaseInterest expense
    
    $
    (1,563,970
    )
    
    $
    (1,538,447
    )
    
    $
    (25,523
    )
    
    
    1.7
    %Amortization of debt
offering costs
    
    
    (8,000
    )
    
    
    (355,922
    )
    
    
    347,922
    
    
    
    -97.8
    %Amortization of debt
discount
    
    
    
    
    
    
    (34,053
    )
    
    
    34,053
    
    
    
    -100.0
    %Impairment losses
    
    
    (308,213
    )
    
    
    (67,358
    )
    
    
    (240,855
    )
    
    
    0.0
    %Interest and other
income
    
    
    27,580
    
    
    
    56,746
    
    
    
    (29,166
    )
    
    
    -51.4
    %$
    (1,852,603
    )
    
    $
    (1,939,034
    )
    
    $
    86,431
    
    
    
    -4.5
    %
  Net income (loss)
  Liquidity and Capital Resources
    19




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##### Table of Contents



Cash Flows From Operating Activities
  Cash Flows From Investing Activities
  Cash Flows From Financing Activities
  Off-Balance Sheet Arrangements
    20




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##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls over Financial Reporting
   21




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##### Table of Contents



PART II. OTHER INFORMATION.
 
 Item 1.
    
    Legal Proceedings.
  
 Item 1A.
    
    Risk Factors.
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3.
    
    Defaults Upon Senior Securities.
  
 Item 4.
    
    (Removed and Reserved)
 
 Item 5.
    
    Other Information.
  
 Item 6.
    
    Exhibits
 Exhibits.
 Exhibit
    
    Description31.1
    
    
    Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a) As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2
    
    
    Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a) As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1
    
    
    Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*32.2
    
    
    Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
 *
    
    Exhibit filed with this Quarterly Report.  22




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##### Table of Contents



SIGNATURES
  HOMELAND SECURITY CAPITAL CORPORATIONDate: May 13, 2011
    /s/ Michael T. BriganteMichael T. Brigante, Chief Financial Officer(Authorized Officer and Principal Financial Officer)  23