##### 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 December 31, 2010
 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
    
    52-2050585(State or Other Jurisdiction of Incorporation
    
    (I.R.S. Employer Identification No.)or Organization)1005 North Glebe Road, Suite 550Arlington, VA
    
    22201(Address of principal executive offices)
    
    (Zip code)
 
 Yes þ No o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 Yes o No þ
  Yes o No þ




---



TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance SheetsCondensed Consolidated Statements of Operations (Unaudited)Condensed Consolidated Statements of Cash Flows (Unaudited)Condensed Consolidated Statements of Changes in Stockholders Deficit and Comprehensive LossNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4(T). Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements.
   2




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##### Table of Contents



December 31,
    
    
    June 30,2010
    
    
    2010(Unaudited)Assets:Cash
    
    $
    3,427,980
    
    
    $
    1,829,429Marketable fixed income securities
    
    
    
    
    
    
    872,427Accounts receivable  net
    
    
    22,929,795
    
    
    
    16,764,897Cost in excess of billings on uncompleted contracts
    
    
    5,072,479
    
    
    
    7,333,931Other current assets
    
    
    199,874
    
    
    
    447,925Total current assets
    
    
    31,630,128
    
    
    
    27,248,609Fixed assets  net
    
    
    1,022,477
    
    
    
    1,129,885Equipment held for sale
    
    
    
    
    
    
    1,455,142Deferred financing costs  net
    
    
    
    
    
    
    8,000Notes receivable  related party
    
    
    439,753
    
    
    
    430,627Securities available for sale
    
    
    
    
    
    
    110,826Other non-current assets
    
    
    204,977
    
    
    
    336,499Intangible assets  net
    
    
    324,535
    
    
    
    346,814Goodwill
    
    
    6,403,982
    
    
    
    6,403,982Total assets
    
    $
    40,025,852
    
    
    $
    37,470,384Liabilities and Stockholders DeficitCurrent liabilities:Accounts payable
    
    $
    10,348,140
    
    
    $
    8,457,186Line of credit
    
    
    1,772,000
    
    
    
    Current portion of long term debt
    
    
    66,000
    
    
    
    536,025Current portion of long term debt  related party
    
    
    18,740,466
    
    
    
    500,000Accrued compensation
    
    
    2,336,137
    
    
    
    2,568,857Accrued other liabilities
    
    
    454,730
    
    
    
    436,906Billings in excess of costs on uncompleted contracts
    
    
    1,070,501
    
    
    
    1,027,500Income taxes payable
    
    
    597,687
    
    
    
    551,941Current portion of deferred revenue
    
    
    177,545
    
    
    
    85,327Total current liabilities
    
    
    35,563,206
    
    
    
    14,163,742Line of credit
    
    
    
    
    
    
    2,162,000Long term debt  related party, less current maturities
    
    
    
    
    
    
    17,755,890Long term debt, less current maturities
    
    
    111,647
    
    
    
    688,593Long term deferred revenue, less current portion
    
    
    
    
    
    
    124,667Dividends payable
    
    
    4,265,617
    
    
    
    3,464,934Total liabilities
    
    
    39,940,470
    
    
    
    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
    
    
    14,146,472
    
    
    
    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
    
    
    55,405,554
    
    
    
    55,297,972Additional paid-in capital  warrants
    
    
    272,529
    
    
    
    272,529Treasury stock  3,570,431 shares at cost
    
    
    (250,000
    )
    
    
    (250,000
    )Accumulated deficit
    
    
    (69,820,483
    )
    
    
    (70,509,227
    )Accumulated comprehensive loss
    
    
    (121,780
    )
    
    
    (301,153
    )Total Homeland Security Capital Corporation stockholders deficit
    
    
    (313,216
    )
    
    
    (1,213,144
    )Noncontrolling interest
    
    
    228,830
    
    
    
    153,934Total stockholders deficit
    
    
    (84,386
    )
    
    
    (1,059,210
    )Total liabilities and stockholders deficit
    
    $
    40,025,852
    
    
    $
    37,470,384
   3




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##### Table of Contents



Three Months Ended December 31,
    
    
    Six Months Ended December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net contract revenue
    
    $
    28,207,029
    
    
    $
    26,572,415
    
    
    $
    53,266,167
    
    
    $
    47,421,857Contract costs
    
    
    22,629,438
    
    
    
    20,801,955
    
    
    
    42,700,668
    
    
    
    38,105,195Gross profit on contracts
    
    
    5,577,591
    
    
    
    5,770,460
    
    
    
    10,565,499
    
    
    
    9,316,662Operating expenses:Marketing
    
    
    109,735
    
    
    
    131,507
    
    
    
    171,326
    
    
    
    198,947Personnel
    
    
    1,963,595
    
    
    
    2,027,003
    
    
    
    4,057,476
    
    
    
    4,215,312Insurance and facility costs
    
    
    133,213
    
    
    
    192,391
    
    
    
    257,577
    
    
    
    366,514Rent expense to related party
    
    
    86,000
    
    
    
    86,000
    
    
    
    172,000
    
    
    
    172,000Travel and transportation
    
    
    77,274
    
    
    
    92,454
    
    
    
    163,634
    
    
    
    190,373Other operating costs
    
    
    152,913
    
    
    
    269,557
    
    
    
    489,068
    
    
    
    486,502Depreciation and amortization
    
    
    275,740
    
    
    
    375,752
    
    
    
    546,832
    
    
    
    722,446Amortization of intangible assets
    
    
    11,140
    
    
    
    11,140
    
    
    
    22,279
    
    
    
    22,279Professional services
    
    
    402,074
    
    
    
    249,824
    
    
    
    804,127
    
    
    
    446,012Administrative costs
    
    
    296,981
    
    
    
    246,194
    
    
    
    554,993
    
    
    
    518,120Total operating expenses
    
    
    3,508,665
    
    
    
    3,681,822
    
    
    
    7,239,312
    
    
    
    7,338,505Operating income
    
    
    2,068,926
    
    
    
    2,088,638
    
    
    
    3,326,187
    
    
    
    1,978,157Other (expense) income:Interest expense
    
    
    (18,630
    )
    
    
    (61,030
    )
    
    
    (77,409
    )
    
    
    (107,256
    )Interest expense to related party
    
    
    (492,287
    )
    
    
    (429,955
    )
    
    
    (984,575
    )
    
    
    (873,521
    )Amortization of debt discounts and offering costs
    
    
    
    
    
    
    (138,768
    )
    
    
    (8,000
    )
    
    
    (286,379
    )Impairment losses
    
    
    
    
    
    
    
    
    
    
    (308,213
    )
    
    
    Other income
    
    
    3,181
    
    
    
    14,344
    
    
    
    18,847
    
    
    
    46,534Total other expense
    
    
    (507,736
    )
    
    
    (615,409
    )
    
    
    (1,359,350
    )
    
    
    (1,220,622
    )Income from continuing operations before
income taxes
    
    
    1,561,190
    
    
    
    1,473,229
    
    
    
    1,966,837
    
    
    
    757,535Income tax expense
    
    
    (186,130
    )
    
    
    (172,129
    )
    
    
    (330,117
    )
    
    
    (202,284
    )Net income
    
    
    1,375,060
    
    
    
    1,301,100
    
    
    
    1,636,720
    
    
    
    555,251Less: Net income attributable to
noncontrolling interests
    
    
    (162,408
    )
    
    
    (76,524
    )
    
    
    (139,932
    )
    
    
    (105,697
    )Net income attributable to Homeland
Security Capital Corporation stockholders
    
    
    1,212,652
    
    
    
    1,224,576
    
    
    
    1,496,788
    
    
    
    449,554Less preferred dividends and other beneficial conversion
features associated with preferred stock issuance
    
    
    (402,905
    )
    
    
    (405,960
    )
    
    
    (808,044
    )
    
    
    (811,921
    )Net income (loss) attributable to common stockholders
of Homeland Security Capital Corporation
    
    $
    809,747
    
    
    $
    818,616
    
    
    $
    688,744
    
    
    $
    (362,367
    )Income (loss) per common share attributable to Homeland
Security Capital Corporation stockholders 
basic and dilutedBasic
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    (0.01
    )Diluted
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.01
    )Weighted average shares outstanding Basic
    
    
    54,491,449
    
    
    
    53,270,160
    
    
    
    53,260,627
    
    
    
    53,270,160Diluted
    
    
    54,491,449
    
    
    
    536,203,500
    
    
    
    53,260,627
    
    
    
    53,270,160
   4




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##### Table of Contents



Six Months Ended December 31,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    1,636,720
    
    
    $
    555,251Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Share-based compensation expense
    
    
    24,449
    
    
    
    543,751Depreciation
    
    
    620,708
    
    
    
    1,022,187Amortization of intangibles
    
    
    22,279
    
    
    
    22,279(Gain) loss on disposal of assets
    
    
    (73,937
    )
    
    
    7,556Impairment losses on securities available for sale
    
    
    308,214
    
    
    
    Amortization of debt offering costs and discounts
    
    
    8,000
    
    
    
    271,221Changes in operating assets and liabilities:Accounts receivable
    
    
    (6,164,898
    )
    
    
    (3,511,441
    )Costs in excess of billings on uncompleted contracts
    
    
    2,261,452
    
    
    
    (1,958,411
    )Other assets
    
    
    334,570
    
    
    
    48,500Accounts payable
    
    
    1,890,955
    
    
    
    (739,556
    )Billings in excess of costs on uncompleted contracts
    
    
    43,001
    
    
    
    681,409Accrued interest due to related party
    
    
    975,450
    
    
    
    453,423Accrued compensation
    
    
    (232,720
    )
    
    
    Accrued other liabilities
    
    
    17,824
    
    
    
    Income taxes payable
    
    
    45,746
    
    
    
    182,816Deferred revenue
    
    
    (32,449
    )
    
    
    (27,074
    )Net cash provided by (used in) operating activities
    
    
    1,685,364
    
    
    
    (2,448,089
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    (466,494
    )
    
    
    (134,209
    )Proceeds from sale of assets
    
    
    1,545,725
    
    
    
    21,500Sale of marketable fixed income securities
    
    
    872,427
    
    
    
    28,000Net cash provided by (used in) investing activities
    
    
    1,951,658
    
    
    
    (84,709
    )Cash flows from financing activities:Net (payments) borrowings on line of credit
    
    
    (390,000
    )
    
    
    1,691,000Liquidating distribution of noncontrolling interest
    
    
    (65,036
    )
    
    
    Repayment of related party debt
    
    
    (500,000
    )
    
    
    Repayments of debt
    
    
    (1,110,423
    )
    
    
    (414,267
    )Net cash (used in) provided by financing activities
    
    
    (2,065,459
    )
    
    
    1,276,733Effect of exchange rate changes on cash
    
    
    26,988
    
    
    
    (13,210
    )Net increase (decrease) in cash
    
    
    1,598,551
    
    
    
    (1,269,275
    )Cash, beginning of year
    
    
    1,829,429
    
    
    
    2,356,534Cash, end of year
    
    $
    3,427,980
    
    
    $
    1,087,259
   5




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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
    
    
    7,362
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,362
    )
    
    
    
    
    
    
    
    
    
    
    Dividends on Series H and Series I
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (800,682
    )
    
    
    
    
    
    
    
    
    
    
    (800,682
    )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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,036
    )
    
    
    (65,036
    )Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,988
    
    
    
    
    
    
    
    26,988Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,496,788
    
    
    
    
    
    
    
    139,932
    
    
    
    1,636,720Balance, December 31, 2010
    
    $
    14,146,472
    
    
    
    54,491,449
    
    
    $
    54,492
    
    
    $
    55,405,554
    
    
    $
    272,529
    
    
    $
    (250,000
    )
    
    $
    (69,820,483
    )
    
    $
    (121,780
    )
    
    $
    228,830
    
    
    
    (84,386
    )
   6




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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
    7




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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
  Stock Options Awarded Outside of the 2005 Plan and the 2008 Plan
   8




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##### Table of Contents



December 31, 2010
    
    
    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
   9




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##### Table of Contents



For the Three Months Ended December 31, 2010Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    26,253,544
    
    
    $
    1,953,485
    
    
    $
    
    
    
    $
    28,207,029Gross margin
    
    
    
    
    
    
    5,063,490
    
    
    
    514,101
    
    
    
    
    
    
    
    5,577,591Operation expenses
    
    
    378,542
    
    
    
    2,768,034
    
    
    
    362,030
    
    
    
    59
    
    
    
    3,508,665Other income (expense)  net
    
    
    (277,624
    )
    
    
    (78,848
    )
    
    
    (151,264
    )
    
    
    
    
    
    
    (507,736
    )Income tax benefit (expense)
    
    
    646,235
    
    
    
    (839,811
    )
    
    
    7,446
    
    
    
    
    
    
    
    (186,130
    )Net income (loss)
    
    
    (9,931
    )
    
    
    1,376,797
    
    
    
    8,253
    
    
    
    (59
    )
    
    
    1,375,060Current assets
    
    
    988,543
    
    
    
    27,194,935
    
    
    
    3,441,948
    
    
    
    4,702
    
    
    
    31,630,128Total assets
    
    
    554,374
    
    
    
    35,704,108
    
    
    
    3,762,668
    
    
    
    4,702
    
    
    
    40,025,852Interest expense
    
    
    492,287
    
    
    
    15,003
    
    
    
    3,627
    
    
    
    
    
    
    
    510,917Depreciation expense
    
    
    
    
    
    
    291,193
    
    
    
    22,020
    
    
    
    
    
    
    
    313,213Capital expenditures
    
    
    
    
    
    
    273,837
    
    
    
    2,707
    
    
    
    
    
    
    
    276,544
 For the Three Months Ended December 31, 2009Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    22,344,769
    
    
    $
    3,209,146
    
    
    $
    1,018,500
    
    
    $
    26,572,415Gross margin
    
    
    
    
    
    
    4,457,618
    
    
    
    1,272,102
    
    
    
    40,740
    
    
    
    5,770,460Operation expenses
    
    
    385,135
    
    
    
    2,944,058
    
    
    
    329,930
    
    
    
    22,699
    
    
    
    3,681,822Other income (expense)  net
    
    
    (536,128
    )
    
    
    (67,325
    )
    
    
    (11,956
    )
    
    
    
    
    
    
    (615,409
    )Income tax benefit (expense)
    
    
    469,296
    
    
    
    (641,425
    )
    
    
    
    
    
    
    
    
    
    
    (172,129
    )Net income (loss)
    
    
    (451,967
    )
    
    
    804,810
    
    
    
    930,216
    
    
    
    18,041
    
    
    
    1,301,100Current assets
    
    
    166,912
    
    
    
    20,166,258
    
    
    
    3,383,327
    
    
    
    750,605
    
    
    
    24,467,102Total assets
    
    
    101,159
    
    
    
    31,343,452
    
    
    
    3,620,303
    
    
    
    750,605
    
    
    
    35,815,519Interest expense
    
    
    429,955
    
    
    
    59,325
    
    
    
    1,705
    
    
    
    
    
    
    
    490,985Depreciation expense
    
    
    
    
    
    
    638,687
    
    
    
    25,667
    
    
    
    
    
    
    
    664,354Capital expenditures
    
    
    
    
    
    
    110,108
    
    
    
    52,013
    
    
    
    
    
    
    
    162,121
 For the Six Months Ended December 31, 2010Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    49,254,486
    
    
    $
    4,011,681
    
    
    $
    
    
    
    $
    53,266,167Gross margin
    
    
    
    
    
    
    9,539,586
    
    
    
    1,025,913
    
    
    
    
    
    
    
    10,565,499Operation expenses
    
    
    1,138,619
    
    
    
    5,555,452
    
    
    
    542,407
    
    
    
    2,834
    
    
    
    7,239,312Other income (expense)  net
    
    
    (863,662
    )
    
    
    (199,981
    )
    
    
    (295,707
    )
    
    
    
    
    
    
    (1,359,350
    )Income tax benefit (expense)
    
    
    1,207,010
    
    
    
    (1,471,827
    )
    
    
    (65,300
    )
    
    
    
    
    
    
    (330,117
    )Net income (loss)
    
    
    (795,271
    )
    
    
    2,312,326
    
    
    
    122,499
    
    
    
    (2,834
    )
    
    
    1,636,720Current assets
    
    
    988,543
    
    
    
    27,194,935
    
    
    
    3,441,948
    
    
    
    4,702
    
    
    
    31,630,128Total assets
    
    
    554,374
    
    
    
    35,704,108
    
    
    
    3,762,668
    
    
    
    4,702
    
    
    
    40,025,852Interest expense
    
    
    984,575
    
    
    
    71,952
    
    
    
    5,457
    
    
    
    
    
    
    
    1,061,984Depreciation expense
    
    
    
    
    
    
    577,966
    
    
    
    42,742
    
    
    
    
    
    
    
    620,708Capital expenditures
    
    
    
    
    
    
    428,734
    
    
    
    37,760
    
    
    
    
    
    
    
    466,494
  10




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##### Table of Contents



For the Six Months Ended December 31, 2009Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    40,432,354
    
    
    $
    5,292,003
    
    
    $
    1,697,500
    
    
    $
    47,421,857Gross margin
    
    
    
    
    
    
    7,398,476
    
    
    
    1,850,286
    
    
    
    67,900
    
    
    
    9,316,662Operation expenses
    
    
    1,163,042
    
    
    
    5,603,902
    
    
    
    548,862
    
    
    
    22,699
    
    
    
    7,338,505Other 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)
    
    
    (1,678,567
    )
    
    
    896,925
    
    
    
    1,291,692
    
    
    
    45,201
    
    
    
    555,251Current assets
    
    
    166,912
    
    
    
    20,166,258
    
    
    
    3,383,327
    
    
    
    750,605
    
    
    
    24,467,102Total assets
    
    
    101,159
    
    
    
    31,343,452
    
    
    
    3,620,303
    
    
    
    750,605
    
    
    
    35,815,519Interest expense
    
    
    873,521
    
    
    
    102,598
    
    
    
    4,658
    
    
    
    
    
    
    
    980,777Depreciation expense
    
    
    
    
    
    
    988,299
    
    
    
    33,888
    
    
    
    
    
    
    
    1,022,187Capital expenditures
    
    
    
    
    
    
    125,182
    
    
    
    75,622
    
    
    
    
    
    
    
    200,804
 6. Income (Loss) Per Share
    Three Months Ended December 31,
    
    
    Six Months Ended December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Basic and Diluted Earnings (Loss) Per Share:Income (Loss) (Numerator)
    
    $
    1,212,652
    
    
    $
    1,224,576
    
    
    $
    1,496,788
    
    
    $
    449,554Less: Series H Preferred Stock beneficial
conversion feature
    
    
    (3,681
    )
    
    
    (3,681
    )
    
    
    (7,362
    )
    
    
    (7,362
    )Less: Preferred stock dividends
    
    
    (399,224
    )
    
    
    (402,279
    )
    
    
    (800,682
    )
    
    
    (804,559
    )Income (loss) attributable to common stockholders
    
    $
    809,747
    
    
    $
    818,616
    
    
    $
    688,744
    
    
    $
    (362,367
    )Shares (Denominator)Weighted-average number of common shares:Basic
    
    
    54,491,449
    
    
    
    53,270,160
    
    
    
    53,260,627
    
    
    
    53,270,160Diluted
    
    
    54,491,449
    
    
    
    536,203,500
    
    
    
    53,260,627
    
    
    
    53,270,160Earnings Per Common ShareBasic income (loss) per share
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    (0.01
    )Diluted loss per share
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.01
    )
  11




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##### Table of Contents



7. Cash Flows
  Six Months Ended December 31,2010
    
    
    2009Cash paid during the period for:Interest
    
    $
    577,409
    
    
    $
    107,256Taxes
    
    
    230,952
    
    
    
    6,947Supplemental disclosure for noncash investing and financing activity:Temporary impairment of value of securities available for sale
    
    $
    (110,825
    )
    
    $
    (55,413
    )Dividends accrued on Perferred Stock
    
    
    800,682
    
    
    
    804,559Dividends paid with Preferred Stock
    
    
    7,362
    
    
    
    7,362Conversion of Series H Preferred Stock
    
    
    (86,000
    )
    
    
    Equipment purchased under capital leases
    
    
    63,452
    
    
    
    66,595
 8. Related Party Transactions
   9. Continuing Operations
    12




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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
     13




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##### Table of Contents



Results of Operations
 Three Month Period Ended December 31, 2010 as Compared to the Three Month Period Ended December 31,
2009
 Contract revenue
  Three Months Ended December 31,2010
    
    
    2009
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    Safety
    
    
    26,253,544
    
    
    
    22,344,769
    
    
    
    3,908,775
    
    
    
    17.5
    %Nexus
    
    
    1,953,485
    
    
    
    3,209,146
    
    
    
    (1,255,661
    )
    
    
    -39.1
    %PMX
    
    
    
    
    
    
    1,018,500
    
    
    
    (1,018,500
    )
    
    
    -100.0
    %$
    28,207,029
    
    
    $
    26,572,415
    
    
    $
    1,634,614
    
    
    
    6.2
    %
  Contract cost
  Three Months Ended December 31,2010
    
    
    2009
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    Safety
    
    
    21,190,054
    
    
    
    17,887,151
    
    
    
    3,302,903
    
    
    
    18.5
    %Nexus
    
    
    1,439,384
    
    
    
    1,937,044
    
    
    
    (497,660
    )
    
    
    -25.7
    %PMX
    
    
    
    
    
    
    977,760
    
    
    
    (977,760
    )
    
    
    -100.0
    %$
    22,629,438
    
    
    $
    20,801,955
    
    
    $
    1,827,483
    
    
    
    8.8
    %
  Operating expenses
  Three Months Ended December 31,2010
    
    
    2009
    
    
    Increase (Decrease)Holding Company
    
    $
    378,542
    
    
    $
    385,135
    
    
    $
    (6,593
    )
    
    
    -1.7
    %Safety
    
    
    2,768,034
    
    
    
    2,944,058
    
    
    
    (176,024
    )
    
    
    -6.0
    %Nexus
    
    
    362,030
    
    
    
    329,930
    
    
    
    32,100
    
    
    
    9.7
    %PMX
    
    
    59
    
    
    
    22,699
    
    
    
    (22,640
    )
    
    
    -99.7
    %$
    3,508,665
    
    
    $
    3,681,822
    
    
    $
    (173,157
    )
    
    
    -4.7
    %
  14




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##### Table of Contents



Other income and expense
  Three Months Ended December 31,2010
    
    
    2009
    
    
    (Increase) DecreaseHolding Company
    
    $
    (277,624
    )
    
    $
    (536,128
    )
    
    $
    258,504
    
    
    
    -48.2
    %Safety
    
    
    (78,848
    )
    
    
    (67,325
    )
    
    
    (11,523
    )
    
    
    17.1
    %Nexus
    
    
    (151,264
    )
    
    
    (11,956
    )
    
    
    (139,308
    )
    
    
    1,165.2
    %PMX
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (507,736
    )
    
    $
    (615,409
    )
    
    $
    107,673
    
    
    
    -17.5
    %
 Three Months Ended December 31,2010
    
    
    2009
    
    
    (Increase) DecreaseInterest expense
    
    $
    (510,917
    )
    
    $
    (490,985
    )
    
    $
    (19,932
    )
    
    
    4.1
    %Amortization of debt
offering costs
    
    
    
    
    
    
    (126,750
    )
    
    
    126,750
    
    
    
    -100.0
    %Amortization of debt
discount
    
    
    
    
    
    
    (12,018
    )
    
    
    12,018
    
    
    
    -100.0
    %Interest and other
income
    
    
    3,181
    
    
    
    14,344
    
    
    
    (11,163
    )
    
    
    -77.8
    %$
    (507,736
    )
    
    $
    (615,409
    )
    
    $
    107,673
    
    
    
    -17.5
    %
  Net income (loss)
  Six Month Period Ended December 31, 2010 as Compared to the Six Month Period Ended December 31,
2009
 Contract revenue
  Six Months Ended December 31,2010
    
    
    2009
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    Safety
    
    
    49,254,486
    
    
    
    40,432,354
    
    
    
    8,822,132
    
    
    
    21.8
    %Nexus
    
    
    4,011,681
    
    
    
    5,292,003
    
    
    
    (1,280,322
    )
    
    
    -24.2
    %PMX
    
    
    
    
    
    
    1,697,500
    
    
    
    (1,697,500
    )
    
    
    -100.0
    %$
    53,266,167
    
    
    $
    47,421,857
    
    
    $
    5,844,310
    
    
    
    12.3
    %
  15




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##### Table of Contents



Contract cost
  Six Months Ended December 31,2010
    
    
    2009
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    Safety
    
    
    39,714,900
    
    
    
    33,033,878
    
    
    
    6,681,022
    
    
    
    20.2
    %Nexus
    
    
    2,985,768
    
    
    
    3,441,717
    
    
    
    (455,949
    )
    
    
    -13.2
    %PMX
    
    
    
    
    
    
    1,629,600
    
    
    
    (1,629,600
    )
    
    
    -100.0
    %$
    42,700,668
    
    
    $
    38,105,195
    
    
    $
    4,595,473
    
    
    
    12.1
    %
  Operating expenses
  Six Months Ended December 31,2010
    
    
    2009
    
    
    Increase (Decrease)Holding Company
    
    $
    1,138,619
    
    
    $
    1,163,042
    
    
    $
    (24,423
    )
    
    
    -2.1
    %Safety
    
    
    5,555,452
    
    
    
    5,603,902
    
    
    
    (48,450
    )
    
    
    -0.9
    %Nexus
    
    
    542,407
    
    
    
    548,862
    
    
    
    (6,455
    )
    
    
    -0.1
    %PMX
    
    
    2,834
    
    
    
    22,699
    
    
    
    (19,865
    )
    
    
    -87.5
    %$
    7,239,312
    
    
    $
    7,338,505
    
    
    $
    (99,193
    )
    
    
    -1.4
    %
  Other income and expense
  Six Months Ended December 31,2010
    
    
    2009
    
    
    (Increase) DecreaseHolding Company
    
    $
    (863,662
    )
    
    $
    (1,083,299
    )
    
    $
    219,677
    
    
    
    -20.3
    %Safety
    
    
    (199,981
    )
    
    
    (127,591
    )
    
    
    (72,390
    )
    
    
    56.7
    %Nexus
    
    
    (295,707
    )
    
    
    (9,732
    )
    
    
    (285,972
    )
    
    
    2,938.5
    %PMX
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,359,350
    )
    
    $
    (1,220,622
    )
    
    $
    (138,728
    )
    
    
    11.4
    %
  16




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##### Table of Contents



Six Months Ended December 31,2010
    
    
    2009
    
    
    (Increase) DecreaseInterest expense
    
    $
    (1,061,984
    )
    
    $
    (980,777
    )
    
    $
    (81,207
    )
    
    
    8.3
    %Amortization of debt
offering costs
    
    
    (8,000
    )
    
    
    (262,342
    )
    
    
    254,342
    
    
    
    -96.7
    %Amortization of debt
discount
    
    
    
    
    
    
    (24,037
    )
    
    
    24,037
    
    
    
    -100.0
    %Impairment losses
    
    
    (308,213
    )
    
    
    
    
    
    
    (308,213
    )
    
    
    100.0
    %Interest and other
income
    
    
    18,847
    
    
    
    46,534
    
    
    
    (27,687
    )
    
    
    -59.5
    %$
    (1,359,350
    )
    
    $
    (1,220,622
    )
    
    $
    (138,728
    )
    
    
    11.4
    %
  Net income (loss)
  Liquidity and Capital Resources
    Cash Flows From Operating Activities
  Cash Flows From Investing Activities
  Cash Flows From Financing Activities
   17




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4(T).
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls over Financial Reporting
   18




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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.
    
    Submission of Matters to a Vote of Security Holders.
  
 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  19




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##### Table of Contents



SIGNATURES
  HOMELAND SECURITY CAPITAL CORPORATIONDate: February 14, 2011
    /s/ Michael T. BriganteMichael T. Brigante(Authorized Officer and Principal Financial Officer)  20