Securities registered pursuant to Section
12(g) of the Act: Common Stock, $.001 par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Indicate by check mark whether the issuer: (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.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark if disclosures of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405) 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
of this Form 10-K. [X]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer [_] Accelerated
Filer [_] Non-Accelerated Filer [_] Smaller Reporting
Company [X]
Indicate by check mark whether the registrant is a shell
company as defined in Rule 12b-2 of the Exchange Act.
As of June 30, 2013, the aggregate market value of the registrant’s
Common Stock held by non-affiliates of the issuer was approximately $327,102 based on the last sales price of the issuer’s
Common Stock, as reported by OTCMarkets. This amount excludes the market value of all shares as to which any executive officer,
director or person known to the registrant to be the beneficial owner of at least 5% of the registrant’s Common Stock may
be deemed to have sole or shared voting power.
The number of shares outstanding of the registrant’s
Common Stock as of March 31, 2014 was 66,364,083.
Listed below are documents incorporated herein by reference
and the part of this Report into which each such document is incorporated:
Certain statements
contained in this Report that are not statements of historical fact constitute “forward-looking statements.” Words
such as “may,” “seek,” “expect,” “anticipate,” “estimate,” “project,”
“budget,” “goal,” “forecast,” “anticipate,” “intend,” “plan,”
“may,” “will,” “could,” “should,” “strategy,” “believes,”
“predicts,” “potential,” “continue,” and similar expressions are intended to identify such
forward-looking statements but are not the exclusive means of identifying such statements. Although the Company believes that the
current views and expectations reflected in these forward-looking statements are reasonable, those views and expectations, and
the Company’s future plans, operations, business strategies, operating results and financial position, are inherently subject
to risks, uncertainties, and other factors, many of which are not under the Company’s control. Those risks, uncertainties,
and other factors could cause the actual results to differ materially from those in the forward-looking statements. Those
risks, uncertainties, and factors (including the risks contained in the section of this report titled “Risk Factors”)
that could cause the Company’s actual results, performance or achievements to differ materially from those described or implied
in the forward-looking statements and its goals and strategies to not be achieved. You are cautioned not to place undue reliance
on forward-looking statements, which speak only as of the date of this Report. The Company expressly disclaims any obligation to
release publicly any updates or revisions to these forward-looking statements to reflect any change in its views or expectations.
The Company can give no assurances that such forward-looking statements will prove to be correct.
Item 10. DIRECTORS, EXECUTIVE OFFICERS,
AND CORPORATE GOVERNANCE.
Directors and Executive Officers
On November 14,
2013, Tony Chron resigned from the Board of Directors of the Company. Set forth below is certain information regarding the persons
who were directors and executive officers at any time during the fiscal year 2013.
Name
|
Age
|
Positions
with the Company
|
Brandon
C. Thompson
|
34
|
Chairman of the
Board, Chief Executive Officer and Director
|
|
|
|
Paul
Williams
|
57
|
Vice
Chairman of the Board, Treasurer, Assistant Secretary and Director
|
|
|
|
Tony J. Chron
|
59
|
Director
(through November 14, 2013)
|
|
|
|
T.
Craig Friesland
|
42
|
Secretary and Director
|
|
|
|
Richard
G. Morris
|
59
|
Director
|
|
|
|
Reif Chron
|
35
|
President and Chief
Legal Counsel
|
|
|
|
Robert A. Boyce
|
51
|
Chief Operating
Officer
|
|
|
|
Robbie
Hicks
|
34
|
Chief
Accounting Officer and Controller
|
Brandon C. Thompson
Brandon C. Thompson,
34, currently serves as Chairman of the Board and Chief Executive Officer of the Company. Mr. Thompson was a co-founder of HGI
and has served as the Chairman of the Board of Directors and Chief Executive Officer of HGI since its founding in January 2007. Commencing
in March 2003, Mr. Thompson served as a Loan Officer with Morningstar Mortgage, LLC, a mortgage company, and eventually acquired
the assets of that company through Halo Funding Group, LLC in February 2005, which was ultimately consolidated into HGI in January
2007. Following this acquisition, Mr. Thompson founded and has served as Chairman, President, and Chief Executive Officer of Halo
Credit Solutions, LLC, Halo Debt Solutions, Inc., and Halo Group Consulting, Inc. In January 2007, upon the founding
of HGI, Mr. Thompson contributed his interest in these companies, as well as his interest in Halo Funding Group, LLC (currently
named Halo Group Mortgage, LLC), to HGI. The breadth of Mr. Thompson’s entrepreneurial and consumer services experience
led the Board of Directors to believe this individual is qualified to serve as a director of the Company. Mr. Thompson was nominated
for the Ernst & Young Entrepreneur of the Year Award, has served on the advisory board of Independent Bank of Texas. Mr. Thompson
graduated from Abilene Christian University with a degree in Finance.
Paul Williams
Paul Williams,
57, currently serves as Vice Chairman of the Board, Treasurer and Assistant Secretary of the Company. Mr. Williams was a co-founder
of HGI, has served as Vice Chairman of the Board, Chief Financial Officer (thru August 2012) and Treasurer of HGI since its founding
in January 2007 and as Assistant Secretary since late September 2009. Mr. Williams has over 30 years of business experience
primarily in the capital markets and mergers and acquisitions. Since October 2007, Mr. Williams has also served as an
executive officer for Bison Financial Group, Inc., a business development company, and as an executive officer for Blue Star Equities,
Inc., a capital markets company, since September 2007. From November 1999 to the present, Mr. Williams has also served as the managing
member of Lincoln America Investments, LLC, a real estate and equity investment company. From January 15, 2006 to March 12, 2008,
Mr. Williams served as an officer and director of NeXplore Corporation. In June 2007, NeXplore and its executive team received
an administrative order from the Arkansas Securities Department, suspending their ability to offer or sell securities in the state.
Mr. Williams has previously served three terms on the Board of the Texas Economic Development Council in Austin. In 2007 he served
as Chairman of the Board of the Frisco Chamber of Commerce and in 2009 was recognized by the Dallas Business Journal as the CFO
of the Year for companies under $50MM in revenues. Mr. Williams graduated from Austin College in Sherman, Texas with a double-major
in Economics and Business Administration. He also graduated from the Institute of Organization Management, affiliated
with the U.S. Chamber of Commerce. The breadth of Mr. Williams’ entrepreneurial and financial services experience led the
Board of Directors to believe this individual is qualified to serve as a director of the Company.
Tony J. Chron
Tony J. Chron, 59,
served as a Director of the Company through November 14, 2014. Mr. Chron joined Halo in late September 2009 as its President. Mr.
Chron brought to the Company over 33 years of business experience in both public and private companies. From 1997 to
September 2009, Mr. Chron was a Senior Partner with Trademark Property Company, a major mixed-use and retail developer, and served
in various executive capacities including, most recently, as Chief Operating Officer and Executive Vice President. Mr.
Chron also served on Trademark Property’s Executive Committee. From 1986-1992 Mr. Chron served as Associate Corporate
Counsel and Director of Real Estate and Property Management for Pier 1 Imports, Inc., a specialty retailer. In 1992,
following Pier 1 Imports’ purchase of Sunbelt Nursery Group, Inc., Mr. Chron served as General Counsel and Vice-President
of Real Estate for Sunbelt, a specialty nursery retailer, and following the purchase by Frank’s Nursery & Crafts, Inc.
of a 49% interest in Sunbelt, as Vice President of Store Development for Frank’s, a specialty retailer, where he remained
until 1994. From 1994 until 1997 Mr. Chron served as Vice President of Real Estate and Real Estate Legal for Michael
Stores, Inc., a specialty retailer. Mr. Chron is Mr. Thompson’s uncle and Reif Chron’s father. Mr. Chron
earned a Doctor of Jurisprudence degree from South Texas College of Law in 1983. He also has a BS degree from Abilene
Christian University. Mr. Chron has been a licensed attorney in the State of Texas for more than twenty-six years. The
breadth of Mr. Chron’s professional and legal experience led the Board of Directors to believe this individual is qualified
to serve as a director of the Company.
T. Craig Friesland
T. Craig Friesland,
42, currently serves as Secretary of the Company and served as Chief Legal Officer until October of 2010. Mr. Friesland was a co-founder
of HGI and had served as a Director and Chief Legal Officer since its inception in January 2007. He also practices law
in his own firm, Law Offices of T. Craig Friesland, founded in January 2005. Prior to establishing his own firm, Mr.
Friesland practiced law with Haynes and Boone, LLP, one of the largest law firms in Texas, from September 1998 through December
2004. Mr. Friesland earned his law degree at Baylor University School of Law in 1998. He also has a Master
of Business Administration degree from Baylor University and a Bachelor of Business Administration degree in Finance from The University
of Texas at Austin. Mr. Friesland was admitted to the State Bar of Texas in 1998. The breadth of Mr. Friesland’s
professional legal experience led the Board of Directors to believe this individual is qualified to serve as a director of the
Company.
Richard G. Morris
Richard G. Morris,
59, currently serves as a Director of the Company. Mr. Morris was a co-founder of HGI, and has served as a Director since its inception
in January 2007. Prior to joining the Company, he served in various positions with United Parcel Service from 1976 until
March 2002, most recently, from January 2001 to March 2002 as one of its three District Operations Managers. In that
role, Mr. Morris was responsible for 5,400 employees, a staff of 18 senior managers, a monthly operating budget of approximately
$28 million, and revenues in excess of $35 million. After departing UPS, in July 2002, Mr. Morris became the principal
owner of Rammco Distributors, Incorporated, an equipment rental company which he still owns. In July 2004, Mr. Morris
co-founded Blue River Development, Inc., a real estate investment and development company, and is currently the sole owner and
operator of this company. In August 2008, Mr. Morris acquired Port City, Inc., a plastics manufacturing company which
Mr. Morris also currently owns and operates. The breadth of Mr. Morris’ entrepreneurial, managerial and operational experience
led the Board of Directors to believe this individual is qualified to serve as a director of the Company.
Reif O. Chron
Reif O. Chron, 35,
currently serves as President and General Counsel of the Company. Mr. Chron joined Halo in March of 2009 to serve as General Counsel.
Mr. Chron studied Accounting at Texas A&M University and subsequently graduated with his Juris Doctorate from Washington University
School of Law. Prior to attending Washington University, Mr. Chron spent time at Pricewaterhouse Coopers LLP where he specialized
in tax planning for high net worth clients. Mr. Chron also worked at Trademark Property Company, where he participated in several
projects, including a $160 million real estate portfolio sale to Heritage Property Investment Trust, a new 400,000 square foot
shopping center in Flowood, MS and a $100 million lifestyle center located in the Woodlands, TX. Mr. Chron also compiled market
research that has led to three new development projects. After earning his law degree, he practiced as a real estate attorney at
Kelly Hart & Hallman where his experience includes the negotiation, due diligence review, documentation, and closing of sophisticated
real estate transactions, including the acquisition and disposition of office buildings, hotels, commercial tracts and ranch land
as well as representing developers in the acquisition, leasing and management of shopping centers and mixed-use projects.
Robert A. Boyce, Jr.
Robert A. Boyce,
Jr., 51, currently serves as Chief Operating Officer of the Company. Mr. Boyce joined Halo in June of 2011 bringing over 27 years
of business operating experience in public companies and the private sector. For the five years prior to joining Halo, Mr. Boyce
managed and operated commercial real estate holdings in Texas and commercial agricultural properties in Mississippi. From 1990
to 2005, Mr. Boyce held various executive positions for United Agri Products (and its related entities), which prior to being taken
public by the Apollo Group, was a wholly-owned subsidiary of ConAgra Foods. While with UAP, Mr. Boyce held the positions of President
of Verdicon, the non-crop distribution business with revenues of $300 million; Executive Vice President of United Agri Products
responsible for $1.2 billion in revenue; and President and General Manager for two independent operating companies with revenue
of $200 million. Prior to joining UAP, Mr. Boyce worked for Helena Chemical Company and ICI Americas. Throughout his career, Mr.
Boyce has served on national and regional industry-related boards. He is a graduate from the University of Mississippi, B.B.A.,
1984.
Robbie Hicks
Robbie Hicks, 34,
currently serves as Chief Accounting Officer and Controller of the Company. Mr. Hicks joined Halo in April of 2009 as
the Company’s Controller. In this capacity, Mr. Hicks has been responsible for the preparation and timely filing of the Company’s
annual and quarterly financials with the Securities Exchange Commission, all accounting functions including accounting policy and
procedure and implementation, treasury management, and internal management reporting to the Company’s Executive Committee
and Board of Directors. Prior to joining the Company, Mr. Hicks was an audit manager with KPMG LLP, servicing its financial
services clients in the Dallas metro area. Several clients included a public national bank, a large mortgage servicing
company, and several private investment companies. Mr. Hicks is a certified public accountant in the State of Texas. He
is a 2003 graduate of Texas Tech University where he received both his B.B.A and Master of Science in Accounting.
Section 16(a) Beneficial
Ownership Reporting Compliance
Section 16(a) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires officers, directors and persons who
beneficially own more than 10% of a class of our equity securities registered under the Exchange Act to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Based solely upon a review of Forms 3 and 4 and amendments
thereto furnished to us during fiscal year 2011 and Forms 5 and amendments thereto furnished to us with respect to fiscal year
2011, or written representations that Form 5 was not required for fiscal year 2011, we believe that except as noted below, all
Section 16(a) filing requirements applicable to each of our officers, directors and greater-than-ten percent stockholders were
fulfilled in a timely manner. James G. Temme, beneficial owner of greater than 10% of our common stock, failed to comply with his
Section 16(a) filing requirements. We have notified all known beneficial owners of more than 10% of our common stock of their requirement
to file ownership reports with the Securities and Exchange Commission.
Code of Ethics
We do not currently have a Code of Ethics applicable
to our principal executive, financial, and accounting officers.
No Committees of the Board of Directors; No Financial Expert
We do not presently
have a separately constituted audit committee, compensation committee, nominating committee, executive committee or any other committees
of our Board of Directors. Nor do we have an audit committee “financial expert”. At present, our entire
Board of Directors acts as our audit committee. None of the members of our Board of Directors meets the definition of “audit
committee financial expert” as defined in Item 407(d) of Regulation S-K promulgated by the Securities and Exchange Commission.
We have not retained an audit committee financial expert because we do not believe that we can do so without undue cost and expense.
Moreover, we believe that the present members of our Board of Directors, taken as a whole, have sufficient knowledge and experience
in financial affairs to effectively perform their duties.
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The particulars
of compensation paid to the following persons during the fiscal period ended December 31, 2013 and 2012 are set out in the summary
compensation table below:
|
•
|
our Chief Executive Officer (Principal Executive Officer);
|
|
•
|
our Chief Accounting Officer (Principal Financial Officer);
|
|
•
|
each of our three most highly compensated executive officers, other than the Principal Executive Officer and the Principal Financial Officer, who were serving as executive officers at the end of the fiscal year ended December 31, 2013 and 2012; and
|
|
•
|
up to two additional individuals for whom disclosure would have been provided under the item above but for the fact that the individual was not serving as our executive officer at the end of the fiscal year ended December 31, 2013 and 2012;
|
(collectively, the “
Named Executive Officers
”):
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
Year
|
Salary
($)**
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All Other Compensation
($)***
|
Total
($)
|
Brandon
C. Thompson, CEO
|
2013
2012
|
$250,000
$225,000
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$250,000
$225,000
|
Paul
Williams, CFO (Principal Financial Officer thru August 31, 2012)
|
2013
2012
|
-0-
$75,000
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$22,000
$3,000
|
$22,000
$78,000
|
Robbie
Hicks, CAO (Principal Financial Officer from August 31, 2012)
|
2013
2012
|
$150,000
$138,865
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$150,000
$138,865
|
Reif
Chron, President & General Counsel
|
2013
2012
|
$250,000
$225,000
|
$0
$0
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$250,000
$225,000
|
**
2013 and 2012 Salary includes both gross cash payments made and deferred compensation accrued during the year ended December 31,
2013 and 2012, respectively
***
Other compensation includes non-employee compensation for the sale of HDS, HFS and HCS subsidiaries. This compensation is paid
as a percentage of cash proceeds received against the note receivable as discussed in Note 2 of the consolidated financial statements.
Summary Compensation
The Company has
no employment agreements with any of its Directors or executive officers.
For the fiscal year
ended December 31, 2013, no outstanding stock options or other equity-based awards were re-priced or otherwise materially modified.
No stock appreciation rights have been granted to any of our Directors or executive officers and none of our Directors or executive
officers exercised any stock options or stock appreciation rights. There are no non-equity incentive plan agreements with any of
our Directors or executive officers.
Outstanding Equity Awards
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
OPTION
AWARDS
|
STOCK
AWARDS
|
Name
|
Number
of Securities Underlying Unexercised options
(#)
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(#)
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares or
Units of
Stock that
have not Vested
(#)
|
Market
Value of
Shares or
Units of
Stock that
have not Vested
($)
|
Equity
Incentive
Plan Awards:
Number of
Unearned Shares,
Units or
Other
Rights that
have not
Vested
(#)
|
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or other
Rights that
have not
Vested
($)
|
Brandon
C. Thompson,
CEO
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Robbie
Hicks, CAO
|
23,000
77,000
|
0
|
0
|
$0.94
$1.59
|
3/04/2014
6/29/2014
|
0
|
0
|
0
|
0
|
Reif
Chron,
President & General
Counsel
|
23,000
77,000
|
0
0
|
0
0
|
$0.94
$1.59
|
3/11/2014
6/29/2014
|
0
0
|
0
0
|
0
0
|
0
0
|
Compensation of Directors
DIRECTOR
COMPENSATION
|
Name
|
Fees
earned or Paid in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All
Other Compensation
($)
|
Total
($)
|
T.
Craig Friesland
|
$13,235
|
-0-
|
-0-
|
-0-
|
$13,235
|
Richard
G. Morris
|
$13,235
|
-0-
|
-0-
|
-0-
|
$13,235
|
Tony
Chron
|
$11,550
|
-0-
|
-0-
|
-0-
|
$11,550
|
Paul
Williams
|
$13,235
|
-0-
|
-0-
|
-0-
|
$13,235
|
Employment Contracts, Termination of Employment, Change-in-Control
Arrangements
There is no employment
or other contracts or arrangements with officers or Directors. There are no compensation plans or arrangements, including payments
to be made by us, with respect to our officers, Directors or consultants that would result from the resignation, retirement or
any other termination of service in respect of such Directors, officers or consultants. There are no arrangements for Directors,
officers, employees or consultants that would result from a change-in-control.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners and Management
The following table
sets forth certain information with respect to the beneficial ownership, as of March 31, 2014 of the Company’s common stock,
which is the Company’s only outstanding class of voting securities, and the voting power resulting from such beneficial ownership,
by
•
|
each stockholder known by
the Company to be the beneficial owner of more than 5% of the Company’s outstanding common stock;
|
•
|
each director of the Company;
|
•
|
each executive officer of the Company;
and
|
•
|
all
directors and executive officers of the Company as a group.
|
Beneficial
Owner (1)
|
Amount
and Nature
of
Beneficial
Ownership
|
Percent
of
Class (3)
|
|
|
|
Brandon
C. Thompson (2)
|
20,051,110
|
28.1%
|
|
|
|
James
Temme (2)
|
17,808,000
(7)
|
24.9%
|
|
|
|
Jimmy
Mauldin (2)
|
8,500,000
|
11.9%
|
|
|
|
Paul
Williams (2)
|
4,395,243
|
6.2%
|
|
|
|
T.
Craig Friesland (2)
|
2,250,122
|
3.2%
|
|
|
|
Richard
G. Morris (2)
|
4,210,006
(4)
|
5.9%
|
|
|
|
Tony
J. Chron (2)
|
1,290,071
(5)
|
1.8%
|
|
|
|
Reif
Chron (2)
|
1,160,005
(6)
|
1.6%
|
|
|
|
Robbie
Hicks (2)
|
150,005
(6)
|
*(3)
|
|
|
|
Directors
and executive officers as a group (six persons)
|
33,356,557
(8)
|
46.9%
|
|
|
|
|
(1) We
understand that, except as noted below, each beneficial owner has sole voting and investment power with respect to all shares
attributable to that owner.
(2) The
address for each such beneficial owner is 7668 Warren Parkway, Suite 350, Frisco, Texas 75034.
(3) Asterisk
indicates that the percentage is less than one percent.
(4) Includes
3,822 shares of the Company’s Series Z preferred stock (172,009 shares of the Company’s common stock into which such
Series Z preferred stock will be convertible) issuable upon exercise of HGI stock options. Further, includes 40,000 shares of
Series E convertible preferred stock (conversion rate of 50 common shares per share of Series E) for a total of 2,000,000 shares
issuable upon conversion of the preferred stock.
(5) Includes
978 shares of the Company’s Series Z preferred stock (44,004 shares of the Company’s common stock into which such
Series Z preferred stock is convertible) issuable upon conversion of HGI preferred stock.
(6) Includes
2,222 shares of the Company’s Series Z preferred stock (100,005 shares of the Company’s common stock into which such
Series Z preferred stock is convertible) issuable upon exercise of HGI stock options.
(7) Shares
issued pursuant to the transaction between Halo and Equitas Asset Management, described in Note 17 to the consolidated financial
statements.
(8) Includes
(a) 3,822 shares of the Company’s Series Z preferred stock (172,009 shares of the Company’s common stock into which
such Series Z preferred stock will be convertible) issuable upon exercise of HGI stock options and (b) 978 shares of the Company’s
Series Z preferred stock (44,004 shares of the Company’s common stock into which such Series Z preferred stock will be convertible)
issuable upon conversion of HGI preferred stock and (c) two separate calculations of 2,222 shares of the Company’s Series
Z preferred stock (100,005 shares of the Company’s common stock into which such Series Z preferred stock will be convertible)
issuable upon exercise of the HGI stock options. This also includes 40,000 shares of Series E convertible preferred stock (conversion
rate of 50 common shares per share of Series E) for a total of 2,000,000 shares issuable upon conversion of the preferred stock
into common stock.
Changes in Control
All of the shares
of the Company owned by Messrs. Cade Thompson and Reif Chron have been pledged as security in a loan agreement. A default under
the loan agreement which is not timely remedied may result in a change of control in the Company. The default provisions of the
loan agreement include the following: (i) non-payment of loan obligations; (ii) breach of a representation or warranty; (iii) non-performance
of certain covenants and obligations; (iv) default on other indebtedness; and (v) judgments exceeding $100,000.
Securities authorized for issuance
under equity compensation plans
The following
table provides information as of the end of the most recently completed fiscal year, with respect to Company compensation plans
(including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
Equity Compensation Plan Information
|
|
A(1)
|
B
|
C
|
Plan category
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
|
Weighted-average exercise price of outstanding options, warrants and rights
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
|
Equity compensation plans approved by security holders
|
681,700(1)
|
$1.00
|
-0-
|
Equity compensation plans not approved by security holders
|
20,000
|
$0.34
|
-6,980,000-
|
Total
|
701,700
|
$0.98
|
-6,980,000-
|
|
(1)
|
Includes 681,700 shares subject to stock options under the HGI 2007
Stock Plan.
|
Following is a brief
description of the material features of each compensation plan under which equity securities of the Company are authorized for
issuance, which was adopted without the approval of the Company security holders:
Prior to the merger
in 2009, HGI granted stock options to certain employees and contractors under the HGI 2007 Stock Plan. Pursuant to the terms of
the merger and the terms of the HGI 2007 Stock Plan, the Company’s common stock will be issued upon the exercise of the HGI
stock options. At December 31, 2009, pursuant to the terms of the merger agreement, all options available for issuance under the
HGI 2007 Stock Plan have been forfeited and consequently the Company has no additional shares subject to options or stock purchase
rights available for issuance under the HGI 2007 Stock Plan. Currently outstanding options under the HGI 2007 Stock Plan have fully
vested and expire upon termination of employment or five years from the date of grant. This plan is discussed in further detail
in Note 16 to the consolidated financials.
On July 19, 2010, the board
of directors approved the Company’s 2010 Incentive Stock Plan (2010 Stock Plan). The 2010 Stock Plan allows for the reservation
of 7,000,000 shares of the Company’s common stock for issuance under the plan. The 2010 Stock Plan became effective July
19, 2010 and terminates July 18, 2020. As of December 31, 2013, 20,000 shares were granted under the 2010 Stock Plan.
Item 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons, Promoters and Certain
Control Persons
Since the beginning of the fiscal
year January 1, 2013 and except as disclosed below, none of the following persons has had any direct or indirect material interest
in any transaction to which the Company was or is a party, or in any proposed transaction to which the Company proposes to be a
party:
|
•
|
any director or officer of the Company;
|
|
•
|
any proposed director of officer of the Company;
|
|
•
|
any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to the Company’s common stock; or
|
|
•
|
any member of the immediate family of any of the foregoing persons (including a spouse, parents, children, siblings, and in-laws).
|
Prior to and during 2013,
the Company was indebted to Reif Chron, President and Chief Legal Officer, for $73,000 in proceeds less the $43,000 in paydowns
on working capital advances he made to the Company. As of December 31, 2013, the advance balance was $30,000. The advance did not
accrue interest. Subsequent to December 31, 2013, Mr. Chron advanced an additional $40,000 for total advances of $70,000.
Prior to and during 2013,
the Company was indebted to Cade Thompson, CEO and Director of the Board, for $112,000 in proceeds less the $62,000 in paydowns
on working capital advances he made to the Company. As of December 31, 2013, the advance balance was $50,000. The advance did not
accrue interest. Subsequent to December 31, 2013, Mr. Thompson advanced an additional $65,000 for total advances of $115,000.
As of December 31, 2012,
a Company director had an outstanding advance to the Company of $100,000, for short term capital. During the twelve months ended
December 31, 2013, the director advanced an additional $325,000 to the Company for working capital less repayment of $375,000 advanced.
As of December 31, 2013, the advance balance was $50,000. The advance did not accrue interest. Subsequent to December 31, 2013,
a Director advanced an additional $300,000 for total outstanding advances of $350,000.
During 2011, the Company
entered into one unsecured promissory note with Tony Chron, Director of the Company, in the amount of $250,000. The note accrued
interest of $52,426. During 2011, the note and accrued interest were consolidated into one note balance of $302,426, with future
payments to be made per the note amortization schedule. As of December 31, 2013 the remaining total principal on this consolidated
note balance was $182,379. The balance accrues interest at an annual rate of 6%. Total interest paid to Mr. Chron during 2013 totaled
$18,327.
During 2010, Martin Williamson
invested $1,200,000 in the $20,000,000 Equitas Housing Fund 25% Secured Promissory Note Offering. In May 2013, the $1,200,000 of
principal balance was paid in full, along with $150,000 of the outstanding accrued interest balance. Halo and the secured asset
promissory note holder agreed to include the remaining accrued interest in a promissory note due December 31, 2013. The maturity
date has been extended to December 31, 2014. The new promissory note will accrue interest at a 10% annual rate, with interest only
payments due periodically and final balloon payment due at maturity. As of December 31, 2013, the accrued interest balance was
$218,568. Mr. Williamson is Reif Chron’s stepfather.
Prior to and during 2013,
the Company had a related party note with an entity owned by the father of Jimmy Mauldin, a beneficial owner, totaling $370,639.
The note currently bears interest of 6% and has a maturity date of September 15, 2016. As of December 31, 2013, the note balance
was $270,180. Total interest paid in 2013 on this note totaled $29,103.
Director Independence; Board Leadership Structure
The Company’s
common stock is quoted through the OTC System. For purposes of determining whether members of the Company’s Board of Directors
are “independent,” the Company’s Board utilizes the standards set forth in the NASDAQ Stock Market Marketplace
Rules. At present, the Company’s entire Board serves as its Audit, Compensation and Nominating Committees. The Company’s
Board of Directors has determined that, of the Company’s present directors, both Richard G. Morris and T. Craig Friesland,
constituting two of the four members of the Board, is an “independent director,” as defined under NASDAQ’s Marketplace
Rules, for purposes of qualifying as independent members of the Board and an Audit, Compensation and Nominating Committee of the
Board, but that Brandon C. Thompson and Paul Williams are not “independent directors” since they currently serve as
or in the past three years have served as executive officers of the Company. In reaching its conclusion, the Board determined that
both Mr. Morris and Mr. Friesland do not have a relationship with the Company that, in the Board’s opinion, would interfere
with his exercise of independent judgment in carrying out the responsibilities of a director, nor does Mr. Morris have any of the
specific relationships set forth in NASDAQ’s Marketplace Rules that would disqualify him from being considered an independent
director.
Since the effective
date of the merger in 2009, the Company has not changed the structure of its Board of Directors and currently, Mr. Brandon C. Thompson
serves as both Chairman of the Board and Chief Executive Officer. As noted above, Mr. Richard G. Morris and Mr. T. Craig Friesland
are the only independent directors and, neither Mr. Morris nor Mr. Friesland have taken on any supplemental role in their capacity
as director. It is anticipated that additional independent directors will be added to the Board, however, the Company’s Board
of Directors has not set a timetable for such action.
The Company’s
Board of Directors is of the view that the current leadership structure is suitable for the Company at its present stage of development,
and that the interests of the Company are best served by the combination of the roles of Chairman of the Board and Chief Executive
Officer.
As a matter of regular
practice, and as part of its oversight function, the Company’s Board of Directors undertakes a review of the significant
risks in respect of the Company’s business. Such review is conducted in concert with the Company’s in-house legal staff,
and is supplemented as necessary by outside professionals with expertise in substantive areas germane to the Company’s business.
With the Company’s current governance structure, the Company’s Board of Directors and senior executives are, by and
large, the same individuals, and consequently, there is not a significant division of oversight and operational responsibilities
in managing the material risks facing the Company.
Item 14. PRINCIPAL ACCOUNTING
FEES AND SERVICES.
The following information
summarizes the fees billed to us by Whitley Penn LLP and Montgomery Coscia Greilich L.L.P. for professional services rendered for
the fiscal year ended December 31, 2013 and 2012, respectively.
Audit Fees
.
Fees billed or remainder to be billed for audit services by Whitley Penn LLP were $77,500 for fiscal year 2013 and $74,000
for fiscal year 2012, and $1,838 was paid to Montgomery Coscia Greilich L.L.P. for fiscal year 2012. Audit fees include fees associated
with the annual audit and the reviews of the Company’s quarterly reports on Form 10-Q, and other SEC filings.
Audit-Related Fees
.
The Company did not pay any audit-related service fees to Whitley Penn LLP, other than the fees described above, for
services rendered during fiscal year 2013 or 2012.
Tax Fees
.
Fees billed for tax compliance by Whitley Penn LLP were $9,500 for fiscal year 2013 and $9,000 for fiscal year 2012.
All Other Fees
.
Other
Fees billed by Whitley Penn LLP were $0 in fiscal year 2013 and 2012.
Consistent with
SEC policies regarding auditor independence, the audit committee has responsibility for appointing, setting compensation, approving
and overseeing the work of the independent auditor. In recognition of this responsibility, the audit committee pre-approves
all audit and permissible non-audit services provided by the independent auditor. The Board of Directors serves as the audit committee
for the Company.
Notes To Consolidated Financial Statements
December 31, 2013
NOTE 1. ORGANIZATION AND RECENT DEVELOPMENTS
Halo Companies,
Inc. (“Halo”, “HCI” or the “Company”) was incorporated under the laws of the State of Delaware
on December 9, 1986. Its principal executive offices are located at 7668 Warren Parkway, Suite 350, Frisco, Texas 75034 and its
telephone number is 214-644-0065.
Unless otherwise provided
in footnotes, all references from this point forward in this Report to “we,” “us,” “our company,”
“our,” or the “Company” refer to the combined Halo Companies, Inc. entity, together with its subsidiaries.
Halo has multiple wholly-owned
subsidiaries including Halo Group Inc. (“HGI”), Halo Asset Management, LLC (“HAM”), Halo Portfolio Advisors,
LLC (“HPA”), and Halo Benefits, Inc. (“HBI”). HGI is the management and shared services operating company.
HAM provides asset management and mortgage servicing services to investors and asset owners including all aspects of buying and
managing distressed REO and non-performing loans. HPA exists to market the Company’s operations as a turnkey solution for
strategic business to business opportunities with HAM’s investors and asset owners, major debt servicers and field service
providers, lenders, and mortgage backed securities holders. HBI was originally established as an association benefit services to
customers throughout the United States and although a non-operating entity, remains a subsidiary due to its historical net operating
loss carryforward. During the year, several non-operating subsidiary entities were legally closed. They included Halo Select Insurance
Services, LLC (“HSIS”), Halo Group Mortgage, LLC (“HGM”), and Equitas Housing Fund, LLC (“EHF”).
These subsidiaries were established in previous years to provide insurance brokerage and mortgage services. EHF was set up as the
Company’s investment in non-performing loans as discussed below in Note 7.
In November 2012,
the Company entered into a stock/unit purchase agreement for the sale of the Company’s subsidiaries Halo Debt Solutions,
Inc. (“HDS”), Halo Financial Services, LLC (“HFS”), and Halo Credit Solutions (“HCS”). The
purchase agreement was finalized at $250,000, which included a $25,000 down payment at closing and promissory note financing for
the remainder of the purchase price. The Company recorded a gain on the sale of HDS, HFS and HCS of $134,731. As of December 31,
2013, the buyer has paid (including the down payment) the Company $250,000 (paid in full).
In April 2013, the
Company eliminated the noncontrolling interest balance on its balance sheet when it effectively closed the non-operating subsidiary
Halo Choice Insurance Services, LLC (“HCIS”). See further discussion in Note 2 of the consolidated financial statements.
In August 2013, the Company
and its office lessor agreed to a final settlement whereby it would vacate its previously leased office facilities in Allen, Texas.
In doing so, the final settlement obligation of $254,023 is to be paid over twelve equal installments beginning in September 2013
through August 2014. This balance is included in the current portion of deferred rent. The final settlement released
previously
recognized rent expense which was included in accounts payable and deferred rent. The release of these obligations was credited
to rent expense which is included in general and administrative expense on the consolidated statements of operations. Additionally,
the final settlement included requirements that (1) the office lessor retain the Company’s $45,000 deposit and (2) the Company
sell certain furniture and equipment in the office.
Both
the cost of the furniture
and equipment and the related accumulated depreciation have been removed from the respective accounts, with the resulting income
statement impact being expensed in general and administrative expenses on the
consolidated
statements of operations.
In October 2013, the Company
entered into a senior unsecured convertible promissory note agreement of $1,500,000. The terms of the note include an interest
rate of 15% with a maturity date of October 10, 2016. See further discussion in Note 10 of the consolidated financial statements.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying Consolidated
Financial Statements as of December 31, 2013 and 2012 include the accounts of the Company and have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”). Certain balances have been
reclassified in prior period to be consistent with current year presentation.
Revenue Recognition, Accounts Receivable
and Deferred Revenue
The Company recognizes
revenue in the period in which services are earned and realizable. To further understand the Company’s business, HAM earns
fees from its clients for its boarding and initial asset management fee, success fees, and its monthly servicing fee. The boarding
and initial asset management services are performed in the first 30-60 days of assets being boarded and include; IRR analysis of
loans boarded, detailed asset level workout exit strategy analysis, boarding the assets onto HAM’s proprietary software platform
and the integrated servicing platform, identification and oversight of custodial files, oversight of mortgage/deed assignment from
previous servicer, oversight of title policy administration work, and delinquent property tax research and exposure review. HAM’s
monthly success fees are earned for completing its default and asset disposition services including note sales, originating owner
finance agreements, and cash sales of REO properties owned by the client. HAM’s servicing fees are earned monthly and are
calculated on a monthly unit price for assets under management.
HAM and HPA receivables
are typically paid the month following services performed. As of December 31, 2013, the Company’s accounts receivable are
made up of the following percentages; HAM at 84% and HPA at 16%.
The Company maintains allowances
for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management
considers the following factors when determining the collectability of specific customer accounts: past transaction history with
the customer, current economic and industry trends, and changes in customer payment terms. The Company provides for estimated uncollectible
amounts through an increase to the allowance for doubtful accounts and a charge to earnings based on actual historical trends and
individual account analysis. Balances that remain outstanding after the Company has used reasonable collection efforts are written-off
through a charge to the allowance for doubtful accounts. The below table summarizes the Company’s allowance for doubtful
accounts as of December 31, 2013 and December 31, 2012, respectively;
|
|
Balance
at Beginning of Period
|
|
Increase
in the Provision
|
|
Accounts
Receivable Write-offs
|
|
Balance
at End of Period
|
Year ended December 31, 2013
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
375,665
|
|
|
$
|
1,197
|
|
|
$
|
1,197
|
|
|
$
|
375,665
|
|
Year ended December
31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
446,722
|
|
|
$
|
35,259
|
|
|
$
|
106,316
|
|
|
$
|
375,665
|
|
As of December 31, 2013,
the Company’s allowance for doubtful accounts is made up of the following percentages; HAM at 96% and HPA at 4%. The HAM
and HPA allowance is related to one client. The client is in a court appointed receivership and the Company is awaiting final outcome
of its receivable claim into the receivership to determine any potential recoverability. As of December 31, 2013, the Company has
fully reserved all outstanding accounts receivables of this client.
Net Income (Loss) Per Common Share
Basic net income (loss)
per share is computed by dividing (i) net income (loss) available to common shareholders (numerator), by (ii) the weighted average
number of common shares outstanding during the period (denominator). Diluted net income (loss) per share is computed using the
weighted average number of common shares and dilutive potential common shares outstanding during the period. At December 31, 2013
and 2012, there were 5,030,327 and 5,563,777 shares, respectively, underlying potentially dilutive convertible preferred stock
and stock options outstanding. These shares were not included in dilutive weighted average shares outstanding for the year ended
December 31, 2012 because their effect is anti-dilutive due to the Company’s reported net loss.
Use of Estimates and Assumptions
The preparation of
consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those
estimates. Significant estimates include the Company’s revenue recognition method, valuation of equity based compensation
and derivative liabilities.
Principles of Consolidation
The consolidated financial
statements of the Company for the year ended December 31, 2013 include the financial results of HCI, HGI, HGM, HBI, HSIS, HCIS,
HPA, HAM, and EHF. All significant intercompany transactions and balances have been eliminated in consolidation.
The consolidated financial
statements of the Company for the year ended December 31, 2012 include the financial results of HCI, HGI, HGM, HBI, HSIS, HCIS,
HPA, HAM, and EHF. The financial results of Halo Group Realty are included for the one month period ended January 31, 2012. The
financial results of HDS, HFS, and HCS are included for period beginning January 1, 2012 thru November 9, 2012. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all
liquid investments with a maturity of 90 days or less to be cash equivalents.
Note Receivable
In November 2012,
the Company entered into a stock/unit purchase agreement for the sale of the Company’s subsidiaries HDS, HFS, and HCS for
consideration of $250,000 (sale discussed in further detail above). As of December 31, 2013, the buyer has paid (including the
down payment) the Company $250,000. The balance has been paid in full. The note receivable did not bear interest.
Deposits and Other Assets
At December 31, 2013, deposits
and other assets was $39,589, which included $36,667 in deferred origination costs ($40,000 in total origination fees offset by
$3,333 in accumulated amortization) for the senior unsecured promissory note discussed in Note 10, with the remaining $2,922 as
a prepaid vendor expense. The fees are to be amortized over the life of the promissory note. During the year ended December 31,
2012, the Company established a $45,000 deposit held with the Company’s office lessor. As discussed in Note 1, in August
2013, the office lessor final settlement with the Company required that the lessor retain the Company’s $45,000 deposit.
As such, the office lessor deposit was $0 at December 31, 2013.
Property, Equipment and Software
Property, equipment, and
software are stated at cost. Depreciation is provided in amounts sufficient to relate the cost of the depreciable assets to operations
over their estimated service lives, ranging from three to seven years. Provisions for depreciation are made using the straight-line
method.
Major additions and
improvements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or
retirement, the cost of the property and equipment and the related accumulated depreciation are removed from the respective accounts,
and any resulting gains or losses are credited or charged to other general and administrative expenses.
Fair Value of Financial Instruments
The carrying value
of trade accounts receivable, accounts payable, and accrued and other liabilities approximate fair value due to the short maturity
of these items. The estimated fair value of the notes payable and subordinated debt approximates the carrying amounts as they bear
market interest rates.
The Company considers
the warrants related to its subordinated debt to be derivatives, and the Company records the fair value of the derivative liabilities
in the consolidated balance sheets. Changes in fair value of the derivative liabilities are included in gain (loss) on change in
fair value of derivative in the consolidated statements of operations. The Company’s derivative liability has been classified
as a Level III valuation according to Accounting Standards Codification (“ASC”) 820.
Internally Developed Software
Internally developed legacy
application software consisting of database, customer relations management, process management and internal reporting modules are
used in each of the Company’s subsidiaries. The Company accounts for computer software used in the business in accordance
with ASC 350 “Intangibles-Goodwill and Other”. ASC 350 requires computer software costs associated with internal use
software to be charged to operations as incurred until certain capitalization criteria are met. Costs incurred during the preliminary
project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application
development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during configuration,
coding, and testing activities. Capitalization begins when (i) the preliminary project stage is complete, (ii) management with
the relevant authority authorizes and commits to the funding of the software project, and (iii) it is probable both that the project
will be completed and that the software will be used to perform the function intended. Management has determined that a significant
portion of costs incurred for internally developed software came from the preliminary project and post-implementation stages; as
such, no costs for internally developed software were capitalized.
Long-Lived Assets
Long-lived assets are reviewed
on an annual basis or whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets held and used is generally measured by a comparison of the carrying amount of an asset to undiscounted
future net cash flows expected to be generated by that asset. If it is determined that the carrying amount of an asset may not
be recoverable, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value
of the asset. Fair value is the estimated value at which the asset could be bought or sold in a transaction between willing parties.
There were no impairment charges for the year ended December 31, 2013 and 2012.
Equity-Based
Compensation
The Company accounts for
equity instruments issued to employees in accordance with ASC 718 “Compensation-Stock Compensation”. Under ASC 718,
the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options beginning
when the specified events become probable of occurrence. For the year ended December 31, 2013 and 2012, there were 0 and 20,000
shares, respectively, of stock options awarded (discussed in Note 16). All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the
equity instrument issued is the earlier of (i) the date on which the counterparty’s performance is complete, or (ii) the
date on which it is probable that performance will occur.
Income Taxes
The Company accounts for
income taxes in accordance with ASC 740 “Income Taxes”. ASC 740 requires the use of the asset and liability method
whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. These differences result in deferred tax assets and liabilities, which are included in the Company’s
consolidated balance sheets.
The Company then assesses
the likelihood of realizing benefits related to such assets by considering factors such as historical taxable income and the Company’s
ability to generate sufficient taxable income of the appropriate character within the relevant jurisdictions in future years. Based
on the aforementioned factors, if the realization of these assets is not likely a valuation allowance is established against the
deferred tax assets.
The Company accounts for
its position in tax uncertainties under ASC 740-10. ASC 740-10 establishes standards for accounting for uncertainty in income taxes.
ASC 740-10 provides several clarifications related to uncertain tax positions. Most notably, a “more likely-than-not”
standard for initial recognition of tax positions, a presumption of audit detection and a measurement of recognized tax benefits
based on the largest amount that has a greater than 50 percent likelihood of realization. ASC 740-10 applies a two-step process
to determine the amount of tax benefit to be recognized in the financial statements. First, the Company must determine whether
any amount of the tax benefit may be recognized. Second, the Company determines how much of the tax benefit should be recognized
(this would only apply to tax positions that qualify for recognition.) No additional liabilities have been recognized as a result
of the implementation. The Company has not taken a tax position that, if challenged, would have a material effect on the financial
statements or the effective tax rate during the years ended December 31, 2013 or 2012.
The Company incurred no
penalties or interest for taxes for the years ended December 31, 2013 or 2012. The Company is subject to a three year statute of
limitations by major tax jurisdictions for the fiscal years ended December 31, 2010, 2011 and 2012. The Company files income tax
returns in the U.S. federal jurisdiction.
Deferred Rent
As discussed in Note 1,
in August 2013, the Company and its office lessor agreed to a final settlement whereby it would vacate its previously leased office
facilities. In doing so, the final settlement obligation of $254,023 is to be paid over twelve equal installments beginning in
September 2013 through August 2014. At December 31, 2013, the $169,349 balance is included in current portion of deferred rent.
Non-controlling Interest
On January 1, 2009, HSIS
entered into a joint venture with another entity to form HCIS. HSIS contributed 49% of the opening equity balance. Under a qualitative
analysis performed in accordance with ASC 810 “Consolidation”, HCIS is a variable interest entity and HSIS is the primary
beneficiary as HSIS’s parent company, HGI, acts as the sole manager of the entity. Based on this analysis, HSIS has consolidated
HCIS with the non-controlling 51% interest included in non-controlling interest on the consolidated balance sheets and consolidated
statements of operations. In April 2013, the Company closed the non-operating HCIS subsidiary. With the closure of HCIS, there
is no future income stream to offset the deficit in the non-controlling interest balance, and as the non-controlling 51% entity
will not reimburse HSIS for its share of cumulative losses, HSIS incurred an expense of $82,460, included in other expense on the
consolidated statements of operations. As of December 31, 2013, the non-controlling interest balance was $0.
NOTE 3. CONCENTRATIONS OF CREDIT RISK
The Company maintains aggregate
cash balances, at times, with financial institutions, which are in excess of amounts insured by the Federal Deposit Insurance Corporation
(“FDIC”). During the year ended December 31, 2013, the FDIC insured deposit accounts up to $250,000. At December 31,
2013, the Company’s cash accounts were all less than the $250,000 FDIC insured amount and as such were insured in full.
Financial instruments that
potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable.
In the normal course of
business, the Company extends unsecured credit to its customers. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its estimate of amounts which will eventually become uncollectible. In the event
of complete non-performance by the Company’s customers, the maximum exposure to the Company is the outstanding accounts receivable
balance at the date of non-performance.
NOTE
4. OPERATING SEGMENTS
The Company
has several operating segments as listed below and as defined in Note 1. The results for these operating segments are based on
our internal management structure and review process. We define our operating segments by service industry. If the management structure
and/or allocation process changes, allocations may change. See the following summary of operating segment reporting;
Operating Segments
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
Revenue:
|
|
|
|
|
|
|
|
|
Halo Asset
Management
|
|
$
|
3,190,393
|
|
|
$
|
2,863,944
|
|
Halo Portfolio Advisors
|
|
|
2,036,362
|
|
|
|
1,440,183
|
|
Other
|
|
|
28,532
|
|
|
|
506,467
|
|
Net revenue
|
|
$
|
5,255,287
|
|
|
$
|
4,810,594
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Halo Asset Management
|
|
$
|
1,882,315
|
|
|
$
|
1,248,448
|
|
Halo Portfolio Advisors
|
|
|
367,075
|
|
|
|
350,968
|
|
Other
|
|
|
(201,411
|
)
|
|
|
(142,158
|
)
|
Less:
Corporate expenses (a)
|
|
|
(1,969,776
|
)
|
|
|
(2,456,544
|
)
|
Operating income (loss):
|
|
$
|
78,203
|
|
|
$
|
(999,286
|
)
|
|
a.
|
Corporate
expenses include salaries, benefits and other expenses, including rent and general &
administrative expenses, related to corporate office overhead and functions that benefit
all operating segments. Corporate expenses are expenses that the Company does not directly
allocate to any segment above. Allocating these indirect expenses to operating segments
would require an imprecise allocation methodology. Further, there are no material amounts
that are the elimination or reversal of transactions between the above reportable operating
segments.
|
The
assets of the Company consist primarily of cash, trade accounts receivable, and property, equipment and software. Cash is managed
at the corporate level of the Company and not at the segment level. Each of the remaining primary assets has been discussed in
detail, including the applicable operating segment for which the assets and liabilities reside, in the consolidated notes to the
financial statements. As such, the duplication is not warranted in this footnote.
All
debt of the Company is recorded at the corporate parent companies HCI and HGI, with the exception of the $1,200,000 secured asset
promissory note of EHF, which was paid in full during May 2013, as discussed further in Note 12. Interest expense related to the
secured asset promissory note totaled $129,069 for the year ended December 31, 2013, and is included above in “Other”
and in “Other Income (expense)” in the consolidated statements of operations. The remaining $124,754 of the $253,823
interest expense in the consolidated statements of operations for the year ended December 31, 2013 are included in corporate expenses
above.
For
the year ended December 31, 2013 and 2012, there have been no material transactions between reportable units that would materially
affect an operating segment profit or loss. Intercompany transactions are eliminated in the consolidated financial statements.
NOTE
5. GOING CONCERN
The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company
will need to manage additional asset units under contract and/or additional financing to fully implement its business plan, including
continued growth and establishment of a stronger brand name of HAM’s asset management in the distressed asset sector. The
Company has recognized net income of $78,203 for the year ended December 31, 2013, however, as included in the consolidated statements
of cash flows, the Company has used a material amount of its net cash provided by financing activities, specifically the $1,500,000
new promissory note, towards the repayment of previously borrowed financing sources and previously existing liabilities. The new
promissory note agreement, as discussed in Note 10, specifically required certain repayment of previous financing and other liability
obligations.
The Company is actively
seeking growth of its asset units under management, both organically and via new client relationships. Management, in the ordinary
course of business, is trying to raise additional capital through sales of common stock as well as seeking financing via equity
or debt, or both from third parties. There are no assurances that additional financing will be available on favorable terms, or
at all. If additional financing is not available, the Company will need to reduce, defer or cancel development programs, planned
initiatives and overhead expenditures. The failure to adequately fund its capital requirements could have a material adverse effect
on the Company’s business, financial condition and results of operations. Moreover, the sale of additional equity securities
to raise financing will result in additional dilution to the Company’s stockholders, and incurring additional indebtedness
could involve an increased debt service cash obligation, the imposition of covenants that restrict the Company operations or the
Company’s ability to perform on its current debt service requirements. The Company has incurred an accumulated deficit of
$10,600,783 as of December 31, 2013. However, of the accumulated deficit, $2,110,748 of expense was incurred as stock-based
compensation, $533,600 in depreciation expense, and $279,241 in impairment loss on investment in portfolio assets, all of which
are noncash expenses. Further, $906,278 of the accumulated deficit is related to the issuance of stock dividends, also non cash
reductions. The $3,829,867 total of these non-cash retained earnings reductions represents 36% of the total deficit balance. The
consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as
a going concern.
NOTE
6. PROPERTY, EQUIPMENT AND SOFTWARE
Property,
equipment and software consist of the following as of December 31, 2013 and December 31, 2012, respectively:
Computers and purchased software
|
|
$
|
149,557
|
|
|
$
|
159,159
|
|
Furniture and equipment
|
|
|
235,515
|
|
|
|
352,800
|
|
|
|
|
385,072
|
|
|
|
511,959
|
|
Less: accumulated depreciation
|
|
|
(276,724
|
)
|
|
|
(365,262
|
)
|
|
|
$
|
108,348
|
|
|
$
|
146,697
|
|
Depreciation totaled $99,139
and $70,603 for the year ended December 31, 2013 and 2012
, respectively. As discussed further
in Note 1, in August 2013, the Company entered into a settlement agreement with its previous landlord. As part of this agreement,
the Company was required to sell certain furniture and equipment to the landlord. As of December 31, 2013, both
the cost
of the furniture and equipment and the related accumulated depreciation have been removed from the respective accounts, with $40,460
of the $99,139 noted above included in other general and administrative expenses on the
consolidated
statements of operations. Further, the Company retired $187,677 of fully depreciated assets for the year ended December 31, 2013.
NOTE
7. INVESTMENTS IN PORTFOLIO ASSETS
In December 2010, EHF entered
into an agreement to purchase non-performing mortgage notes secured by the property, across the United States, for 6.6% of unpaid
principal balance. Total purchase price of the investment was $300,000. Payments of $20,759 were received during 2011 and applied
to the investment. During 2011, the seller’s estate, including the above mentioned non-performing mortgage notes purchased
for $300,000 were placed into receivership with a court appointed receiver of the seller. The receiver has asserted ownership of
the assets in receivership, including the referenced mortgage notes. As the Company’s right to these assets had been impaired,
the Company assessed its ability to reclaim the assets as remote and an impairment of the investment in portfolio assets was warranted.
Accordingly, the Company recognized impairment of the assets of $279,241 as of December 31, 2011. As of December 31, 2013, the
Company is still awaiting final outcome of any potential recoverability from the receivership and as such the value remains $0.
NOTE
8. ACCRUED AND OTHER LIABILITIES
The Company had $345,524
in accrued liabilities at December 31, 2013. Included in this accrual is $63,926 in deferred compensation to multiple senior management
personnel, $277,042 in accrued interest ($218,568 of this balance related to interest on the secured asset promissory note discussed
in more detail in Note 12), and $4,556 in other. The Company had $601,742 in accrued liabilities at December 31, 2012. Included
in this accrual was $77,296 in salaries and wages payable, $211,936 in deferred compensation to multiple senior management personnel,
$311,365 in accrued interest ($252,000 of this balance is discussed in more detail in Note 12), and $1,145 in other.
NOTE 9. NOTES PAYABLE TO RELATED PARTIES
The notes payable to related
parties reside as follows;
During March 2011, the
Company entered into one unsecured promissory note with a related party (a company director) in the amount of $250,000 (the “2011
Related Party Note”). The 2011 Related Party Note had a fixed interest amount of $50,000 and a maturity date of July 31,
2011. On September 20, 2011, the 2011 Related Party Note was amended to include the 2011 Related Party Note plus $52,426 of accrued
interest for a total note balance of $302,426. The 2011 Related Party Note has a 6% interest rate and is a monthly installment
note with final maturity of September 2014. Interest and principal is due upon maturity. As of December 31, 2012, the balance of
the 2011 Related Party Note was $206,292, all of which is included in current portion of notes payable to related parties. As of
December 31, 2013, the 2011 Related Party Note was $182,379, all of which is included in current portion of notes payable to related
parties.
On September 1, 2011, several
previous related party notes totaling $370,639 were amended and consolidated (“the 2011 Consolidated Related Party Note”).
This note bears interest of 6% and has a maturity date of September 15, 2016. As of December 31, 2012, the 2011 Consolidated Related
Party Note balance was $291,969, of which $49,837 is included in current portion of notes payable to related parties. As of December
31, 2013, the 2011 Consolidated Related Party Note balance was $270,180, of which $75,853 is included in current portion of notes
payable to related parties.
As of December 31, 2012,
a Company director had an outstanding advance to the Company of $100,000, for short term capital. During the twelve months ended
December 31, 2013, the director advanced an additional $325,000 to the Company for working capital less repayments of $375,000
advanced. As of December 31, 2013, the advance balance was $50,000. At the time of the filing of these consolidated financial statements,
the Company and the director had not finalized a maturity date for the advance repayment, and as such the entire balance is included
in current portion of notes payable to related parties. The advance does not accrue interest.
In December 2012, the Company’s
President and Chief Legal Officer advanced $28,000 to the Company for short term capital. During the twelve months ended December
31, 2013, an additional advance of $45,000 was made for working capital less repayments of $43,000 advanced. As of December 31,
2013, the advance balance was $30,000. At the time of the filing of these consolidated financial statements, the Company and the
President had not finalized a maturity date for the advance repayment, and as such the entire balance is included in current portion
of notes payable to related parties. The advance does not accrue interest.
In December 2012, the Company’s
CEO and Director of the Board advanced $12,000 to the Company for short term capital. During the twelve months ended December 31,
2013, an additional advance of $100,000 was made for working capital less repayments of $62,000 advanced. As of December 31, 2013,
the advance balance was $50,000. At the time of the filing of these consolidated financial statements, the Company and the CEO
had not finalized a maturity date for the advance repayment, and as such the entire balance is included in current portion of notes
payable to related parties. The advance does not accrue interest.
As of December 31, 2013,
the notes payable to related party balance totaled $582,559, of which $388,232 is included in current portion of notes payable
to related parties in the consolidated financial statements. As of December 31, 2012, the notes payable to related party balance
totaled $638,261, of which $396,129 is included in current portion of notes payable to related parties in the consolidated financial
statements.
The Company incurred $33,128
and $36,633 of interest expense to directors, officers, and other related parties during the year ended December 31, 2013 and 2012,
respectively. Accrued interest due to directors and other related parties totaled $81,160 at December 31, 2013, of which $58,149
is included in accrued and other current liabilities at December 31, 2013. Accrued interest due to directors and other related
parties totaled $90,579 at December 31, 2012, of which $55,927 is included in accrued and other current liabilities.
NOTE 10. NOTES PAYABLE
In October 2013, the Company
entered into a senior unsecured convertible promissory note agreement of $1,500,000. The terms of the note include an interest
rate of 15% with a maturity date of October 10, 2016. The Company, although not required, is entitled to capitalize any accrued
interest into the outstanding principal balance of the note up until maturity. At the maturity date, all unpaid principal and accrued
interest is due. As part of the promissory note, the Company was required to pay origination fees and expenses associated with
this note agreement (discussed in Other Assets Note 2), pay the subordinated debt originated in January 2010 (debt discussed in
Note 11), pay $375,000 to a related party note held by a director (discussed in Note 9 above), with the remaining use of proceeds
for general corporate purposes including paying deferred compensation to several management personnel. Additionally, the noteholder
has the right, but not the obligation, to convert up to $1,000,000 of the principal balance of the note into common shares of the
Company. The $1,000,000 maximum conversion ratio would entitle the noteholder to a maximum total of 10% of the then outstanding
common stock of the Company, calculated on a fully diluted basis. Any conversion of the principal amount of this note into common
stock would effectively lower the outstanding principal amount of the note. As of December 31, 2013, the notes payable balance
was $1,551,828, which includes capitalized interest of $51,828.
On August 15, 2011, the
Company entered into an agreement with LegacyTexas Bank (“LTB”) to refinance a previously outstanding $75,001 line
of credit into an 18 month note. The terms of the new note include an interest rate of 3% with a maturity date of February 15,
2013. The note payable balance was paid in full in February 2013. As of December 31, 2012, the note payable balance was $8,509,
which is included in current portion of notes payable.
NOTE 11. SUBORDINATED DEBT
During January 2010, the
Company authorized a $750,000 subordinated debt offering (“Subordinated Offering”), which consists of the issuance
of notes paying a 16% coupon with a 1% origination fee at the time of closing. The maturity date of the notes was originally January
31, 2013, however, subsequent to December 31, 2012, the Company and the subordinated debt holders agreed to an extended maturity
date of April 30, 2013, and then again to December 31, 2013. Repayment terms of the notes included interest only payments through
July 31, 2010. Thereafter, level monthly payments of principal and interest are made as calculated on a 60 month payment amortization
schedule with final balloon payment due at maturity. The rights of holders of notes issued in the Subordinated Offering are subordinated
to any and all liens granted by the Company to a commercial bank or other qualified financial institution in connection with lines
of credit or other loans extended to the Company in an amount not to exceed $2,000,000, and liens granted by the Company in connection
with the purchase of furniture, fixtures or equipment. This includes the LTB debt disclosed in Note 10. Since inception of the
offering, the Company has raised $420,000 in the Subordinated Offering. In October 2013, the company entered into a senior unsecured
convertible promissory note (discussed in Note 10) which required the use of those financing proceeds to pay down the subordinated
debt. As such, as of December 31, 2013, the remaining balance was $0.
As part of the Subordinated
Offering, the Company granted to investors common stock purchase warrants (the “Warrants”) to purchase an aggregate
of 200,000 shares of common stock of the Company at an exercise price of $0.01 per share. The 200,000 shares of common stock contemplated
to be issued upon exercise of the Warrants are based on an anticipated cumulative debt raise of $750,000. The investors are granted
the Warrants pro rata based on their percentage of investment relative to the $750,000 aggregate principal amount of notes contemplated
to be issued in the Subordinated Offering. The Warrants shall have a term of seven years, exercisable from January 31, 2015 to
January 31, 2017. The Company will have a call option any time prior to maturity, so long as the principal and interest on the
notes are fully paid, to purchase the Warrants for an aggregate of $150,000. After the date of maturity until the date the Warrants
are exercisable, the Company will have a call option to purchase the Warrants for $200,000. The call option purchase price assume
a cumulative debt raise of $750,000.
The Company adopted
the provisions of ASC 815, “Derivatives and Hedging”. ASC 815 requires freestanding contracts that are settled in a
company’s own stock to be designated as an equity instrument, assets or liability. Under the provisions of ASC 815, a contract
designated as an asset or liability must be initially recorded and carried at fair value until the contract meets the requirements
for classification as equity, until the contract is exercised or until the contract expires. Accordingly, the Company determined
that the warrants should be accounted for as derivative liabilities and has recorded the initial value as a debt discount which
will be amortized into interest expense using the effective interest method. As of December 31, 2013, the balance of the debt discount
was $0 (fully amortized). As of December 31, 2012, the balance of the debt discount was $1,454, included in current portion of
subordinated debt. Subsequent changes to the marked-to-market value of the derivative liability will be recorded in earnings as
derivative gains and losses. As of December 31, 2013, there were 112,000 warrants outstanding with a derivative liability of $15,772.
As of December 31, 2012, there were 112,000 warrants outstanding with a derivative liability of $29,351. The $13,579 decrease in
fair value is included in the consolidated statements of operations as gain on change in fair value of derivative
.
The Warrants
were valued using the Black-Scholes model, which resulted in the fair value of the warrants at $0.14 per share using the following
assumptions:
|
|
December 31, 2013
|
Risk-free rate
|
|
|
0.76
|
%
|
Expected volatility
|
|
|
602.94
|
%
|
Expected remaining life (in years)
|
|
|
3.00
|
|
Dividend yield
|
|
|
0.00
|
%
|
During August 2012, the
Company entered into an additional $25,000 subordinated term note with a then current holder of the Company’s subordinated
debt. The note pays an 18% coupon rate with a maturity date of August 31, 2015. There are no warrants associated with this subordinated
term note. Repayment terms of the note include interest only payments through February 28, 2013. Thereafter, level monthly payments
of principal and interest are made as calculated on a 60 month payment amortization schedule with final balloon payment due at
maturity. The rights of the holder of this note is subordinated to any and all liens granted by the Company to a commercial bank
or other qualified financial institution in connection with lines of credit or other loans extended to the Company in an amount
not to exceed $2,000,000, and liens granted by the Company in connection with the purchase of furniture, fixtures or equipment.
As of December 31, 2013, the remaining balance of this note totals $21,250 of which $5,417 is included in current portion of subordinated
debt. As of December 31, 2012, the balance of this note totals $25,000.
As of December 31, 2012,
the cumulative subordinated debt balance (including the January 2010 and August 2012 offering) was $247,546, of which $226,713
was included in current portion of subordinated debt.
NOTE 12. SECURED ASSET PROMISSORY NOTE
During
December 2010, the Company authorized a debt offering to be secured by real estate assets purchased in connection with Equitas
Housing Fund, LLC, (“Equitas Offering”). The Equitas Offering, which is now closed, generated $1,200,000 in proceeds.
Of the $1,200,000 in proceeds received in December 2010, $300,000 was used to acquire non-performing, residential mortgage notes
and the balance was used for mortgage note workout expenses and operational expenses of Halo Asset Management. The Secured Asset
Promissory Notes consist of a 25% coupon with a maturity date of December 31, 2012. Accrued interest is to be paid quarterly at
the end of each fiscal quarter beginning March 31, 2011 through maturity date and continuing until the promissory note has been
paid in full. The rights of the holders of the Secured Asset Promissory Notes include a security interest in the collateral of
the above mentioned securities of real estate properties. As of December 31, 2012, the Secured Asset Promissory Note balance was
$1,200,000.
In May
2013, the Secured Asset Promissory Note was paid in full, along with $150,000 of the outstanding accrued interest balance. Halo
and the secured asset promissory note holder agreed to include the remaining accrued interest in a promissory note originally due
December 31, 2013. The maturity date has been extended to December 31, 2014. The new promissory note will accrue interest at a
10% annual rate, with interest only payments due periodically and final balloon payment due at maturity. As of December 31, 2013,
the accrued interest balance was $218,568. As of December 31, 2012, the accrued interest balance was $252,000. For the year ended
December 31, 2013 and 2012, the Company incurred
$129,069
and $327,000 respectively,
in interest expense on the note.
NOTE 13. RELATED PARTY TRANSACTIONS
For the year ended December
31, 2013 and 2012, HAM recognized monthly servicing fee revenue totaling $457,148 and $20,783 from an entity that is an affiliate
of the Company.
For the year ended December
31, 2013 and 2012, the Company incurred interest expense to related parties (See Note 9).
NOTE 14. INCOME TAXES
The following table
summarizes the difference between the actual tax provision and the amounts obtained by applying the statutory tax rates to the
income or loss before income taxes for the years ended December 31, 2013 and 2012:
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
Tax benefit calculated at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Permanent Differences
|
|
|
3.3
|
|
|
|
(0.6
|
)
|
State Income Tax
|
|
|
18.5
|
|
|
|
(1.6
|
)
|
Other
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
Total
|
|
|
55.8
|
|
|
|
31.8
|
|
|
|
|
|
|
|
|
|
|
Increase to Valuation Allowance
|
|
|
(27.7
|
)
|
|
|
(34.3
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
28.1
|
%
|
|
|
(2.5
|
%)
|
Deferred tax assets
and liabilities are computed by applying the effective U.S. federal and state income tax rate to the gross amounts of temporary
differences and other tax attributes. In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. At December 31, 2013, the Company believed it was more likely than not that future tax benefits
from net operating loss carry-forwards and other deferred tax assets would not be realizable through generation of future taxable
income and are fully reserved.
The Company has net
operating loss (“NOL”) carry-forwards of approximately $4,760,000 available for federal income tax purposes, which
expire from 2024 to 2033. Separately, because of the changes in ownership that occurred on June 30, 2004 and September 30, 2009,
prior to GVC merging with HCI, and based on the Section 382 Limitation calculation, the Company will be allowed approximately $6,500
per year of GVC Venture Corp.’s federal NOLs generated prior to June 30, 2004 until they would otherwise expire. The Company
would also be allowed approximately $159,000 per year of GVC Venture Corp.’s federal NOLs generated between June 30, 2004
and September 30, 2009 until they would otherwise expire.
Significant
components of the Company’s deferred income tax assets and liabilities as of December 31, 2013 and 2012 are as follows:
|
|
2013
|
|
2012
|
Net current deferred tax assets:
|
|
|
|
|
|
|
|
|
Bad debt allowance
|
|
$
|
127,726
|
|
|
$
|
127,726
|
|
Installment sale of HDS
|
|
|
|
|
|
|
(47,465
|
)
|
Net
|
|
|
127,726
|
|
|
|
80,261
|
|
Net non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
19,555
|
|
|
|
0
|
|
Capital loss carryover
|
|
|
635,743
|
|
|
|
94,942
|
|
Deferred rent
|
|
|
57,579
|
|
|
|
104,157
|
|
Stock compensation
|
|
|
279,111
|
|
|
|
279,111
|
|
Other
|
|
|
7,095
|
|
|
|
9,356
|
|
Net operating loss carry-forward
|
|
|
1,620,088
|
|
|
|
1,634,374
|
|
Net
|
|
|
2,746,897
|
|
|
|
2,202,201
|
|
Less valuation allowance
|
|
|
(2,746,897
|
)
|
|
|
(2,202,201
|
)
|
Net deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 15. COMMITMENTS AND CONTINGENCIES
The Company leases various
office equipment, each under a non-cancelable operating lease providing for minimum monthly rental payments. In relation to its
office facilities, as discussed in Note 1, effective August 31, 2013 the Company and its office lessor agreed to a final settlement
whereby it would vacate its previously leased office facilities in Allen, Texas. In doing so, the final settlement obligation of
$254,023 is to be paid over twelve equal installments beginning in September 2013 through August 2014. This balance is included
in current portion of deferred rent. As of December 31, 2013, the Company has not entered into any additional office lease whereby
it is contractually committed. The Company currently pays for its office space on a month to month basis, and will continue to
do so for the foreseeable future.
Future minimum rental obligations,
including its previous office lease space, as of December 31, 2013 are as follows:
Years Ending December 31:
|
|
|
|
|
|
2014
|
|
|
$
|
181,059
|
|
2015
|
|
|
|
14,601
|
|
Thereafter
|
|
|
|
0
|
|
Total minimum lease commitments
|
|
|
$
|
195,660
|
|
For
the year ended December 31, 2013 and 2012, the Company incurred facilities rent expense totaling $155,334 and $408,850, respectively.
As discussed in Note 1, the final settlement released previously recognized rent expense which was included in accounts payable
and deferred rent. The release of these obligations was credited to rent expense which is included in general and administrative
expense on the consolidated statements of operations.
In
the ordinary course of conducting its business, the Company may be subject to loss contingencies including possible
disputes
or lawsuits. The Company notes the following;
The
Company and certain of its affiliates, officers and directors have been named as defendants in an action filed on December 12,
2011 in the 191
st
District Court of Dallas County, Texas. The Plaintiffs allege that the Company has misappropriated
funds in connection with offerings of securities during 2010 and 2011. The complaint further alleges that Defendants engaged in
fraudulent inducement, negligent misrepresentation, fraud, breach of fiduciary duty, negligence, breach of contract, unjust enrichment,
conversion, violation of the Texas Securities Act, and civil conspiracy. The Plaintiffs amended their Petition on April 24, 2012
and dropped the conversion and civil conspiracy claims. The action seeks an injunction and a demand for accounting along with
damages in the amount of $4,898,157. The Company has taken the position that the Plaintiff’s claims have no merit, and accordingly
is defending the matter vigorously. Defendants have filed a general denial of the claims as well as a Motion to Designate Responsible
Third Parties whom Defendants believe are responsible for any damages Plaintiffs may have incurred. Defendants have also filed
a Motion for Sanctions against the Plaintiffs and their counsel arguing, among other things, that (i) Plaintiffs’ claims
are “judicially stopped” from moving forward by virtue of the fact that the same Plaintiffs previously filed suit
against separate entities and parties with dramatically opposed and contradicting views and facts; (ii) Plaintiffs have asserted
claims against Defendants without any basis in law or fact; and (iii) Plaintiffs have made accusations against Defendants that
Plaintiffs know to be false. Additionally, Defendants have filed a no evidence Motion for Summary Judgment which was scheduled
to be heard in October of 2012. The Plaintiffs requested and were granted a six month continuance on the hearing of that motion.
The Plaintiffs have also filed a Motion to Stay the case pending the outcome of the Company’s lawsuit with the insurance
companies which the Company has opposed. Initially the motion to stay was granted and Defendants moved for reconsideration. The
parties were alerted that the court had reversed the Stay on appeal. The no evidence Motion for Summary Judgment was heard on
August 9, 2013. Prior to the hearing, the Plaintiff’s filed a 3
rd
Amended Petition in which they dropped any
claim of fraud including fraudulent inducement, fraud, conversion and civil conspiracy and added a new “control person”
claim which was not subject to the no evidence Motion for Summary Judgment heard on August 9, 2013. On September 25, 2013, Defendants
no evidence Motion for Summary Judgment was granted in its entirety. Defendants subsequently filed a no evidence Motion for Summary
Judgment on the final remaining “control person” claim which was heard before the court on October 21, 2013. On December
18, 2013 a final Order Granting Defendant’s Second No-Evidence Motion of Final Summary Judgment was signed. The Plaintiff’s
subsequently filed a motion for new trial. Following a hearing, the Plaintiff’s motion for new trial was denied by operation
of law. The Plaintiff’s Filed a Notice of Appeal on March 11, 2014.
As
noted above, the Company, in conjunction with its Directors and Officers insurance carrier,
is defending the matter vigorously.
Based on the facts alleged and the proceedings to date, the Company believes that the Plaintiffs’
allegations will prove to be false, and that accordingly, it is not probable or reasonably possible that a negative outcome for
the Company or the remaining Defendants will occur. As with any action of this type the timing and degree of any effect upon the
Company are uncertain. If the outcome of the action is adverse to the Company, it could have a material adverse effect on our
business prospects, financial position, and results of operation.
The Company and certain of its affiliates, officers and
directors named as defendants in an insurance action filed on April 27, 2012 in the United States District Court for the Northern
District of Texas. The Plaintiffs allege that it had no duty to indemnify the Company, its affiliates, officers or directors because
the claims set forth in the lawsuit mentioned herein above were not covered by the insurance policy issued by Plaintiff in favor
of Defendants. The action sought declaratory judgment that the Plaintiff had no duty to indemnify the Defendants pursuant to the
insurance policy that Defendants purchased from Plaintiff. The Company took the position that Plaintiff’s claim had no merit,
and defended the matter vigorously. Additionally, Defendants filed a counterclaim against the insurer alleging breach of contract,
violation of the Texas Insurance Code and violation of the duty of good faith and fair dealing. On March 12, 2013, Plaintiff and
Defendants entered into an agreement whereby Plaintiff’s and Defendant’s claims, are to be dismissed without prejudice
while the underlying liability suit in the 191
st
District Court of Dallas County proceeds. An Agreed Motion to Dismiss
Without Prejudice was filed on March 12, 2013, and the parties are awaiting the court’s entry of the Agreed Order of Dismissal
Without Prejudice.
As
noted above, the Company has defended this matter vigorously. Based on the status of the litigation, it is not probable or reasonably
possible that a negative outcome for the Company or the remaining Defendants will occur. As with any action of this type the timing
and degree of any effect upon the Company are uncertain. If the outcome of the action is adverse to the Company, it could have
a material adverse effect on our financial position.
The
Company and certain of its affiliates, officers and directors have been named as defendants in an action filed on July 19, 2012
in the United States District Court for the Northern District of Texas. The Plaintiff alleges that it has no duty to defend or
indemnify the Company, its affiliates, officers or directors because the claims set forth in the lawsuit mentioned herein above
are not covered by the insurance policy written by Plaintiff in favor or Defendants. The action seeks declaratory judgment that
the Plaintiff has no duty to defend or indemnify the Defendants pursuant to the insurance policy that Defendants purchased from
Plaintiff. Initially, the Company took the position that Plaintiff’s claims had no merit, and defended the matter vigorously.
Additionally, Defendants filed a counterclaim against the insurer alleging breach of contract, violation of the Texas Insurance
Code and violation of the duty of good faith and fair dealing. Plaintiff has filed a Motion for Summary Judgment seeking a judgment
that it owes no duty to defend or indemnify Defendants. After careful consideration, Defendants decided not to oppose the Motion
for Summary Judgment and a response in opposition was not filed. The Motion for Summary Judgment was granted in part and the remaining
matter remains pending before the court.
Based
on the current status of the litigation, the Company believes it is not probable or reasonably possible that a negative outcome
for the Company or the remaining Defendants will occur. As with any action of this type the timing and degree of any effect upon
the Company are uncertain. If the outcome of the action is adverse to the Company, it could have a material adverse effect on
our financial position.
NOTE
16. STOCK OPTIONS
The Company granted stock
options to certain employees under the HGI 2007 Stock Plan, as amended (the “Plan”). The Company was authorized to
issue 2,950,000 shares subject to options, or stock purchase rights under the Plan. These options (i) vest over a period no greater
than two years, (ii) are contingently exercisable upon the occurrence of a specified event as defined by the option agreements,
and (iii) expire three months following termination of employment or five years from the date of grant depending on whether or
not the options were granted as incentive options or non-qualified options. At September 30, 2009, pursuant to the terms of the
merger, all options granted prior to the merger were assumed by the Company and any options available for issuance under the Plan
but unissued, have been forfeited and consequently the Company has no additional shares subject to options or stock purchase rights
available for issuance under the Plan. As of December 31, 2013, 438,300 option shares have been exercised. Total stock options
outstanding through December 31, 2013 total 681,700. The weighted average remaining contractual life of the outstanding options
at December 31, 2013 is approximately 2.5 years.
A summary of stock option activity in the Plan
is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
Exercise
|
|
Average
|
|
|
Number of
|
|
Price
|
|
Exercise
|
|
|
Options
|
|
Per Option
|
|
Price
|
|
Outstanding at December 31, 2011
|
|
|
|
1,462,350
|
|
|
|
$ 0.01 – 1.59
|
|
|
$
|
0.81
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
(10,000
|
)
|
|
|
0.01
|
|
|
|
0.01
|
|
|
Canceled
|
|
|
|
(237,200
|
)
|
|
|
0.01
|
|
|
|
0.01
|
|
|
Outstanding at December 31, 2012
|
|
|
|
1,215,150
|
|
|
|
$ 0.01 – 1.59
|
|
|
$
|
0.97
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Canceled
|
|
|
|
(533,450
|
)
|
|
|
0.01 – 0.94
|
|
|
|
0.93
|
|
|
Outstanding at December 31, 2013
|
|
|
|
681,700
|
|
|
|
$ 0.01
– 1.59
|
|
|
$
|
1.00
|
|
All stock options granted
under the Plan and as of December 31, 2013 became exercisable upon the occurrence of the merger that occurred on September 30,
2009. As such, equity-based compensation for the options was recognized in earnings from issuance date of the options over the
vesting period of the options effective December 31, 2009. Total compensation cost expensed over the vesting period of stock options
was $2,103,948, all of which was expensed as of September 30, 2011.
On July 19, 2010, the board
of directors approved the Company’s 2010 Incentive Stock Plan (“2010 Stock Plan”). The 2010 Stock Plan allows
for the reservation of 7,000,000 shares of the Company’s common stock for issuance under the plan. The 2010 Stock Plan became
effective July 19, 2010 and terminates July 18, 2020. As of December 31, 2013, 20,000 shares were granted under the 2010 Stock
Plan with an exercise price of $0.34 per option. These are the only shares that have been issued under the 2010 Stock Plan. The
shares granted vested immediately and can become exercisable for so long as the Company remains a reporting company under the Securities
Exchange Act of 1934. Total compensation cost expensed over the vesting period of the stock options was $6,800, all of which was
expensed in the year ended December 31, 2012. As of December 31, 2013, none of the shares issued under the 2010 Stock Plan have
been exercised.
NOTE 17. SHAREHOLDERS’ (DEFICIT) EQUITY
Common Stock
On December 13, 2010 (“the
Closing”), the Company was party to an Assignment and Contribution Agreement (the “Agreement”). Pursuant
to the terms of Agreement, the members of Equitas Asset Management, LLC, (“EAM”), a non Halo entity, which owned 100%
of the interests of Equitas Housing Fund, LLC (“EHF”), assigned and contributed 100% of the interests of EAM to HAM
(a Halo subsidiary) in exchange for shares of 21,200,000 shares of the Company’s Common Stock, $0.001 par value, of the Company.
The Agreement did not constitute a business combination.
The Company issued 7,500,000
shares of Halo common stock in exchange for $3,000,000 in debt or equity capital. The aggregate of 7,500,000 shares of Halo common
stock will be subject to clawback (and cancellation) by Halo in the event that EAM does not generate at least three million dollars
($3,000,000) in new capital to Halo within twelve months following the closing. Halo shall have the right to claw back 2.5 shares
of Halo common stock for every dollar not raised within the twelve months. Any cash generated by EAM will need to be designated
for use in Halo’s general operations and not that of the EHF business to release the clawback rights.
The Company issued 13,700,000
shares of Halo common stock for the purchase of intangible assets owned by EAM which included trade secrets and business processes
used in the EHF business. The aggregate 13,700,000 shares of Halo common stock shall be subject to clawback (and cancellation)
by Halo in the event that EAM fails to generate at least $10,000,000 of net operating cash flows from the EHF business within twenty-four
months following the closing. Halo shall have the right to claw back 1.37 shares of Halo common for every dollar not generated
from the net operating cash flows of the EHF business. Once the $10,000,000 in net operating cash flows from the EHF business is
generated, the clawback rights will be released.
In applying
the guidance of ASC 505 “Equity” to the above transactions, the clawback provisions create a performance commitment
that has not been met. As such, although the transaction did provide for a grant date at which time the equity shares are issued
and outstanding, the equity shares have not met the measurement date requirements required by ASC 505. Accordingly, the par value
of the shares issued and outstanding have been recorded at the grant date and as the clawback rights are released and the measurement
dates established, the fair value of the transactions will be determined and recorded. The pro-rata fair value of equity issued
in connection with fund raising efforts at each measurement date will be recorded as debt issuance costs or a reduction in the
equity proceeds raised by the counter party. The pro-rata fair value of equity issued in connection with the purchase of intangible
assets at the measurement date will be recorded as amortization expense because the amortization period of the underlining asset
purchase and the clawback release rights are commensurate.
As mentioned above, the
Agreement provides for “clawback” provisions, pursuant to which all of the shares of Halo Common Stock issued to the
member of EAM are subject to forfeiture in the event certain financial metrics are not timely achieved. The financial metrics call
for significant cash generation by EHF within the first 12 months, and within the first 24 months following the closing date. We
refer you to Section 2(b)(i) and (ii) of the Agreement, for the specifics of the clawback provisions. As of December 31, 2012,
no cash was generated by EHF. The times to meet both the 12 month and 24 month financial metrics have lapsed and the metrics have
not been met. Based upon the events that have transpired, and the lack of progress toward the financial metrics, the Company demanded
that the recipients of the shares of Halo Common Stock give effect to both clawback provisions and immediately forfeit back all
of the Halo shares issued to such recipients – an aggregate of 21,200,000 shares. Additionally, the Company has instructed
the Company’s transfer agent to cancel all of the shares of Company Common Stock issued pursuant to the Agreement. To date,
the Company’s transfer agent has refused to cancel the shares without either (i) presentation of the physical certificates
to the transfer agent, or (ii) a court order requiring the transfer agent to cancel. At the time of issuing these consolidated
financial statements, the Company has been unsuccessful in its attempts to procure the physical certificates for presentment to
the transfer agent, and the Company has yet to secure a court order requiring the transfer agent to cancel the certificates. Accordingly,
the 21,200,000 shares issued are still outstanding at December 31, 2013.
The Company’s total
common shares outstanding totaled 66,364,083 at December 31, 2013.
Preferred Stock
In connection with the
merger, the Company authorized 1,000,000 shares of Series Z Convertible Preferred Stock with a par value of $0.01 per share (the
“Series Z Convertible Preferred”). The number of shares of Series Z Preferred Stock may be decreased by resolution
of the Board; provided, however, that no decrease shall reduce the number of Series Z Preferred Shares to less than the number
of shares then issued and outstanding. In the event any Series Z Preferred Shares shall be converted, (i) the Series
Z Preferred Shares so converted shall be retired and cancelled and shall not be reissued and (ii) the authorized number of Series
Z Preferred Shares set forth in this section shall be automatically reduced by the number of Series Z Preferred Shares so converted
and the number of shares of the Corporation’s undesignated Preferred Stock shall be deemed increased by such number. The
Series Z Convertible Preferred is convertible into common shares at the rate of 45 shares of common per one share of Series Z Convertible
Preferred. The Series Z Convertible Preferred has liquidation and other rights in preference to all other equity instruments. Simultaneously
upon conversion of the remaining Series A Preferred, Series B Preferred, and Series C Preferred and exercise of any outstanding
stock options issued under the HGI 2007 Stock Plan into Series Z Convertible Preferred, they will automatically, without any action
on the part of the holders, be converted into common shares of the Company. Since the merger, in connection with the exercise of
stock options into common stock and converted Series A Preferred, Series B Preferred and Series C Preferred as noted above, 82,508
shares of Series Z Convertible Preferred were automatically authorized and converted into shares of the Company’s common
stock leaving 917,492 shares of authorized undesignated Preferred Stock in the Company in accordance with the Series Z Convertible
Preferred certificate of designation. As of December 31, 2013, there were 82,508 shares of Series Z Preferred authorized with zero
shares issued and outstanding.
The Company authorized
175,000 shares of Series X Convertible Preferred Stock with a par value of $0.01 per share (the “Series X Preferred”).
The number of shares of Series X Preferred may be decreased by resolution of the Board; provided, however, that no decrease shall
reduce the number of Series X Preferred to less than the number of shares then issued and outstanding. In the event any Series
X Preferred Shares shall be redeemed, (i) the Series X Preferred so redeemed shall be retired and cancelled and shall not be reissued
and (ii) the authorized number of Series X Preferred Shares set forth in this section shall be automatically reduced by the number
of Series X Preferred Shares so redeemed and the number of shares of the Corporation's undesignated Preferred Stock shall be deemed
increased by such number. The Series X Preferred Shares rank senior to the Company’s common stock to the extent of $10.00
per Series X Preferred Shares and on a parity with the Company’s common stock as to amounts in excess thereof. The holders
of Series X Preferred shall not have voting rights. Holders of the Series X Preferred shall be entitled to receive, when and as
declared by the board of directors, dividends at an annual rate of 9% payable in cash when declared by the board. Holders of Series
X Preferred have a liquidation preference per share equal to $10.00. The liquidation preference was $1,436,770 as of December 31,
2013. As of December 31, 2013, there were 143,677 shares authorized with 143,677 shares issued and outstanding. Of the 143,677
shares issued and outstanding, 53,677 shares were related to the 2010 conversion from notes payable due to related parties. The
remaining 90,000 shares were issued for cash consideration.
In April 2012, the Company
authorized 100,000 shares of Series E Convertible Preferred Stock (the “Series E Preferred”) with a par value of $0.001
per share, at ten dollars ($10.00) per share with a conversion rate of fifty (50) shares of the Company’s common stock for
one share of Series E Preferred. The number of shares of Series E Preferred may be decreased by resolution of the Board; provided,
however, that no decrease shall reduce the number of Series E Preferred to less than the number of shares then issued and outstanding.
In the event any Series E Preferred Shares shall be converted, (i) the Series E Preferred so converted shall be retired and cancelled
and shall not be reissued and (ii) the authorized number of Series E Preferred Shares set forth shall be automatically reduced
by the number of Series E Preferred Shares so converted and the number of shares of the Corporation's undesignated Preferred Stock
shall be deemed increased by such number. The Series E Preferred Shares rank senior to the Company’s common stock to the
extent of $10.00 per Series E Preferred Shares and on a parity with the Company’s common stock as to amounts in excess thereof.
The holders of Series E Preferred shall not have voting rights. Holders of the Series E Preferred shall be entitled to receive,
when and as declared by the board of directors, dividends at an annual rate of 9% payable in cash or common stock when declared
by the board. Holders of Series E Preferred have a liquidation preference per share equal to $10.00. The liquidation preference
was $700,000 as of December 31, 2013. Each share of Series E Preferred, if not previously converted by the holder, will automatically
be converted into common stock at the then applicable conversion rate after thirty-six months from the date of purchase. As of
December 31, 2013, there were 70,000 shares issued and outstanding with total cash consideration of $700,000, convertible into
3,500,000 shares of the Company’s common stock.
The HGI Series A Convertible
Preferred Stock (the “Series A Preferred”) has a par value of $0.001 per share and has a liquidation preference of
the greater of (a) the consideration paid to the Company for such shares plus all accrued but unpaid dividends, if any or (b) the
per share amount the holders of the Series A Preferred would be entitled to upon conversion, as defined in the Series A Preferred
certificate of designation. The liquidation preference was $648,667, of which $89,168 is an accrued (but undeclared) dividend as
of December 31, 2013. Holders of the Series A Preferred are entitled to receive, if declared by the board of directors, dividends
at a rate of 8% payable in cash or common stock of the Company. The Series A Preferred is convertible into the Company’s
common stock at a conversion price of $1.25 per share. The Series A Preferred is convertible, either at the option of the holder
or the Company, into shares of the Company’s Series Z Convertible Preferred Stock, and immediately, without any action on
the part of the holder, converted into common stock of the Company. The Series A Preferred is redeemable at the option of the Company
at $1.80 per share prior to conversion. As of December 31, 2013, there have been 127,001 shares of Series A Preferred converted
or redeemed. The Series A Preferred does not have voting rights. The Series A Preferred ranks senior to the following capital stock
of the Company: (a) Series B Preferred, and (b) Series C Preferred.
The HGI Series B Convertible
Preferred Stock (the “Series B Preferred”) has a par value of $0.001 per share and has a liquidation preference of
the greater of (a) the consideration paid to the Company for such shares plus all accrued but unpaid dividends, if any or (b) the
per share amount the holders of the Series B Preferred would be entitled to upon conversion. The liquidation preference was $539,010,
of which $79,098 is an accrued (but undeclared) dividend as of December 31, 2013. Holders of the Series B Preferred are entitled
to receive, if declared by the board of directors, dividends at a rate of 8% payable in cash or common stock of the Company. The
Series B Preferred is convertible into the Company’s common stock at a conversion price of $1.74 per share. The Series B
Preferred is convertible, either at the option of the holder or the Company, into shares of the Company’s Series Z Convertible
Preferred Stock, and immediately, without any action on the part of the holder, converted into common stock of the Company. The
Series B Preferred is redeemable at the option of the Company at $2.30 per share prior to conversion. As of December 31, 2013,
there have been 270,044 shares of Series B Preferred converted or redeemed. The Series B Preferred does not have voting rights.
Series B Preferred ranks senior to the following capital stock of the Company: the Series C Preferred.
The HGI Series C Convertible
Preferred Stock (the “Series C Preferred”) has a par value of $0.001 per share and has a liquidation preference of
the greater of (a) the consideration paid to the Company for such shares plus all accrued but unpaid dividends, if any or (b) the
per share amount the holders of the Series C Preferred would be entitled to upon conversion. The liquidation preference was $363,276,
of which $53,276 is an accrued (but undeclared) dividend as of December 31, 2013. Holders of the Series C Preferred are entitled
to receive, if declared by the board of directors, dividends at a rate of 8% payable in cash or common stock of the Company. The
Series C Preferred is convertible into the Company’s common stock at an initial conversion price of $2.27 per share. The
Series C Preferred is convertible, either at the option of the holder or the Company, into shares of the Company’s Series
Z Convertible Preferred Stock, and immediately, without any action on the part of the holder, converted into common stock of the
Company. The Series C Preferred is redeemable at the option of the Company at $2.75 per share prior to conversion. As of December
31, 2013, there have been 28,000 shares of Series C Preferred converted or redeemed. The Series C Preferred does not have voting
rights. Series C Preferred ranks senior to the following capital stock of the Company: None.
The Company had issued
and outstanding at December 31, 2013, 372,999 shares of Series A Preferred, 229,956 shares of Series B Preferred, and 124,000 shares
of Series C Preferred, all with a par value of $0.001.
NOTE 18. SUBSEQUENT EVENTS
Subsequent to December
31, 2013, the CEO and Director of the Board advanced $65,000 for working capital. At the time of the filing of these financial
statements, a maturity date had not been set.
Subsequent to December
31, 2013, the President and Chief Legal Officer advanced $40,000 for working capital. At the time of the filing of these financial
statements, a maturity date had not been set.
Subsequent to December
31, 2013, a Director advanced $300,000 for working capital. At the time of the filing of these financial statements, a maturity
date had not been set.
There were no other subsequent
events to disclose.