Converted by EDGARwiz



 

[hsyn10q2ndquarter2008001.jpg]

 

Form 10-Q


Homeland Security Network, Inc. - HSYN


Filed:


Quarterly report which provides a continuing view of a company's financial position

 

 

Table of Contents



Part I



Item 1.

Financial Statements 2


Part II




PART 1



FINANCIAL INFORMATION

Item 1.

Financial Statements

Item 2.

Management s Discussion and Analysis of Financial Condition and Results of Operations.

Item 3.

Quantitative and Qualitative Disclosure about Market Risk.

Item 4.

Controls and Procedures.


PART II--OTHER



INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Item 4.

Item 5.

Item 6.

Exhibits

SIGNATURES


EX-31.1 (EXHIBIT 31.1)


EX-31.2 (EXHIBIT 31.2)


EX-32.1 (EXHIBIT 32.1)


EX-32.2 (EXHIBIT 32.1)





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM 10-Q


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


For the quarterly period ended June 30, 2008


¨         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number 000-15216


HOMELAND SECURITY NETWORK, INC.

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

 

 

Nevada

86-0892913

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)


7920 Beltline Road, Suite 770

 Dallas, Texas 75254

 (Address of principal executive offices)


(972) 386-6667

 (Issuer’s telephone number)


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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     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:

The number of shares outstanding of each of the registrant’s classes of common stock, as of July 31, 2008 was: 314,472,717
















HOMELAND SECURITY NETWORK, INC.

10-Q


TABLE OF CONTENTS


Part I

 

 

 

Item 1.

Financial Statements

2

Item 2.

Managements discussion and Analysis of Financial Condition and Results of Operation

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35



Part II

 

 

 

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3.

Default Upon Senior Securities

40

Item 4.

 Submission of Matters to a Vote of Security Holders

41

Item 5.

Other Information

41

Item 6.

Exhibits

41

 

Signatures

41

















PART 1 – FINANCIAL INFORMATION


Item 1.

Financial Statements


HOMELAND SECURITY NETWORK, INC.

10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

FINANCIAL Statements

Page

 

Report of independent registered public accounting firm

3

 

Balance Sheet as of June 30, 2008 and December 31, 2007

4

 

Statement of Operations for the six months ended June 30, 2008 and 2007

5

 

Statement of Operations for the three months ended June 30, 2008 and 2007

6

 

Statements of Cash flows for six months ended June 30, 2008 and 2007

7

 

Notes to the Financial Statements

8























HOMELAND SECURITY NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

June 30,

2008

 

December 31,

2007

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash

 

$

5,598

 

$

833

 

Accounts receivable – trade

 

 

9,177

 

 

8,793

 

Accounts receivable from related parties

 

 

802,725

 

 

-

 

Inventory

 

 

26,007

 

 

 29,800

 

Prepaid expenses

 

 

20,000

 

 

 

 

Total current assets

 

 

863,507

 

 

39,426

 

Property, plant and equipment, net of accumulated depreciation

 

 

99,415

 

 

1,311

 

Capitalized software, net of accumulated amortization

 

 

99,179

 

 

                  110,848

 

Other intangible assets

 

 

215,000

 

 

 -

 

Other long-term assets

 

 

1,124

 

 

1,124

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,278,225

 

$

152,709

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

1,288,856

 

$

1,279,693

 

Accounts payable and accrued liabilities to related parties

 

 

1,305,756

 

 

905,345

 

Notes payable to related parties

 

 

1,113,224

 

 

1,149,366

 

Amounts payable to credit unions

 

 

72,032

 

 

80,032

 

Line of credit

 

 

166,085

 

 

166,085

 

Total current liabilities

 

 

3,945,953

 

 

3,580,521

 

 

 

 

 

 

 

 

 

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, 310,472,717 and 261,015,238 shares issued and outstanding

 

 

310,472

 

 

261,016

 

Additional paid-in-capital

 

 

23,750,249

 

 

21,872,833

 

Accumulated deficit

 

 

(26,685,439

)

 

(25,518,651

)

 

 

 

(2,267,988

)

 

(3,028,072

)

Less treasury at cost, 1,817,000 shares

 

 

(399,740

)

 

(399,740

)

Total shareholders’ deficit

 

 

(2,667,728

 

(3,427,812

)

Total liabilities and shareholders’ deficit

 

$

1,278,225

 

$

152,709

 



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



















HOMELAND SECURITY NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

  For the Six Months Ended

June 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Sales

 

$

34,083

 

$

59,036

 

Cost of goods sold

 

 

14,263

 

 

43,244

 

Gross margin - product sales

 

 

19,820

 

 

15,792

 

 

 

 

 

 

 

 

 

Other income

 

 

2,611

 

 

 -

 

Gross margin

 

$

22,431

 

$

15,792

 

Expenses:

 

 

 

 

 

 

 

Compensation and benefits

 

 

225,991

 

 

273,645

 

Office occupancy and equipment

 

 

41,855

 

 

30,573

 

Professional and consulting fees

 

 

160,934

 

 

77,276

 

Sales Development

 

 

457,396

 

 

-

 

Depreciation and amortization

 

 

17,840

 

 

3,177

 

Marketing expense

 

 

30,750

 

 

-

 

Other debt settlement fees

 

 

169,882

 

 

-

 

Other operating expense

 

 

21,918

 

 

32,016

 

Total expenses

 

 

1,126,566

 

 

416,687

 

Loss from operations

 

$

(1,104,135

)

$

(400,895

)

 

 

 

 

 

 

 

 

Other income (loss):

 

 

 

 

 

 

 

Gain on cancellation of debt

 

 

-

 

 

85,059

 

Loss on disposition of assets

 

 

-

 

 

(18,913

)

Interest expense

 

 

(62,564

 

 (123,346

)

Total other income (loss)

 

 

(62,564

 

 (57,200

)

 

 

 

 

 

 

 

 

Net loss

 

(1,166,789

)

(458,095

)

Net loss per share, basic and diluted

 

$

(0.004

)

(0.001

)

Weighted average shares outstanding, basic and diluted

 

 

294,128,011

 

 

210,258,664

 



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

 






















HOMELAND SECURITY NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

  For the Three Months Ended

June 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Sales

 

$

12,510

 

$

31,457

 

Cost of goods sold

 

 

6,834

 

 

14,991

 

Gross margin - product sales

 

 

5,676

 

 

16,466

 

 

 

 

 

 

 

 

 

Other income

 

 

1,073

 

 

 -

 

Gross margin

 

$

6,749

 

$

16,466

 

Expenses:

 

 

 

 

 

 

 

Compensation and benefits

 

 

123,388

 

 

164,929

 

Office occupancy and equipment

 

 

32,892

 

 

15,789

 

Professional and consulting fees

 

 

30,934

 

 

54,713

 

Sales Development

 

 

391,756

 

 

-

 

Depreciation and amortization

 

 

11,874

 

 

1,588

 

Marketing expense

 

 

29,039

 

 

-

 

Other debt settlement fees

 

 

169,882

 

 

-

 

Other operating expense

 

 

17,124

 

 

20,740

 

Total expenses

 

 

806,889

 

 

257,759

 

Loss from Operations

 

$

(800,140

)

$

(241,293

)

 

 

 

 

 

 

 

 

Other income (loss):

 

 

 

 

 

 

 

Gain on cancellation of debt

 

 

-

 

 

85,059

 

Loss on disposition of assets

 

 

-

 

 

(18,913

)

Interest expense

 

 

(36,240

 

 (77,590

)

Total other income (loss)

 

 

(36,240

 

 (11,444

)

 

 

 

 

 

 

 

 

Net loss

 

(836,380

)

(252,737

)

Net loss per share, basic and diluted

 

$

(0.003

)

(0.001

)

Weighted average shares outstanding, basic and diluted

 

 

304,118,458

 

 

236,422,823

 



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

 

 

 

 

 


   



















 

HOMELAND SECURITY NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

June 30,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(1,166,789

)

$

(458,095

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

17,840

 

 

3,177

 

Loss on disposal of fixed assets

 

 

-

 

 

18,913

 

Common stock issued in lieu of interest

 

 

5,000

 

 

-

 

Common stock issued for services

 

 

690,350

 

 

-

 

Common stock issued for commissions

 

 

-

 

 

6,260

 

Common stock issued for debt settlement fees

 

 

169,882

 

 

-

 

Gain on cancellation of debt

 

 

-

 

 

(85,059

 )

 

 

 

 

 

 

 

 

Changes in:

 

 

 

 

 

 

 

Accounts receivable – trade

 

 

(384

)

 

(19,406

) 

Accounts receivable from related parties

 

 

(802,725

)

 

-

 

Prepaid expenses

 

 

(20,000

)

 

 

 

Inventory

 

 

3,793

 

 

 

 

Other assets

 

 

-

 

 

-

 

Accounts payable and other accrued expenses

 

 

36,623

 

 

534,573

 

Net cash provided (used) in operating activities

 

 

(1,066,410

)

 

363

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(104,275

)

 

-

 

Net cash used in investing activities

 

 

(104,275

)

 

 -

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payment of debt

 

 

(8,000

)

 

 

 

Advances from related parties

 

 

783,450

 

 

-

 

Proceeds from notes payable

 

 

400,000

 

 

-

 

Net cash provided by financing activities

 

 

1,175,450

 

 

-

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

4,765

 

 

363

 

Cash beginning of the period

 

 

833

 

 

1,842

 

Cash end of the period

 

$

5,598

 

$

2,205

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

    Stock issued to settle related party advances and accrued expenses

 

$

400,906

 

$

588,392

 

    Stock issued to settle notes payable

 

$

436,142

 

$

174,619

 

    Stock issued to acquire intangible assets

 

$

215,000

 

$

-

 

 

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

 
















 


HOMELAND SECURITY NETWORK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Note 1. Basis of Presentation


The financial information presented in this report comprises the consolidated financial information (i) for the three and six months ended June 30, 2008; and (ii) for the three and six months ended June 30, 2007.


Homeland Security Network, Inc., or “HSNI”, or “the Company”, without audit, has prepared the accompanying interim consolidated 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 regulation of the Securities and Exchange Commission for quarterly reports on Form 10-Q. The consolidated financial statements include the Company’s accounts and those of its subsidiaries. All material inter-company balances have been eliminated. These unaudited consolidated 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-KSB for the year ended December 31, 2007.


In the opinion of HSNI’s management, the consolidated financial statements include all adjustments, which consist of normal recurring adjustments, necessary to present fairly the consolidated 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, 2008 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 consolidated 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 consolidated 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 consolidated 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 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.  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 and are generally payable in full, however, some customers submit monthly fees through electronic fund transfers upon activation of the related unit or renewal of a previous service contract.


Accounts Receivable


Accounts receivable consist of payments due from wholesalers of the tracking device products. In the normal course of business, the Company monitors the financial condition of the Company’s customer base. The Company has recorded a provision for uncollectible accounts of $133,250 as of June 30, 2008 and December 31, 2007.  The account deemed uncollectible relates to an individual customer for which the Company has a note payable outstanding to an affiliated company.  Although there is not a right of offset the Company believes that they will prevail with this offset in the event that the note payment is demanded.  However the Company has fully reserved for the balance in accordance with its own accounting policies.


Fixed Assets and Capitalized Software


Furniture and equipment are carried at cost net of accumulated depreciation. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of the assets.


Leasehold Improvements are carried at cost net of accumulated depreciation. Depreciation and amortization are calculated using the straight-line method over the life of the lease.


The Company capitalizes certain computer software costs, after technological feasibility has been established, which are amortized utilizing the straight-line method over the economic life of the related software which has been estimated at five years.  Development costs of the software are accounted for in accordance with 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 applications development.  For the six months ended June 30, 2008 and June 30, 2007 the Company capitalized $0 of expenditures relating to application development.


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 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.


In a prior filing Form10KSB for December 31, 2006, the impairment of an asset, capitalized software, was classified in the income statement in the category of other expenses.   The expense relating to the impairment of this asset should have been included as part of income from continuing operations rather than other expenses.  The impairment expense for that period was $624,433.


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.


Investment in Joint Venture


In March 2008, the Company entered into a joint venture with Huma-Clean.  Under the terms of the agreement, the Company will share in 50% of the joint venture’s profits and losses.  Thus, the Company will account for this investment under the equity method of accounting.  Under the equity method of accounting, the carrying amount of the investment is increased to reflect the Company’s shares of the joint
















venture’s income and is reduced by its share of the joint venture’s losses.  As the joint venture was formed at the end of March 2008, there was no profit or loss to recognize during the first six months of 2008.  The Company has advanced $700,000 to the joint venture, which is to be paid back out of the initial proceeds of the venture.  The Company has recorded this as an advance to a related party as of June 30, 2008.


Fair Value of Financial Instruments


The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced sale or liquidation. Significant differences can arise between the fair value and carrying amount of financial instruments that are recognized at historical cost amounts. The carrying value of cash, accounts payable and accrued liabilities approximate the fair value because of the short maturity of those instruments. The finance receivables have been reduced to their estimated fair value.


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 $100,000.


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  . Stock-based compensation for non-employees was accounted for 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 provisions of Staff Accounting Bulletin No. 107 (SAB No. 107), issued by the Securities and Exchange Commission, have been applied in the Company’s 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).


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. In our pro forma disclosures required under SFAS No. 123 for periods prior to 2006, we accounted for forfeitures as they occurred.


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 Consolidated 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 tax effects of employee stock-based compensation have not been recorded.


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 the Company’s historical net operating loss position, we have not recorded these excess tax benefits as of June 30, 2008.


Recently issued Accounting Pronouncements


In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements  (“SFAS 157”).  SFAS 157 defines fair value, establishes a formal framework for measuring fair value and expands disclosures about fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  FAS 157 is not expected to have a material impact on the Company’s financial statements.


In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements an amendment of Accounting Research Bulletin No. 51  (“SFAS 160), which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for the Company beginning January 1, 2009. As the Company does not hold any non-controlling interests, it believes the impact of adopting SFAS 160 will not have a material effect on its consolidated statement of earnings, financial condition, and statement of cash flows or earnings per share.


In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, Business Combinations  (“SFAS 141R”), which establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. This statement also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for the Company on a prospective basis for business combinations for which the acquisition date is on or subsequent to the reporting period beginning January 1, 2009. As the Company does not have any acquisition plans, it believes the impact of adopting SFAS 141 will not have a material effect on its consolidated statement of earnings, financial condition, and statement of cash flows or earnings per share.


Note 3.  Divestiture of Subsidiary


On September 26, 2006, the Company entered into an agreement to sell 80% of the total issued and outstanding common stock of its wholly-owned subsidiary Pacific Auto Group, Inc. ("PAG") pursuant to a Stock Purchase Agreement by and between Homeland Security Network, Inc. and Monet Acquisition, LLC, (“Monet”) a Delaware limited liability company.  Monet agreed to indemnify the Company against any contingent liabilities of PAG and return 20% of the entity that could potentially have value in the future depending on the buyer’s future action with the entity in consideration of the stock purchase. Pacific Auto Group, Inc. will be operated and controlled totally independent of HSNI; however, it is the intention of HSNI to distribute the remaining 20% of the outstanding common stock of PAG that HSNI owns to its stockholders as a dividend.

















On May 24, 2007, the Company contributed 100% of the outstanding stock in its subsidiaries, American Finance Company (“AFCO”) and Autocorp Financial Services, Inc. (“ACFS”) to AFCO Receivables Funding Corp. (“AFCORF”).  After this reorganization, the Company sold 90% of its stock in ACORF to Monet Acquisition, LLC.  The Company also issued a Promissory Note in the amount of $95,000 at an interest rate of 10% per annum to Monet.  The loan from Monet is personally guaranteed by the President and CEO of the Company, Peter Ubaldi. The consideration for the sale of the reorganized subsidiary was the $95,000 advance from Monet in exchange for a note with terms more favorable than the Company’s financial condition would have allowed at the time from other lending sources.  In addition, the Company retained a 10% interest in the sold subsidiary.  Monet was willing to give the Company funding of $95,000 and a 10% carried interest because they intend to use the acquired subsidiaries to build businesses which they hope to register the shares for public trading in the future.

  

Note 4. Going Concern Uncertainty


The Company has incurred net losses in the six months ended June 30, 2008 and 2007 and has had working capital deficiencies both periods.


The Company's consolidated 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 inventory financing and 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,

 

 

  

2008

 

 

2007

 

 

  

 

 

 

 

 

Loss from operations

  

(1,104,135

)

(400,895

)

Other income (deductions)

  

 

(62,654

 

(57,200

)

 

 

 

 

 

 

 

Net loss

  

(1,166,789

)

(458,095

)

 

  

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

  

For the Three Months Ended

June 30,

 

 

  

2008

 

 

2007

 

 

  

 

 

 

 

 

Loss from operations

  

(800,140

)

(241,293

)

Other income (deductions)

  

 

(36,240

 

(11,444

)

 

 

 

 

 

 

 

Net loss

  

(836,380

)

(252,737

)

 

  

 

 

 

 

 



Note 5. 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, 2008 and 2007.


Note 6. Property, Plant and Equipment

 

Property, plant and equipment are comprised of the following at June 30, 2008 and December 31, 2007:


 

 

 

 

 

 

 

 

 

 Description: 

  

June 30,

2008

 

 

December 31,

2007

 

Furniture,  office  and computer equipment

  

$

104,925

 

 

49,485

 

Leasehold Improvements

 

 

48,835

 

 

 

-

 

Software

  

 

2,185

 

 

 

2,185

 

 

  

 

 

 

 

 

 

  

 

155,945

 

 

 

51,670

 

Less accumulated depreciation

  

 

(56,530

 

 

(50,359

)

 

  

 

 

 

 

 

Property and equipment, net

  

$

99,415

 

 

$

1,311

 

 

  

 

 

 

 

 


Note 7. Capitalized Software Costs

 

The Company accounts for the development costs of software that is intended for sale in accordance with  AICPA Statement of Position 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 applications development.  


During 2007 the Company acquired new software to operate and enhance its GPS systems.  The development costs of this software totaled $116,682; these costs were capitalized as of December 31, 2007. As of June 30, 2008, the Company determined that there was no impairment of these assets as management has projected there will be sufficient future cash flows from operations related to this software acquired in 2007.


Capitalized software costs and accumulated amortization were as follows for the six months ended June 30, 2008 and December 31, 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

2008

 

 

December 31,

2007

 

Software development costs

116,682

 

 

$

116,682

 

Less accumulated amortization

 

(17,503

 )

 

 

(5,834

)

 

 

 

 

 

 

Capitalized Software, net

99,179

 

 

110,848

 

 

 

 

 

 

 


















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

 

 

 

 

 

Year

 

Amount  

 

 

 

 

2008

 

 

11,667

2009

 

 

23,337

2010

 

 

23,337

2011

 

 

23,337

Thereafter

 

 

17,501

Total

 

 

$      99,179

 

 

 


Note 8. 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 issue. 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 March 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 is 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; 14,710,936 shares have been issued from the Plan as of June 30, 2008.



Note 9. Notes Payable


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

2008

 

December 31,

2007

 

 

 

 

 

 

 

Two notes payable to a Director of the Company. Both bear interest at 8% per annum. The notes matured in February 2007 and are due in full.  This note has been extended .

 

 

286,874

 

 

286,874


In 2006, the Company obtained funds under a financing arrangement bearing interest at 7% per annum.  This note originally matured in May 2006 but was extended until December 31, 2007.  It is currently due in full and has been extended.

 

 

 2                              27,000

 

 

                        27,000








 

 

 

 

 

 

 


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

 

 

100,000

 

 

100,000


In 2005, the Company obtained funds under a financing arrangement bearing interest at 8% per annum from a related third party. The note provides a line of credit totaling $500,000. The Company has not received any additional funds under the proposed line of credit. The note is uncollateralized and the proceeds were utilized for working capital. This note matured in January 2007 and is due in full.  The Company is making arrangements to settle this amount with its common stock.

 

 

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 is uncollateralized and the proceeds were utilized for working capital. This note has been renegotiated with an extended term. This note matured in April 2006 and is due in full.  This note has been extended.

 

 

141,875

 

 

141,875


Note payable, unsecured, to an Executive bearing interest at 6% per annum and matured in July 2006.  The Company has renegotiated with the executives and the parties have agreed to an extended term.

 

 

216,150

 

 

216,150


Note payable, unsecured, to a former Executive and current Director bearing interest at 6% per annum and matured in July 2006.  The Company settled this note through the issuance of common stock.

 

 

-

 

 

13,167


Note payable to Monet Acquisition, LLC for additional consideration related to sale of subsidiaries. The note bears interest at a rate of 10% per annum and matured on April 25, 2008.  It is personally guaranteed by the CEO.  This note has been extended.

 

 

95,000 

 

 

95,000 


Note payable to a related party, which matured in November 2007.   The proceeds were used for working capital.  The note was settled by conversion to shares of the Company’s common stock at the option of the holder.

 

 

-

 

 

7,975  


 

 

 

 

 

 

 










 

 

 

 

 

 

 

In September 2007, the Company obtained $15,000 under a financing arrangement bearing interest at 12% per annum from a third party. The note was uncollateralized and the proceeds were utilized for working capital. This was settled by conversion to shares of the Company’s common stock at the option of the holder.

 

 

-

 

 

15,000

 

 

 

 

 

 

 

$

1,113,224

 

$

1,149,366

 

 

 

 

 



Note 10. Credit Union Participations


As of December 31, 2007, the Company no longer services automobile finance receivables. However, there was one remaining credit union relationship (Houston Postal Credit Union/Plus4 Credit Union) which resulted in a dispute over amounts due on the collection of auto finance contracts.  The Company arrived at a settlement with this credit union which calls for payments totaling $41,000 with a $5,000 initial payment and $1,000 payable each month until March 2009, at which time a balloon payment of $24,000 will be due. This settlement is secured by a $41,000 judgment.  As of June 30, 2008, payments totaling $8,000 have been made.


Note 11. 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 December 31, 2007 is in default. However, the Company is presently negotiating revised payment terms with the lender. The Company is discussing a settlement for substantially less than the outstanding balance with a payout which will extend the maturity date.  There has been no decision on the part of either party as to the amount, date and outcome of these discussions.


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 interest and amortization paid by the Company to AFA is passed through to Lenders Funding (an unrelated company) of Fort Lee New Jersey. The Company is responsible only for the amounts due to Lenders Funding for interest and principle and bank service fees incurred by AFA.  The total credit facility is $50,000.  AFA/Lenders Funding will advance 70% of the cost of the inventory and there is an amount as of June 30, 2008 of $18,593, which is included in the Accounts payable and accrued liabilities to related parties balance.


Note 12. Advances to a Related Party


On March 27, 2008, the Company entered into a joint venture agreement with Huma-Clean of Palestine, Texas.  Huma-Clean is in the soil remediation industry and specializes in lake clean up and dredging, internationally.  HSNI will complement the technology used by Huma-Clean with the use of their licensed product; Clear Blue 104.  The partnership will allow HSNI to acquire projects and add to the existing capabilities of Clear Blue.  HSNI has committed an initial funding to the first project in Juarez, Mexico in the amount of $800,000.  As of June 30, 2008, HSNI has advanced $700,000 of the agreed upon amount, which is presented as a related party receivable on the balance sheet.


Note 13

Purchase of Other Intangible Assets


On June 6, 2008, the Company acquired technology from Robert Elfstrom. Mr. Elfstrom has developed a mobile water purification plant and computerized ballast water distribution system.  The PureWater System is a state of the art water purification system that can be easily deployed in hard to reach locations and can service the daily water needs of a 5,000-person village. The PureWater System removes water-born and human pollution as well as all harmful bacteria. The current mobile and stationary versions of the system can comfortably process about 35,000 gallons day at a rate of 45 gallons of water per minute. The PureWater System can be deployed in several ways. The mobile version is the only transportable high-volume, pure water production system available today using the company’s chelated copper-based formula to purify water.


The Company agreed to purchase these assets for 1,000,000 shares of the Company’s common stock with a value of $215,000 at the date of the agreement.   The Company issued 100,000 shares upon execution of the Bill of Sale; the balance of the shares will 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 has presented this technology as other intangible assets on the balance sheet and recorded a liability for the remaining shares to be issued.


Note 14. 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 contingent upon the Company’s drawing down on the line of credit.  The agreement also provided that the Company was to issue 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.  As of June 30, 2008, the Board has authorized the issuance of the full 5,000,000 shares.  However, 4,000,000 are being held in reserve until the transaction is completed.  These shares will be recorded at their grant date fair value at that time.
















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. Ubladi’s Employment Contract for an additional 2 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 2 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.


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

·

Mr. Nunez shall be 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, 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 salary 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 his technology, limited to $250,000 for any given quarter.



Operating Leases


The Company currently leases office space in two locations:


·

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; and


·

140 Smith Street, 5th Floor, Keasbey New Jersey 08832. The sublease from a related party is for one year with two one- year automatic renewals.  The annual rent is $108,000.  The lease commenced on March 1, 2008 and included a provision for two months of free rent.


·

In a prior period filing, Form 10-QSB for the quarter ended June 30, 2006, the Company did not reflect the rent expense, net of rent holidays, on a straight-line basis over the lease term.  The amount of the rent holiday was four months rent of $15,518.  This amount reduced the rent expense for the term of the lease.  The net rent expense for the forty (40) month term of the lease was $155,176 and should have been reported on a straight-line basis over the lease term.  Accordingly, the rent expense for the quarter should have been $39,441 instead of $27,803


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


 

 

 

 

 

 

 

 

Year Ending December 31,

 

Amount

2008

 

84,555

2009

 

 

121,485

2010

 

 

122,415

2011

 

 

18,000

 

 

 

Total

 

$

346,455

 

 

 


Note 14.  Pension Plans


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


Note 15.  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.  Subsequent to December 31, 2007, HPCU and the Company entered into a settlement agreement.  The Company paid  $5,000 upon signing of the document and will pay a monthly payment of $1,000 per month through February 2009.  A balloon payment of $24,000 is due on March 1, 2009.  This settlement is secured by a $41,000 judgment.  As of June 30, 2008, payments totaling $8,000 have been made.


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 of Financial Condition and Results of Operations.


You should read this section together with our consolidated financial statements and related notes thereto included elsewhere in this report.


We intend that our forward-looking statements be subject to the safe harbors created by the Exchange Act. The forward-looking statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “expect” and other similar words and statements and variations or negatives of these words. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect, including those discussed under the heading “Risk Factors” in this report filed with the Securities and Exchange Commission. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from our anticipated outcomes. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate. Therefore, we can give no assurance that the results implied by these forward-looking statements will be realized. The inclusion of forward-looking information should not be regarded as a representation by our company or any other person that the future events, plans or expectations contemplated by Homeland Security Network, Inc. will be achieved. We disclaim any intention or obligation to update or revise any forward-looking statements contained in the documents incorporated by reference herein, whether as a result of new information, future events or otherwise.


Overview

 

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. The Company intends `Homeland Security Network, Inc.' to be recognized as a provider of technology products and services for tracking and recovering valuable mobile assets.  The Company anticipates its new course of business will capitalize on rapidly emerging, largely under-served, GPS tracking markets. HSNI plans to serve the concerns and requirements of the individual consumer and corporations. HSNI predominantly targets markets such as commercial trucking and cargo management, commercial fleet management, equipment rental and personal vehicle tracking. These markets could have a potential demand in excess of 100 million units in the United States, Canada and Mexico over the next decade. The Company expects to impact 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. The Company plans to continually enhance features.


In the fourth quarter of 2007, the Company began a second business segment. 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 two events at the United Nations and  has sponsored a third  on May 2, 2008.  This dinner reception is part of the Company’s association with International Renewable Energy Organization (“IREO”), a Brazilian private partner of the United Nations. In attendance were Ambassadors, Government Officials and entertainment celebrities.  Peter Ubaldi, President & CEO of the Company has been appointed as Chairman of IREO’s Water Restoration Committee.  The Company has proposed its remediation technology for Lake Rodrigo in Brazil as part of its expanding marketing efforts in Central and South America.  


HSNI has entered into a joint venture with HumaClean, 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 next site has been designated as Monterey, Mexico.  The Company believes that revenue from these activities will begin to be recorded in the third quarter of 2008 and the first order of its processed soil has been received for in excess of $2,000,000.  The Company has agreed to advance $800,000 to the venture and this will be paid back before the year end.  As of June 30, 2008 the Company had advanced $700,000 to the venture.  The terms of the pay-back 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 the auto receivable portfolio. Its focus is in several new markets with new products for the GPS industry and the water purification 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”).  From the 1st quarter of 2005 until December of 2007, the Company had operated this system under a licensing agreement from RSSI; however, RSSI was issued a total of 8,855,760 shares of the Company’s common stock for this purchase. The total purchase price of the software was $116,682.  


The purchase from RSSI provided 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 distinct sales and marketing presence in the automobile retail industry, and 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.


Ultimately, 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 and are payable in full upon activation of the related tracking unit, 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 a second business segment. 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 has supported two events at the United Nations and  has sponsored a third  on May 2, 2008.  This dinner reception is part of the Company’s association with International Renewable Energy Organization (“IREO”), a Brazilian private partner of the United Nations. In attendance were Ambassadors, Government Officials and entertainment celebrities.  Peter Ubaldi, President & CEO of The Company has been appointed as Chairman of IREO’s Water Restoration Committee.  The Company has proposed its remediation technology for Lake Rodrigo in Brazil as part of its expanding marketing efforts in Central and South America.  


HSNI has also entered into a joint venture with HumaClean, 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 next site has been designated as Monterey, Mexico.  The Company believes that revenue from these activities will begin to be recorded in the third quarter of 2008 and the first order of its processed soil has been received for in excess of $2,000,000.


Ultimately, the Company expects this activity to become a major business segment contributing sustaining revenues.


Going Concern


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. The Company has secured a line of credit for the purchase of inventory.  This will reduce the need for the Company to use its working capital to acquire inventory for re-sale. 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.


Financial Condition and Results of Operations


Comparison of the Three and Six Months Ended June 30, 2008 and 2007


Product Sales

















For the three months ended June 30, 2008, revenues from product sales decreased by 60 %, or $18,947 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, 2008, revenues from product sales decreased by 42 %, or $24,953 as compared to June 30, 2007.



Cost of Sales


For the three months ended June 30, 2008, cost of product sales decreased by 54 %, or $8,157 as compared to the same period a year ago, primarily due to the decrease in the sale of tracking devices and their related costs.  For the six months ended June 30, 2008, cost of product sales decreased by 67 %, or $28,981 as compared to June 30, 2007.


Operating Expenses


Operating expenses incurred were $806,889 and $257,759 respectively for the three months ended June 30, 2008 and 2007.  Operating expenses incurred were $1,126,566 and $416,687, respectively for the six months ended June 30, 2008 and 2007.



Significant expenditures for operating expenses for the three and six months ended June 30, 2008 and 2007 were:


 

 

  For the Three Months Ended

June 30,

 

  For the Six Months Ended

June 30,

 

 

2008

2007

 

2008

2007

Compensation and benefits

 

 

123,388

 

164,929

 

 

 

225,991

 

273,645

Office occupancy and equipment

 

 

32,892

 

15,789

 

 

 

41,855

 

30,753

Professional and consulting fees

 

 

30,934

 

54,713

 

 

 

160,934

 

77,276

Sales development

 

 

391,756

 

-

 

 

 

457,396

 

-

Depreciation and amortization

 

 

11,874

 

1,588

 

 

 

17,840

 

3,177

Marketing expense

 

 

29,039

 

-

 

 

 

30,750

 

-

Other debt settlement fees

 

 

169,882

 

-

 

 

 

169,882

 

-

Other operating expense

 

 

17,124

 

20,740

 

 

 

21,918

 

32,016

Total expenses

 

 

806,889

 

257,759

 

 

 

1,126,566

 

416,687




Compensation and benefits decreased by $41,541 and $47,654, respectively, for the three and six months ended June 30, 2008 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 $17,103 and $11,102, respectively for the three and six months ended June 30, 2008 as compared to the same periods a year earlier primarily due to a increase in rent and associated rent expense as a result of opening a new office in Keasbey, NJ.


Professional fees decreased by $23,779 and increased by $83,658, respectively, for the three and six months ended June 30, 2008 as compared to the same periods a year earlier primarily due to varying needs related to legal counsel and accounting services.


Depreciation and amortization expense increased $10,286 and $14,663, respectively for the three and six months ended June 30, 2008 as compared to the same periods a year earlier due to the depreciation of leasehold improvements made to the Keasbey, NJ office in 2008 and amortization of capitalized software acquired in September 2007.


The Sales development and marketing expenses increased $420,795 and $488,146, respectively for the three and six months ended June 30, 2008 as compared to the same periods a year earlier due to the Company entering the water purification industry and aggressively pursuing this business during 2008.  The Company utilizes the services of several consultants to establish business relationships which include foreign governments, domestic government agencies, partnerships with United Nations groups and humanitarian organizations.


Other debt settlement fees increased $169,882 and $169,882 for the three and six months ended June 30, 2008 as compared to the same periods a year earlier due to the Company incurring additional fees related to the settlement of notes by common stock.


Operating expenses for Form 10-KSB for 12/31/06 included interest expense of $144,322.  This amount should have been classified in other expenses.


Interest Expenses


Interest expense as an other expense decreased by $41,350 and $60,782, respectively for the three and six months ended June 30, 2008 as compared to the same periods a year earlier, primarily due to the settlement of certain outstanding debt from issuances of common stock.



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 the issuance of additional common or preferred stock, additional lines of credit, or the 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 $1,104,135 and $400,895 for the six-month periods ending June 30, 2008 and 2007, respectively.  In 2008, the Company has been able to minimally sustain its working capital needs based on capital derived primarily from: issuances of additional common stock; notes payable and advances from related parties; and from the sale of tracking devices along with the associated airtime charges of these devices.   


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,

 

 

  

2008

 

 

2007

 

Cash provided by (used in):

  

 

 

 

 

 

 

 

Operating activities

  

(1,066,410

)

 

363

 

Investing activities

  

 

    (104,275

)

 

 

-

 

Financing activities

  

 

  1,175,450

 

 

 

-

 

Increase/(decrease in cash)

  

    4,765

 

 

363

 


Net cash used in operating activities for the six months ended June 30, 2008 increased to $1,066,410 from net cash provided by operations of $363 for the six months ended June 30, 2007 primarily due to increased spending related to the Company entering the water purification industry.  The Company increased spending for sales development and advanced $700,000 under its joint venture agreement with Huma Clean of Palestine, Texas.


Net cash used by investing activities was $104,275 for the six months ended June 30, 2008 compared to net cash used by investing activities of $0 for the six months ended June 30, 2007 as a result of disbursements for leasehold improvements and office furniture for the subleased space located at 140 Smith Street, Suite 200, Keasbey, New Jersey.


Net cash provided by financing activities was $1,175,450 for the six months ended June 30, 2008 compared to net cash provided by financing activities of $0 for the six months ended June 30, 2007 as a result of financing the purchase of the other intangible assets and the advances and notes payable obtained from related parties.


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 Disclosure about Market Risk.


Not applicable to smaller reporting companies.


Item 4. Controls and Procedures.


Evaluation of Disclosure Controls and Procedures


Our  management evaluated, with the participation of our Chief Executive Officer and  our  Principal  Accounting Officer, the effectiveness of our disclosure controls and  procedures  as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Principal Accounting Officer have concluded that our disclosure controls and procedures are primarily effective, but are still in the process of being revised and enhanced  to ensure that information we are required to disclose in reports that we  file  or  submit  under the Securities Exchange Act of 1934 (i) is recorded, processed,  summarized  and  reported  within  the  time  periods  specified  in Securities  and Exchange Commission rules and forms, and (ii) is accumulated and communicated  to  our  management, including our Chief Executive Officer and our Principal Accounting  Officer,  as  appropriate  to allow timely decisions regarding required  disclosure.  Our  disclosure  controls  and procedures are designed to provide  reasonable  assurance  that  such  information  is  accumulated  and communicated  to  our management. Our disclosure controls and procedures include components of our internal control over financial reporting.  Management's assessment of the effectiveness of our internal control over financial reporting is  expressed  at  the level of reasonable assurance that the control system, no matter  how  well  designed  and  operated, can provide only reasonable, but not absolute,  assurance  that  the  control  system's  objectives  will  be  met.

















Changes in Internal Control over Financial Reporting


There  was  no  change  in  our  internal  control over financial reporting that occurred  during  our  last  fiscal  quarter  that  materially  affected,  or is reasonably  likely  to  materially  affect,  our internal control over financial reporting.


PART II--OTHER INFORMATION



Item 1.

 Legal Proceedings


The Company is presently a party to a legal proceeding as follows:  


Plus 4 Credit Union FK/A Houston Postal Credit Union (“HPCU”).  The Company, through its 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 have settled the dispute for $41,000.  The company paid $5,000 upon signing of the document and will be making a monthly payment of $1,000 per month through February 2009.  A balloon payment of $24,000 is due on March 1, 2009.  This settlement is secured by a $41,000 judgment.


We believe that there are no other claims or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results.  However, if litigation should arise and the company was to receive an unfavorable ruling, there is a possibility that it would have a material adverse impact on our financial condition, results of operations, or liquidity of the period in which the ruling occurs, or future periods.

 


Item 1A.   Risk Factors


Risks Associated with our Business


Limited Operating History of Present Business:


In August 2004, as described under Part I, Item 1, the heading “Acquisition by AutoCorp Acquisition Partners”, the Company’s stock was acquired by a partnership formed by the then President (and CEO) and Executive Vice President of the Company. Although the Company’s current management has extensive operating experience in the consumer finance industry, the brief operating history as a provider of technology products and services for tracking and recovering valuable mobile assets provides only a limited basis for evaluation. The prospects for the Company must be considered in light of the risks, expenses, difficulties and problems frequently encountered in transitioning a company.


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;

·

The number of potential customers in a target market;

·

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;

·

Pricing and availability of equipment, materials, inventory and programming;
















·

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

·

The ability to enter into strategic alliances or other business relationships;

·

The ability to overcome significant operating losses;

·

The ability to reduce costs;

·

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


One of the Company's new businesses is related, in part, to the sale of new and pre-owned automobiles. Sales are affected by employment rates, prevailing interest rates, and other general economic conditions. Economic slowdown or recession could lead to inventory and production decreases. Adverse economic changes and sluggish sales of new and pre-owned automobiles and weaknesses in the economy could lead to a decline in the sale of tracking devices.


The Company’s other new business, the water purification business, is not expected to be affected by general economic conditions.  Since the reliance on pure water is essential to the operations of 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 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 compete in the water purification industry.  This industry is competitive and relies 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 this industry.  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. However, it is Management’s belief that the overwhelming need for pure and environmentally safe water, along with the continuing need for this service will allow more than enough opportunity for the company.  


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. 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. These factors will have less negative impact on the Company when the water purification revenue has begun and is firmly established.


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 and successfully concluded an inventory line of credit with a company owned by the President and CEO of HSNI . (Atlantic Financial Advisors, Inc. ”AFA”) Lenders Funding in Elmwood Park, New Jersey, an unrelated company, has funded this line of credit through AFA.. This will allow the Company to purchase inventory for re-sale with a minimal use of its working capital.  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 2007, 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.


Seasonality; Variability of Quarterly Operating Results


The Company's business is related, in part, to the sale of new and pre-owned automobiles. The new and pre-owned automobile sales and finance industry is subject to substantial seasonal variations in revenues. Demand for new and pre-owned automobiles is generally lower in the winter than in other seasons. Sales tend to be lower during the holiday and back-to-school seasons, while sales tend to be higher during the late spring and through the summer months. The planned growth strategy may subject the Company's operating results to substantial variables and changes each quarter. Accordingly, given the possibility of such fluctuations, management believes that quarterly comparisons of the results of operations during any fiscal year are not necessarily meaningful and that results for any one fiscal quarter should not be relied upon as an indication of future performance. There is no seasonal fluctuation in revenue or potential revenue in the Company’s water purification business segment.


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.


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.


Risk Factors Relating to Our Common Stock

 

Because our common stock is deemed a low-priced “Penny” Stock, an investment in our common stock should be considered high risk and subject to marketability restrictions.
















 

Since our common stock is a penny stock, as defined in Rule 3a51-1 under the Securities Exchange Act, it will be more difficult for investors to liquidate their investment of our common stock. Until the trading price of the common stock rises above $5.00 per share, if ever, trading in the common stock is subject to the penny stock rules of the Securities Exchange Act specified in rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting transactions in any penny stock, to:


·

Deliver to the customer, and obtain a written receipt for, a disclosure document;

·

Disclose certain price information about the stock;

·

Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;

·

Send monthly statements to customers with market and price information about the penny stock;

·

In some circumstances, approve the purchaser’s account under certain standards; and

·

Deliver written statements to the customer with information specified in the rules.  


Consequently, the penny stock rules may restrict the ability or willingness of broker-dealers to sell the common stock and may affect the ability of holders to sell their common stock in the secondary market and the price at which such holders can sell any such securities. These additional procedures could also limit our ability to raise additional capital in the future.

 

NASD sales practice requirements may also limit a stockholder's ability to buy and sell our stock.

 

In addition to the “penny stock” rules described above, the National Association of Securities Dealers (NASD) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Homeland Security Network; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Homeland Security Network are being made only in accordance with authorizations of management and directors of Homeland Security Network, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

We have a limited number of personnel that are required to perform various roles and duties as well as be responsible for monitoring and ensuring compliance with our internal control procedures. We are in the process of establishing a core group of personnel that will remedy any limitations that have existed in the past. As a result, our internal controls are vastly improved but may still have some limitations that could
















result in some of the information or procedures established to be inadequate or ineffective.  This,  could result  in some of our financial reporting to be unreliable and lead to some misinformation being disseminated to the public. Accordingly, we are taking every precaution to prevent any misinformation from being included in all future filings. Investors relying upon any misinformation that management has not identified may be making an  investment decision based on this limited information.

 

We do not expect to pay dividends for the foreseeable future.

 

For the foreseeable future, it is anticipated that earnings, if any, that may be generated from our operations will be used to finance our operations and that cash dividends will not be paid to holders of our common stock.


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, 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 GPS 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, 2008, the Company issued the following securities without registration under the Securities Act of 1933 :


In January 2008, 2,951,920 shares of common stock were issued to two related parties as a final payment for the software purchase at $0.008 per share totaling $29,519.  The value represents the selling price of the Company’s stock at the date the Board of Directors approved the issuance of stock in December 2007.


In January 2008, 2,000,000 shares of common stock were issued to an employee pursuant to a Consulting Agreement dated November 30, 2007.   The 2,000,000 shares valued at $0.01 per share total $20,000 and represent the closing market price of the Company’s stock at the time the agreement was executed in November 2007.


In January 2008, 500,000 shares of common stock were issued to a related party for consulting services rendered to the Company under the terms of a consulting agreement dated March 1, 2005.   The 500,000 shares valued at $0.01 per share total $5,000 and represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in December 2007.


In January 2008, 3,500,000 shares of common stock were issued to a related party for consulting services rendered to the Company under the terms of a consulting agreement dated June 1, 2007.   The 3,500,000 shares valued at $0.01 per share total $35,000 and represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in December 2007.


In January 2008, 200,000 shares of common stock were issued for the payment of accounting fees accrued for the year ended December 31, 2007.   The 200,000 shares valued at $0.01 per share total $2,000 and represent the average market price of the Company’s stock at the time the services were performed in the 3 rd quarter of 2007.


In March 2008, 800,000 shares of common stock were issued to a related party under an agreement to convert a promissory note to common stock of the Company.  The 800,000 shares were valued at $0.01 per
















share for a total of $7,975 which represents the closing market price of the Company’s shares at the note’s maturity date in November 2007.


In March, 2008, 10,000,000 shares of common stock were issued to Peter Ubaldi at $0.025 per share for payment of accrued officer compensation for the year ended December 31, 2007 totaling $250,000.  The value represents the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in February 2008.


In March, 2008, 9,409,533 shares of common stock were issued to Joseph Battiato at $0.009 per share in settlement of working capital advances made directly to the Company or indirectly on behalf of the Company during 2007.  The 9,409,533 shares were computed by taking the amount of the advances totaling $84,905 and dividing it by the market price of the Company’s stock at the time of each advance.


In March, 2008, 5,000,000 shares of common stock were issued to Roy Pardini at $0.025 per share for payment of accrued officer compensation for the year ended December 31, 2007 totaling $125,000.  The value represents the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in February 2008.


In March, 2008, 200,000 shares of common stock were issued for the payment of accounting fees accrued for the year ended December 31, 2007.   The 200,000 shares valued at $0.026 per share total $5,200 and represent the average market price of the Company’s stock at the time the services were performed during February 2008.


In March, 2008, 1,500,000 shares of common stock were issued to William Merritt at $0.02 per share for consulting services performed in his capacity as Managing Director of Business Development for the Company totaling $30,000.  The value represents the average market price of the Company’s stock at the time the services were performed in the fourth quarter of 2007 and first quarter of 2008.


In March, 2008, 5,000,000 shares of common stock were issued at $0.02 per share for consulting services pursuant to an employment agreement dated February 1, 2008 totaling $100,000. The value represents the closing market price of the Company’s stock at the time the agreement was executed in February 2008.


In March, 2008, 171,500 shares of common stock were issued to a third party at $0.02 per share for commissions for marketing and sales of GPS products in 2007 totaling, $3,430.  The value represents the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in February 2008.


In April 2008, the Company authorized the issuance of 5,000,000 shares of common stock to eFund Capital Management, LLC for compensation related to Equity Line of Credit Agreement dated August 9, 2006. While the Board of Directors has authorized this transaction, 4,000,000 shares are being held in reserve until the transaction is completed.  The 1,000,000 shares released were valued at $10,000, or $0.01 per share, which represented the market price of the Company’s stock at August 9, 2006, the effective date of the agreement.


In May 2008, 250,000 shares of common stock were issued to a third party at $0.27 per share for payment of legal services performed in the current year.  The 250,000 shares valued at $67,500 represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in May 2008.


In June 2008, 355,930 shares of common stock were issued to a third party at an average price of $0.107 per share for payment of legal services performed under a retainer agreement dated April 2, 2008.   The 355,930 shares valued at $38,000 represents the average market price of the Company’s stock at the services were performed in 2007 and first quarter of 2008.


In June, 2008, 50,000 shares of common stock were issued to a related party as additional consideration for working capital advances made directly to the Company in the 1st quarter of 2008.  The 50,000 shares valued at $0.0215 per share total $1,075 and represent the average market price of the Company’s stock at the time the working capital advances were made during February 2008.


In June, 2008, 1,500,000 shares of common stock were issued to Michael Madison at $0.01 per share in settlement of a note payable from the Company for $15,000 dated September 22, 2007.  The terms of the note allowed Mr. Madison to convert this note to 1,500,000 shares of the Company’s common stock in full settlement of the obligation.


In June 2008, 43,000 shares of common stock were issued to a third party at $0.15 per share for payment of public relations services performed in the current year.  The 43,000 shares valued at $6,450 represent the closing market price of the Company’s stock at the date the shares were issued in June 2008.


In June 2008, 400,000 shares of common stock were issued to a third party for payment of a $40,000 retainer for 2008 legal services.  The share price represented the average market price of the Company’s stock at the time the settlement was negotiated.


In June 2008, 400,000 shares of common stock were issued to a related party as additional consideration for working capital advances made directly to the Company in the 1st quarter of 2008.  The 400,000 shares were valued at $0.214 per share for a total of $85,400.  In addition, 1,428,571 shares of common stock were issued in settlement for the $300,000 promissory note entered into during the 1st quarter of 2008 and the related accrued interest of $5,000 in accordance with the conversion provision in the note agreement. The 1,828,571 shares were valued at $0.214 per share.


In June 2008, 200,000 shares of common stock were issued to a related party as additional consideration for working capital advances made directly to the Company in the 1st quarter of 2008.  The 200,000 shares were valued at $0.21 per share for a total of $42,000.  In addition, 714,285 shares of common stock were issued in settlement for the working capital advances made directly to the Company in the 1st quarter of 2008 totaling $150,000. The 914,285 shares valued at $0.21 per share represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in June 2008.


In June 2008, 86,450 shares of common stock were issued to a related party as additional consideration for working capital advances made directly to the Company in the 1st quarter of 2008.  The 86,450 shares were valued at $0.21 per share for a total of $18,155.  In addition, 309,523 shares of common stock were issued in settlement for the working capital advances made directly to the Company in the 1st quarter of 2008 totaling $65,000. The 395,973 shares valued at $0.21 per share represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in June 2008.


In June 2008, 168,831 shares of common stock were issued to a related party as additional consideration for working capital advances made directly to the Company in the 1st quarter of 2008.  The 168,831 shares were valued at $25,084, or $0.15 per share, the closing market price of the Company’s stock on the date the shares were issued as no further performance was required at that time.  In addition, 285,714 shares of common stock were issued at $0.35 per share in settlement of the note payable balance of $100,000.


In June 2008, 32,222 shares of common stock were issued to a third party at $0.27 per share for payment of legal services to be performed in the current year.  The 32,222 shares were valued at $8,400, which was the fair market value of the services performed.


In June 2008, 100,000 shares of common stock were issued to Robert W. Elfstrom under the terms of a bill of sale agreement dated June 6, 2008.   The 100,000 shares valued at $0.21 per share total $21,000 and represent the closing market price of the Company’s stock at the date the Board of Directors approved the issuance of stock in June 2008.


In June 2008, 500,000 shares of common stock were issued to Vincent Nunez with Huma-Clean of Palestine, Texas upon execution of an agreement, dated June 1, 2008, to provide consulting services.   The 500,000 shares valued at $0.24 per share total $120,000 and represent the average market price of the Company’s stock as of the date of the execution of the agreement.


In June 2008, 400,000 shares of common stock were issued in settlement for the $100,000 promissory note with Galactic Technology, LLC for working capital funding entered into during the second quarter of 2008. The 400,000 shares were valued at $0.25 per share.



We believe the issuance of the shares described above were exempt from the registration and prospectus delivery requirement of the Securities Act of 1933 by virtue of Section 4(2).  The shares were issued directly by the Company and did not involve a public offering or general solicitation.  The recipients of the shares were afforded an opportunity for effective access to files and records of our company that contained the relevant information needed to make their investment decision, including our financial statements and 34 Act reports. We reasonably believed that the recipients had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The recipients had the opportunity to speak with our management on several occasions prior to their investment decision.    


In a filing for a prior period, from 10K for 12/31/06, Item 5 – Market for Common Equity and Related Stockholder Matters, the number of shares of commons stock issued during fiscal 2006 did not agree with the number of shares presented on the face of our statements of stockholders equity.  The correct amount of
















stock issued was 4,212,500 s shares and this is the amount that should have been reported in both Item 5 and in the statement of stockholders equity.


Item 3.

Defaults Upon Senior Securities


None.


Item 4.

Submission of Matters to a Vote of Security Holders


None.


Item 5.

Other Information


None.



Item 6.  Exhibits

 

 

 

 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).

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


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Homeland Security Network, Inc.

Registrant

 

 

 

/s/ PETER UBALDI

Peter Ubaldi

Chief Executive Officer and Principal Accounting Officer

 

 

Dated: August 14, 2008



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.


 

 

 

Name

Title

Date

 

 

 

/s/ Peter Ubaldi                          

Peter Ubaldi

Chief Executive Officer & Director and Principal  Officer

August 14, 2008

 

 

 

/s/ Joseph Battiato                       

Director and Chairman

August 14, 2008

Joseph Battiato

 

 

 

 

 

/s/ Roy Pardini                

Director

August 14, 2008

Roy Pardini