Timios National 10-Q 2010 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended September 30, 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

(Name of small business issuer in its charter)

Delaware	52-2050585
(State or Other Jurisdiction of Incorporation	(I.R.S. Employer Identification No.)
or Organization)
1005 North Glebe Road, Suite 550
Arlington, VA	22201
(Address of principal executive offices)	(Zip code)

(703) 528-7073
(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. Yesþ Noo

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). Yeso Noo

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 filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(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). Yeso Noþ

As of November 11, 2010, there were 54,194,268 shares of common stock, par value $.001 per share, issued, 50,623,837 shares of common stock outstanding and 3,570,431 shares of common stock held in treasury.

Transitional Small Business Disclosure Format (check one):    Yes  o    No  þ

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Operations (Unaudited)
		Condensed Consolidated Statements of Cash Flows (Unaudited)
		Condensed Consolidated Statements of Changes in Stockholders’ Deficit and Comprehensive Loss
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4(T). Controls and Procedures
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
SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

The accompanying interim condensed consolidated financial statements and notes to the consolidated financial statements for the interim periods as of September 30, 2010 and September 30, 2009, are unaudited. The accompanying interim unaudited financial statements have been prepared by Homeland Security Capital Corporation (the “Company” or the “Holding Company”) in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the requirements for reporting on Form 10-Q. Accordingly, these interim unaudited financial statements do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended September 30, 2010, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2011. The condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended June 30, 2010.

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

	September 30,			June 30,
	2010			2010
	(Unaudited)
Assets:
Cash	$	1,650,938		$	1,829,429
Marketable fixed income securities		—			872,427
Accounts receivable — net		22,154,427			16,764,897
Cost in excess of billings on uncompleted contracts		4,727,039			7,333,931
Other current assets		278,702			447,925
Total current assets		28,811,106			27,248,609
Fixed assets — net		1,058,299			1,129,885
Equipment held for sale		—			1,455,142
Deferred financing costs — net		—			8,000
Notes receivable — related party		435,090			430,627
Securities available for sale		—			110,826
Other non-current assets		241,195			336,499
Intangible assets — net		335,674			346,814
Goodwill		6,403,982			6,403,982
Total assets	$	37,285,346		$	37,470,384
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	9,701,495		$	8,457,186
Line of credit		1,270,000			—
Current portion of long term debt		66,000			536,025
Current portion of long term debt — related party		18,248,178			500,000
Accrued compensation		2,702,502			2,568,857
Accrued other liabilities		356,566			436,906
Billings in excess of costs on uncompleted contracts		924,140			1,027,500
Income taxes payable		650,429			551,941
Current portion of deferred revenue		204,061			85,327
Total current liabilities		34,123,371			14,163,742
Line of credit		—			2,162,000
Long term debt — related party, less current maturities		—			17,755,890
Long term debt, less current maturities		127,424			688,593
Long term deferred revenue, less current portion		—			124,667
Dividends payable		3,866,392			3,464,934
Total liabilities		38,117,187			38,359,826
Warrants Payable — Series H Preferred Stock		169,768			169,768
Stockholders’ Deficit
Homeland Security Capital Corporation stockholders’ deficit:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 1,559,899 and 1,559,985 shares issued and outstanding, respectively		14,142,791			14,225,110
Common stock, $0.001 par value, 2,000,000,000 shares authorized, 54,491,449 and 51,624,725 shares issued and 50,921,018 and 48,054,294 shares outstanding, respectively		54,492			51,625
Additional paid-in capital		55,393,869			55,297,972
Additional paid-in capital — warrants		272,529			272,529
Treasury stock - 3,570,431 shares at cost		(250,000	)		(250,000	)
Accumulated deficit		(70,630,230	)		(70,509,227	)
Accumulated comprehensive loss		(116,518	)		(301,153	)
Total Homeland Security Capital Corporation stockholders’ deficit		(1,133,067	)		(1,213,144	)
Noncontrolling interest		131,458			153,934
Total stockholders’ deficit		(1,001,609	)		(1,059,210	)
Total liabilities and stockholders’ deficit	$	37,285,346		$	37,470,384

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

HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)

	Three Months Ended September 30,
	2010			2009
Net contract revenue	$	25,059,138		$	20,849,442
Contract costs		20,071,230			17,303,240
Gross profit on contracts		4,987,908			3,546,202
Operating expenses:
Marketing		61,591			67,440
Personnel		2,093,881			2,188,309
Insurance and facility costs		124,364			174,123
Rent expense to related party		86,000			86,000
Travel and transportation		86,360			97,919
Other operating costs		336,155			216,945
Depreciation and amortization		271,092			346,694
Amortization of intangible assets		11,139			11,139
Professional services		402,053			196,188
Administrative costs		258,012			271,926
Total operating expenses		3,730,647			3,656,683
Operating income (loss)		1,257,261			(110,481	)
Other (expense) income:
Interest expense		(58,779	)		(61,853	)
Interest expense to related party		(492,288	)		(427,939	)
Amortization of debt discounts and offering costs		(8,000	)		(147,611	)
Impairment losses		(308,213	)		—
Other income		15,666			32,190
Total other expense		(851,614	)		(605,213	)
Income (loss) from continuing operations before income taxes		405,647			(715,694	)
Income tax expense		(143,987	)		(30,155	)
Net income (loss)		261,660			(745,849	)
Net income (loss) attributable to noncontrolling interests		22,476			(29,171	)
Net income (loss) attributable to Homeland Security Capital Corporation stockholders		284,136			(775,020	)
Less preferred dividends and other beneficial conversion features associated with preferred stock issuance		(405,139	)		(405,960	)
Net loss attributable to common stockholders of Homeland Security Capital Corporation	$	(121,003	)	$	(1,180,980	)
Loss per common share attributable to Homeland Security Capital Corporation stockholders - basic and diluted
Basic	$	(0.00	)	$	(0.02	)
Diluted	$	(0.00	)	$	(0.02	)
Weighted average shares outstanding —
Basic		52,029,806			53,270,160
Diluted		52,029,806			53,270,160

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

HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	261,660		$	(745,849	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Share-based compensation expense		12,764			273,354
Depreciation		307,495			496,572
Amortization of intangibles		11,140			11,139
(Gain) loss on disposal of assets		(74,882	)		2,111
Impairment losses on securities available for sale		308,214			—
Amortization of debt offering costs and discounts		8,000			147,611
Changes in operating assets and liabilities:
Accounts receivable		(5,389,530	)		(2,827,876	)
Costs in excess of billings on uncompleted contracts		2,606,892			517,804
Other assets		219,524			189,413
Accounts payable		1,244,309			(2,329,065	)
Billings in excess of costs on uncompleted contracts		(103,360	)		104,463
Accrued interest due to related party		487,825			436,130
Accrued compensation		133,645			92,992
Accrued other liabilities		(80,340	)		(128,113	)
Income taxes payable		98,488			—
Deferred revenue		(5,933	)		(5,702	)
Net cash provided by (used in) operating activities		45,911			(3,765,016	)
Cash flows from investing activities:
Purchase of fixed assets		(189,950	)		(38,683	)
Proceeds from sale of assets		1,545,725			5,199
Sale of marketable fixed income securities		872,427			—
Net cash provided by (used in) investing activities		2,228,202			(33,484	)
Cash flows from financing activities:
Proceeds from notes payable		—			15,280
Net borrowings (payments) on line of credit		(892,000	)		3,245,000
Repayments of related party debt		(500,000	)		—
Repayments of debt		(1,092,854	)		(223,149	)
Net cash (used in) provided by financing activities		(2,484,854	)		3,037,131
Effect of exchange rate changes on cash		32,250			(16,459	)
Net decrease in cash		(178,491	)		(777,828	)
Cash, beginning of year		1,829,429			2,356,534
Cash, end of year	$	1,650,938		$	1,578,706

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

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Deficit and Comprehensive Loss

	Homeland Security Capital Corporation Shareholders
										Additional
								Additional		Paid-In								Accumulated						Total
	Preferred			Common Stock				Paid-In		Capital -		Treasury			Accumulated			Comprehensive			Noncontrolling			Stockholders’
	Stock			Shares Issued		Amount		Capital		Warrants		Stock			Deficit			Loss			Interest			(Deficit)
Balance, July 1, 2010	$	14,225,110			51,624,725	$	51,625	$	55,297,972	$	272,529	$	(250,000	)	$	(70,509,227	)	$	(301,153	)	$	153,934		$	(1,059,210	)
Amortization of Series H warrants		3,681			—		—		—		—		—			(3,681	)		—			—			—
Dividends on Series H and Series I		—			—		—		—		—		—			(401,458	)		—			—			(401,458	)
Value of vested stock options		—			—		—		12,764		—		—			—			—			—			12,764
Preferred stock converted		(86,000	)		2,866,724		2,867		83,133		—		—			—			—			—			—
Reduction in value of securities available for sale		—			—		—		—		—		—			—			(110,825	)		—			(110,825	)
Realization of impairment in value of securities available for sale		—			—		—		—		—		—			—			263,210			—			263,210
Currency translation		—			—		—		—		—		—			—			32,250			—			32,250
Net income		—			—		—		—		—		—			284,136			—			(22,476	)		261,660
Balance, September 30, 2010	$	14,142,791			54,491,449	$	54,492	$	55,393,869	$	272,529	$	(250,000	)	$	(70,630,230	)	$	(116,518	)	$	131,458		$	(1,001,609	)

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

HOMELAND SECURITY CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

September 30, 2010

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

Organization

Homeland Security Capital Corporation (the “Company” or the “Holding Company”) is an international provider of specialized technology-based radiological, nuclear, environmental disaster relief and electronic security solutions to government and commercial customers. We are engaged in the strategic acquisition, operation, development and consolidation of companies operating in the chemical, biological, radiological, nuclear and explosive (“CBRNE”) incident response and security marketplace within the homeland security industry. We are focused on creating long-term shareholder value by taking a controlling interest in and developing our subsidiary companies through what we believe to be superior management, operations, marketing and finance. We operate businesses that provide products and services solutions, growing organically and by acquisitions. The Company targets emerging companies that are generating revenues but face challenges in scaling their businesses to capitalize on opportunities in the aforementioned industry sectors.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2011.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Safety & Ecology Holdings Corporation (“Safety”) (including Safety’s wholly-owned Untied Kingdom subsidiary Safety and Ecology Corporation Limited and majority owned subsidiary Radcon Alliance, LLC) and majority owned subsidiaries Nexus Technologies Group, Inc. (“Nexus”) and Polimatrix, Inc. (“PMX”). The Company controls each of the subsidiary boards of directors and provides extensive advisory services to the subsidiaries. Accordingly, the Company believes it exercises sufficient control over the operations and financial results of each company and consolidates the results of operations. All intercompany balances and transactions have been eliminated.

Recent Accounting Pronouncements

In August 2010, the FASB issued Accounting Standards Updates (“ASU’s”) No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies (SEC Update) and No. 2010-22, Accounting for Various Topics—Technical Corrections to SEC Paragraphs (SEC Update) Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (Topic 470). Both of these ASU’s amend, clarify and update various SEC rules, schedules, forms, timing and previous codified financial reporting policies. This guidance was effective immediately and did not have a material effect on the financial position, results of operations, or cash flows of the Company.

2. Fair Value Measurements

The Company follows Topic 820 —Fair Value Measurements and Disclosures(“FASB ASC 820”), which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to utilize the best available information. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and lowest priority to unobservable inputs (level 3 measurement). The three levels of fair value hierarchy are as follows:

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.

Level 2 — Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3 — Unobservable inputs for the asset or liability.

As of September 30, 2010, the Company reduced the carrying value of the securities it owns that are available for sale to zero as a result of inactive and illiquid markets for such securities. Additionally, the Company does not believe the quoted prices represent the actual value appurtenant to the securities. Consequently, the Company regards the value of the secutities it owns that are available for sale as permanently impaired and has recorded a loss in the amount of $263,210 for the period ended September 30, 2010.

3. Minority Interest in Ultimate Escapes, Inc.

The Company has indirectly acquired a minority equity interest in Ultimate Escapes, Inc., a luxury destination club (“UEI”) (NYSE Amex: UEI; formerly known as Secure America Acquisition Corporation, or “SAAC”), as a result of the business combination between SAAC and Ultimate Escapes Holdings, LLC, which was consummated on October 29, 2009. Through its membership interests in Secure America Acquisition Holdings, LLC (“SAAH”), the Company is deemed to beneficially own 40,912 shares, or approximately 1.5% of the outstanding capital stock of UEI, at September 30, 2010. Such shares of common stock in UEI were scheduled to be issued in exchange for the shares of SAAC owned by SAAH upon their release from escrow in October 2010. Such shares have not been released from escrow.

On September 20, 2010, UEI filed for bankruptcy protection. Management believes it is appropriate, based on the inactive and illiquid market for UEI’s common stock, to reduce the carrying value of its investment in SAAH membership units to zero for the period ended September 30, 2010. Accordingly, the Company considers its investment in SAAH’s membership units permanently impaired and has recorded a loss in the amount of $45,003 for the period ended September 30, 2010.

4. Income Taxes

The Company has not recorded any federal income tax expense or benefit for the three months ended September 30, 2010, mainly due to available federal net operating loss carryforwards. The Company has recorded an income tax valuation allowance equal to the benefit of any deferred tax asset because of the uncertain nature of realization.

5. Stock Options

Stock Options Awarded Under the 2005 Plan

There are 7,200,000 shares of common stock reserved for issuance upon exercise of options under the Company’s 2005 stock option plan (the “2005 Plan”). From August 2005 through October 2006, 6,800,000 options were granted under the 2005 Plan at strike prices ranging from $0.08 to $0.17. Of the options granted, all have vested through September 30, 2010. During the three month period ending September 30, 2010, no options under the 2005 Plan were granted and at September 30, 2010, there were 400,000 options available for award under the 2005 Plan. There have been no exercises of vested options under the 2005 Plan.

Stock Options Awarded Under the 2008 Plan

There are 75,000,000 shares of common stock reserved for issuance upon exercise of options under the Company’s 2008 stock option plan (the “2008 Plan”). In July 2008, 73,850,000 options were granted under the 2008 Plan at a strike price of $0.05. Of the options granted, 73,750,000 have fully vested, 33,360 have been exercised and 66,640 have been forfeited through September 30, 2010. During the three month period ending September 30, 2010, no options under the 2008 Plan were granted and at September 30, 2010, there were 1,216,640 options available for award under the 2008 Plan.

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

From December 2005 through May 2007, the Company granted 2,760,000 options to three directors and one consultant outside of the 2005 Plan and the 2008 Plan at strike prices ranging from $0.12 to $0.17. All of these options have vested through September 30, 2010.

Additional information about the Company’s stock option plans is summarized below:

	September 30, 2010						June 30, 2010
			Weighted Average						Weighted Average
			Exercise		Grant Date				Exercise		Grant Date
	Options		Price		Fair Value		Options		Price		Fair Value
Outstanding at beginning of period		83,310,000	$	0.056	$	0.044		75,669,374	$	0.057	$	0.049
Granted		—		—		—		—		—		—
Rescinded (Exercised)		—		—		—		7,640,626		0.050		0.036
Outstanding at end of period		83,310,000	$	0.056	$	0.044		83,310,000	$	0.056	$	0.044
Options exercisable at end of period		83,310,000	$	0.056	$	0.044		83,310,000	$	0.056	$	0.044

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of between 4.0% and 4.95%, volatility between 60% and 456% and expected lives of ten years. All options granted have a maximum three year service period.

Not included in the table above, but included in consolidated compensation expense, are options issued by our subsidiaries to purchase shares of the subsidiaries’ common stock in the future or accept cash settlements in exchange for the increased value of any vested subsidiary options. Compensation expense for these options is calculated by comparing our subsidiaries to comparable publicly traded companies in their industry for stock volatility purposes and using the Black-Scholes option-pricing model.

6. Business Segments

The Company analyzes its assets, liabilities, cash flows and results of operations by operating unit or subsidiary. In the case of our subsidiary companies, the Company relies on local management to analyze each of its controlled subsidiaries and report to us based on a consolidated entity. As a result, the Company will make its financial decisions based on the overall performance of its direct subsidiaries. Our subsidiaries derive their revenues and cash flow from different activities, (i) engineering and environmental remediation services in the case of Safety, (ii) design, installation and maintenance of electronic security systems in the case of Nexus, and (iii) sales of radiological detection products and services in the case of PMX.

The following tables reflect the Company’s segments for the three months ended September 30, 2010 and 2009, without regard to minority interests:

For the Three Months Ended September 30, 2010
	Holding			Services			Services			Products
Homeland Security	Company			Company			Company			Company
Capital Corporation - Consolidated	(HSCC)			(Safety)			(Nexus)			(PMX)			Consolidated
Revenues	$	—		$	23,000,942		$	2,058,196		$	—		$	25,059,138
Gross margin		—			4,476,096			511,812			—			4,987,908
Operating expenses		760,077			2,787,418			180,377			2,775			3,730,647
Other income (expense) — net		(586,038	)		(121,133	)		(144,443	)		—			(851,614	)
Income tax benefit (expense)		560,775			(632,016	)		(72,746	)		—			(143,987	)
Net income (loss) from continuing operations		(785,340	)		935,529			114,246			(2,775	)		261,660
Current assets		241,814			25,070,231			3,494,299			4,762			28,811,106
Total assets		(197,018	)		33,645,060			3,832,542			4,762			37,285,346
Interest expense		(492,288	)		(56,949	)		(1,830	)		—			(551,067	)
Depreciation expense		—			286,773			20,722			—			307,495
Capital expenditures		—			154,897			35,053			—			189,950

For the Three Months Ended September 30, 2009
	Holding			Services			Services			Products
Homeland Security	Company			Company			Company			Company
Capital Corporation - Consolidated	(HSCC)			(Safety)			(Nexus)			(PMX)		Consolidated
Revenues	$	—		$	18,087,585		$	2,082,857		$	679,000	$	20,849,442
Gross margin		—			2,940,858			578,184			27,160		3,546,202
Operating expenses		777,906			2,659,844			218,933			—		3,656,683
Other income (expense) — net		(547,172	)		(60,266	)		2,225			—		(605,213	)
Income tax benefit (expense)		98,478			(128,633	)		—			—		(30,155	)
Net income (loss) from continuing operations		(1,226,600	)		92,115			361,476			27,160		(745,849	)
Current assets		137,871			18,099,581			2,713,509			709,875		21,660,836
Total assets		317,810			29,681,414			2,936,751			709,875		33,645,850
Interest expense		(443,566	)		(43,273	)		(2,953	)		—		(489,792	)
Depreciation expense		—			479,217			17,355			—		496,572
Capital expenditures		—			15,074			23,609			—		38,683

7. Loss Per Share

The basic 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 Preferred Stock, Common Stock options and warrants that can be exercised or converted, as applicable, into Common Stock. Diluted earnings per share are not indicated for the three month period ending September 30, 2009, because this period indicates a loss and the computation would be anti-dilutive.

The reconciliations of the basic and diluted loss Per Share for the loss attributable to the Company’s shareholders are as follows:

	Three Months Ended September 30
	2010			2009
Basic and Diluted Loss Per Share:
Income (Loss) (Numerator)	$	284,136		$	(775,020	)
Less: Series H Preferred Stock beneficial conversion feature		(3,681	)		(3,681	)
Less: Preferred stock dividends		(401,458	)		(402,279	)
Loss attributable to common
stockholders	$	(121,003	)	$	(1,180,980	)
Shares (Denominator)
Weighted-average number of common shares:
Basic		52,029,806			53,270,160
Diluted		52,029,806			53,270,160
Loss Per Common Share
Basic loss per share	$	(0.00	)	$	(0.02	)
Diluted loss per share	$	(0.00	)	$	(0.02	)

8. Cash Flows

 Supplemental disclosure of cash flow information for the three month periods ending September 30, 2010 and 2009, are as follows:

	Three Months Ended September 30,
	2010			2009
Cash paid during the period for:
Interest	$	558,779		$	46,226
Taxes		530			6,947
Supplemental disclosure for noncash investing and financing activity:
(Impairment) recovery of value of securities available for sale	$	(110,825	)	$	76,192
Dividends accrued on Preferred Stock		401,458			402,279
Dividends paid with Preferred Stock		3,681			3,681
Conversion of Series H Preferred Stock		(86,000	)		—
Equipment purchased under capital lease		61,660			—

9. Related Party Transactions

Safety leases approximately 21,000 square feet of office space from a company controlled by our President. The Company recognized rent expense under such lease of $86,007 during each of the three month periods ended September 30, 2010 and 2009, respectively.

On June 1, 2007, the Company loaned $500,000 to SAAH, an entity affiliated with our Chairman and Chief Executive Officer. The loan is evidenced by a note bearing 5% interest per annum, which is due on or before May 31, 2011, with no prepayment penalties. The loan is guaranteed in its entirety by our Chairman and Chief Executive Officer. At September 30, 2010 and 2009, the balance of the note, including interest, was $435,090 and $416,790, respectively. Interest income related to this note was $4,663 for each of the three month periods ended September 30, 2010 and 2009, respectively.

10. Debt Extension Agreement

On September 23, 2010, the Company entered into a debt extension agreement with Y.A. Global Investments, L.P. (“YA”) to extend the maturity dates for all senior notes payable and all accrued interest from October 1, 2010 and April 1, 2011 to July 15, 2011. At September 30, 2010, the balance due to YA, including accrued interest through that date, is $18,248,178.

11. Conversion of Series H Convertible Preferred Shares

On September 17, 2010, YA converted eighty six (86) shares of Series H Convertible Preferred Stock into 2,866,724 shares of our Common Stock. At September 30, 2010, YA owns 9,574 shares of Series H Convertible Preferred Stock, which are convertible into approximately 319,130,000 shares of our Common Stock.

12. Contingencies

On April 12, 2010, Safety received a protest on an in progress Department of Energy project. The protest, made by an unsuccessful bidder for the project, is disputing Safety’s business size under the rules of the Small Business Administration (“SBA”). On August 5, 2010, the SBA ruled that Safety is “other than small for the captioned size standard” finding that Safety is affiliated to its protégé through its mentor protégé relationship and, therefore its protégé headcount should be included in Safety’s headcount to determine applicable size under the SBA guidelines. It is Safety’s strongly held position that the SBA determination is incorrect and, as such, on August 20, 2010, appealed to the SBA’s Office of Hearings and Appeals. As of the date of this filing, there have been no further determinations from the SBA as to the appeal. If Safety is determined to be “other than small for the captioned size standard” it may be excluded from future contracts requiring a small business designation.

13. Continuing Operations

The primary source of financing for the Company since its inception has been through the issuance of equity and debt securities. The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its obligations. As of September 30, 2010, the Company has a stockholders’ deficit of $1,001,609. The Company had net income of $261,660 during the three months ended September 30, 2010. The Company also has related party debt of $18,248,178, which matures July 15, 2011. Management recognizes that it will be necessary to continue to generate positive cash flow from operations, gain availability to other sources of capital or extend debt terms to continue as a going concern. The Company continues to implement measures to increase profitability on our operations and reduce certain expenses. Management also intends to continue to explore all options available to the Company, which include among other things, additional acquisitions, private placements, sale of subsidiaries and significant expense reductions where ever possible.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report onForm 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 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 onForm 10-K for the year ended June 30, 2010. These factors as well as other cautionary statements made in this Quarterly Report onForm 10-Q, should be read and understood as being applicable to all related forward-looking statements wherever they appear herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. In this report, the “Company,” “the Holding Company,” “we,” “us,” and “our” refer to Homeland Security Capital Corporation.

Overview

The Company focuses on the acquisition and development of businesses whose primary operations are in the CBRNE incident response and security marketplace of the homeland security industry. The Company’s near term focus is to grow these businesses both organically and through complementary acquisitions. The Company targets growth companies that are generating revenues but face challenges in scaling their businesses to capitalize on homeland security opportunities. The Company will enhance the operations of these companies by helping them generate new business, grow revenues, build infrastructure and improve cash flows.

The Company currently conducts its ongoing operations through one wholly owned subsidiary and two majority-owned subsidiaries. Our wholly owned subsidiary Safety, is a provider of global environmental, hazardous material and radiological infrastructure remediation and advanced construction services in the United States and the United Kingdom. Our majority owned subsidiaries include Nexus, a security integration company having a presence in the Mid-Atlantic region with a focus on the New York City, New Jersey and Pennsylvania markets and PMX, a company focused on radiological detection and isotope identification.

Results of Operations

Three Month Period Ended September 30, 2010 as Compared to the Three Month Period Ended September 30, 2009

Contract revenue

For the three months ended September 30, 2010, the Company recorded contract revenue of $25,059,138 as compared to $20,849,442 recorded for the three months ended September 30, 2009. The increase of $4,209,696 is further outlined below:

	Three Months Ended September 30
	2010		2009		Increase (Decrease)
Holding Company	$	—	$	—	$	—		—
Safety		23,000,942		18,087,585		4,913,357		27.2	%
Nexus		2,058,196		2,082,857		(24,661	)	-1.2	%
PMX		—		679,000		(679,000	)	-100.0	%
	$	25,059,138	$	20,849,442	$	4,209,696		20.2	%

The overall increase of $4,209,696, or 20.2% reflects increased revenues in our Safety subsidiary attributable mostly to new contracts in fiscal year 2011. Our PMX subsidiary did not ship any products in the quarter ended September 30, 2010.

Contract cost

For the three months ended September 30, 2010, the Company recorded contract cost of $20,071,230 as compared to $17,303,240 recorded for the three months ended September 30, 2009. The increase of $2,767,990 is further outlined below:

	Three Months Ended September 30
	2010		2009		Increase (Decrease)
Holding Company	$	—	$	—	$	—		—
Safety		18,524,846		15,146,727		3,378,119		22.3	%
Nexus		1,546,384		1,504,673		41,711		2.8	%
PMX		—		651,840		(651,840	)	-100.0	%
	$	20,071,230	$	17,303,240	$	2,767,990		16.0	%

The overall increase of $2,767,990, or 16.0%, are costs associated with the additional contract revenues noted above. Our gross profit on contract revenue improved from 17.0% for the three months ended September 30, 2009 to 19.9% for the three months ended September 30, 2010. This improved margin is mainly due to a more effective management of contract costs, specifically at our Safety subsidiary.

Operating expenses

For the three months ended September 30, 2010, the Company recorded operating expenses of $3,730,647 as compared to $3,656,683 recorded for the three months ended September 30, 2009. The increase of $73,964 is further outlined below:

	Three Months Ended September 30
	2010		2009		Increase (Decrease)
Holding Company	$	760,077	$	777,906	$	(17,829	)	-2.3	%
Safety		2,787,418		2,659,844		127,574		4.8	%
Nexus		180,377		218,933		(38,556	)	-17.6	%
PMX		2,775		—		2,775		—
	$	3,730,647	$	3,656,683	$	73,964		2.0	%

The overall increase of $73,964, or 2.0%, is primarily due to an increase in professional services during the three months ended September 30, 2010, which services were attributable to legal, accounting and advisory support, partially offset by decreases in personnel, facility and administrative expenses.

Other income and expense

For the three months ended September 30, 2010, the Company recorded net other expenses of $851,614 as compared to $605,213 recorded for the three months ended September 30, 2009. The increase in net other expenses of $246,401 is further outlined below by operating unit and functional line item:

	Three Months Ended September 30
	2010			2009			(Increase) Decrease
Holding Company	$	(586,038	)	$	(547,172	)	$	(38,866	)	7.1	%
Safety		(121,133	)		(60,266	)		(60,867	)	101.0	%
Nexus		(144,443	)		2,225			(146,668	)	-6,591.8	%
PMX		—			—			—		—
	$	(851,614	)	$	(605,213	)	$	(246,401	)	40.7	%

	Three Months Ended September 30
	2010			2009			(Increase) Decrease
Interest expense	$	(551,067	)	$	(489,792	)	$	(61,275	)	12.5	%
Amortization of debt offering costs		(8,000	)		(135,592	)		127,592		-94.1	%
Amortization of debt discount		—			(12,019	)		12,019		-100.0	%
Impairment losses		(308,213	)		—			(308,213	)	—
Interest and other income		15,666			32,190			(16,524	)	-51.3	%
	$	(851,614	)	$	(605,213	)	$	(246,401	)	40.7	%

The overall increase in net other expenses of $246,401, or 40.7%, reflects the write down of the Company’s investments (Vuance and UEI) and increased net interest expenses offset by amortization expenses not present in fiscal year 2010.

Net income (loss)

As a result of the foregoing, the Company recorded net income of $261,660 for the three months ended September 30, 2010 as compared to a net loss of $745,849 for the three months ended September 30, 2009. These results reflect improved margins on increased contract revenues, with a slight increase in operating expenses and other expenses during the current period.

Liquidity and Capital Resources

The primary source of financing for the Company since its inception has been through the issuance of common stock, preferred stock and convertible debt. The Company had cash on hand of $1,650,938, a working capital deficit of $5,312,265 and approximately $6,730,000 available for borrowing on our credit line at September 30, 2010. Our primary needs for cash are to fund our ongoing operations and to have cash available to make additional acquisitions of businesses that provide products and services in our target industries. While we believe that we have sufficient cash on hand and available credit to satisfy our current operating commitments, we will require significant additional funding in order to make additional acquisitions.

During the three months ended September 30, 2010, we had a net decrease in cash of $178,491. Our sources and uses of funds were as follows:

Cash Flows From Operating Activities

We provided net cash of $45,911 in our operating activities during the three months ended September 30, 2010 primarily from income of $834,391 (net income of $261,660 adjusted for non-cash items of $572,731) offset by net uses of cash of $788,480 due to changes in our operating assets and liabilities.

Cash Flows From Investing Activities

We provided net cash of $2,228,202 in our investing activities during the three months ended September 30, 2010, related to the proceeds from the sale of fixed assets of $1,545,725, plus proceeds from the sale of marketable fixed income securities in the amount of $872,427, reduced by the purchase of fixed assets of $189,950.

Cash Flows From Financing Activities

We used net cash of $2,484,854 from our financing activities during the three months ended September 30, 2010, consisting of the repayment of installment notes payable of $1,092,854, net payments on Safety’s line of credit of $892,000 and the repayment of related party debt of $500,000.

Off-Balance Sheet Arrangements

We do not have off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, also known as special purpose entities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide information required by this item.

Item 4(T). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the 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.

PART II. OTHER INFORMATION.

Item 1. Legal Proceedings.

As of September 30, 2010, we are not subject to any material legal proceedings.  From time to time, however, we and/or our subsidiaries may become involved in litigation and other legal proceedings relating to claims arising from our operations in the normal course of business

Item 1A. Risk Factors.

As a smaller reporting company, we are not required to provide information required by this item.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits

Exhibits.

Exhibit		Description
	31.1	Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
	31.2	Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
	32.1	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
	32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* Exhibit filed with this Quarterly Report

SIGNATURES

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

	HOMELAND SECURITY CAPITAL CORPORATION
Date: November 15, 2010	/s/ Michael T. Brigante
	Michael T. Brigante
	(Authorized Officer and Principal Financial Officer)