Homeland Security Network, Inc. (Form: 10-Q, Received: 05/20/2009 13:12:38)

        

 

 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


———————

FORM 10-Q

———————


 

 

   x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2009

 

Or

 

   o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 



Homeland Security Network, Inc.

(Exact name of small business issuer as specified in its charter)

———————


 

 

 

Nevada

000-15216

86-0892913

(State or Other Jurisdiction

(Commission

(I.R.S. Employer

of Incorporation)

File Number)

Identification No.)

 

7920 Beltline Road, Suite 770

 

Dallas, TX 75254

(Address of Principal Executive Office) (Zip Code)

 

(972) 386-6667

(Issuer’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

———————

Securities registered under Section 12(g) of the Exchange Act:


Common Stock, Par Value of $.001 per Share

(Title of Class)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. Yes   þ      No   o


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).Yes   o No      þ      


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. (Check one):




Large accelerated filer

Accelerated filer

o

o


Non-accelerated filer

Smaller reporting company

o

þ




     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   o      No   þ


APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 323,002,717

 




HOMELAND SECURITY NETWORK, INC.

FORM 10-Q

QUARTER ENDED June 30, 2009

 

 

 

 

 

 

 

INDEX

 

 

 

 

 

  

 

  

Page

PART I - FINANCIAL INFORMATION

  

3

 

 

 

Item 1.

  

Financial Statements

  

3

 

 

 

 

  

Balance Sheets as of June 30, 2009 and December 31, 2008 (Unaudited)

  

3

 

 

 

 

  

Statements of Operations: Three Months Ended June 30, 2009 and 2008 (Unaudited)

  

4

 

 

 

 

 

Statements of Operations: Six Months Ended June 30, 2009 and 2008 (Unaudited)

 

5

 

 

 

 

 

 

  

Statements of Cash Flows: Six Months Ended June 30, 2009 and 2008 (Unaudited)

  

6

 

 

 

 

  

Notes to Financial Statements

  

7

 

 

 

Item 2.

  

Management’s Discussion and Analysis

  

19

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risks

  

23

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

23

 

 

 

Item 4T.

       Controls and Procedures

      23

 

 

 

PART II - OTHER INFORMATION

  

24

 

 

 

Item 1.

  

Legal Proceedings

  

24

 

 

 

Item 1A.

       Risk Factors

24

 

 

 

Item 2.

  

Unregistered Sale of Equity Securities and Use of Proceeds

  

27

 

 

 

Item 3.

      Default Upon Senior Securities

28

 

 

 

Item 4.

       Submission of Matters to Vote of Security Holders

28

 

 

 

Item 5.

       Other Information

28

 

 

 

Item 6.

  

Exhibits

  

28

 

 

 

SIGNATURES

  

29


 

 







 

PART I - FINANCIAL INFORMATION


Item 1. Financial Statements


HOMELAND SECURITY NETWORK, INC.

BALANCE SHEETS

(Unaudited)


 

 

 

 

 

 

 

 

 

 

June 30,

2009

 

December 31,

2008

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash

 

$

1,031

 

$

857

 

Accounts receivable – trade

 

 

10,398

 

 

8,278

 

Accounts receivable from related parties

 

 

2,300

 

 

-

 

Prepaid expenses

 

 

2,700

 

 

-

 

Inventory

 

 

-

 

 

 25,409

 

Total current assets

 

 

16,429

 

 

34,544

 

Property, plant and equipment, net of accumulated depreciation

 

 

73,648

 

 

93,946

 

Capitalized software, net of accumulated amortization

 

 

75,842

 

 

87,511

 

Other intangible assets

 

 

21,500

 

 

21,500

 

Investment in joint venture

 

 

780,000

 

 

780,000

 

Other long-term assets

 

 

1,124

 

 

1,124

 

 

 

 

 

 

 

 

 

Total assets

 

$

968,543

 

$

1,018,625

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

1,286,180

 

$

1,310,395

 

Accounts payable and accrued liabilities to related parties

 

 

803,306

 

 

863,055

 

Advances from related parties

 

 

777,586

 

 

760,786

 

Current portion of notes payable to related parties

 

 

998,224

 

 

998,224

 

Current portion of notes payable

 

 

409,500

 

 

252,000

 

Amounts payable to credit unions

 

 

71,032

 

 

71,032

 

Line of credit

 

 

166,085

 

 

166,085

 

Total current liabilities

 

 

4,511,913

 

 

4,421,577

 

 

 

 

 

 

 

 

 

Long term notes payable, net of current portion

 

 

-

 

 

50,000

 

 

 

 

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

Series A cumulative convertible preferred stock, $.001 par value, 10,000,000 shares authorized, 4,086,856 issued and outstanding

 

 

4,087

 

 

4,087

 

Series B cumulative convertible preferred stock, no par value, 5% non-cumulative; liquidation preference of $14.64 per share; 2,000,000 shares authorized, 1,621,642 issued and outstanding

 

 

352,643

 

 

352,643

 

Common Stock, par value $.001; 400,000,000 shares authorized, 323,002,717 and 310,402,717 shares issued and outstanding

 

 

323,003

 

 

310,403

 

Additional paid-in-capital

 

 

24,338,081

 

 

23,955,181

 

Accumulated deficit

 

 

(28,161,444

)

 

(27,675,526

)

 

 

 

(3,143,630

)

 

(3,053,212

)

Less treasury at cost, 1,817,000 shares

 

 

(399,740

)

 

(399,740

)

Total shareholders’ deficit

 

 

(3,543,370

 

(3,452,952

)

Total liabilities and shareholders’ deficit

 

$

968,543

 

$

1,018,625

 


The accompanying notes are an integral part of these Financial Statements.









HOMELAND SECURITY NETWORK, INC.

STATEMENTS OF OPERATIONS

(Unaudited)


 

 

 

 

 

 

 

 

 

 

   For the Three Months Ended

June 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Sales

 

$

                  8,568

 

$

12,510

 

Cost of goods sold

 

 

                26,367

 

 

6,834

 

Gross margin - product sales

 

 

 (17,799)

 

 

5,676

 

 

 

 

 

 

 

 

 

Other income

 

 

                        59

 

 

1,073

 

Gross margin

 

$

(17,740)

 

$

6,749

 

Expenses:

 

 

 

 

 

 

 

Compensation and benefits

 

 

               105,603

 

 

123,388

 

Office occupancy and equipment

 

 

                 38,542

 

 

32,892

 

Professional and consulting fees

 

 

                 44,032

 

 

30,934

 

Sales and product development

 

 

                   1,800

 

 

391,756

 

Depreciation and amortization

 

 

                16,016

 

 

11,874

 

Marketing expense

 

 

                        -

 

 

29,039

 

Other operating expense

 

 

                   1,310

 

 

17,124

 

Debt issuance and settlement costs

 

 

                        -

 

 

169,882

 

Total expenses

 

 

               207,303

 

 

806,889

 

Loss from Operations

 

$

              (225,043

)

$

(800,140

)

 

 

 

 

 

 

 

 

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(29,624

 

(36,240

)

Total other income (loss)

 

 

(29,624

 

(36,240

)

 

 

 

 

 

 

 

 

Net loss

 

(254,667

)

(836,380

)

Net loss per share, basic and diluted

 

$

(0.001

)

(0.003

)

Weighted average shares outstanding, basic and diluted

 

 

322,689,530

 

 

304,118,458

 


The accompanying notes are an integral part of these Financial Statements.

 

 

 

 

 



    







HOMELAND SECURITY NETWORK, INC. AND SUBSIDIARIES

STATEMENTS OF OPERATIONS

(Unaudited)


 

 

 

 

 

 

 

 

 

 

  For the Six Months Ended

June 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Sales

 

$

               19,296

 

$

34,083

 

Cost of goods sold

 

 

               29,120

 

 

14,263

 

Gross margin - product sales

 

 

(9,824

 

19,820

 

 

 

 

 

 

 

 

 

Other income

 

 

                    665

 

 

2,611

 

Gross margin

 

$

(9,159

)

$

22,431

 

Expenses:

 

 

 

 

 

 

 

Compensation and benefits

 

 

            211,206

 

 

225,991

 

Office occupancy and equipment

 

 

               81,353

 

 

41,855

 

Professional and consulting fees

 

 

               71,032

 

 

160,934

 

Sales Development

 

 

               13,942

 

 

457,396

 

Depreciation and amortization

 

 

               31,967

 

 

17,840

 

Marketing expense

 

 

                     -

 

 

30,750

 

Other debt settlement fees

 

 

  5,000

 

 

169,882

 

Other operating expense

 

 

   4,225

 

 

21,918

 

Total expenses

 

 

             418,725

 

 

1,126,566

 

Loss from operations

 

$

(427,884

)

$

(1,104,135

)

 

 

 

 

 

 

 

 

Other income (loss):

 

 

 

 

 

 

 

Gain on cancellation of debt

 

 

-

 

 

-

 

Loss on disposition of assets

 

 

-

 

 

-

)

Interest expense

 

 

(58,034

 

(62,564

)

Total other income (loss)

 

 

(58,034

 

(62,564

)

 

 

 

 

 

 

 

 

Net loss

 

(485,918

)

(1,166,789

)

Net loss per share, basic and diluted

 

$

(0.002

)

(0.004

)

Weighted average shares outstanding, basic and diluted

 

 

      319,454,651

 

 

294,128,011

 



The accompanying notes are an integral part of these Financial Statements.

 





  

HOMELAND SECURITY NETWORK, INC

STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

June 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(485,918

)

$

(1,166,789

)

Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

31,967

 

 

17,840

 

Common stock issued for services and compensation

 

 

28,000

 

 

690,350

 

Common stock issued for debt settlement fees

 

 

5,000

 

 

169,882

 

Common stock issued in lieu of interest

 

 

 -

 

 

5,000

 

Inventory write-off

 

 

25,409

 

 

-                 

 

Changes in:

 

 

 

 

 

 

 

Accounts receivable – trade

 

 

(2,120

)

 

(384

)

Accounts receivable from related parties

 

 

(2,300

)

 

(802,725

)

Prepaid expenses

 

 

(2,700

 

(20,000

)

Inventory

 

 

 

 

 

3,793

 

Accounts payable and other accrued expenses

 

 

278,536

 

 

36,623

 

 

 

 

 

 

 

 

 

Net cash provided (used) in operating activities

 

 

(124,126

)

 

(1,066,410

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Investment in joint venture

 

 

-

 

 

-

 

Purchases of property and equipment

 

 

-

 

 

(104,275

)

Net cash used in investing activities

 

 

-

 

 

(104,275

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Advances from related parties

 

 

16,800

 

 

783,450

 

Borrowings (repayment) under line of credit

 

 

-

 

 

(8,000

)

Proceeds from notes payable

 

 

107,500

 

 

400,000

 

Net cash provided by financing activities

 

 

124,300

 

 

1,175,450

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

174

 

 

4,765

 

Cash beginning of the quarter

 

 

857

 

 

833

 

Cash end of the quarter

 

$

1,031

 

$

5,598

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

     Stock issued to settlement accounts payable and accrued expenses

 

$

362,500

 

$

-

 

     Stock issued to settle related party advances

 

$

-

 

$

400,906

 

     Stock issued to settle note payable

 

$

-

 

$

436,142

 

     Stock issued to acquire intangible assets

 

 

 

 

$

215,000

 

 

The accompanying notes are an integral part of these Financial Statements.

 

 




HOMELAND SECURITY NETWORK, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS


Note 1. Basis of Presentation


The financial information presented in this report comprises the financial information (i) for the three and six months ended June 30, 2009 and (ii) for the three and six months ended June 30, 2008.


Homeland Security Network, Inc., or “HSNI”, or “the Company”, without audit, has prepared the accompanying interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.


In the opinion of HSNI’s management, the financial statements include all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The results of operations for the period ended June 30, 2009 are not necessarily indicative of operating results expected for the full year or future interim periods.

 

Note 2. Significant Accounting Policies


Use of Estimates

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. When sources of information regarding the carrying values of assets, liabilities and reported amounts of revenue and expenses are not readily apparent, HSNI bases its estimates on historical experience and on various other assumptions that HSNI’s management believes to be reasonable for making judgments. HSNI evaluates all of its estimates on an on-going basis and may consult outside experts to assist in HSNI’s evaluations. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Actual results could differ from those estimates.


Revenue Recognition

The Company recognizes revenue principally on two types of transactions – sales of products and wireless communication service fees. The products sold and bundled in the product offering include a radio transmitter, hosted software, and a data transmission network. Revenue arrangements are accounted for under EITF No. 00-21: Revenue Arrangements with Multiple Deliverables since the company hosts the software and customers do not have the option to take possession of the software during the hosting period.   The Company believes the multiple deliverable arrangements meets the separate units of accounting criteria under paragraph 9 of EITF No. 00-21. Accordingly revenue is recognized for the multiple deliverable arrangements as separate units of accounting since the radio transmitter can be used for purposes other than those associated with the service provided.  The units are manufactured for the Company by a subcontractor.  This subcontractor makes these units for other parties and they are sold with different programming.  The Company’s units could be reprogrammed by its customers and then used for other purposes.  Thus, the Company feels that this fact establishes that the delivered items should be recognized under the rules for separate units of accounting.  Accordingly the Company’s product meets the three criteria established in paragraph 9 as follows: 1) the delivered item has value on a standalone basis; 2) there is objective and reliable evidence of the fair value of the undelivered items, since many firms provide similar services on both universal and custom devices; and 3) there is no general right of return.


In accordance with guidance provided by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, or SAB No. 104, Revenue Recognition , revenue is recognized when all of the following are met: (i) persuasive evidence of an arrangement exists, (ii) title and risk of loss have passed, (iii) delivery has occurred or the services have been rendered, (iv) the sales price is fixed or determinable and (v) collection is reasonably assured.


The Company generally recognizes revenue on products sales upon shipment, which is prior to the installation of the related products on the consumer’s vehicle or other valuable assets, since the company is not responsible for the installation of the product and the revenue recognized is not conditioned on the installation.  The Company’s policy is that there is no general right of return.


For revenues relating to the sale of wireless communication service, subscriptions are recognized over the life of the contract.  The term of service contracts offered ranges from 1 to 36 months with most customers being billed and making payments on a monthly basis.





Accounts Receivable

Accounts receivable relating to the Company’s tracking device segment consist of payments due from users of the products.  In the normal course of business, the Company monitors the financial condition of the Company’s customer base.  As of June 30, 2009 and December 31, 2008, the Company has recorded a provision for uncollectible accounts of $133,250 and $133,250, respectively, related to a long-outstanding balance.  The account deemed uncollectible relates to an individual customer; the Company has a note payable outstanding to an affiliated entity of the customer with a principal balance of $141,875 and $141,875 as of June 30, 2009 and December 31, 2008, respectively. As the note payable terms do not have a right of offset, the Company has reserved the balance in full in accordance with its own accounting policies; however, the Company believes it has a legal right of offset if the affiliated entity of the customer pursues further collection efforts on the notes payable balance.


Inventory

Inventory consists of the radio transmitter units sold in the GPS business and carried at cost.


 Property, Plant and Equipment

Furniture and equipment are carried at cost net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of the assets, which is three years.  Leasehold improvements are carried at cost net of accumulated depreciation. Depreciation is calculated using the straight-line method over the life of the lease.


Capitalized Software

The Company capitalizes certain computer software costs, after technological feasibility has been established.  These costs are amortized utilizing the straight-line method over the software’s economic life, which has been estimated at five years.  Development costs of the software are accounted for in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP 98-1”).  SOP 98-1 permits capitalization of software costs if they are expenditures related to the applications development.   In the past, and prospectively, the Company has and will capitalize expenditures directly related to the development of applications.  For the six-month periods ended June 30, 2009 and June 30, 2008, no expenditures relating to application development were capitalized by the Company.


Goodwill and Intangible Assets

Goodwill and intangible assets are accounted for in accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS No. 142, goodwill and indefinite lived intangible assets are not amortized but instead are reviewed annually for impairment, or more frequently, if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their estimated useful lives. The Company tests for impairment whenever events or changes in circumstances indicate that the carrying amount of goodwill or other intangible assets may not be recoverable, or at least annually at December 31 of each year. These tests are performed at the reporting unit level using a two-step, fair-value based approach. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, a second step is performed to measure the amount of impairment loss.  The second step allocates the fair value of the reporting unit to the Company's tangible and intangible assets and liabilities.  This derives an implied fair value for the reporting unit's goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized equal to that excess.  In the event that the Company determines that the value of goodwill or other intangible assets have become impaired, the Company will incur a charge for the amount of the impairment during the fiscal quarter in which the determination is made.


Investment in Joint Venture

In March 2008, the Company entered into a joint venture agreement with Huma-Clean, LLC.  Under the terms of the agreement, the initial funding for the venture was to be $800,000, which was to be advanced in several installments by the Company.  This funding was to be in the form of a loan that will be repaid out of the initial proceeds of the venture.  Any income or loss generated by the joint venture is to be allocated 50% to the Company and 50% to Huma-Clean, LLC.  As of June 30, 2009 and December 31, 2008, the Company has advanced $780,000 and $780,000, respectively, under this agreement, which has been recorded on a cost basis.  The investment has not been recorded on an equity method basis because of the Company’s inability to exercise significant influence over the venture.


Deferred financing costs

The Company capitalizes costs associated with the issuance of debt instruments. These costs are amortized on a straight-line basis over the term of the related debt instruments.


Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are generally recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and net operating loss carry forwards.


Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is



recognized in income in the period that includes the enactment date. In addition, a valuation allowance has been established to reduce any deferred tax asset in which the Company is not able to determine on a more likely than not basis that the deferred tax asset will be realized.


Long-Lived Assets

HSNI accounts for its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS No. 144”) which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the undiscounted future cash flows is less than the carrying amount of the asset or asset group, an impairment loss is recognized for the difference between the estimated fair value and the carrying value of the asset or asset group.


Fair Value of Financial Instruments

On September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which addresses standardizing the measurement of fair value for companies who are required to use a fair value measure for recognition or disclosure purposes.  The FASB defines fair value as “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.”  The Company’s adoption of the required portions of SFAS No. 157 as of January 1, 2008 did not have a material impact on the Company’s financial position, results of operations and cash flows.  In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), permitting entities to delay application of SFAS No. 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and nonfinancial liabilities, except for items recognized or disclosed at fair value on a recurring basis.  The Company adopted the application of SFAS No. 157 to nonfinancial assets and liabilities effective January 1, 2009; this did not have a material effect on the Company’s financial condition or results of operations.


SFAS No. 157 established a fair value hierarchy to prioritize the inputs used in valuation techniques into three levels as follows.  The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).


·

Level 1 – Observable inputs that reflect quoted prices in active markets for identical assets or liabilities in active markets.


·

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


·

Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data.


At June 30, 2009, the Company’s assets and liabilities reported at fair value utilizing Level 1 inputs include cash and cash equivalents. For these items, quoted current market prices are readily available.  The Company does not currently have any financial instruments utilizing Level 2 and Level 3 inputs.


The following table presents information about the Company’s fair value hierarchy for financial assets as of June 30, 2009:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

Active Markets for Identical Assets

(Level 1)

 

Significant Other Observable Inputs

(Level 2)

 

Significant

Unobservable Inputs

(Level 3)

 

Total

 

 

 

 

 

 

 

 

Cash and cash equivalents

$                   1,031

 

-

 

-

 

$                 1,031

Total assets

$                   1,031

 

-

 

-

 

$                 1,031



The carrying amounts of trade receivables and payables, accrued expenses and other current liabilities approximate fair value due to their short-term nature.  


In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which permits companies to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently measured at fair value.  Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings at each subsequent reporting date.  Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred.  The Company did not elect the fair value option for any of its existing financial instruments other than those already measured at fair value.  Therefore, the Company’s adoption of SFAS No. 159 as of January 1, 2008 did not have an impact on the Company’s financial position, results of operations or cash flows.




Concentrations of Credit Risk

The Company maintains its cash with high credit quality financial institutions. The Federal Deposit Insurance Corporation secures each depositor up to $250,000.


Stock-Based Compensation

Prior to January 1, 2006, the Company elected to follow Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for our employee and director stock options, as permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company accounted for stock-based compensation for non-employees under the fair value method prescribed by SFAS No. 123. Effective January 1, 2006, The Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payments, (“SFAS No. 123(R)”) for all share-based payment awards to employees and directors including stock options, restricted stock units and employee stock purchases related to our employee stock purchase plan. In addition, the Company has applied the provisions of Staff Accounting Bulletin No. 107 (SAB No. 107), issued by the Securities and Exchange Commission, in our adoption of SFAS No. 123(R).

The Company adopted SFAS No. 123(R) using the modified-prospective-transition method. Under this transition method, stock-based compensation expense recognized after the effective date includes: (1) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the measurement date fair value estimate in accordance with the original provisions of SFAS No. 123, and (2) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the measurement date fair value estimate in accordance with the provisions of SFAS No. 123(R). Results from prior periods have not been restated and do not include the impact of SFAS No. 123(R). For the six-month periods ending June 30, 2009 and June 30, 2008, the Company recognized no stock-based compensation expense under SFAS No. 123(R) relating to employee and director stock options, restricted stock units or the employee stock purchase plan.

Stock-based compensation expense recognized each period is based on the greater of the value of the portion of share-base payment awards under the straight-line method or the value of the portion of share-based payment awards that is ultimately expected to vest during the period. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Upon adoption of SFAS No. 123(R), the Company elected to use the Black-Scholes-Merton option-pricing formula to value share-based payments granted to employees subsequent to January 1, 2006 and elected to attribute the value of stock-based compensation to expense using the straight-line single option method. These methods were previously used for our pro forma information required under SFAS No. 123.

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards, which detailed an alternative transition method for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R). This alternative transition method included simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation and to determine the subsequent impact on the APIC pool and Statement of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R). Due to the Company’s historical net operating losses, the Company has not recorded the tax effects of employee stock-based compensation and has no APIC pool.

Prior to the adoption of SFAS No. 123(R), all tax benefits of deductions resulting from the exercise of stock options were required to be presented as operating cash flows in the Consolidated Statement of Cash Flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. Due to our historical net operating loss position, we have not recorded these excess tax benefits as of June 30, 2009.


Recently issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). Among other changes, SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction at fair value; and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, including earn-out provisions. Effective January 1, 2009, the Company adopted SFAS No. 141(R).  The adoption of SFAS No. 141(R) has not had and is not expected to have a material impact on the results of operations and financial position.


In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP No. 142-3”), which amends the factors that should be considered when developing renewal or extension assumptions used to determine the useful life of an intangible asset under Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), Goodwill and Other Intangible Assets , in order to improve consistency between SFAS No. 142 and the period of expected cash flows to measure the fair value of the asset under Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations , and other U.S. generally accepted accounting practices. Effective January 1, 2009, the Company adopted FSP No. 142-3. The adoption of FSP No. 142-3 has not had and is not expected to have a material impact on the results of operations and financial position.




In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in accordance with GAAP.  With the issuance of this statement, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature established by the FASB as opposed to the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles . This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company has evaluated the new statement and has determined that it will not have a significant impact on the determination or reporting of its financial results.

We adopted FIN 48, Accounting for Uncertainty in Income Taxes – An interpretation of FASB Statement No. 109 (“FIN48”) on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in tax positions by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We had no unrecognized tax benefits and no accrued interest or penalties recognized as of the date of our adoption of FIN48. During the three and six months ended June 30, 2009, there were no changes in our unrecognized tax benefits, and we had no accrued interest or penalties as of June 30, 2009.


Reclassifications

Certain reclassifications have been made to the prior period balances to conform to the current period presentation.

  

Note 3. Going Concern Uncertainty


The Company has incurred net losses in the six months ended June 30, 2009 and 2008 and has had working capital deficiencies both periods.


The Company's financial statements have been prepared on the assumption that the Company will continue as a going concern. Management is seeking a revolving credit facility for the purchase of inventory and various types of additional funding such as issuance of additional common or preferred stock, additional lines of credit, or issuance of subordinated debentures or other forms of debt. The additional funding would alleviate the Company's working capital deficiency and increase profitability. However, it is not possible to predict the success of management's efforts to achieve profitability or to secure additional funding. Also, there can be no assurance that additional funding will be available when needed or, if available, that its terms will be favorable or acceptable. Management is also seeking to renegotiate certain liabilities in order to alleviate the working capital deficiency.


If the additional financing or arrangements cannot be obtained, the Company would be materially and adversely affected and there would be substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and realization of assets and classifications of liabilities necessary if the Company becomes unable to continue as a going concern.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

For the Six Months Ended

June 30,

 

 

  

2009

 

 

2008

 

 

  

 

 

 

 

 

Loss from operations

  

(427,884

)

(1,104,135

)

Other income (deductions)

  

 

(58,034

 

(62,654

)

 

 

 

 

 

 

 

 

Net loss

  

(485,918

)

(1,166,789

)

 

  

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

  

For the Three Months Ended

June 30,

 

 

  

2009

 

 

2008

 

 

  

 

 

 

 

 

Loss from operations

  

(225,043

)

(800,140

)

Other income (deductions)

  

 

(29,624

 

(36,240

)

 

 

 

 

 

 

 

 

Net loss

  

(254,667

)

(836,380

)













 

  

 

 

 

 

 






Note 4. Income (Loss) Per Share


Basic loss per share is computed based on net loss divided by the weighted average number of shares of common stock outstanding during the period.

 

Diluted loss per share is computed based on net loss divided by the weighted average number of shares of common stock outstanding during the period after giving effect to convertible securities considered to be dilutive common stock equivalents. The conversion of preferred stock and stock options during the periods in which the Company incurs a loss from continuing operations before giving effect to gains from the sale of the discontinued operations is not assumed since the effect is anti-dilutive. The number of shares of preferred stock, which would have been assumed to be converted and have a dilutive effect if the Company had income from continuing operations, is 42,490,202 for the six months ended June 30, 2009 and 2008.









Note 5. Property, Plant and Equipment

 

Property, plant and equipment are comprised of the following at June 30, 2009 and December 31, 2008:


 

 

 

 

 

 

 

 

 

Description: 

  

June 30,

2009

 

 

December 31,

2008

 

Furniture and office equipment

  

$

110,517

 

 

110,517

 

Leasehold Improvements

 

 

57,555

 

 

 

57,555

 

Software

  

 

3,987

 

 

 

3,987

 

 

  

 

 

 

 

 

 

  

 

172,059

 

 

 

172,059

 

Less accumulated depreciation

  

 

(98,411

 

 

(78,113

)

 

  

 

 

 

 

 

Property and equipment, net

  

$

73,648

 

 

$

93,946

 

 

  

 

 

 

 

 


Note 6. Capitalized Software Costs

 

The Company accounts for the development cost of software intended for sale in accordance with Statement of Financial Accounting Standards No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed , (“SFAS No. 86”). SFAS No. 86 requires product development costs to be charged to expense as incurred until technological feasibility is attained. Technological feasibility is attained when the Company’s software has completed system testing and been determined viable for its intended use. Accordingly the Company did not capitalize any development costs other than product development costs acquired through a third party purchase. The Company capitalizes software through technology purchases if the related software under development has reached technological feasibility or if there are alternative future uses for the software.


During the year ended December 31, 2007, the Company acquired new software to operate and enhance its GPS system.  The development costs of this software, which totaled $116,682, were capitalized and placed in service at the end of September 2007 and are being amortized over their estimate useful life of five years.  No such software development costs were capitalized during the six-month periods ended June 30, 2009 and June 30, 2008.  Amortization expense of $11,669 and $11,669 was recognized related to this capitalized software during the six-month periods ended June 30, 2009 and June 30, 2008, respectively.  


Capitalized software costs and accumulated amortization were as follows as of June 30, 2009 and December 31, 2008.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 

June 30,

2009

 

 

December 31,

2008

 

Software development costs

116,682

 

 

$

116,682

 

Less accumulated amortization

 

(40,840

  )

 

 

(29,171

)

 

 

 

 

 

 

Capitalized Software, net

75,842

 

 

87,511

 

 

 

 

 

 

 


Expected future capitalized software amortization expense for the years ending December 31 is as follows.

  

 

 

 

 

Year

 

Amount  

 

 

 

 

2009

 

 

11,668

2010

 

 

23,337

2011

 

 

23,337

2012

 

 

17,500

Total

 

 

$      75,842

 

 

 






Note 7.  Other Intangible Assets


On June 6, 2008, the Company acquired a mobile water purification plant and computerized ballast water distribution system from Robert Elfstrom.  The Company agreed to purchase these assets in consideration for 1,000,000 shares of the Company’s common stock to be issued as follows: 100,000 shares upon the execution of the Bill of Sale and the remaining balance of shares to be issued in increments of 300,000 shares each time the Company accumulates net revenues of $2,000,000 from the utilization of the technology.  The Company initially recorded the asset at the fair value of the full 1,000,000 shares at the date of the sale, which was $215,000, and recorded a liability for the remaining 900,000 shares to be issued.  As of December 31, 2008, no revenues had been generated from this technology and thus no additional shares had been issued.  Management determined that it was more appropriate to reverse the liability for the remaining contingent shares and to reduce the value of the assets to the fair value of the 100,000 shares issued at execution of the agreement, or $21,500.  If and when the remaining shares are issued, they will be recorded as a royalty expense.


Note 8.   Investment in Joint Venture and Other


On March 27, 2008, the Company entered into a joint venture agreement with Huma-Clean, LLC of Palestine, Texas.  Huma-Clean is in the soil remediation industry and specializes in lake clean up and dredging, internationally.  The purpose of this joint venture was initially to execute and manage a sludge clean-up project in Mexico and subsequently seek out other mutually beneficial projects.  Under the terms of the agreement, the initial funding for the venture was to be $800,000 which was to be advanced in several installments by the Company. This funding was to be in the form of a non-recourse loan that will be repaid through the initial proceeds of the venture.  Any income or loss generated by the joint venture is to be allocated 50% to Huma-Clean, LLC and 50% to the Company.  As of June 30, 2009 and December 31, 2008, the Company has advanced $780,000 and $780,000, respectively, to Huma-Clean, LLC; this amount has been recorded on the Company’s balance sheet as a cost basis investment in a joint-venture based on the Company’s inability to exercise significant influence over the investment and the non-recourse terms of the loan.


During the year ended December 31, 2008, the Company advanced $130,000 to a third-party in conjunction with the third-party’s agreement to acquire another entity and all of its assets.  Per the terms of the agreement, as part of the purchase price, the third-party was to make two payments of $100,000 each in exchange for a convertible debenture from the entity being acquired.  Per the agreement, if the sale did not close, the third-party could elect to have the debenture, which has a maturity date of April 9, 2011, paid out of the net income of the entity.  The third-party planned to assign the agreements to the Company.  As of December 31, 2008, the Company had decided not to make the acquisition.  There is no formal documentation assigning the convertible debenture from the third-party to the Company and no efforts have been made to collect the money advanced.  Thus, as of December 31, 2008, management fully impaired the $130,000 advanced to the third-party.  











Note 9.   Notes Payable to Related Parties


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

2009

 

December 31,

2008

 

 

 

 

 

 

 

The Company has two outstanding notes payable to a former

Director of the Company.  The notes are for $195,000 and $91,874 and bear interest at 8% per annum.  The notes matured in February 2007 and are currently in default.

 

 

286,874

 

 

286,874


In 2005, the Company obtained funds under a financing arrangement from a related third party. The note provided a line of credit totaling $500,000 and accrued interest at a rate of 8% per annum.  It originally matured on January 28, 2006, at which time the unpaid principal was $229,365.  Interest due on the note was $16,960.  The note was amended in February 2006 to incorporate the interest into the principal and extend the term through January 2007.  The note is uncollateralized and the proceeds were utilized for working capital.  The note is in default.  The holder of the note has agreed to settle the balance due and the related accrued interest for shares of the Company’s common stock.  The Company is currently working to finalize this settlement agreement with the lender.

 

 

246,325

 

 

246,325


In March 2005, the Company obtained $134,500 under a financing arrangement bearing interest at 7% per annum from a related third party.  The note originally matured on June 28, 2005.  The note was amended in January 2006 to incorporate the related accrued interest of $7,375 into the principal of the note and extend the maturity date through April 28, 2006.  The note is uncollateralized and the proceeds were utilized for working capital. The note is past due and in default.

 

 

141,875

 

 

141,875


The Company has an outstanding note payable to an Executive and Director of the Company.  The note does not bear interest and originally matured in July 2006.  The Executive has agreed to extend the terms of the note until the Company has the funds to repay him.

 

 

216,150

 

 

216,150


The Company has a note payable to Monet Acquisition, LLC for additional consideration related to the sale of its subsidiaries in May 2007.  The note bears interest at a rate of 10% per annum and matured on April 25, 2009.   It is personally guaranteed by the CEO of the Company.  The note is past due and in default.

 

 

95,000 

 

 

95,000 


The Company entered into a letter agreement with a former employee in March 2007.  Per the terms of this agreement, the Company was to pay the former employee $12,000 in monthly installment payments with the entire balance being fully paid no later than November 15, 2007.  No payments have been made related to this agreement.  The note is past due and in default.

 

 

12,000

 

 

12,000

 

 

 

 

 

 

 

$

998,224

 

$

998,224

 

 

 

 

 



























Note 10.  Notes Payable



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

2009

 

December 31,

2008

 

 

 

 

 

 

 


In March 2006, the Company entered into a note payable for $27,000.   This note bears interest at a rate of 7% per annum and originally matured on May 27, 2006.  The maturity date was extended through December 31, 2007.  As of December 31, 2008, no payments have been made on the principal balance. The note is past due and in default.

 

 

                              27,000

 

 

                       27,000


In February 2006, the Company obtained funds under a financing arrangement bearing interest at 10% per year. The note matured on February 1, 2007 and is convertible into shares of the Company’s common stock at a fixed rate.  The note is past due and in default.

 

 

100,000

 

 

100,000


In February 2008, the Company entered into a promissory note for $50,000.  The note bears interest at a rate of 12% per annum and matures on January 31, 2010.  The note is convertible at any time to shares of the Company’s common stock at a fixed rate.

 

 

50,000

 

 

50,000


In March 2008, the Company entered into a promissory note for $50,000.  The note bears interest at a rate of 10% per annum and matured on April 1, 2009.  The note is convertible at any time to shares of the Company’s common stock at a fixed rate.  The note is past due and in default.

 

 

50,000

 

 

50,000


In September 2008, the Company entered into a $100,000 settlement agreement with an individual.  $25,000 was paid in cash and the remaining $75,000 was to be paid by November 21, 2008.   No additional payments have been made.  The amount is past due and in default.

 

 

75,000

 

 

75,000


In February 2009, the Company entered into a promissory note for $107,500.  The note bears interest at a rate of 10% per annum and matures on January 31, 2010.  It may be

 

 

 

 

 

 




extended for up to six months subject to a 5% increase in the interest rate in effect during those additional months. The note is collateralized by the Company’s pledge of 2,150,000 shares of the Company’s preferred A shares convertible at a 10 to 1 ratio of common stock.  The pledged collateral is to be held in escrow until an event of default or payment in full of the loan.

 

 

107,500

 

 

-

 

 

 

 

 

 

 

$

409,500

 

$

302,000

 

 

 

 

 



Note 11. Credit Union Participations

The Company no longer services automobile finance receivables. However, there was one remaining credit union relationship (Houston Postal Credit Union/Plus4 Credit Union) through the Company’s former wholly owned subsidiary, Autocorp Financial Services, Inc., which resulted in a dispute over amounts due on the collection of auto finance contracts.  During January 2008, the Company arrived at a $41,000 settlement with this credit union.  Per the terms of this agreement, the Company was to make an initial payment of $5,000, payments of $1,000 per month through February 2009 and a balloon payment of $24,000 at March 1, 2009.  This settlement is secured by a $41,000 judgment.  As of June 30, 2009 payments totaling $9,000 had been made under the settlement agreement.   The remaining settlement obligation is past due.







Note 12. Line of Credit


In November 2003, the Company executed a revolving credit facility in the amount of $10,000,000 with a financial institution that bore interest at a rate of prime plus 2% and matured in November 2004.  The purpose of the credit facility was to provide funding for the purchase of automobile finance installment contracts for sale to banks and credit unions.  The outstanding balance totaling $166,085 at both June 30, 2009 and December 31, 2008 is in default. However, the Company is presently negotiating revised payment terms with the lender.



In April 2007 the President and CEO of the Company provided a line of credit in the amount of $50,000 to the Company from Atlantic Financial Advisors, Inc (“AFA”), a Corporation which is 100% owned by him. This line is used for the purchase of inventory of GPS hardware.  The Company is not required to keep additional inventory of GPS units because their suppliers have the capability to supply product immediately. Therefore, the Company will no longer need the Line of Credit provided by AFA and this will be re-paid as sales of the existing GPS units occur.


Note 13.  Related Party Transactions


The Company entered into an agreement with Rodwell Software Systems, Inc. (“RSSI”) regarding the Company’s acquisition of all of the systems, software, data and technology developed by RSSI for the Company being used in the operation of its GPS tracking division.  The Company had been operating the system under a license agreement with RSSI since the Company entered into the GPS industry.  Under this agreement, the Company issued RSSI 5,903,840 shares of R-144 during the year ended December 31, 2007, an additional 2,951,920 shares in January 2008 and an option to acquire an additional 4,583,640 shares of R-144 common stock at $0.001 per share after the Company’s stock is trading for a period of 30 days at an average above $0.10 per share.


From time to time certain employees and/or officers advance funds to the Company in order for the Company to meet its operating needs or make payments directly on the Company’s behalf.  Such advances are recorded as liability on the Company’s balance sheet.  These amounts are loaned to the Company without any formal note agreement and do not bear interest.  They are payable on demand.  As of June 30, 2009 and December 31, 2008, the Company has recorded a liability of $777,586 and $760,786, respectively, for such related party advances.  During the six-month periods ended June 30, 2009 and June 30, 2008, $0 and $400,906, respectively, in related party advances were repaid through the issuance of stock.




Certain revenues were derived from sales to related parties.


Note 14.  Stock Plans

 

The Company has a non-qualified stock option plan (the “Plan”) that was adopted by the Board of Directors in March 1997. The Plan, as authorized, provides for the issuance of up to 2,000,000 shares of the Company’s stock. Persons eligible to participate in the Plan as recipients of stock options include full and part-time employees of the Company, as well as officers, directors, attorneys, consultants and other advisors to the Company or affiliated corporations.


Options issued under the Plan are exercisable at a price that is not less than twenty percent (20%) of the fair market value of such shares (as defined) on the date the options are granted. The non-qualified stock options are generally non-transferable and are exercisable over a period not to exceed ten (10) years from the date of the grant. Earlier expiration is operative due to termination of employment or death of the issuee. The entire Plan expired on March 20, 2007, except as to non-qualified stock options then outstanding, which will remain in effect until they have expired or have been exercised. As of December 31, 2008, 1,990,289 shares had been exercised and issued under the Plan.


On November 8, 2006, the Company filed a Non-Statutory Stock Option Plan with the Securities and Exchange Commission.  This 2006 Non-Statutory Stock Option Plan was intended as an employment incentive, to aid in attracting and retaining in the employ or service of Homeland Security Network, Inc., a Nevada Corporation, and any affiliated corporation, persons of experience and ability and whose services are considered valuable to encourage the sense of proprietorship in such persons, and to stimulate the active interest of such persons in the development and success of the Company.  This Plan provides for the issuance of non-statutory stock options which are not intended to qualify as incentive stock options within the meaning of section 422 of the Internal Revenue Code of 1986, as amended.  There were a total of 15,000,000 shares in the Plan at inception; 13,100,000 shares have been issued from the Plan as of June 30, 2009.


Note 15.  Sale of GPS Business


In September 2008 the Company entered into a contract with Global Safety Holdings Corp., (“GSH”), a U.S. privately held company with a substantial presence in Russia.  Under the terms of this agreement, the Company has sold the rights to their technology to GSH for use throughout Europe and Asia but specifically in Russia.  HSNI has received a 10% non-dilutive interest in GSH and a percentage of the Company’s cash flow.  HSNI has also retained its rights exclusively to market this technology in the United States and Mexico.  The Company recorded the transaction as a non-monetary exchange and assigned no fair value to the consideration given or received as currently no GPS operations exist in Russia; thus, the fair value of the consideration is contingent upon successful execution of the business model by GSH.


Note 16. Stock Transactions


The following is a summary of stock transactions during the six-month period ended June 30, 2009:


In February 2009, 1,000,000 shares of common stock were issued to a contract employee in lieu of a cash payment for services he performed on an ad hoc basis totaling $10,000.  The 1,000,000 shares were valued at $0.01 per share and represent the average market price of the Company’s stock during the period the services were performed.  This amount had been accrued as of December 31, 2008.


In February 2009, 500,000 shares of common stock were issued to a third party under an existing consulting agreement dated September 1, 2007 for consulting fees incurred in 2007 totaling $5,000.  The 500,000 shares were valued at $0.01 per share and represent the average market price of the Company’s stock during the period the services were performed. This amount had been accrued as of December 31, 2008.


In February 2009, 600,000 shares of common stock were issued to Frederick C. Biehl, Esq.  for payment of a $6,000 for legal fees incurred.  The 600,000 shares were valued at $0.01 per share and represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in February 2009.


In February 2009, 1,000,000 shares of common stock were issued to Letta Gorman, et.al, as a retainer for consulting fees totaling $10,000.  The issuance was composed of 900,000 restricted shares and 100,000 non-restricted shares that were valued at $0.01 per share and represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in February 2009 as no further performance was required at that time.


In February 2009, 500,000 shares of common stock were issued for payment of a $25,000 retainer for 2008 & 2009 legal services, of which, $17,500 has been expensed and accrued for as of the year ended December 31, 2008.   The 500,000 shares were valued at $0.05 per share. The Company’s closing market price for its stock at the time of the Board approval was $0.01 per share.




In February 2009, 5,000,000 shares of common stock were issued to Peter Ubaldi, President and CEO of the Company, at $0.05 per share for payment of accrued officer compensation for the year ended December 31, 2008 totaling $250,000. The closing market price of the Company’s stock at the time of the approval of this issuance was $0.01 per share. 


In February 2009, 1,750,000 shares of common stock were issued in settlement for the $17,500 debt to Rex Draughn, CPA, a third party, for accounting services performed prior to 2008. The shares are to be held in escrow by an attorney for six months during which the Company or its designee will have the right to purchase all or part or the shares from the third party. The 1,750,000 shares were valued at $0.01 per share.  


In February 2009, 1,250,000 shares of common stock were issued to Roy Pardini, Executive Vice President of the Company, at $0.05 per share for partial payment of accrued officer compensation for the year ended December 31, 2008 totaling $62,500. The closing market price of the Company’s stock at the time of the approval of the issuance was $0.01 per share. 


In February 2009, the Company authorized the issuance of 500,000 shares of common stock to Financial Indemnity Insurance Company at $0.01 per share as a cost of entering into a Note and Pledge Agreement dated February 9, 2009.  The Agreement provides for a working capital loan to the Company. The issuance of these shares is a $5,000 fee in addition to the interest rate on the note.


In May 2009, the Company authorized the issuance of 500,000 shares of its common stock from its non-statutory S-8 Stock Plan to Letta Gorman, whose group is the Company’s grant writing and business development team.  The shares were issued at a price of $0.009 per share representing expenses due and to become due to Gorman for the months of May, June, July, August, and September of 2009 at rate of $900.00 per month. The stock had a market value at the time of issuance of $0.0089 per share.  


Note 17.  Commitments and Contingencies


In July 2006, the Company entered into an equity line of credit agreement with eFund Small Cap Fund II, LP.  Under the terms of the agreement, eFund will be granted warrants to purchase 5,000,000 shares of the Company’s stock to provide funding contingent upon the Company’s drawing down on the line of credit.  The agreement also provided that the Company was to issue stock as compensation to eFund in the amount of 5,000,000 shares of its common stock as follows; 1,000,000 shares of stock upon execution of the agreement with an additional 4,000,000 shares to be issued as follows: 1,000,000 shares issuable upon the first Put; 1,000,000 shares upon the funding of $1,000,000 under the equity line, and 1,000,000 shares per each funding of $500,000. The Equity Line of Credit with eFund was never consummated.  On July 18, 2008, the Company entered into an agreement with EFund Capital Management, LLC (“EFUND”), an affiliate of eFund Small Cap Fund II, LLP, to provide consulting services.  As part of the engagement, EFUND prepared the Company’s Business Plan, promotional material, and private placement documents. In addition, EFUND agreed to introduce the Company to potential investors and assist in the negotiation of financing arrangements on behalf of the Company.  The Company received the material as contemplated in the agreement and availed itself of consulting services during the subsequent 12 month period.  As of July 15, 2009, the Company’s senior management had authorized the conveyance of 3,000,000 shares of the Company’s common stock which was originally issued on April 22, 2008 to EFUND as payment of services under the agreement of July 18, 2008, however, was held by the Company until performance under the contract was determined to be completed.  The Company will issue the shares in the 3rd Quarter of 2009 in full settlement of the services performed. No additional compensation is due under this agreement with EFUND or eFund Small Cap Fund II, LLP.  The Company will return 1,000,000 shares of its common stock (which was part of the issuance on April 22, 2008) to the Transfer Agent for cancellation during the 3rd Quarter of 2009.


Consulting and Employment Contracts


In May 2004, (amended and restated January 2005) HSNI entered into an Employment Agreement (“Agreement”) with Peter Ubaldi. The Agreement provided that Mr. Ubaldi should serve as the President of HSNI through January 1, 2007. In January of 2007, the Company renewed Mr. Ubaldi’s Employment Contract for an additional two years under the same terms and conditions as the original agreement. At any time prior to the expiration of the Agreement, HSNI and Mr. Ubaldi may mutually agree to extend the duration of employment under the terms of the Agreement for an additional period or periods. As payment for services, HSNI agrees to pay Mr. Ubaldi, as the President, a minimum base salary of $250,000 per annum. As provided in the Agreement, Mr. Ubaldi is eligible to be paid bonuses, from time to time, at the discretion of HSNI’s Board of Directors, of cash, stock or other valid form of compensation. Upon termination of and under the terms of the Agreement, Mr. Ubaldi shall be entitled to severance compensation in an amount equal to twenty-four months of base salary as shall exist at the time of such termination.  


In January of 2007, the Company entered into an employment agreement with Roy Pardini to serve as its Executive Vice President. The term of the contract is two years with a base salary of $125,000 per year.  As provided by the agreement, Mr. Pardini is eligible to receive bonuses from time to time at the discretion of the Board of Directors in stock, cash or other forms of compensation. Upon termination, Mr. Pardini shall be entitled to severance compensation in an amount equal to twenty-four months of base salary as shall exist at the time of termination.  During June of 2009, Mr. Pardini resigned his position of Executive Vice President, Secretary and Board Member.




In June of 2008, the Company entered into a consulting agreement with Vincent Nunez with Huma-Clean, LLC of Palestine, Texas.  The term of the contract is 5 years.  The provisions in the agreement include:


·

Mr. Nunez was issued 500,000 shares of the Company’s common stock upon execution of the consulting agreement.


·

Each time the Company accumulates $2,000,000 in gross revenues from sales generated in connection with the technology and services of Huma-Clean, LLC, an additional 500,000 shares of the Company’s common stock will be issued to the consultant, limited to 2,500,000 total shares.


·

A quarterly cash distribution equal to 20% of the net revenues generated by the sales of the consultant, limited to $500,000 for any given quarter.


In June of 2008, the Company entered into an employment agreement with Robert W. Elfstrom.  The term of the contract is 2 years with a base compensation of $104,000 per year.  Additional provisions in the agreement include:


·

Mr. Elfstrom shall earn a bonus of $50,000 to be paid within 90 days from the date of execution of the employment agreement.


·

A quarterly cash distribution equal to 20% of the net revenues generated by the sales of the employee, or the use of this technology, limited to $250,000 for any given quarter.


Mr. Elfstrom and the Company are reviewing their arrangement as there are certain disputes in performance on the part of the parties.  As a result, the Company has withheld the $50,000 bonus referred to below along with the weekly compensation as stated in the contract.  These amounts have been accrued for as of June 30, 2009 and no additional accruals have been recorded by the Company. The Company expects to reach an amicable conclusion with Mr. Elfstrom for the termination of his services.


Operating Leases


The Company currently leases office space in two locations.  The following table sets forth the Company’s commitment thereof.


 

 

1.  

7920 Belt Line Road, Suite 770, Dallas Texas 75254.  The lease commenced on October 15, 2007.  The first year’s rent is $12,555, the second year’s is, $13,485 and the third year’s is $14,415.

2.  

140 Smith Street, 5th Floor, Keasbey, New Jersey 08832.  The Company subleases office space from a related party.  The Company received two months of free rent with the monthly base rent equal to $9,143.  The sublease was initially to be for one year with two automatic one-year renewals.  It was subsequently revised, with an effective date of January 31, 2008, to extend the lease term through January 31, 2013.


Future minimum annual payments expected under the operating lease are as follows:


 

 

 

 

 

 

 

 

Year Ending December 31,

 

Amount

2009

 

$  

61,830

2010

 

 

120,521

2011

 

 

109,710

2012

 

 

109,710

2013

 

 

9,143

 

 

 

Total

 

$

410,914

 

 

 



Note 18.  Pension Plans


The Company does not currently provide, administer or manage a 401(K) plan or any other pension plan.


Note 19.  Legal Proceedings


The Company, through its former wholly owned subsidiary, Autocorp Financial Services, Inc. (“ACFS”) had entered into an auto loan servicing agreement dated January 7, 2003. ACFS and HPCU have disputes over collection of certain auto finance receivables and general performance under the servicing agreement. During 2008, HPCU and the Company entered into a $41,000 settlement agreement.  Under the terms of this agreement, the Company was to pay $5,000 upon signing of the document and make monthly payments of $1,000



through February 2009.  A balloon payment of $24,000 was due on March 1, 2009.  This settlement is secured by a $41,000 judgment.  As of June 30, 2009 payments totaling $9,000 have been made under this settlement agreement.


The Company entered into a consulting service agreement with Waterville Associates on March 20, 2007. The agreement called for certain services by Waterville Associates which included: (a) Posting information about the Company on their web site, (b) Production of an 8 to 10 page research report providing data on HSNI, and (c) Assisting the Company in the creation of capital to implement its business plan.  The Company agreed to compensate Waterville for their services by issuing shares on the Company’s common stock as these services were performed.  The Company has not received any of the services by Waterville as outlined in the agreement.  Waterville is seeking a claim for compensation as provided for in the agreement.  Management believes that the lawsuit is without merit and will prevail in the counterclaim it has filed against Waterville.


The Company entered into a convertible promissory note for $100,000 with an individual in May 2008.  In June 2008, the note was converted into shares of common stock at the holder’s request.  Subsequently, the individual requested additional consideration and even though the Company had no obligation to accommodate the request, the Chairman of the Company advanced him $25,000 of his own funds and the Company signed an agreement in September 2008 to pay him an additional $75,000 within 60 days.  The Company has not been able to meet this deadline and the individual had commenced litigation and received a judgment . This amount has been accrued for in the financial statements.


In addition to the matter described above, the Company is involved in various legal actions and claims from time to time, which arise in the normal course of business. In the opinion of management, the final disposition of these matters will not have a material adverse effect on the Company’s financial position or results of operations.



Item 2.  Management’s Discussion and Analysis or Plan of Operations


The following discussion of the Company’s financial condition, changes in financial conditions and results of operations should be read in conjunction with the unaudited  financial statements and notes for the period ended June 30, 2009 contained in this Form 10-Q, and with the audited financial statements and notes as well as other items thereto included in our annual report on Form 10-K for the year ended December 31, 2008. This report, annual reports on Form 10-K, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) of the Exchange Act are made available free of charge through the SEC's website (www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. In addition, these documents are made available on HSNI's website as soon as reasonably practicable after the material is electronically filed with, or furnished to, the SEC. The public may read and copy any material HSNI files with the SEC at the SEC's Public Reference Room located at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.


Cautionary Statement Regarding Forward Looking Statements

Certain of the statements contained in this Form 10-Q for the period ended June 30, 2009 should be considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which reflect the current views of HSNI with respect to current events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should,” and “continue” or similar words. These forward-looking statements may also use different phrases.  From time to time,


HSNI may also provide forward-looking statements in other materials HSNI releases to the public or files with the SEC, as well as oral forward-looking statements. You should consult any further disclosures on related subjects in HSNI’s annual report on Form 10-KSB and current reports on Form 8-K filed with the SEC.


Such forward-looking statements are and will be subject to many risks, uncertainties and factors relating to HSNI’s operations and the business environment in which HSNI operates, which may cause its actual results to be materially different from any future results, express or implied, by such forward-looking statements. Statements in this quarterly report and the exhibits to this report should be evaluated in light of these important risks, uncertainties and factors. HSNI is not obligated to, and undertakes no obligation to publicly update any forward-looking statement due to actual results, changes in assumptions, new information or as the result of future events.


The Company


The Company is a Nevada corporation formed in 1993. HSNI’s principal executive office is located at 7920 Beltline Rd, Suite 770, Dallas, TX 75254. HSNI’s telephone number is (972) 386-6667. HSNI’s website is www.hsni.us.




From 1998 until the third quarter of 2004, the Company provided financial products and related services to the new and pre-owned automotive finance industry. The Company primarily purchased and subsequently sold automobile finance receivables collateralized by new and pre-owned automobiles. The receivables were predominately purchased from automobile retailers nationwide and sold to banks and credit unions.


The Company changed its name to Homeland Security Network, Inc. (OTC: HSYN) on March 1, 2005 to reflect the direction of a new course of business. HSNI predominantly targets markets such as commercial trucking and cargo management, commercial fleet management, equipment rental and personal vehicle tracking. The Company provides the GPS tracking industry with state-of-the-art software, as well as with its ability to provide low cost tracking hardware, and its ability to offer a cost-effective data transmission fee. The Company's GPS products incorporate map tracking and trailing, geo-fencing alerts for designated parameter infringements, and the ability to control vehicle functions with voice commands from its customers’ web-enabled mobile phones or personal computers, via the company's internet website system software.


In the fourth quarter of 2007, the Company began investing in a new industry. HSNI has secured distribution rights to a patented water restoration technology, which represents a substantial opportunity in the multi-billon dollar global water purification market.  The Company has proposed the use of its services in the United States and several foreign counties. The Company is in the process of changing its name to Global Ecology Corporation.  Management has decided that this new name will better reflect the new direction of the Company into various forms of environmental restoration.  A substantial part of the Company’s business will be conducted internationally and the new name will help establish this presence.


The Company has supported a number of events at the United Nations and has established itself as a strategic partner with International Renewable Energy Organization (“IREO”), a Brazilian private partner of the United Nations.   Peter Ubaldi, President and CEO of The Company, has been appointed as Chairman of IREO’s Water Restoration Committee.  The Company has proposed its remediation technology for contaminated bodies of water and for the remediation of soil  in South America, Central America, the Philippines and the United States as part of its expanding marketing efforts.  


HSNI has entered into a joint venture with Huma-Clean, LLC, a Texas-based soil remediation and re-seller of processed soil for consumer and commercial users.  The first project is underway in Juarez, Mexico, and the Company is hopeful that the next sites will be located in the United States.   The Company initially believed that revenue from these activities would begin to be recorded in the fourth quarter of 2008 and that the first order of its processed soil has would have been received for in excess of $2,000,000. However, the violent activities which have occurred in the City of Juarez and the surrounding area have taken the government officials’ focus away from the building and expansion of their farmlands. This has directly impacted the first $2,000,000 order.  Nevertheless, the Joint Venture continues to produce “Gourmet Soil” and a contract has been entered into for the shipment of soil to India and discussions are in progress with other substantial new buyers.  The Company has advanced $780,000 to the venture.  The terms of the agreement call for the initial revenue to be used to repay the advance, however the Company at its discretion can allow a portion of the repayment to be left in the Venture for working capital.


Plan of Operation


In August 2004, the Company ceased its activities in the automobile finance business and has completed the orderly liquidation of its auto receivable portfolio. Its focus is in several new markets such as products for the GPS industry, the water purification industry and the soil remediation industry.  The Company anticipates this business will capitalize on rapidly emerging, largely under-served, GPS tracking markets and the worldwide need for water purification.


The Company completed the purchase of the software which supports its GPS tracking technology from Rodwell Software Systems, Inc. (“RSSI”) with the issuance of 8,855,760 shares of its R-144 common stock for a total purchase price of $116,682.The purchase from RSSI provides the Company with technology products and support services for tracking and recovering valuable mobile assets.  HSNI's plan further incorporates engaging and developing strategic alliances with third party sale and installation entities and distributors that have a marketing presence in the commercial and government sectors. The Company expects these types of engagements to be particularly beneficial and anticipates the results of such alliances to create name recognition for the Company.


The Company expects to generate sustaining revenues derived primarily from the sale and installation of its GPS products and components to domestic end users and third party users generated from non-prime finance companies and “buy here, pay here” companies.  Additionally, the Company expects to generate revenues relating to the sale of service contracts, for which terms of service are anticipated to range from 12 to 36 months, as well as subsequent renewals of previous service contracts.


Costs for product development are expensed as incurred and include salaries, fees to consultants, and other related costs associated with the development of products. The Company’s product development effort has thus far been outsourced to third parties. Because the rate of achievement is unpredictable, product development expenses may vary significantly from period to period. Such variability can have a significant impact on the Company’s income from operations and cash flows.




In the fourth quarter of 2007, the Company began investing in a new industry. HSNI has secured distribution rights to a patented water restoration technology, which represents a substantial opportunity in the multi-billon dollar global water purification market.  The Company has proposed the use of its services in the United States and several foreign counties.


In July 2008, the Company announced that it has filed an application to patent its Mobile PureWater System. This transportable system filters and purifies up to 90,000 liters of water per day by pumping it from a contaminated water source and treating it within the system itself. The unit is powered by solar, wind, diesel generator or vehicle alternator dispatch and requires no external power source.


In September 2008, the Company entered into a contract with Global Safety Holdings Corp., (“GSH”) a U.S privately held company with a substantial presence in Russia.  The Company has sold the rights to their technology to GSH for use through Europe and Asia but specifically in Russia.  HSNI has received a 10% non-dilutive interest in GSH and a percentage of the Company’s cash flow.  HSNI has also retained its rights exclusively to this technology in the United States and Mexico.


HSNI has also entered into a joint venture with Huma-Clean, LLC, a Texas based soil remediation and re-seller of processed soil for consumer and commercial users.  The first project is underway in Juarez, Mexico and the Company is in meaningful discussions with strategic partners through a joint venture for a similar project in the Philippines. The Company is also hopeful that aditional sites will be located in the United States.   Ultimately, the Company expects this activity to become a major business segment contributing sustaining revenues.


As part of the expansion of the Company’s soil remediation and water purification efforts, HSNI has expanded its business model of engaging in Joint Venture partnerships bothe in this country and overseas.  The first two such initiatives are:


Ø

ChainRule Enviornmental, LLC.  Chain Rule is a New York based company with long standing relationships in the Philippines.  HSNI and Chain Rule have entered into a Joint Venture Agreement on May 5 2009 where the parties agreed to develop the use of HSNI’s licensed technologies in the Philippines. The first such effort is underway with local strategic relationships for the implementation of the Huma-Clean process in Manila, the largest city in the Philippines.  Chain Rule will provide the capital for the venture as well as the site for the project and the key individuals and companies to insure its success. The Company has given Chain Rule the option (based on certain revenue milestones) of not only introducing the Huma Clean process but also the right to offer HSNI’s services in river restoration and its Mobile Pure Water System.

Ø

SureWater Solutions,LLC.  SureWater, a New York based company and HSNI entered into a Strategic Alliance Agreement on July 3, 2009.  The Company has given SureWater the right to manufacture and distribute its Mobile Pure Water System.  Sure Water under the terms of this agreement will enhance and improve the original design and these changes when approved by HSNI will become part of the System and owned by HSNI.   SureWater will also manufacture the System for various sub-distributors set up by HSNI.  As part of this Agreement, SureWater will have the right to distribute the System in Countries approved by HSNI.  In all cases, HSNI will be the exclusive supplier of the ionized copper solution required to operate the System.   




Employees


At June 30, 2009, the Company employed a total of 5 people. No employees are covered by a collective bargaining agreement.


Management’s Discussion and Analysis of Financial Condition and Results Operations:


The Company's consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern. Management is seeking various types of additional funding such as issuance of additional common or preferred stock, additional lines of credit, or issuance of subordinated debentures or other forms of debt. The funding would alleviate the Company's working capital deficiency and increase profitability.  However, it is not possible to predict the success of management's efforts to achieve profitability or to secure additional funding. Also, there can be no assurance that additional funding will be available when needed or, if available, that its terms will be favorable or acceptable. Management has also renegotiated certain present liabilities in order to alleviate the working capital deficiency.


If the additional financing or arrangements cannot be obtained, the Company would be materially and adversely affected and there would be substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and realization of assets and classifications of liabilities necessary if the Company becomes unable to continue as a going concern.


Six Months and Three Months Ended June 30, 2009 versus Six Months and Three Months Ended June 30, 2008


Revenues




Product Sales

For the three months ended June 30, 2009, revenues from product sales decreased by 31%, or $3,942 as compared to the same period a year ago, primarily due to a decrease in activation revenue and sale of tracking devices.  For the six months ended June 30, 2009, revenues from product sales decreased by 43 %, or $14,787 as compared to the six months ended June 30, 2008.


Cost of Sales

For the three months ended June 30, 2009, cost of product sales increased by $19,533, or 285%, as compared to the same period a year ago, primarily due to the write off of the Company’s inventory balance as of June 30, 2009 due to no tracking devices being sold since December 31, 2008.  For the six months ended June 30, 2009, cost of product sales increased by 104%, or $14,857 as compared to the six month period ended June 30, 2008.


Other Income

For the three months ended June 30, 2009, revenue from sources categorized as other income decreased by 95%, or $1,014 as compared to the same period a year ago, primarily due to income earned on the Company's portfolio of automobile finance receivables due to terminations of certain servicing and loan pools and sales of certain loan pools. For the six months ended June 30, 2009, other income decreased by 75%, or $1,946 as compared to the six month period ended June 30, 2008.



Operating Expenses

Significant expenditures for operating expenses for the three and six months ended June 30, 2009 and 2008 were:


 

 

  For the Three Months Ended

June 30,

 

  For the Six Months Ended

June 30,

 

 

2009

2008

 

2009

2008

Compensation and benefits

 

 

105,603

 

123,388

 

 

 

211,206

 

225,991

Office occupancy and equipment

 

 

38,542

 

32,892

 

 

 

81,353

 

41,855

Professional and consulting fees

 

 

44,032

 

30,934

 

 

 

71,032

 

160,934

Sales development

 

 

1,800

 

391,756

 

 

 

13,942

 

457,396

Depreciation and amortization

 

 

16,016

 

11,874

 

 

 

31,967

 

17,840

Marketing expense

 

 

-

 

29,039

 

 

 

-

 

30,750

Other debt settlement fees

 

 

-

 

169,882

 

 

 

5,000

 

169,882

Other operating expense

 

 

1,310

 

17,124

 

 

 

4,225

 

21,918

Total expenses

 

 

207,303

 

806,889

 

 

 

418,725

 

1,126,566




Compensation and benefits decreased $17,785 and $14,785, respectively, for the three and six months ended June 30, 2009 as compared to the same periods a year earlier primarily due to a decrease in accrued employee benefits expense.


Office, occupancy and equipment increased by $5,650 and $39,498, respectively, for the three and six months ended June 30, 2009 as compared to the same periods a year earlier primarily due to an increase in rent and associated rent expense as a result of opening a new office in Keasbey, NJ.


Professional fees increased by $13,098 for the three months ended June 30, 2009 as compared to the same period a year earlier primarily due to increased accounting and auditing fees.  Professional fees decreased by $89,902 for six months ended June 30, 2009 as compared to the same period a year earlier primarily due to varying needs related to legal counsel and accounting services.


Depreciation and amortization expense increased $4,142 and $14,127, respectively, for the three and six months ended June 30, 2009 as compared to the same periods a year earlier due to the depreciation of furniture and leasehold improvements made to the Keasbey, NJ office in 2008.


Sales development and product development expense decreased $389,956 and $443,454, respectively,  for the three and six months ended June 30, 2009 as compared to the same periods a year earlier due to reduced spending by the Company in the current period after entering the water purification industry and aggressively pursuing this business during 2008.  

 

Other debt settlement fees decreased $169,882 and $164,882, respectively, for the three and six months ended June 30, 2009 as compared to the same periods a year earlier due to the Company incurring less fees related to obtaining additional financing.




Marketing expense decreased $29,039 and $30,750, respectively, for the three and six months ended June 30, 2009 as compared to the same periods a year earlier due to the decreased spending on consultants related to foreign government business development activities.


Other operating expense decreased $15,814 and $17,693, respectively, for the three and six months ended June 30, 2009 as compared to the same periods a year earlier due to an overall decrease in business operations.


Interest Expenses


Interest expense decreased by $6,616 and $4,530, respectively, for the three and six months ended June 30, 2009 as compared to the same periods a year earlier, primarily due to decreased borrowing to fund operations and conversion of debt to common equity.


Liquidity


The Company's consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern. Management is seeking various types of additional funding such as issuance of additional common or preferred stock, additional lines of credit, or issuance of subordinated debentures or other forms of debt will be pursued. The funding should alleviate the Company's working capital deficiency and increase profitability. However, it is not possible to predict the success of management's efforts to achieve profitability. Also, there can be no assurance that additional funding will be available when needed or, if available, that its terms will be favorable or acceptable.


These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation. Management is seeking to raise additional capital and to renegotiate certain liabilities in order to alleviate the working capital deficiency.


Due to recurring operating losses and the Company's current working capital deficit, there is a need to obtain additional funding of working capital for the Company to operate as a going concern. The Company incurred operating losses of $465,509 and $1,166,789 for the six-month periods ending June 30, 2009 and 2008, respectively.  In 2009, the Company has been able to minimally sustain its working capital needs based on capital derived primarily from entering into notes payable and from revenue related to GPS unit airtime charges.


The Company's cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the following table:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

For the Six Months Ended

June 30,

 

 

  

2009

 

 

2008

 

Cash provided by (used in):

  

 

 

 

 

 

 

 

Operating activities

  

(124,126

)

 

(1,066,410

)

Investing activities

  

 

-

 

 

 

    (104,275

)

Financing activities

  

 

124,300

 

 

 

  1,175,450

 

Increase/(decrease) in cash

  

174

 

 

    4,765

 


 Net cash used in operating activities for the six months ended  June 30, 2009 decreased to $125,126 from $1,066,410 for the six months ended June 30, 2008 primarily due to decreased spending in the current period related to the Company entering the water purification industry in 2008.  


Net cash used by investing activities was $0 for the six months ended June 30, 2009 compared to net cash used by investing activities of $104,275 for the six months ended June 30, 2008 as a result of disbursements made for leasehold improvements and office furniture for the subleased space located at 140 Smith Street, Suite 200, Keasbey, New Jersey during the prior year.  There were no such expenditures in the current year.


Net cash provided by financing activities was $125,300 for the six months ended June 30, 2009 compared to net cash provided by financing activities of $1,175,450 for the six months ended June 30, 2008 due to decreased advances from related parties during the current period.  


Market for Common Stock; Volatility of Prices


There has been a limited public trading market for Common Shares of the Company. There can be no assurance that a regular trading market for the Common Shares will ever develop or, if developed, that it will be sustained. The market price of the Common Shares could



also be subject to significant fluctuations in response to such factors as variations in the anticipated or actual results of operations of the Company or other companies in the automotive finance and GPS tracking industries, changes in conditions affecting the economy generally, analyst reports, general trends in industry, and other political or socioeconomic events or factors.


Off Balance Sheet Arrangements


The Company does not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.


Deferred Tax Valuation


The Company continues to incur tax net operating losses, which are available to carry forward and offset future taxable income. These net operating losses were generated, principally as a result of losses resulting from the operations of the Company. A deferred tax asset results from the benefit of utilizing these net operating loss carry-forwards in future years.


Due to the current uncertainty of realizing the benefits of the tax NOL carry-forward, a valuation allowance equal to the tax benefits for the deferred taxes has been established. The full realization of the tax benefit associated with the carry-forward depends predominately upon the Company's ability to generate taxable income during future periods, which is not assured.


Indemnification of Directors and Officers


Subject to and subsequent to an appointment or election as an officer or director, the Company provides contractually indemnification.


The Company agrees to indemnify the positions of directors and officers as follows: A director or officer shall not be liable for any claim or demand on account of damages in any manner. The Company agrees to indemnify and hold directors or officers, without limitation, harmless from any and all damages, losses (which shall include any diminution in value), shortages, liabilities (joint or several), payments, obligations, penalties, claims, litigation, demands, defenses, judgments, suits, proceedings, costs, disbursements or expenses of any kind or nature whatsoever, specifically including without limitation, fees, disbursements and expenses of attorneys, accountants and other professional advisors and of expert witnesses and cost of investigation and preparation. A director or officer will be indemnified from any decision or action taken prior to his or her hire date as a director or officer.



Item 3.   Quantitative and Qualitative Disclosures about Market Risk.


Not applicable to smaller reporting companies.


Item 4.  Controls and Procedures.

 

Not applicable.


Item 4T. Controls and Procedures.


(a)  Evaluation of disclosure controls and procedures.  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

 




































As of June 30, 2009, an evaluation was conducted under the supervision and with the participation of our management, including our chief executive officer and principal accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and principal accounting officer concluded that our disclosure controls and procedures were effective.

 


(b)  Changes in internal control over financial reporting.  There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Part II - OTHER INFORMATION




Item 1. Legal Proceedings


Plus 4 Credit Union FK/A Houston Postal Credit Union (“HPCU”).  The Company, through its formerly wholly owned subsidiary, Autocorp Financial Services, Inc. (“ACFS”) had entered into an auto loan servicing agreement dated January 7, 2003. ACFS and HPCU have disputes over collection of certain auto finance receivables and general performance under the servicing agreement.  HPCU and the Company reached a $41,000 settlement agreement.  The company was to pay $5,000 upon signing of the document and a monthly payment of $1,000 per month through February 2009. The total payments made to date under this arrangement are $9,000.  A balloon payment of $24,000 was due on March 1, 2009 but the Company is attempting to extend this date.  This settlement is secured by a $41,000 judgment.


Waterville Associates .  The Company entered into a contract for services to be provided by Waterville Associates.  The services to be received from Waterville included but were not limited to: the production of a research report, a display on the Waterville web site, access to their opt-in e-mail of potential investors and assistance in raising capital.  None of these services were rendered by Waterville.  The Company believes that the suit is without merit and in fact the Company’s attorney has filed an answer and counter-claim for substantial damages from Waterville’s non-performance.


Chris Verrone . In May 2008, Mr. Verrone loaned the Company $100,000 under a convertible note agreement. The note was converted to common shares during June 2008.  Subsequently, Mr. Verrone requested additional consideration and even though the Company had no obligation to accommodate this request, the Chairman of the Company advanced him $25,000 on behalf of the Company and the Company signed an agreement to pay him an additional $75,000 in 60 days.  The Company was not able to meet this deadline and Mr. Verrone commenced litigation and received a judgement against the Company.  


In addition to the matter described above, the Company is involved in various legal actions and claims from time to time, which arise in the normal course of business. In the opinion of management, the final disposition of these matters will not have a material adverse effect on the Company’s financial position or results of operations.


Item 1A.

Risk Factors.


Limited Operating History of Present Business:


The prospects for the Company must be considered in light of the risks, expenses, difficulties and problems frequently encountered in transitioning a company into new business opportunities.


Risks, uncertainties and factors that could cause HSNI’s actual results to differ materially from forward-looking statements include, but are not limited to, the following:


·

The ability to maintain adequate liquidity and produce sufficient cash flow to meet HSNI’s capital expenditure requirements;

·

The ability to attract and retain qualified management and other personnel;

·

Changes in the competitive environment in which HSNI operates;



·

Changes in government and regulatory policies;

·

Uncertainty relating to economic conditions generally and in particular affecting the markets in which HSNI operates;

·

The ability to complete acquisitions or divestitures and to integrate any business or operation acquired;

;

·

The ability to overcome significant operating losses;

·

The ability to develop HSNI’s products and services and to penetrate existing and new markets; and

·

Technological developments and changes in the industry



Risk Associated with Expansion:


The Company's growth strategy may include future mergers or acquisitions, or expansion of services and products offered. There can be no assurance that management will successfully integrate the “refocused” operations of the Company with those that may be acquired or established in the future and effectively manage the combined enterprise. There will be a need to limit overhead as additional operations may be acquired while still maintaining sufficient staff. Failure to do so would have a materially adverse effect on the business, financial condition and results of operations of the Company (See Plan of Operations).


General Economic Conditions:


The Company’s GPS business is reliant upon the success of some of our country’s basic industries.  Sales of automobiles, light trucks and SUVs have always driven the need for GPS tracking devices.  The Company’s commercial markets include auto finance companies and small trucking fleets.  It is expected that the Company, through its efforts in the government sector and the sale of its technology internationally, will support any loss of volume in some of these more traditional markets. The water purification and soil remediation business is not expected to be as affected by general economic conditions as the GPS industry.  Since the reliance on pure water and soil for farmlands is essential to the operations of almost all economies, the Company does not anticipate economic challenges unless they are related to extraordinary circumstances.  The Company feels that the new technologies employed in this new business area will provide a cost effective solution where there has not been one in the past.


Competition:


The Company will compete with other product and service suppliers in the GPS industries. The GPS tracking industry relies on coordinating the merging of four separate components in order to operate as a GPS tracking system. They are: hardware, firmware, a software or application system, and wireless communication providers. The Company is a GPS tracking company that has adapted a portion of its hardware and software capabilities to operate on what is currently the least costly type of airtime network provider in the industry. It is possible that a competitor could adapt its hardware and software to also utilize the Company’s current airtime provider. This event could reduce the size of the Company’s targeted markets.


The Company will also experience competition in the water purification and soil remediation industries. Both of these segments rely on technologies that must satisfy numerous regulatory and compliance requirements which have already been overcome by the developers of the technology that the Company has licensed.  The Company is aligning itself with established professionals and experts in these industries. The Company anticipates that the new technologies which it will bring to the market should provide a competitive advantage.  However, there are large and well capitalized businesses that will offer competition that could make the Company’s progress into this new business segment difficult.


Dependence on Key Alliances:


Presently, the Company is no longer dependent on a single electronics developer and manufacturer to develop and manufacture the Company’s products. However, it is possible that new emerging technologies could render the Company’s products obsolete or that procurement of supplies could become scarce or more costly to acquire should the Company’s suppliers terminate their alliance with the Company.




Additionally, the Company presently relies on the ability of a wholesale distributor, strategic alliances and a limited in-house sales force to market and sell the products. Many competitors are larger and have greater financial and marketing resources than the Company.


Dependence on Management Information Systems:


The Company's future success depends in part on the ability to continue to adapt technology on a timely and cost-effective basis to meet changing customer and industry standards and requirements.


Dependence on Key Personnel:


The Company is highly dependent on the services of certain key employees. The Company has entered into an employment agreement with some, but not all such employees. The loss of certain key employees' services could have a materially adverse effect on the business and operations of the Company. In addition, the future success of the Company depends upon its ability to attract and retain qualified general personnel, which have sufficient and suited expertise in the GPS tracking industry tracking industry, the water purification industry and the soil remediation business.  There can be no assurance of success in attracting and retaining qualified personnel in the future.


Market for Common Stock; Volatility of Prices:


There has been a limited public trading market for the Company’s shares of common stock. There can be no assurance that a regular trading market for the common stock will ever develop or, if developed, that it will be sustained.  The market price of the common stock could also be subject to significant fluctuations in response to such factors as variations in the anticipated or actual results of operations of the Company or other companies in the GPS tracking industries, changes in conditions affecting the economy generally, analyst reports, general trends in industry, and other political or socioeconomic events or factors.


Liquidity and Need for Additional Funding:


Due to recurring operating losses and the Company's current working capital deficit, there is a need to obtain additional funding of working capital for the Company to operate as a going concern. Various types of additional funding such as issuance of additional common or preferred stock, additional lines of credit, or issuance of subordinated debentures on other forms of debt will be pursued. The Company is currently negotiating additional investments in the Company.  However, there can be no assurance that additional funding will be available when needed, or if available, that its terms will be favorable or acceptable.


Substantial Leverage:


Although substantially leveraged at the end of fiscal year 2008, in order to meet the ongoing working capital requirements of the Company, additional indebtedness may have to be incurred, perhaps resulting in a more highly leveraged capital structure. A highly leveraged capital structure could have adverse consequences, including:

·

Limiting the ability to obtain additional financing;

·

Requiring the use of operating cash flow to meet interest and principal repayment obligations;

·

Increasing the Company’s vulnerability to changes in general economic conditions and competitive pressures; and

·

Limiting the Company's ability to realize some or all of the benefits of significant business opportunities.


In addition, any indebtedness that would be incurred is expected to contain covenants that limit, among other things, the ability to incur additional indebtedness, engage in mergers and acquisitions, pay dividends or take other actions. These covenants may also require the meeting of certain financial tests and the maintenance of a minimum level of collateral and may give the lender the right to perform periodic audits to ensure compliance with the terms of the applicable loan. Non-compliance with any of the terms of such covenants may result in a suspension of funding, acceleration and consequent demand for repayment and a foreclosure on collateral, as well as the pursuit of other rights and remedies, all of which could have a materially adverse effect on the financial condition, results of operations and prospects of the Company.


Interest Rate Fluctuations:


The Company's profitability is based, in part, on the interest rate charged on interest bearing liabilities. Interest rates with respect to outstanding indebtedness or indebtedness that may be incurred in the future are, or will be, as the case may be, based on interest rates prevailing in the market at the time the debt is incurred. In some cases, the rates may be floating rates. Increases in interest rates paid on



outstanding indebtedness would adversely affect the profitability of the Company and consume cash allocated for other operating activities.


Lack of Prospective Dividends:


The Company has not paid any dividends on its Common Stock and anticipates that future earnings, if any, will be used to reduce debt or finance future growth and that dividends will not be paid to shareholders. There can be no assurance that operations will result in sufficient revenues to enable the Company to operate at profitable levels or to generate positive cash flow. Accordingly, the Company does not anticipate the payment of any dividends on Common Stock for the foreseeable future (see Item 5, Market for Common Equity and Related Stockholder Matters).


Inflation:


Higher interest rates, which generally occur with inflation, would tend to increase the cost of credit used by the Company and would thus, decrease profits.


Risks Related to Doing Business in Mexico and Other Foreign Countries:


Adverse changes in political and economic policies of foreign governments could have a material adverse effect on the Company’s operations.


Possible Other Risks:


In addition to all risks and assumptions including, but not limited to, those identified under this "Risk Factors" section, businesses are often subject to risks not foreseen or fully appreciated by management. In reviewing this report, investors and potential investors should keep in mind other possible risks that could be important. Among key factors that may have a direct bearing on the Company's results are competitive practices in GPS tracking industries and the environmental restoration business, the ability to meet existing financial obligations in the event of adverse industry or economic conditions or to obtain additional capital to fund future research and development requirements of their products, commitments and expansion, and the impact of current and future laws and governmental regulations on operations.


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


For the six months ended June 30, 2009,  the Company issued the following securities without registration under the Securities Act of 1933. These shares were issued under the Section 4(2) exemption of the Securities Act:


In February 2009, 1,000,000 shares of common stock were issued to an employee, Anthony Santora in lieu of a cash payment for services he performed on an ad hoc basis totaling $10,000.  The 1,000,000 shares were valued at $0.01 per share and represent the average market price of the Company’s stock during the period the services were performed.


In February 2009, 500,000 shares of common stock were issued to a third party; William N. Utz under an existing Consulting Agreement dated September 1, 2007 for consulting fees incurred in 2007 totaling $5,000.  The 500,000 shares were valued at $0.01 per share and represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in February 2009.


In February 2009, 600,000 shares of common stock were issued to Frederick C. Biehl, Esq.  for payment of a $6,000 retainer for 2009 legal services.  The 600,000 shares were valued at $0.01 per share and represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in February 2009.


In February 2009, 1,000,000 shares of common stock were issued to Letta Gorman, et.al  as a retainer for consulting fees totaling $10,000.  The issuance was composed of 900,000 restricted shares and 100,000 non-restricted shares that were valued at $0.01 per share and represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in February 2009.


In February 2009, 500,000 shares of common stock were issued for payment of a $25,000 retainer for 2008 & 2009 legal services, of which, $17,500 has been expensed and accrued for the year ended December 31, 2008.   The 500,000 shares were valued at $0.05 per share. The Company’s closing market price for its stock at the time of the Board approval was $0.01 per share.




In February 2009, 5,000,000 shares of common stock were issued to Peter Ubaldi, President and CEO of the Company, at $0.05 per share for payment of accrued officer compensation for the year ended December 31, 2008 totaling $250,000. The closing market price of the Company’s stock at the time of the approval of this issuance was $0.01 per share. 


In February 2009, 1,750,000 shares of common stock were issued in settlement for the $17,500 debt to Rex Draughn, CPA a third party for accounting services performed prior to 2008. The shares are to be held in escrow by an attorney for six months during which the Company or its designee will have the right to purchase all or part or the shares from the third party. The 1,750,000 shares were valued at $0.01 per share.  


In February 2009, 3,000,000 shares of common stock were issued to settle the working capital advances made directly to the Company by a third party, Ken Loman prior to 2008 totaling $300,000. The 3,000,000 shares were valued at $0.10 per share.  It is agreed upon that if the price of the Company’s common stock does not reach an average of $0.10 per share for a period of 30 days after August 2009, the Company will issue additional shares to bring the total value of the common stock issued to a value of $300,000.  The stock certificate is still being held by the Company until the agreement is signed.


In February 2009, 1,250,000 shares of common stock were issued to Roy Pardini, Executive Vice President of the Company, at $0.05 per share for partial payment of accrued officer compensation for the year ended December 31, 2008 totaling $62,500. The closing market price of the Company’s stock at the time of the approval of the issuance was $0.01 per share. 


In February 2009, the Company authorized the issuance of 500,000 shares of common stock to Financial Indemnity Insurance Company for compensation related to a Note and Pledge Agreement dated February 9, 2009.  The Agreement provides for a working capital loan in the amount of $107,500 to the Company. The issuance of these shares is a fee in addition to the interest rate on the note.


In May 2009, the Company authorized the issuance of 500,000 shares of its common stock from its non-statutory S-8 Stock Plan to Letta Gorman, whose group is the Company’s grant writing and business development team.  The shares were issued at a price of $0.009 per share representing expenses due and to become due to Gorman for the months of May, June, July, August and September of 2009 at a rate of $900.00 per month.  The stock had a market value at the time of issuance of $0.0089 per share.


Item 3. Defaults Upon Senior Securities


None


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


None

  

Item 5. Other Information


In June of 2009, Roy Pardini resigned as Executive Vice President, Secretary and Board member.  The Company is in the process of finding a qualified individual to replace Mr. Pardini on the Board of Directors.

   

Item 6. Exhibits


 

 

 

 Exhibit

 

Exhibit Description

2.1

 

Acquisition Agreement (incorporated here by reference to Exhibit 2.1 of HSNI’s August 31, 2004 Form 8-K).

3.1

 

Amendments of Articles of Incorporation (incorporated by reference to Exhibit C of HSNI’s February 7, DEF 14C).

10.1

 

Software and Firmware Purchase Agreement Dated September 18, 2006 (Rodwell Software Systems, Inc.).

10.2

 

EFund Capital II, LP (incorporated here by reference to Form 8K filed September 12, 2006).

10.3

 

Monet Acquisition, LLC Agreement (incorporated here by reference to Form 8-K filed September 26, 2006).

10.4

 

Distribution License Agreement between Homeland Security Network and Ph Solutions, Inc.  (filed on Form 10-Q on May 20, 2008).

10.5

 

Joint Venture Agreement with Huma Clean, LLC dated March 28, 2008 (filed herewith).

10.6

 

Asset Purchase and Sale Agreement with Global Safety Holdings, Corp. (filed on Form 8-K on October 1, 2008 and incorporaed herein by reference).







 

31.1

 

Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

 Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 


 

 





  

 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

 

 

/s/ PETER D. UBALDI

 

 

 

President & Chief Executive Officer

 

Date: August 15, 2009

 

 

 

/s/ PETER D.UBALDI

 

 

 

President & Chief Executive  Officer

 

Date: August 15, 2009