The accompanying notes
are an integral part of these consolidated financial statements.
Notes
To Consolidated Financial Statements
June
30, 2014
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 real estate owned (“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.
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 August 2013 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
interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments considered necessary
for fair presentation of the results of the interim periods have been included (consisting of normal recurring accruals). The
accompanying consolidated financial statements as of June 30, 2014, and for the three and six months ended June 30, 2014 and 2013,
include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim information. Accordingly, the financial statements do not include all
of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the
audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K. The results of operations
for the three and six months ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year
ending December 31, 2014.
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 June 30, 2014, the Company’s accounts
receivable are made up of the following percentages; HAM at 91% and HPA at 9%.
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 June 30, 2014 and December 31, 2013, respectively;
|
|
Balance
at Beginning of Period
|
|
Increase
in the Provision
|
|
Accounts
Receivable Write-offs
|
|
Balance
at End of Period
|
Six Months ended June 30, 2014
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
375,665
|
|
|
$
|
92
|
|
|
$
|
92
|
|
|
$
|
375,665
|
|
Year
ended December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
375,665
|
|
|
$
|
1,197
|
|
|
$
|
1,197
|
|
|
$
|
375,665
|
|
As
of June 30, 2014, 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 June
30, 2014, 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 June 30, 2014 and 2013, there were 4,596,126 and 5,556,577 shares, respectively, underlying potentially dilutive convertible
preferred stock and stock options outstanding. For the three and six months ended June 30, 2014, the 4,596,126 shares were not
included in dilutive weighted average shares because their effect is anti-dilutive due to the Company’s 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 and derivative
liabilities.
Principles
of Consolidation
The
consolidated financial statements of the Company for the three and six months ended June 30, 2014 include the financial results
of HCI, HGI, HBI, HPA and HAM. All significant intercompany transactions and balances have been eliminated in consolidation.
The
consolidated financial statements of the Company for the three and six months ended June 30, 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.
Cash
and Cash Equivalents
The
Company considers all liquid investments with a maturity of 90 days or less to be cash equivalents.
Deposits
and Other Assets
At
June 30, 2014, deposits and other assets was $30,000 ($40,000 in total origination fees offset by $10,000 in accumulated amortization)
for the senior unsecured promissory note discussed in Note 10. The fees are to be amortized over the life of the promissory note.
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, with the remaining
$2,922 as a prepaid vendor expense.
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 three and six months ended June 30, 2014 and 2013.
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. 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 three and six months ended June 30, 2014 or 2013.
The
Company incurred no penalties or interest for taxes for the three and six months ended June 30, 2014 or 2013. 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 June 30, 2014 and December 31, 2013, the $42,337 and $169,349
balance, respectively, is included in current portion of deferred rent.
Recent
Accounting Standards
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (“
ASU 2014-09”),
which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an
entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle
and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing
U.S. GAAP.
The
standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following
transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period
with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially
adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating
the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method
by which we will adopt the standard in 2017.
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 three and six months ended June 30, 2014, the FDIC insured
deposit accounts up to $250,000. At June 30, 2014, 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 Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Halo Asset
Management
|
|
$
|
579,902
|
|
|
$
|
2,284,338
|
|
|
$
|
882,419
|
|
|
$
|
2,608,954
|
|
Halo Portfolio Advisors
|
|
|
248,003
|
|
|
|
698,743
|
|
|
|
537,774
|
|
|
|
1,230,813
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,531
|
|
Net
revenue
|
|
$
|
827,905
|
|
|
$
|
2,983,081
|
|
|
$
|
1,420,193
|
|
|
$
|
3,868,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Halo Asset Management
|
|
$
|
392,799
|
|
|
$
|
1,956,415
|
|
|
$
|
432,412
|
|
|
$
|
1,930,853
|
|
Halo Portfolio Advisors
|
|
|
39,668
|
|
|
|
109,477
|
|
|
|
85,651
|
|
|
|
208,659
|
|
Other
|
|
|
—
|
|
|
|
(109,082
|
)
|
|
|
—
|
|
|
|
(200,085
|
)
|
Less:
Corporate expenses (a)
|
|
|
(548,887
|
)
|
|
|
(559,849
|
)
|
|
|
(1,070,219
|
)
|
|
|
(1,062,343
|
)
|
Operating
income (loss):
|
|
$
|
(116,420
|
)
|
|
$
|
1,396,961
|
|
|
$
|
(552,156
|
)
|
|
$
|
877,084
|
|
|
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 also include interest expense. 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. In 2014, all interest expense is included in corporate
expenses above. In 2013, interest expense of $118,231 (majority of 2013 balance in “Other”) related to the secured
asset promissory note is included above in “Other”, with the remaining $38,128 of the $156,359 interest expense in
the consolidated statements of operations included in corporate expenses above. Interest expense is discussed in further detail
in Notes 9, 10, and 12.
For
the three and six months ended June 30, 2014 and 2013, 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 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 consolidated financial statements do not
include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The
Company has incurred an accumulated deficit of $11,152,939 as of June 30, 2014. However, of the accumulated deficit, $2,110,748
of expense was incurred as stock-based compensation, $562,259 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 $3,858,526 total of these non-cash retained earnings reductions represents 35%
of the total deficit balance.
NOTE
6. PROPERTY, EQUIPMENT AND SOFTWARE
Property,
equipment and software consist of the following as of June 30, 2014 and December 31, 2013, respectively:
Computers and purchased software
|
|
$
|
149,557
|
|
|
$
|
149,557
|
|
Furniture and equipment
|
|
|
235,515
|
|
|
|
235,515
|
|
|
|
|
385,072
|
|
|
|
385,072
|
|
Less: accumulated depreciation
|
|
|
(305,383
|
)
|
|
|
(276,724
|
)
|
|
|
$
|
79,689
|
|
|
$
|
108,348
|
|
Depreciation
totaled $14,286, $28,659, $14,574 and $29,386 for the three and six months ended June 30, 2014 and 2013, respectively.
NOTE
7. INVESTMENTS IN PORTFOLIO ASSETS
In
December 2010, Equitas Housing Fund, LLC (“EHF”), a subsidiary of the Company, 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 June 30, 2014, 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 $618,222 in accrued liabilities at June 30, 2014. Included in this accrual is $307,497 in accrued interest ($214,955
of this balance is related to interest on the secured asset promissory note discussed in more detail in Note 12) and $310,725
in deferred compensation to several senior management personnel. 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 is related to interest on the secured asset promissory note discussed in Note 12), and $4,556
in other.
NOTE
9. NOTES PAYABLE TO RELATED PARTIES
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 balloon payment at maturity in September 2014. 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. As of June 30,
the 2011 Related Party Note was $180,666, 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, 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 June 30, 2014, the 2011 Consolidated Related Party Note balance was $267,569, of which $79,051 is included
in current portion of notes payable to related parties.
As
of December 31, 2013, a Company director had an outstanding advance to the Company of $50,000 for short term capital. During the
six months ended June 30, 2014, the director advanced an additional $300,000 for working capital. As of June 30, 2014, the outstanding
advance balance was $350,000. 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 accrues interest at a rate of 15%.
As
of December 31, 2013, the Company’s President and Chief Legal Officer had an outstanding advance balance of $30,000 for
short term capital. During the six months ended June 30, 2014, the President advanced an additional $40,000 for working capital.
As of June 30, 2014, the outstanding advance balance was $70,000. 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 accrues interest at a rate of 15%.
As
of December 31, 2013, the Company’s CEO and Director of the Board had an outstanding advance balance of $50,000 for short
term capital. During the six months ended June 30, 2014, the CEO advanced an additional $65,000 for working capital. As of June
30, 2014, the outstanding advance balance was $115,000. 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 accrues interest at a rate of 15%.
As
of June 30, 2014, the notes payable to related party balance totaled $983,235, of which $794,717 is included in current portion
of notes payable to related parties in the consolidated financial statements. 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.
The
Company incurred $27,260, $49,010, $8,077, and $16,170 of interest expense to directors, officers, and other related parties during
the three and six months ended June 30, 2014 and 2013, respectively. Accrued interest due to directors and other related parties
totaled $111,816 at June 30, 2014, of which $92,541 is included in accrued and other current liabilities. 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.
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 payment of 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 June 30, 2014,
the notes payable balance was $1,672,600, which includes capitalized interest of $172,600. As of December 31, 2013, the notes
payable balance was $1,551,828, which includes capitalized interest of $51,828.
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. 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, t
he 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 assumed a cumulative
debt raise of $750,000.
The
Company follows 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). Subsequent changes to the marked-to-market value of the derivative
liability will be recorded in earnings as derivative gains and losses. As of June 30, 2014, there were 112,000 warrants outstanding
with a derivative liability of $2,239. As of December 31, 2013, there were 112,000 warrants outstanding with a derivative liability
of $15,772. The $13,533 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 $0.02 per share using the following assumptions:
|
|
June
30, 2014
|
Risk-free rate
|
|
|
0.90
|
%
|
Expected volatility
|
|
|
604.02
|
%
|
Expected remaining life (in years)
|
|
|
2.50
|
|
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 June 30, 2014, the remaining balance of this note totals $18,333 of which $5,000 is included in current
portion of subordinated debt. 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.
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. 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 June 30, 2014, the accrued interest balance was $214,955. As of December 31, 2013, the accrued interest balance was $218,568.
For the three and six months ended June 30, 2014 and 2013, the Company incurred $5,419, $10,838, $34,231 and $118,231 respectively,
in interest expense on the note.
NOTE
13. RELATED PARTY TRANSACTIONS
For
the three and six months ended June 30, 2014 and 2013, HAM recognized monthly servicing fee revenue totaling $114,680, $218,255,
$126,706 and $230,984, respectively, from an entity that is an affiliate of the Company.
For
the three and six months ended June 30, 2014 and 2013, the Company incurred interest expense to related parties (See Note 9).
NOTE
14. INCOME TAXES
For
the three and six months ended June 30, 2014 and 2013, the effective tax rate -23%, -4%, 2% and 3% varies from the U.S. federal
statutory rate primarily due to state income taxes, net losses, certain non-deductible expenses and an increase in the valuation
allowance associated with the net operating loss carryforwards. Our deferred tax assets related to net operating loss carryforwards
remain fully reserved due to uncertainty of utilization of those assets.
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 June 30, 2014, 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 $5,300,000 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.
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, all of which was expensed during 2013, 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 June 30, 2014, 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 June 30, 2014 are as follows:
Years Ending December 31:
|
|
|
|
|
|
2014
|
|
|
$
|
54,424
|
|
2015
|
|
|
|
14,601
|
|
Thereafter
|
|
|
|
—
|
|
Total minimum lease commitments
|
|
|
$
|
69,025
|
|
For
the three and six months ended June 30, 2014 and 2013, the Company incurred facilities rent expense totaling $29,751, $59,493,
$112,142 and $219,462, respectively.
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 June 30, 2014, 438,300 option shares have been exercised. Total stock
options outstanding as of June 30, 2014 total 247,500. The weighted average remaining contractual life of the outstanding options
at June 30, 2014 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, 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
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Canceled
|
|
|
|
(434,200
|
)
|
|
|
0.94
– 1.59
|
|
|
|
0.96
|
|
|
Outstanding
at June 30, 2014
|
|
|
|
247,500
|
|
|
$
|
0.01
– 1.59
|
|
|
$
|
0.50
|
|
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 June 30, 2014, 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 June 30, 2014, 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 June 30, 2014.
The
Company’s
total common shares outstanding totaled 66,364,083 at June 30, 2014.
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 June 30, 2014, 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 June 30, 2014. As of June 30, 2014, 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 June 30, 2014. 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 June 30, 2014, 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 $682,177, of which $122,679 is an accrued
(but undeclared) dividend as of June 30, 2014. 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 June 30, 2014, 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 $560,804, of which $100,892 is an accrued (but undeclared) dividend as of June 30, 2014. 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 June 30, 2014, 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 $378,086, of which $68,086 is an accrued (but undeclared) dividend as of June 30, 2014. 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 June 30, 2014, 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 June 30, 2014,
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
There
were no subsequent events to disclose.