10Q out.
Form 10-Q for HOMELAND SECURITY CAPITAL CORP
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20-Aug-2012
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including, without limitation, Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. The forward-looking information is based on various factors and was derived using numerous assumptions. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as "believe," "anticipate," "plan," "seek," "expect," "intend" and similar expressions.
Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including those set forth in Part I, Item 1A, entitled "Risk Factors," of our Transition Report on Form 10-K for the six months ended December 31, 2011, as may be updated and supplemented by this report. These factors as well as other cautionary statements made in this Quarterly Report on Form 10-Q, should be read and understood as being applicable to all related forward-looking statements wherever they appear herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. In this report, the "Company," "the Holding Company," "we," "us," and "our" refer to Homeland Security Capital Corporation.
Overview
Homeland Security Capital Corporation was incorporated in Delaware on August 12, 1997 under the name "Celerity Systems, Inc." In August 2005, we changed our name to "Homeland Security Capital Corporation" and changed our business plan to seek acquisitions of and joint ventures with companies operating in the homeland security business sector and, until July 2011, operated soley as a provider of specialized, technology-based, radiological, nuclear, environmental, disaster relief and electronic security solutions to government and commercial customers. Our corporate headquarters is located in Arlington, Virginia.
In early 2011, we had announced that we were considering strategic alternatives to retire part or all of our debt, including the sale of one or all of our subsidiaries. On August 19, 2011, we completed the sale of substantially all of the assets of Corporate Security Solutions, Inc., the operating subsidiary of our 93%-owned Nexus Technologies Group, Inc. subsidiary and on October 31, 2011, we completed the sale of our wholly-owned subsidiary, Safety& Ecology Holdings Corporation. The proceeds from these sales were used to retire debt.
In July 2011, we expanded the scope of operations to include companies operating in the real estate services industry through our acquisition of a majority interest in a subsidiary holding company that owns, through an intermediary company, three operating companies: 1) Timios, Inc., or "Timios", which is engaged nationally in title and escrow services for mortgage origination, refinance, reverse mortgages and deed-in-lieu transactions; 2) Timios Appraisal Management, Inc. , or "TAM", which is engaged nationally in residential property appraisals; and 3) and Default Servicing USA, Inc., or "DSUSA",which is engaged nationally in real estate-owned liquidation services to institutional real estate owned, or REO, customers.
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We currently conduct our operations through one majority-owned subsidiary, Fiducia Holdings Corporation. On July 6, 2011, the Company formed Fiducia Holdings LLC (the assets of which, as of December 30, 2011, were contributed to Fiducia Holdings Corporation) and, through this subsidiary, on July 19, 2011, acquired eighty percent (80%) of Fiducia Real Estate Solutions, Inc., or FRES, a company involved in the real estate services industry. On July 5, 2011 and on July 29, 2011, FRES, through two newly-formed subsidiaries, Default Servicing USA, Inc., or DSUSA, acquired substantially all the assets of Default Servicing, Inc. and, Timios Acquisition Corporation, all of the capital stock of Timios, respectively.
The Company expects to grow these businesses both organically and through acquisitions. The Company continues to target growth companies that are generating revenues but face challenges in scaling their businesses to capitalize on growth opportunities. The Company plans to enhance the operations of these companies by helping them generate new business, grow revenues, develop superior management, build infrastructure and improve cash flows.
Results of Operations
The discussion below reflects the consolidated accounts of the Company's operations for the three and six months ended June 30, 2012. As a result of the acquisitions of DSUSA and Timios and the formation of TAM during the second half of 2011 and the reporting of the Company's former subsidiaries as discontinued operations in 2011, comparison to the previous year's three and six months results of operations would be misleading to the reader and generally not reflective of the current operations of the Company.
Where appropriate, management has attempted to add expanded discussion as to our current businesses reflected in the results of operations. These discussions may include certain details concerning each operating entity prior to their acquisition by the Company. Where this is the case, it will be noted.
Management considers Timios, DSUSA and TAM all to be operating in the same industry, real estate services. As a result, management does not measure each company as if it were its own segment.
Three Month Period Ended June 30, 2012
Revenue
For the three months ended June 30, 2012, the Company recorded revenue of $4,577,193. Of this revenue Timios recorded $4,541,336, DSUSA recorded $24,047 and TAM recorded $11,810. Timios' main source of revenue is derived from title insurance fees and escrow fees. DSUSA derives its revenue from fees associated with the management of properties, which are owned by banks or other mortgage lenders. TAM derives its revenue from residential property appraisals.
Cost of Revenue
For the three months ended June 30, 2012, the Company recorded cost of revenue of $3,988,815. Of this cost of revenue, Timios recorded $3,726,318, DSUSA recorded $42,589 and TAM recorded $219,908.
Operating expenses
For the three months ended June 30, 2012, the Company recorded operating expenses of $971,527. The Holding Company incurred operating expenses of $388,937 during this period compared to $1,388,473 for the three months ended June 30, 2011. The decrease was primarily due to lower professional fees, including director fees. Also for the three months ended June 30, 2012, Timios recorded operating expenses of $514,175, DSUSA recorded operating expenses of $18,797 and TAM recorded operating expenses of $49,618.
Operating expenses consist of personnel costs, including fringe benefits, insurance and facility costs, travel and entertainment, depreciation and amortization, marketing, professional services such as legal and accounting costs and general administrative costs. To the extent possible, the Company has eliminated costs associated with redundant services carried on separately at each location by centralizing such activities.
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Other income and expense
For the three months ended June 30, 2012, the Company recorded net other expense of $28,187. The Holding Company incurred net other expense of $34,441, which primarily consisted of interest expense reduced by interest income, compared to net other expense of $489,761 for the three months ended June 30, 2011. During the three months ended June 30, 2012, Timios recorded other income of $6,352 and DSUSA incurred other expense of $98.
Net loss
As a result of the foregoing, the Company recorded a net loss of $447,771, before losses of non-controlling interests and preferred dividends of $20,219 for the three months ended June 30, 2012. The total net loss attributable to common shareholders was $427,552 for the period.
Six Month Period Ended June 30, 2012
Revenue
For the six months ended June 30, 2012, the Company recorded revenue of $9,464,671. Of this revenue Timios recorded $9,403,305, DSUSA recorded $49,556 and TAM recorded $11,810.
DSUSA's contract with its only client at the time of acquisition expired late in 2011 and management has been in negotiations with several potential clients to replace this business.
Cost of Revenue
For the six months ended June 30, 2012, the Company recorded cost of revenue of $7,905,975. Of this cost of revenue, Timios recorded $7,380,295, DSUSA recorded $305,772 and TAM recorded $219,908.
Operating expenses
For the six months ended June 30, 2012, the Company recorded operating expenses of $1,927,227. The Holding Company incurred operating expenses of $759,455 during this period compared to $1,808,777 for the six months ended June 30, 2011. The decrease was primarily due to lower professional fees, including director fees. Also for the six months ended June 30, 2012, Timios recorded operating expenses of $1,043,559, DSUSA recorded operating expenses of $74,595 and TAM recorded operating expenses of $49,618.
Other income and expense
For the six months ended June 30, 2012, the Company recorded net other expense of $94,465. The Holding Company incurred net other expense of $73,628, which primarily consisted of interest expense reduced by interest income, compared to net other expense of $994,662 for the six months ended June 30, 2011. The decrease was primarily related to the reduction in accrued interest expense on the Company's senior debt, which was reduced by the proceeds from the sale of the Company's homeland security subsidiaries. Timios incurred other expense of $20,764 and DSUSA incurred other expense of $73 for the six months ending June 30, 2012.
Net loss
As a result of the foregoing, the Company recorded a net loss of $543,731, before losses of non-controlling interests and preferred dividends of $2,679, for the six months ended June 30, 2012. The total net loss attributable to common shareholders was $546,410 for the six month period.
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Liquidity and Capital Resources
From August 2005 through March 2008, the Company operated and acquired businesses using funding from issuance of its Common Stock, Preferred Stock and convertible debt to YA Global Investments, L.P. (formerly known as Cornell Capital, L.P.), or YA, totaling approximately $23,250,000. At June 30, 2012, the Company owed YA approximately $5,696,283, including accrued interest. In March 2008, the total debt was consolidated into three notes, each with a maturity date of March 14, 2010. The maturity date was initially extended to October 1, 2010, and then subsequently extended to July 15, 2011, by which time the Company had expected to sell its homeland security subsidiaries and retire the debt. Since none of the subsidiaries were sold by this date, YA agreed to forbearance until August 31, 2011 and then subsequently agreed to an extension of the forbearance period until September 14, 2011. On August 19, 2011, Nexus was sold and $1,733,917 of the proceeds from the sale was paid to YA. On October 31, 2011, Safety was sold and $12,651,910 of the proceeds from the sale was paid to YA. On October 26, 2011, YA agreed to an extension of the forbearance period until April 30, 2012 on the balance of the remaining debt owed them, which date was extended to June 29, 2012 on May 11, 2012. On June 15, 2012, YA agreed to an additional extension of the forbearance period until August 31, 2012. YA and the Company are continuing discussions as to different alternatives to satisfy this outstanding debt.
The Company had cash on hand of $1,775,926 at June 30, 2012. Our primary needs for cash are to repay debt owed to YA and fund our ongoing operations. Our secondary need for cash is to make additional acquisitions of businesses that provide products and services in our target industries. We do not have sufficient capital on hand to repay our debt to YA nor are we able to internally generate sufficient capital to repay such debt in full at this time. We will require significant additional capital in order to repay our debt, fund our operations and make additional acquisitions.
During the six months ended June 30, 2012, the Company had a net decrease in cash of $903,131. The Company's sources and uses of cash were as follows:
Cash Flows From Operating Activities
We used net cash of $443,722 in our operating activities during the six months ended June 30, 2012, consisting of a loss of $273,008 (net loss of $543,731 less adjustment for non-cash items of approximately $270,723), offset by net uses of cash totaling approximately $170,714 due to changes in our operating assets and liabilities.
Cash Flows From Investing Activities
We used net cash of $476,208 in our investing activities during the six months ended June 30, 2012, consisting of collections of notes receivable of $405,461. Cash was used to purchase fixed assets of $159,366 and payments on contingent consideration of $722,303.
Cash Flows From Financing Activities
We provided cash of $16,799 in our financing activities during the six months ended June 30, 2012, consisting of the net repayment of related party debt.
As of June 30, 2012, the Company had a net working capital deficit of $4,577,650.
Off-Balance Sheet Arrangements
The Company was not a party to any off-balance sheet arrangements during the quarter ended June 30, 2012.
