Timios National 10-Q 2010 Q4 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 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

(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 February 11, 2011, there were 54,491,449 shares of common stock, par value $.001 per share, issued, 50,921,018 shares of common stock outstanding and 3,570,431 shares of common stock held in treasury.

Transitional Small Business Disclosure Format (check one):Yeso Noþ

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 period as of December 31, 2010, are unaudited. The accompanying interim unaudited financial statements have been prepared by Homeland Security Capital Corporation (the “Company” or the “Holding Company”) in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the requirements for reporting on Form 10-Q. Accordingly, these interim unaudited financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended December 31, 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.

2

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

	December 31,			June 30,
	2010			2010
	(Unaudited)
Assets:
Cash	$	3,427,980		$	1,829,429
Marketable fixed income securities		—			872,427
Accounts receivable — net		22,929,795			16,764,897
Cost in excess of billings on uncompleted contracts		5,072,479			7,333,931
Other current assets		199,874			447,925
Total current assets		31,630,128			27,248,609
Fixed assets — net		1,022,477			1,129,885
Equipment held for sale		—			1,455,142
Deferred financing costs — net		—			8,000
Notes receivable — related party		439,753			430,627
Securities available for sale		—			110,826
Other non-current assets		204,977			336,499
Intangible assets — net		324,535			346,814
Goodwill		6,403,982			6,403,982
Total assets	$	40,025,852		$	37,470,384
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	10,348,140		$	8,457,186
Line of credit		1,772,000			—
Current portion of long term debt		66,000			536,025
Current portion of long term debt — related party		18,740,466			500,000
Accrued compensation		2,336,137			2,568,857
Accrued other liabilities		454,730			436,906
Billings in excess of costs on uncompleted contracts		1,070,501			1,027,500
Income taxes payable		597,687			551,941
Current portion of deferred revenue		177,545			85,327
Total current liabilities		35,563,206			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		111,647			688,593
Long term deferred revenue, less current portion		—			124,667
Dividends payable		4,265,617			3,464,934
Total liabilities		39,940,470			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		14,146,472			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		55,405,554			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		(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			153,934
Total stockholders’ deficit		(84,386	)		(1,059,210	)
Total liabilities and stockholders’ deficit	$	40,025,852		$	37,470,384

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

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

	Three Months Ended December 31,						Six Months Ended December 31,
	2010			2009			2010			2009
Net contract revenue	$	28,207,029		$	26,572,415		$	53,266,167		$	47,421,857
Contract costs		22,629,438			20,801,955			42,700,668			38,105,195
Gross profit on contracts		5,577,591			5,770,460			10,565,499			9,316,662
Operating expenses:
Marketing		109,735			131,507			171,326			198,947
Personnel		1,963,595			2,027,003			4,057,476			4,215,312
Insurance and facility costs		133,213			192,391			257,577			366,514
Rent expense to related party		86,000			86,000			172,000			172,000
Travel and transportation		77,274			92,454			163,634			190,373
Other operating costs		152,913			269,557			489,068			486,502
Depreciation and amortization		275,740			375,752			546,832			722,446
Amortization of intangible assets		11,140			11,140			22,279			22,279
Professional services		402,074			249,824			804,127			446,012
Administrative costs		296,981			246,194			554,993			518,120
Total operating expenses		3,508,665			3,681,822			7,239,312			7,338,505
Operating income		2,068,926			2,088,638			3,326,187			1,978,157
Other (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			46,534
Total 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			757,535
Income tax expense		(186,130	)		(172,129	)		(330,117	)		(202,284	)
Net income		1,375,060			1,301,100			1,636,720			555,251
Less: 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			449,554
Less 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 diluted
Basic	$	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			53,270,160
Diluted		54,491,449			536,203,500			53,260,627			53,270,160

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

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

	Six Months Ended December 31,
	2010			2009
Cash flows from operating activities:
Net income	$	1,636,720		$	555,251
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Share-based compensation expense		24,449			543,751
Depreciation		620,708			1,022,187
Amortization of intangibles		22,279			22,279
(Gain) loss on disposal of assets		(73,937	)		7,556
Impairment losses on securities available for sale		308,214			—
Amortization of debt offering costs and discounts		8,000			271,221
Changes 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			48,500
Accounts payable		1,890,955			(739,556	)
Billings in excess of costs on uncompleted contracts		43,001			681,409
Accrued interest due to related party		975,450			453,423
Accrued compensation		(232,720	)		—
Accrued other liabilities		17,824			—
Income taxes payable		45,746			182,816
Deferred 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			21,500
Sale of marketable fixed income securities		872,427			28,000
Net 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	)		1,691,000
Liquidating 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	)		1,276,733
Effect 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			2,356,534
Cash, end of year	$	3,427,980		$	1,087,259

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

5

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		7,362			—		—		—		—		—			(7,362	)		—			—			—
Dividends on Series H and Series I		—			—		—		—		—		—			(800,682	)		—			—			(800,682	)
Value of vested stock options		—			—		—		24,449		—		—			—			—			—			24,449
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
Liquidating distribution of noncontrolling interest		—			—		—		—		—		—			—			—			(65,036	)		(65,036	)
Currency translation		—			—		—		—		—		—			—			26,988			—			26,988
Net income		—			—		—		—		—		—			1,496,788			—			139,932			1,636,720
Balance, 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	)

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

6

HOMELAND SECURITY CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

December 31, 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 superior management, operations, marketing and finance. We operate businesses that provide products and services solutions, growing organically and by acquisitions. The Company targets emerging companies that are generating revenues but face challenges in scaling their businesses to capitalize on opportunities in the aforementioned industry sectors.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 31, 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 include the accounts of the Company and its wholly-owned subsidiary, Safety & Ecology Holdings Corporation (“Safety”) (including Safety’s wholly-owned United 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.

Reclassifications — Certain prior period balances have been reclassified to conform with the current period presentation.

Recent Accounting Pronouncements

In December 2010, the FASB issued Accounting Standards Updates (“ASU’s”) No. 2010-28, Intangibles — Goodwill and Other (Topic 350). This ASU gives guidance on when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts (a consensus of the FASB Emerging Issues Task Force). This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Adoption of this ASU is not expected to have a material effect on the financial position, results of operations, or cash flows of the Company.

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.

7

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.

In September 2010, the Company’s reduced the carrying value of its securities available for sale and other investments in minority interests to zero as a result of inactive and illiquid markets for the 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 these investments as permanently impaired and has recorded a loss in the amount of $308,213.

3. Income Taxes

The Company has not recorded any federal income tax expense or benefit for the three and six months ended December 31, 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.

The Company has recorded state income tax expense for certain of the jurisdictions in which it operates.

4. 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”). Of these options, 6,800,000 were previously granted at strike prices ranging from $0.08 to $0.17 and at December 31, 2010, all granted options have vested. During the three and six month periods ending December 31, 2010, no options under the 2005 Plan were granted and at December 31, 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”). Of these options, 73,850,000 were previously granted 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 December 31, 2010. During the three and six month periods ending December 31, 2010, no options under the 2008 Plan were granted and at December 31, 2010, there are 1,216,640 options available for award under the 2008 Plan. There have been no exercises of vested options under the 2008 Plan.

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

The Company granted 2,760,000 options to three directors and one consultant outside of the 2005 Plan and the 2008 Plan at strike prices ranging from $0.12 to $0.17. All of these options have vested through December 31, 2010. There have been no exercises of these options.

8

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

	December 31, 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
Forfeited		—		—		—		—		—		—
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.

On February 1, 2011, Safety purchased from certain of its employees, all of the outstanding options (which at that date were fully vested) originally granted under the Safety 2008 Employee Option Plan (the “Plan”) for a total amount of $850,000. There are 85,748 fully vested options under the Plan that remains outstanding as of February 11, 2011.

5. 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.

9

The following tables reflect the Company’s segments for the three and six month periods ended December 31, 2010 and 2009, without regard to minority interests:

For the Three Months Ended December 31, 2010
Homeland Security	Holding			Services			Services			Products
Capital Corporation -	Company			Company			Company			Company
Consolidated	(HSCC)			(Safety)			(Nexus)			(PMX)			Consolidated
Revenues	$	—		$	26,253,544		$	1,953,485		$	—		$	28,207,029
Gross margin		—			5,063,490			514,101			—			5,577,591
Operation expenses		378,542			2,768,034			362,030			59			3,508,665
Other 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	)		1,375,060
Current assets		988,543			27,194,935			3,441,948			4,702			31,630,128
Total assets		554,374			35,704,108			3,762,668			4,702			40,025,852
Interest expense		492,287			15,003			3,627			—			510,917
Depreciation expense		—			291,193			22,020			—			313,213
Capital expenditures		—			273,837			2,707			—			276,544

For the Three Months Ended December 31, 2009
Homeland Security	Holding			Services			Services			Products
Capital Corporation -	Company			Company			Company			Company
Consolidated	(HSCC)			(Safety)			(Nexus)			(PMX)		Consolidated
Revenues	$	—		$	22,344,769		$	3,209,146		$	1,018,500	$	26,572,415
Gross margin		—			4,457,618			1,272,102			40,740		5,770,460
Operation expenses		385,135			2,944,058			329,930			22,699		3,681,822
Other income (expense) — net		(536,128	)		(67,325	)		(11,956	)		—		(615,409	)
Income tax benefit (expense)		469,296			(641,425	)		—			—		(172,129	)
Net income (loss)		(451,967	)		804,810			930,216			18,041		1,301,100
Current assets		166,912			20,166,258			3,383,327			750,605		24,467,102
Total assets		101,159			31,343,452			3,620,303			750,605		35,815,519
Interest expense		429,955			59,325			1,705			—		490,985
Depreciation expense		—			638,687			25,667			—		664,354
Capital expenditures		—			110,108			52,013			—		162,121

For the Six Months Ended December 31, 2010
Homeland Security	Holding			Services			Services			Products
Capital Corporation -	Company			Company			Company			Company
Consolidated	(HSCC)			(Safety)			(Nexus)			(PMX)			Consolidated
Revenues	$	—		$	49,254,486		$	4,011,681		$	—		$	53,266,167
Gross margin		—			9,539,586			1,025,913			—			10,565,499
Operation expenses		1,138,619			5,555,452			542,407			2,834			7,239,312
Other 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	)		1,636,720
Current assets		988,543			27,194,935			3,441,948			4,702			31,630,128
Total assets		554,374			35,704,108			3,762,668			4,702			40,025,852
Interest expense		984,575			71,952			5,457			—			1,061,984
Depreciation expense		—			577,966			42,742			—			620,708
Capital expenditures		—			428,734			37,760			—			466,494

10

For the Six Months Ended December 31, 2009
Homeland Security	Holding			Services			Services			Products
Capital Corporation -	Company			Company			Company			Company
Consolidated	(HSCC)			(Safety)			(Nexus)			(PMX)		Consolidated
Revenues	$	—		$	40,432,354		$	5,292,003		$	1,697,500	$	47,421,857
Gross margin		—			7,398,476			1,850,286			67,900		9,316,662
Operation expenses		1,163,042			5,603,902			548,862			22,699		7,338,505
Other income (expense) — net		(1,083,299	)		(127,591	)		(9,732	)		—		(1,220,622	)
Income tax benefit (expense)		567,774			(770,058	)		—			—		(202,284	)
Net income (loss)		(1,678,567	)		896,925			1,291,692			45,201		555,251
Current assets		166,912			20,166,258			3,383,327			750,605		24,467,102
Total assets		101,159			31,343,452			3,620,303			750,605		35,815,519
Interest expense		873,521			102,598			4,658			—		980,777
Depreciation expense		—			988,299			33,888			—		1,022,187
Capital expenditures		—			125,182			75,622			—		200,804

6. Income (Loss) Per Share

The basic income (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 Shares, Common Stock options and warrants that can be exercised or converted, as applicable, into Common Stock. Diluted earnings per share are not indicated for the three and six month periods ended December 31, 2010 because the market price of the Company’s Common Stock, when using the treasury method, indicates that conversions or exercises would not be prudent, as the Preferred Shares and Common Stock options and warrants are “out of the money.” Diluted earnings per share are not indicated for the six month period ending December 31, 2009 because this period indicates a loss and the computation would be anti-dilutive.

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

	Three Months Ended December 31,						Six Months Ended December 31,
	2010			2009			2010			2009
Basic and Diluted Earnings (Loss) Per Share:
Income (Loss) (Numerator)	$	1,212,652		$	1,224,576		$	1,496,788		$	449,554
Less: 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			53,270,160
Diluted		54,491,449			536,203,500			53,260,627			53,270,160
Earnings Per Common Share
Basic 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

7. Cash Flows

Supplemental disclosure of cash flow information for the six month periods ending December 31, 2010 and 2009, are as follows:

	Six Months Ended December 31,
	2010			2009
Cash paid during the period for:
Interest	$	577,409		$	107,256
Taxes		230,952			6,947
Supplemental 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			804,559
Dividends paid with Preferred Stock		7,362			7,362
Conversion of Series H Preferred Stock		(86,000	)		—
Equipment purchased under capital leases		63,452			66,595

8. Related Party Transactions

Safety leases approximately 21,000 square feet of office space from a company controlled by our President. The Company recognized rent expense under this agreement of $86,006 and $172,012 during the three and six month periods ending December 31, 2010 and 2009, respectively.

On June 1, 2007, the Company loaned $500,000 to Secure America Acquisition Holdings, LLC, an entity affiliated with our Chairman and Chief Executive Officer. The loan is evidenced by a note bearing 5% interest per annum and is due on or before May 31, 2011, with no prepayment penalties. The loan is guaranteed in its entirety by our Chairman and Chief Executive Officer. At December 31, 2010 and 2009, the balance of the note, including interest, was $439,453 and $421,453, respectively. Interest income related to this note was $4,663 and $9,326 for each of the three and six month periods ended December 30, 2010 and 2009, respectively.

9. Continuing Operations

These financial statements have been prepared on a going concern basis which contemplates the realization of assets and the payment of liabilities in the ordinary 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 liabilities.

The Company has related party debt totaling $18,740,466 which is due within the next 12 months. If the Company is unable to repay its debt or extend repayment terms, the Company may cease operations. The primary source of financing for the Company since its inception has been through the issuance of equity and debt securities. As of December 31, 2010, the Company has negative working capital of $3,933,078 and stockholders’ deficit of $84,386. The Company had net income attributable to common stockholders of $688,744 for the six month period ended December 31, 2010. Management recognizes that it will be necessary to continue to generate positive cash flow from operations, gain availability to other sources of capital, and or extend related party debt terms or possibly sell one or more of its subsidiaries to continue as a going concern. In addition, Management continues to implement measures to increase profitability in operations and reduce certain operating expenses.

12

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 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 onForm 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

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.

In a publically released decision document dated January 12, 2011, the United States Small Business Administration’s Office of Hearing and Appeals (OHA) announced that it has ruled in favor of Safety concerning a small business size determination protest. The protest, originally filed in April 2010, claimed that Safety should be considered other than a small business as a result of its size as determined by headcount. The December 20, 2010 OHA finding removes any impediments, based on headcount, to Safety’s ability to bid on small business set aside contracts for the Federal Government.

13

Results of Operations

Three Month Period Ended December 31, 2010 as Compared to the Three Month Period Ended December 31, 2009

Contract revenue

For the three months ended December 31, 2010, the Company recorded contract revenue of $28,207,029 as compared to $26,572,415 recorded for the three months ended December 31, 2009. The increase of $1,634,614 is further outlined below:

	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	%

The overall increase of $1,634,614, or 6.2%, reflects significantly increased revenues in our Safety subsidiary attributable to both expanded services within existing contracts and services provided under new contracts, primarily resulting from stimulus funded programs, as compared to the prior year. The decreased revenues at Nexus and PMX reflect the winding up of several projects originally started in fiscal year 2010 in regards to Nexus and no new orders from its primary customer in regards to PMX.

Contract cost

For the three months ended December 31, 2010, the Company recorded contract cost of $22,629,438 as compared to $20,801,955 recorded for the three months ended December 31, 2009. The increase of $1,827,483 is further outlined below:

	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	%

The overall increase of $1,827,483, or 8.8%, are costs associated with the additional contract revenues noted above for Safety and comparable reductions for Nexus and PMX resulting from reduced revenue. Our gross profit on contract revenue fell from 21.7% for the three months ended December 31, 2009 to 19.8% for the three months ended December 30, 2010. This lower margin is mainly due to the initial start-up of new stimulus related projects at our Safety subsidiary and continued work on lower margin projects at our Nexus subsidiary.

Operating expenses

For the three months ended December 31, 2010, the Company recorded operating expenses of $3,508,665 as compared to $3,681,822 recorded for the three months ended December 31, 2009. The decrease of $173,157 is further outlined below:

	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

The overall decrease of $173,157, or 4.7%, is primarily due to the reduction of operating expenses at our Safety subsidiary reflecting dedicated management oversight in containing expense increases while raising revenue. The Holding Company and Nexus expenses were substantially consistent with the previous year.

Other income and expense

For the three months ended December 31, 2010, the Company recorded net other expenses of $507,736 as compared to $615,409 recorded for the three months ended December 31, 2009. The decrease in net other expenses of $107,673 is further outlined below by operating unit and functional line item:

	Three Months Ended December 31,
	2010			2009			(Increase) Decrease
Holding 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) Decrease
Interest 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	%

The overall decrease in net other expenses of $107,673, or 17.5%, mainly reflects an increase in the rate of interest on senior debt, offset by the lack of amortization of debt offerings and debt discount costs in the current year.

Net income (loss)

As a result of the foregoing, the Company recorded net income, before noncontrolling interests and preferred dividends of $1,375,060 for the three months ended December 31, 2010 as compared to net income of $1,301,100 for the three months ended December 31, 2009. The overall increase of $73,960 reflects the continued growth of the Company, particularly its Safety subsidiary.

Six Month Period Ended December 31, 2010 as Compared to the Six Month Period Ended December 31, 2009

Contract revenue

For the six months ended December 31, 2010, the Company recorded contract revenue of $53,266,167 as compared to $47,421,857 recorded for the six months ended December 31, 2009. The increase of $5,844,310 is further outlined below:

	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

The overall increase of $5,844,310, or 12.3%, reflects significantly increased revenues in our Safety subsidiary attributable to both expanded services within existing contracts and services provided under new contracts, primarily resulting from stimulus funded programs, as compared to the prior year. The decreased revenues at Nexus and PMX reflect the winding up of several projects originally started in fiscal year 2010 in regards to Nexus and no new orders from its primary customer in regards to PMX.

Contract cost

For the six months ended December 31, 2010, the Company recorded contract cost of $42,700,668 as compared to $38,105,195 recorded for the six months ended December 31, 2009. The increase of $4,595,473 is further outlined below:

	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	%

The overall increase of $4,595,473, or 12.1%, are costs associated with the additional contract revenues noted above for Safety and comparable reductions for Nexus and PMX resulting from reduced revenue. Our gross profit on contract revenue remained consistent at 19.6% for the three months ended December 31, 2009 compared to 19.8% for the three months ended December 30, 2010.

Operating expenses

For the six months ended December 31, 2010, the Company recorded operating expenses of $7,239,312 as compared to $7,338,505 recorded for the six months ended December 31, 2009. The decrease of $99,193 is further outlined below:

	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	%

The overall decrease of $99,193, or 1.4%, is primarily due to the reduction of operating expenses at our Holding Company and Safety subsidiary. The reduction in PMX’s operating expenses reflects the lack of operating revenues when compared to the prior year.

Other income and expense

For the six months ended December 31, 2010, the Company recorded net other expenses of $1,359,350 as compared to $1,220,622 recorded for the six months ended December 31, 2009. The increase in net other expenses of $138,728 is further outlined below by operating unit and functional line item:

	Six Months Ended December 31,
	2010			2009			(Increase) Decrease
Holding 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

	Six Months Ended December 31,
	2010			2009			(Increase) Decrease
Interest 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	%

The overall increase in net other expenses of $138,728, or 11.4%, mainly reflects an increased interest expense of $81,207 due to an increase in our interest rate, the permanent impairment writedown of investments of $308,213 and the reduction of interest and other income of $27,687, offset by the lack of amortization costs of $278,379 in the current year due to debt offering costs and debt discounts being fully amortized in fiscal year 2010.

Net income (loss)

As a result of the foregoing, the Company recorded net income, before noncontrolling interests and preferred dividends of $1,636,720 for the six months ended December 31, 2010 as compared to net income of $555,251 for the six months ended December 31, 2009. The overall increase of $1,081,469 reflects the growth of the Company, particularly its Safety subsidiary, during the six months ended December 31, 2010.

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 $3,427,980, a deficit in working capital of $3,993,078 and approximately $6,228,000 available for borrowing on our credit line at December 31, 2010. Our deficit in working capital is primarily the result of classifying our related party debt in current liabilities as a result of its due date of July 15, 2011, which is within twelve months of balance sheet date of this filing.

Our primary needs for cash are to fund our ongoing operations and to have cash available to make additional acquisitions of businesses that provide products and services in our target industries. While we believe that we have sufficient cash on hand and available credit to satisfy our current operating commitments, we will require significant additional funding in order to make additional acquisitions.

During the six months ended December 31, 2010, we had a net increase in cash of $1,598,551. Our sources and uses of funds were as follows:

Cash Flows From Operating Activities

We provided net cash of $1,685,364 in our operating activities during the six months ended December 31, 2010 primarily from income of $2,546,433 (net income of $1,636,720 adjusted for non-cash items of $909,713) offset by net uses of cash of $861,069 due to changes in our operating assets and liabilities.

Cash Flows From Investing Activities

We provided net cash of $1,951,658 in our investing activities during the six months ended December 31, 2010, related to the proceeds from the sale of fixed assets of $1,545,725, plus the sale of securities of $872,427 reduced by the purchase of fixed assets totaling $466,494.

Cash Flows From Financing Activities

We used net cash of $2,065,459 in our financing activities during the six months ended December 31, 2010, consisting of repayment of installment debt of $1,110,423, net repayment of Safety’s line of credit of $390,000, repayment of related party debt of $500,000 and the partial liquidation of a noncontrolling interest in a subsidiary of $65,036.

17

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.

18

PART II. OTHER INFORMATION.

Item 1. Legal Proceedings.

As of December 31, 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

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SIGNATURES

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

	HOMELAND SECURITY CAPITAL CORPORATION
Date: February 14, 2011	/s/ Michael T. Brigante
	Michael T. Brigante
	(Authorized Officer and Principal Financial Officer)

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