Homeland Security Capital Corp. Q2 2008 Earnings Call Transcript

Homeland Security Capital Corp. (HOMS.OB)

Q2 2008 Earnings Call

October 1, 2008 4:00 pm ET

Executives

Conrad F. Mir - The Investor Relations Group

C. Thomas McMillen - Chairman, Chief Executive Officer

Christopher P. Leichtweis - President, Director

Michael T. Brigante - Chief Financial Officer, Vice President - Finance

Analysts

[Barbara Morrow - Baronet]

Presentation

Operator

Welcome to the Homeland Security Capital Corporation transition year-end period fiscal 2008 conference call. (Operator Instructions) It is now my pleasure to introduce your host, Conrad Mir, Investor Relations Professional for Homeland Security Capital Corporation.

Conrad F. Mir

With us today from Homeland Security Capital Corporation’s management team are the company Chairman and CEO Thomas McMillen, Homeland Security Capital Corp’s President Christopher Leichtweis, and Homeland Security Capital Corp’s CFO Michael Brigante.

Before we start, I would like to remind listeners of some key points. First, during this conference call including the question and answer session management may make some forward-looking statements regarding future events and/or future financial performance of the company. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. I refer you to the documents that Homeland Security Capital Corporation files from time to time with the SEC, particularly the company’s annual report on Form 10K for the fiscal year ended July 31, 2007 filed with the SEC on October 23, 2007. Including the risk factors discussed in Item 1A of that report and the risk factor discussion in Part II Item 1A of our subsection of quarterly report on Form 10Q. These documents contain the identifying important factors that could cause actual results to differ materially from those contained in our projections. The company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results.

Secondly, if you do not have a copy of the earnings release, you may access it through the company’s website www.hscapcorp.com under the Homeland Security Capital Corporation and the Investor Information tabs.

At this time I’d like to turn the call over to Thomas McMillen.

C. Thomas McMillen

Thank you everyone for joining us today for our conference call discussing our 10K results as was filed the other day with the Securities and Exchange Commission. A lot of people are wondering why we’re filing another 10K so soon after our last one.

And the answer to that is that we bought a company, Safety and Ecology, on March 17 of this year. Safety and Ecology’s own fiscal year ended June 30. We thought it would be less disruptive to operations giving the size of this company that we amend our fiscal year and move our fiscal year to June 30 as well; hence, a requirement for an abridged 10K which covers this transitional period of six months from January 1, 2008 to June 30, 2008. So the answer to the question is this is a transitional K that was necessary because we were trying to align our fiscal year with Safety and Ecology.

We’re very, very pleased to close that transaction in March because Safety and Ecology is really our platform company moving forward as we focus on technology based radiological nuclear environmental disaster relief and security solutions to government and commercial customers.

The highlights to this K are that we generated about $23.1 million in revenue and our consolidated net loss was roughly -$259,000. There were a lot of derivative accounting issues having to do with the fact that until we closed Safety and Ecology we had some derivative accounting issues. When we closed that deal we were able to eliminate most of that.

So going forward our P&L, income statement, will be a lot cleaner and more transparent to the investor. As a result of some of those derivative accountings, you will notice that we had a one-time charge of $3.9 million from the financing that closed in March and so forth. The good news is that going forward as I said we’ll have a much cleaner financial statement to review.

I believe the pertinent information that we would like to share with the shareholders has to do with what our second quarter looked like which was the first full quarter, second quarter being the quarter from April 1 to June 30. We wanted to talk about the second quarter because it’s the only quarter that really will give us the full benefit of the Safety and Ecology acquisition.

In that quarter which is part of this K we ended up doing about $17.4 million in revenue. The second part of this transitional six months, we did $17.4 million of revenues out of the $23.1 million. So you can see having SEC in our fold has considerably enhanced our revenue base.

The good news is that our EBITDA number for that quarter, the second quarter of this transitional six-month period, was a -$175,348 very close in fact to zero which we anticipate crossing over in subsequent quarters. The $17.4 million revenue annualizes it about $70 million of revenue per year which is what we consider our baseline revenue. That $17.4 million was broken up into SEC of $16.5 million, Nexus at $900,000, and Polimatrix at zero

Most important was that our gross profit was only about 16.6% when really our target gross profit going forward should be much higher, 21% or 22%.

If you look at the components of the business, this was a rather slow quarter all the way around for our company. SEC, Safety and Ecology, was in the process of transitioning into some of their larger projects that some of them had not come on line.

Nexus has been a cyclical decline. They only generated about $900,000 for the quarter.

Polimatrix despite the fact that they signed a major contract with the State of Illinois to provide portable nuclear detection devices, they did not ship any of those devices for the quarter so they reported no revenue, which all those things we believe will change in subsequent quarters and we’ll see improved performance across the group of companies.

Of course a lot of this has to do with the economy and the slowdown in the building markets and so forth, particularly when it comes to Nexus. But we anticipate those results will improve.

The real I think positive news for the second quarter of this transitional K period is that we have booked $52.3 million in new business during this quarter. SEC had the bulk of it. They booked $50 million of new business, Nexus booked about $800,000 and Polimatrix booked about $1.5 million in new contracts. So during this quarter we booked over $50 million of revenue. And that’s a very, very significant step for us.

Overall I would say that we’re very pleased with the Safety and Ecology acquisition. We have some very high profile major projects that are turning on in this quarter that we’re in and that should be reflected in our revenues and our profits. And all of our other business lines are improving as well.

That’s a summary of this sub-K if you would. As I said the high points are in this quarter our revenues hit $17.4 million; we’re annualizing at about $70 million a year; we were very, very close to break-even at a -$175,000 EBITDA; our gross profit will increase as we move forward; and we’ve been very, very successful in executing on new business.

That is a summary of where we are. And if anybody has any questions, I’ll be prepared to take them.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Barbara Morrow - Baronet].

[Barbara Morrow - Baronet]

Could you give us a little bit more color on the $50 million that you booked? Over what time period will it be flowing in and whether it’s in the high or low end of the gross margin part of your business and what the business breakdown is? You went through it but it was so fast I couldn’t quite grasp it.

C. Thomas McMillen

I’m hopeful that Chris Leichtweis is on the call, who is our President of Homeland Security. Chris, are you on the call? He’s actually driving to a job in Kentucky at this moment.

If you go through our press release, we just announced a contract on Friday that was $25 million. Our part of that was only 45%. We have a number of projects that we have signed on and the margins on all those projects are north of 20%. So we believe that our gross margins are holding. The two biggest ones were the, and again I have to be careful because some of these things we cannot disclose the customer for sometimes governmental reasons, but there are two very sizable projects in that mix that comprise most of that $50 million.

[Barbara Morrow - Baronet]

Which part of your business are they in?

C. Thomas McMillen

They’re all in the Safety and Ecology business in our environmental remediation business. If you look over our press releases over the last couple or three weeks, you will see pretty detailed press releases on most of these. In some cases we cannot disclose the customer because of the sensitivity of the job that we’re working on.

[Barbara Morrow - Baronet]

I’m trying to get like if it’s nuclear detection or chemical or biological?

C. Thomas McMillen

No, it’s mostly remediation work. We’re doing commissioning and those kinds of jobs. It is not the equipment sales. As I’ve said the new business booked since July 1, $50 million of it was Safety and Ecology but it’s mostly decommissioning and those kinds of things and remediation contracts. So the bulk of the $52.3 million was Safety and Ecology.

[Barbara Morrow - Baronet]

Over what period of time will these flow?

C. Thomas McMillen

Most of this will run out over two to two and a half to three years.

[Barbara Morrow - Baronet]

And what proportion is government and what proportion is non-government?

C. Thomas McMillen

All this is government. And the good thing about this is these are all firm projects that have been funded. These are not projects that need funding. In other words, they’re all funded projects going forward. So this is guaranteed business that will roll in over the next two, two and a half to three years.

Operator

It appears there are no further questions.

C. Thomas McMillen

I would just like to make one follow up comment on the question that was asked. That’s all new backlog on top of our existing backlog. So this new backlog is all additive business which we’re very pleased. If we could duplicate this every quarter, we’d be very, very excited.

As I said this is a transitional K. We have really built I think off of our platform company a solid foundation to move the company forward. We’re annualizing about $70 million in revenue. We expect profitability going forward out of this new booked business. But we’re also looking at a number of acquisitions that could augment our organic growth that we are experiencing.

Again thank you all for coming to this call.

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