UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
_______________
[X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September
30, 2014
[_] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
HALO COMPANIES, INC.
(Exact
name of registrant as specified in Charter)
Delaware |
|
000-15862 |
|
13-3018466 |
(State or other
jurisdiction of
incorporation or
organization) |
|
(Commission
File No.) |
|
(IRS
Employee Identification No.) |
7668 Warren Parkway, Suite 350
Frisco, Texas 75034
(Address of Principal Executive Offices)
_______________
214-644-0065
(Issuer Telephone number)
_______________
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the issuer was required to file such reports), and (2)has been subject to such filing requirements for the past 90
days.
Yes
[X] No [_]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes
[X] No [_]
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.
Yes
[_] No [X]
State the number of shares outstanding of each of the issuer’s
classes of common equity, November 14, 2014: 66,364,083 shares of Common Stock, $.001 par value per share outstanding.
Halo Companies, Inc.
INDEX
PART I. FINANCIAL INFORMATION
Item
1. |
Financial
Statements |
|
|
Consolidated
Balance Sheets at September 30, 2014 (unaudited) and December 31, 2013 |
3 |
|
Consolidated
Statements of Operations (unaudited) for the three and nine months ended September 30, 2014 and 2013 |
4 |
|
Consolidated
Statements of Changes in Shareholders’ Deficit (unaudited) for the nine months ended September 30, 2014 and 2013 |
5 |
|
Consolidated
Statements of Cash Flows (unaudited) for the nine months ended September 30, 2014 and 2013 |
6 |
|
Notes
to Consolidated Financial Statements |
7-23 |
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations |
24-29 |
Item
3. |
Quantitative
and Qualitative Disclosures about Market Risk |
29 |
Item
4T. |
Controls
and Procedures |
29 |
PART II. OTHER INFORMATION
Item
1. |
Legal
Proceedings |
30-31 |
Item
1A. |
Risk
Factors |
31-34 |
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds |
34 |
Item
3. |
Defaults
upon Senior Securities |
34 |
Item
4. |
Mine
Safety Disclosures |
34 |
Item
5. |
Other
Information |
34 |
Item
6. |
Exhibits |
34 |
|
SIGNATURES |
35 |
Part
1 – Financial Information
Item
1. Financial Statements
Halo Companies, Inc. and Subsidiaries |
CONSOLIDATED BALANCE SHEETS |
| |
| |
|
ASSETS | |
| | | |
| | |
| |
| September 30, 2014 | | |
| December 31, 2013 | |
| |
| (unaudited) | | |
| | |
| |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | |
Cash and cash equivalents | |
$ | 35,363 | | |
$ | 127,048 | |
Trade accounts receivable, net of allowance for doubtful | |
| | | |
| | |
accounts of $375,665 and $375,665, respectively | |
| 135,764 | | |
| 157,765 | |
Total current assets | |
| 171,127 | | |
| 284,813 | |
| |
| | | |
| | |
PROPERTY, EQUIPMENT AND SOFTWARE, net | |
| 71,490 | | |
| 108,348 | |
DEPOSITS AND OTHER ASSETS | |
| 26,667 | | |
| 39,589 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 269,284 | | |
$ | 432,750 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS' DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable | |
$ | 553,864 | | |
$ | 616,878 | |
Accrued and other liabilities (including $95,110 and | |
| | | |
| | |
$58,149 to related parties, respectively) | |
| 729,284 | | |
| 345,524 | |
Current portion of subordinated debt | |
| 17,083 | | |
| 5,417 | |
Current portion of notes payable to related parties | |
| 873,995 | | |
| 388,232 | |
Current portion of deferred rent | |
| — | | |
| 169,349 | |
Total current liabilities | |
| 2,174,226 | | |
| 1,525,400 | |
| |
| | | |
| | |
SUBORDINATED DEBT, LESS CURRENT PORTION | |
| — | | |
| 15,833 | |
NOTES PAYABLE TO RELATED PARTIES, LESS CURRENT PORTION | |
| 186,964 | | |
| 194,327 | |
NOTE PAYABLE | |
| 1,737,539 | | |
| 1,551,828 | |
ACCRUED INTEREST ON RELATED PARTY NOTES, LESS CURRENT PORTION | |
| 22,619 | | |
| 23,011 | |
DERIVATIVE LIABILITY | |
| 2,239 | | |
| 15,772 | |
Total liabilities | |
| 4,123,587 | | |
| 3,326,171 | |
| |
| | | |
| | |
SHAREHOLDERS' DEFICIT | |
| | | |
| | |
Series Z Convertible Preferred Stock, par value $0.01 per share; 82,508 shares | |
| | | |
| | |
authorized; 0 shares issued and outstanding at September 30, 2014 and December 31, 2013 | |
| — | | |
| — | |
Preferred Stock, par value $0.001 per share; 917,492 shares | |
| | | |
| | |
authorized; 0 shares issued and outstanding at September 30, 2014 and December 31, 2013 | |
| — | | |
| — | |
Series X Convertible Preferred Stock, par value $0.01 per share; 143,677 shares authorized; 143,677 | |
| | | |
| | |
shares issued and outstanding at September 30, 2014 and December 31, 2013, | |
| 1,437 | | |
| 1,437 | |
liquidation preference of $1,436,770 | |
| | | |
| | |
Series E Convertible Preferred Stock, par value $0.001 per share; 100,000 shares authorized; | |
| | | |
| | |
70,000 shares issued and outstanding at September 30, 2014 and December 31, 2013, | |
| | | |
| | |
respectively, liquidation preference of $700,000 | |
| 70 | | |
| 70 | |
Halo Group, Inc. Preferred Stock, par value $0.001 per share; 2,000,000 shares authorized | |
| | | |
| | |
Series A Convertible Preferred Stock; | |
| | | |
| | |
372,999 shares issued and outstanding at September 30, 2014 and December 31, 2013, | |
| | | |
| | |
liquidation preference of $694,299 | |
| 373 | | |
| 373 | |
Series B Convertible Preferred Stock; | |
| | | |
| | |
229,956 shares issued and outstanding at September 30, 2014 and December 31, 2013, | |
| | | |
| | |
liquidation preference of $572,616 | |
| 230 | | |
| 230 | |
Series C Convertible Preferred Stock; | |
| | | |
| | |
124,000 shares issued and outstanding at September 30, 2014 and December 31, 2013, | |
| | | |
| | |
liquidation preference of $385,759 | |
| 124 | | |
| 124 | |
Common Stock, par value $0.001 per share; 375,000,000 shares authorized; | |
| | | |
| | |
66,364,083 shares issued and outstanding | |
| | | |
| | |
at September 30, 2014 and December 31, 2013 | |
| 66,364 | | |
| 66,364 | |
Additional paid-in capital | |
| 7,638,764 | | |
| 7,638,764 | |
Accumulated deficit | |
| (11,561,665 | ) | |
| (10,600,783 | ) |
Total shareholders' deficit | |
| (3,854,303 | ) | |
| (2,893,421 | ) |
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | |
$ | 269,284 | | |
$ | 432,750 | |
| |
| | | |
| | |
The accompanying notes are an integral part of these consolidated financial statements. |
Halo Companies, Inc. and Subsidiaries |
CONSOLIDATED STATEMENTS OF OPERATIONS |
(Unaudited) |
| |
| |
| |
| |
|
| |
For the Three Months Ended | |
For the Nine Months Ended |
| |
September 30, | |
September 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
REVENUE (including $107,900, $120,562, $326,155 and | |
| | | |
| | | |
| | | |
| | |
$351,546 from related parties, respectively) |
|
$ | 555,466 |
| |
$ | 731,494 |
| |
$ | 1,975,659 |
| |
$ | 4,599,792 |
|
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | | |
| | | |
| | |
Sales and marketing expenses | |
| 300,992 | | |
| 344,489 | | |
| 767,197 | | |
| 1,365,952 | |
General and administrative expenses | |
| 160,084 | | |
| 137,102 | | |
| 535,748 | | |
| 697,080 | |
Salaries, wages, and benefits | |
| 386,103 | | |
| 563,337 | | |
| 1,311,525 | | |
| 1,720,652 | |
Total operating expenses | |
| 847,179 | | |
| 1,044,928 | | |
| 2,614,470 | | |
| 3,783,684 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING INCOME (LOSS) | |
| (291,713 | ) | |
| (313,434 | ) | |
| (638,811 | ) | |
| 816,108 | |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME (EXPENSE) | |
| | | |
| | | |
| | | |
| | |
Gain (loss) on change in fair value of derivative | |
| — | | |
| (255 | ) | |
| 13,533 | | |
| 9,729 | |
Wind down of noncontrolling interest subsidiary | |
| — | | |
| — | | |
| — | | |
| (82,460 | ) |
Interest expense (including $29,075, $7,803, $78,085 and | |
| | | |
| | | |
| | | |
| | |
$23,973 to related parties, respectively) | |
| (107,143 | ) | |
| (22,845 | ) | |
| (303,609 | ) | |
| (179,204 | ) |
Net income (loss) from operations, before income tax provision | |
| (398,856 | ) | |
| (336,534 | ) | |
| (928,887 | ) | |
| 564,173 | |
| |
| | | |
| | | |
| | | |
| | |
INCOME TAX PROVISION | |
| 9,870 | | |
| (1,499 | ) | |
| 31,995 | | |
| 22,124 | |
| |
| | | |
| | | |
| | | |
| | |
NET INCOME (LOSS) | |
$ | (408,726 | ) | |
$ | (335,035 | ) | |
$ | (960,882 | ) | |
$ | 542,049 | |
| |
| | | |
| | | |
| | | |
| | |
Loss per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | 0.01 | |
Diluted | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | 0.01 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Shares Outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 66,364,083 | | |
| 66,364,083 | | |
| 66,364,083 | | |
| 66,364,083 | |
Diluted | |
| 66,364,083 | | |
| 66,364,083 | | |
| 66,364,083 | | |
| 71,674,260 | |
| |
| | | |
| | | |
| | | |
| | |
The accompanying notes are an integral part of these consolidated financial statements. |
Halo Companies, Inc. and Subsidiaries |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT |
For the Nine Months Ended September 30, 2014 and 2013 |
(Unaudited) |
| |
| |
|
|
| |
|
|
| |
|
|
|
|
|
| |
|
| |
Halo Companies, Inc. Common Stock |
| Halo Companies, Inc. Series X Convertible Preferred Stock | |
Halo Companies, Inc. Series E Convertible Preferred Stock |
|
Halo Group, Inc. Series A Convertible Preferred Stock | |
Halo Group, Inc. Series B Convertible Preferred Stock | |
Halo Group, Inc. Series C Convertible Preferred Stock | |
|
Additional Paid-in Capital | |
| Accumulated Deficit | |
|
| Noncontrolling Interest | | |
| Total | |
| |
Shares | |
| Amount |
| Shares | |
| Amount | |
Shares | |
| Amount | |
Shares | |
| Amount | |
Shares | |
| Amount | |
Shares | |
| Amount | |
| | |
| | |
|
| | | |
| | |
| |
| |
| |
| | |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
|
| | | |
| | |
Balance at December 31, 2012 |
|
66,364,083 |
|
$ |
66,364 |
|
143,677 |
|
$ |
1,437 |
|
70,000 |
|
$ |
70 |
|
372,999 |
|
$ |
373 |
|
229,956 |
|
$ |
230 |
|
124,000 |
|
$ |
124 |
|
$ |
7,638,764 |
|
$ |
(10,678,986 |
) |
|
$ |
(82,460 |
) |
|
$ |
(3,054,084 |
) |
| |
| |
| |
| | |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
|
| | | |
| | |
Net income | |
— | |
| — |
| — | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
| — | |
| 542,049 | |
|
| — | | |
| 542,049 | |
| |
| |
| |
| | |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
|
| | | |
| | |
Wind down of noncontrolling interest subsidiary | |
— | |
| — |
| — | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
| — | |
| — | |
|
| 82,460 | | |
| 82,460 | |
| |
| |
| |
| | |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
|
| | | |
| | |
Balance at September 30, 2013 | |
66,364,083 | |
$ | 66,364 |
| 143,677 | |
$ | 1,437 | |
70,000 | |
$ | 70 | |
372,999 | |
$ | 373 | |
229,956 | |
$ | 230 | |
124,000 | |
$ | 124 | |
$ | 7,638,764 | |
$ | (10,136,937 | ) |
|
$ | — | | |
$ | (2,429,575 | ) |
| |
| |
| |
| | |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
|
| | | |
| | |
Balance at December 31, 2013 | |
66,364,083 | |
$ | 66,364 |
| 143,677 | |
$ | 1,437 | |
70,000 | |
$ | 70 | |
372,999 | |
$ | 373 | |
229,956 | |
$ | 230 | |
124,000 | |
$ | 124 | |
$ | 7,638,764 | |
$ | (10,600,783 | ) |
|
$ | — | | |
$ | (2,893,421 | ) |
| |
| |
| |
| | |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
|
| | | |
| | |
Net loss | |
— | |
| — |
| — | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
| — | |
| (960,882 | ) |
|
| — | | |
| (960,882 | ) |
| |
| |
| |
| | |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
|
| | | |
| | |
Balance at September 30, 2014 | |
66,364,083 | |
$ | 66,364 |
| 143,677 | |
$ | 1,437 | |
70,000 | |
$ | 70 | |
372,999 | |
$ | 373 | |
229,956 | |
$ | 230 | |
124,000 | |
$ | 124 | |
$ | 7,638,764 | |
$ | (11,561,665 | ) |
|
$ | — | | |
$ | (3,854,303 | ) |
| |
| |
| |
| | |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
|
| | | |
| | |
The accompanying notes are an integral part of these consolidated financial statements. |
Halo Companies, Inc. and Subsidiaries |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
For the Nine Months Ended September 30, 2014 and 2013 |
(Unaudited) |
| |
|
| |
September 30, 2014 | | |
September 30, 2013 | |
CASH FLOWS FROM OPERATIONS | |
| | | |
| | |
| |
| | | |
| | |
Net (loss) income | |
$ | (960,882 | ) | |
$ | 542,049 | |
Adjustments to reconcile net (loss) income to net cash | |
| | | |
| | |
(used in) provided by operating activities: | |
| | | |
| | |
Depreciation | |
| 37,558 | | |
| 84,595 | |
Amortization of debt discount | |
| — | | |
| 1,454 | |
Amortization of loan origination costs | |
| 10,000 | | |
| — | |
Capitalization of interest into note payable and notes payable to related parties | |
| 190,228 | | |
| — | |
Bad debt expense | |
| 111 | | |
| 1,092 | |
Gain on change in fair value of derivative | |
| (13,533 | ) | |
| (9,729 | ) |
Noncontrolling interest | |
| — | | |
| 82,460 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 21,890 | | |
| (12,267 | ) |
Deposits and other assets | |
| 2,922 | | |
| 45,000 | |
Accounts payable | |
| (63,014 | ) | |
| 2,450 | |
Accrued and other liabilities | |
| 383,368 | | |
| 235,265 | |
Deferred rent | |
| (169,349 | ) | |
| (73,490 | ) |
Deferred revenue | |
| — | | |
| (11,300 | ) |
Net cash (used in) provided by operating activities | |
| (560,701 | ) | |
| 887,579 | |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Proceeds received from note receivable | |
| — | | |
| 165,000 | |
Purchases of property and equipment | |
| (700 | ) | |
| (60,790 | ) |
Net cash (used in) provided by investing activities | |
| (700 | ) | |
| 104,210 | |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Principal payments on secured asset promissory note | |
| — | | |
| (1,200,000 | ) |
Principal payments on notes payable | |
| — | | |
| (8,509 | ) |
Proceeds from notes payable to related parties | |
| 480,000 | | |
| 332,011 | |
Principal payments on notes payable to related parties | |
| (6,117 | ) | |
| (125,304 | ) |
Principal payments on subordinated debt | |
| (4,167 | ) | |
| (92,333 | ) |
Net cash provided by (used in) financing activities | |
| 469,716 | | |
| (1,094,135 | ) |
| |
| | | |
| | |
Net decrease in cash and cash equivalents | |
| (91,685 | ) | |
| (102,346 | ) |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, beginning of period | |
| 127,048 | | |
| 184,121 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, end of period | |
$ | 35,363 | | |
$ | 81,775 | |
| |
| | | |
| | |
SUPPLEMENTAL INFORMATION | |
| | | |
| | |
Cash paid for taxes - Texas Margin Tax | |
$ | 31,995 | | |
$ | 22,124 | |
Cash paid for interest | |
$ | 51,216 | | |
$ | 218,006 | |
| |
| | | |
| | |
The accompanying notes are an integral part of these consolidated financial statements. | |
Halo Companies, Inc.
Notes To Consolidated Financial Statements
September 30, 2014
NOTE 1. ORGANIZATION AND RECENT DEVELOPMENTS
U
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. 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 September 30, 2014, and for the three and nine months ended September 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
nine months ended September 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 September 30, 2014, the Company’s accounts receivable are
made up of the following percentages; HAM at 89% and HPA at 11%.
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 September 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 |
Nine Months ended September 30, 2014 | |
| |
| |
| |
|
Allowance
for doubtful accounts | |
$ | 375,665 | | |
$ | 111 | | |
$ | 111 | | |
$ | 375,665 | |
Year
ended December 31, 2013 | |
| | | |
| | | |
| | | |
| | |
Allowance
for doubtful accounts | |
$ | 375,665 | | |
$ | 1,197 | | |
$ | 1,197 | | |
$ | 375,665 | |
As of September 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 September 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 September 30,
2014 and 2013, there were 4,518,626 and 5,056,576 shares, respectively, underlying potentially dilutive convertible preferred
stock and stock options outstanding. For the three and nine months ended September 30, 2014 and for the three months ended September
30, 2013, the 4,518,626 and 5,056,576 shares were not included in dilutive weighted average shares because their effect is anti-dilutive
due to the Company’s net loss.
UUse
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.
U
Principles of Consolidation
The consolidated financial
statements of the Company for the three and nine months ended September 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 nine months ended September 30, 2013 include the financial results of HCI, HGI, Halo
Group Mortgage, HBI, Halo Select Insurance Services, Halo Choice Insurance Services, HPA, HAM, and Equitas Housing Fund. 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 September 30, 2014,
deposits and other assets was $26,667 ($40,000 in total origination fees offset by $13,333 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. U
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 nine months ended September 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.
U
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 nine months ended September 30, 2014 or 2013.
The Company incurred no
penalties or interest for taxes for the three and nine months ended September 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, 2011, 2012 and 2013. 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 September 30, 2014 and December 31, 2013, the $0 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 nine months ended September 30, 2014, the FDIC insured deposit
accounts up to $250,000. At September 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 Nine Months Ended |
| |
September 30, | |
September 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
Revenue: | |
| | | |
| | | |
| | | |
| | |
Halo Asset Management | |
$ | 219,125 | | |
$ | 301,900 | | |
$ | 1,101,544 | | |
$ | 2,910,854 | |
Halo Portfolio Advisors | |
| 336,341 | | |
| 429,594 | | |
| 874,115 | | |
| 1,660,406 | |
Other | |
| — | | |
| — | | |
| — | | |
| 28,532 | |
Net revenue | |
$ | 555,466 | | |
$ | 731,494 | | |
$ | 1,975,659 | | |
$ | 4,599,792 | |
| |
| | | |
| | | |
| | | |
| | |
Operating income (loss): | |
| | | |
| | | |
| | | |
| | |
Halo Asset Management | |
$ | 70,014 | | |
$ | (17,595 | ) | |
$ | 502,426 | | |
$ | 1,913,258 | |
Halo Portfolio Advisors | |
| 43,833 | | |
| 80,326 | | |
| 129,484 | | |
| 288,986 | |
Other | |
| — | | |
| (3,614 | ) | |
| — | | |
| (203,477 | ) |
Less: Corporate expenses (a) | |
| (522,573 | ) | |
| (394,152 | ) | |
| (1,592,792 | ) | |
| (1,456,718 | ) |
Operating income (loss): | |
$ | (408,726 | ) | |
$ | (335,035 | ) | |
$ | (960,882 | ) | |
$ | 542,049 | |
| a. | Corporate
expenses include salaries, benefits and other expenses, including rent and general and
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 $123,650 (majority of 2013 balance in “Other”) related to the secured
asset promissory note is included above in “Other”, with the remaining $55,554 of the $179,204 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 nine months ended September 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 $11,561,665 as of September 30, 2014. However, of the accumulated deficit, $2,110,748 of expense was
incurred as stock-based compensation, $571,158 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 $3,867,425 total of these non-cash retained earnings reductions represents 33% of the total deficit
balance.
NOTE
6. PROPERTY, EQUIPMENT AND SOFTWARE
Property,
equipment and software consist of the following as of September 30, 2014 and December 31, 2013, respectively:
Computers and purchased software | |
$ | 150,257 | | |
$ | 149,557 | |
Furniture and equipment | |
| 235,515 | | |
| 235,515 | |
| |
| 385,772 | | |
| 385,072 | |
Less: accumulated depreciation | |
| (314,282 | ) | |
| (276,724 | ) |
| |
$ | 71,490 | | |
$ | 108,348 | |
Depreciation totaled $8,899,
$37,558, $56,485 and $84,595 for the three and nine months ended September 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 September 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 $729,284
in accrued liabilities at September 30, 2014. Included in this accrual is $334,191 in accrued interest ($218,568 of this balance
is related to interest on the secured asset promissory note discussed in more detail in Note 12) and $395,093 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 previous 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. At the time of the filing of these consolidated
financial statements, the Company and the related party had not finalized an extended maturity date, and as such the entire $183,390
2011 Related Party Note balance 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, 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 September 30, 2014, the 2011 Consolidated Related Party Note balance was $267,569, of which $80,605 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 nine months ended September
30, 2014, the director advanced an additional $375,000 for working capital. As of September 30, 2014, the outstanding advance
balance was $425,000. 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 nine months ended September 30, 2014, the President advanced an additional $40,000 for working capital. As of September 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 nine months ended September 30, 2014, the CEO advanced an additional $65,000 for working capital. As of September 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 September 30, 2014,
the notes payable to related party balance totaled $1,060,959, of which $873,995 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 $29,075,
$78,085, $7,803 and $23,973 of interest expense to directors, officers, and other related parties during the three and nine months
ended September 30, 2014 and 2013, respectively. Accrued interest due to directors and other related parties totaled $117,729
at September 30, 2014, of which $95,110 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.
NOTE 10. NOTE 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, pay $375,000
to a related party note held by a director, 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 September 30, 2014, the note payable balance was $1,737,539, which includes capitalized interest
of $237,539. 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, 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 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 September 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:
| |
September
30, 2014 |
Risk-free rate | |
| 0.90 | % |
Expected volatility | |
| 604.02 | % |
Expected remaining life (in years) | |
| 2.25 | |
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 September 30, 2014, the remaining balance of this note totals $17,083, all of which 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 September 30, 2014, the accrued interest balance was $218,568. As of December 31, 2013, the accrued interest balance was
$218,568. For the three and nine months ended September 30, 2014 and 2013, the Company incurred $5,419,
$16,257, $5,419 and $123,650 respectively, in interest expense on the note.
NOTE 13. RELATED PARTY TRANSACTIONS
For the three and nine
months ended September 30, 2014 and 2013, HAM recognized monthly servicing fee revenue totaling $107,900, $326,155, $120,562 and
$351,546, respectively, from an entity that is an affiliate of the Company.
For the three and nine
months ended September 30, 2014 and 2013, the Company incurred interest expense to related parties (See Note 9).
NOTE 14. INCOME TAXES
For the three and
nine months ended September 30, 2014 and 2013, the effective tax rate -2%, -3%, -1% and 4% 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 September 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 $5,700,000 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. The open balance is included in accounts payable. As of September 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 as of September 30, 2014 are as follows:
Years Ending December 31: | | |
| | |
2014 | | |
$ | 5,070 | |
2015 | | |
| 14,601 | |
Thereafter | | |
| — | |
Total minimum lease commitments | | |
$ | 19,671 | |
For
the three and nine months ended September 30, 2014 and 2013, the Company incurred facilities rent expense totaling $29,751, $89,244,
($74,036) and $145,427, respectively. As discussed in Note 1, the 2013 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 191st 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 3rd 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. The Plaintiffs
have requested multiple extensions to their time to file their brief on the Appeal. After having multiple extensions granted,
the Plaintiff’s requested that the Appeals court stay the Appeal pending the outcome of the Company’s approved settlement
agreement with the court appointed Receiver for James G. Temme and Stewardship Fund, LLC, appointed by the Federal Court in the
Eastern District of Texas. The State Appeals court has currently granted the Plaintiff’s request for stay.
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 191st
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 September 30, 2014, 438,300 option shares have been exercised. Total stock options
outstanding as of September 30, 2014 total 170,000. The weighted average remaining contractual life of the outstanding options
at September 30, 2014 is approximately 3 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 | | |
| (511,700 | ) | |
| 0.94
– 1.59 | | |
| 1.06 | |
| Outstanding
at September 30, 2014 | | |
| 170,000 | | |
$ | 0.01 | | |
$ | 0.01 | |
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 September 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 September 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 September 30, 2014.
The Company’s
total common shares outstanding totaled 66,364,083 at September 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 September 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 September
30, 2014. As of September 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 September 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
September 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 $694,299, of which $134,801 is an accrued (but undeclared) dividend
as of September 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 September 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
$572,616, of which $112,704 is an accrued (but undeclared) dividend as of September 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 September
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
$385,759, of which $75,759 is an accrued (but undeclared) dividend as of September 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
September 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 September 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
During October 2014, the
Company entered into an additional $100,000 subordinated term note with the current holder of the Company’s subordinated
debt. The note pays an 18% coupon rate with a maturity date of September 30, 2017.
There were no other subsequent
events to disclose.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements
contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute “forward-looking
statements”. Words such as “expect,” “estimate,” “project,” “budget,” “forecast,”
“anticipate,” “intend,” “plan,” “may,” “will,” “could,”
“should,” “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 related statements, 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.
The following discussion
of the financial condition and results of operation of the Company should be read in conjunction with the consolidated financial
statements and the notes to those statements included in this Report.
Company Overview
The Company, through
its subsidiaries, operates a nationwide distressed asset services company, providing technology-driven asset management, portfolio
due diligence, acquisition, repositioning and liquidation strategies for the private investment and mortgage servicing industry.
Founded in 2004, Halo began operating in the mortgage origination sector, expanding quickly to an award-winning consumer financial
services company. Halo’s years of experience, key leadership and industry knowledge, laid the foundation for its emergence
as a premier distressed asset services company.
Halo focuses its
distressed asset services, portfolio due diligence, and asset liquidation strategies primarily on single family residential real
estate across the United States for its business customers (typically distressed debt investors or debt servicers) to market turnkey
solutions for improved performance and monetization of their portfolios. In today’s economy, lenders are experiencing an
overflow of distressed assets. Many mortgage debt servicers are currently overwhelmed with externally imposed programs that are
stretching the limits of their human resources, money and time. Halo’s technology systems are bundled with transparency,
accountability, efficiency, and flexibility. This unique strategy directs borrowers into an intelligent, results-driven process
that establishes affordable, long-term mortgages while also achieving an improved return for lenders and investors, when compared
to foreclosure.
Plan of Operations
Halo
has developed a fee for service business model through Halo Asset Management for the monetization of non-performing, residential
mortgage notes (“NPNs”) or foreclosed single family homes (“REO”) (collectively, “Assets”).
Halo provides investors and asset owners a complete suite of asset management and mortgage services including, but not limited
to (i) portfolio due diligence such as valuation engines, tax research, portfolio bid management, cost allocations and decision
support; (ii) acquisition services including portfolio reconciliation, title, and tax reporting, an investor portal, initial portfolio
inspection and servicing transfer assistance; (iii) repositioning services including portfolio restructuring, valuations, document
preparation engine, document e-vaulting and proprietary loan underwriting; (iv) asset management and mortgage servicing including
portfolio accounting, servicing and loan management functions, escrow administration, payment processing, loss mitigation and
default resolution; and (v) liquidation strategies including predictive liquidity waterfalls, portfolio liquidation analysis,
market analysis and disposition support. Halo focuses on the monetization and servicing of distressed real estate assets and finding
a win-win solution for the asset owner/investor and the consumer. Halo will board REO properties as well as sub-performing and
non-performing first lien mortgages from banks, financial institutions and mortgage servicers which have been purchased by investors.
The majority of the assets will be either modified first lien mortgages or sold via owner finance, as opposed to a fire sale through
a real estate network. HAM, through its strategic sub-servicing relationship, will “season” the notes (season is defined
as collecting consistent cash flow payments from the borrower). Following several months of seller financed payment seasoning,
Halo will assist in the disposal of the performing Assets in bulk to various bulk performing asset buyers.
For
the NPN’s, Halo will attempt to restructure or modify the note for those borrowers who have a desire to stay in the home
and have the capacity to afford the home. For the borrowers who either lack the desire to stay in the home, or who lack the capacity
to afford the home, Halo will obtain a deed-in-lieu of foreclosure from the borrower (which ensures the investor ownership of
the underlying asset; not just the purchased note), often times through incentives, and take the home back to an REO.
For
the REO’s, traditional apartment or home renters become buyers after a qualification and screening process because they
are given the opportunity to purchase affordable homes with achievable and manageable down payments and subsequent monthly payments.
Halo originates land contracts or mortgage notes for the new home owners. A land contract (sometimes known as an “installment
contract” or “contract for deed”) is a contract between a seller and buyer on real property in which the seller
provides the buyer financing to buy the property for an agreed-upon purchase price, and the buyer repays the loan in installments.
Under a land contract, the seller retains the legal title to the property, while permitting the buyer to take possession of it
for most purposes other than legal ownership. The sales price is typically paid in periodic installments. As a general rule, the
seller is obligated to convey legal title of the property to the buyer when the full purchase price has been paid including any
interest. This process creates entry level housing with built-in, fully amortized financing that equates to payments that are
equivalent to what the buyers are currently paying in rent, and often as much as 35% less.
When
the loans are “seasoned,” they are attractive investment vehicles to be either refinanced or sold in bulk. Halo will
attempt to refinance the rehabilitated borrowers through an FHA loan providing the Client with an exit at 90-95% of par value.
The notes of borrowers who did not achieve qualifying levels will be sold in bulk at a discount of par value on the remaining
unpaid principle balance of the notes.
Currently,
HAM is under contract to manage and service approximately 4,700 assets in various stages of their life-cycle including REO, non-performing
loans, re-performing note modifications, and performing owner financed contract-for-deeds. As the Company currently has the management,
infrastructure, and physical work area capacity to scale and support additional assets under contract, it is actively seeking
new clients as well as helping existing clients increase their respective asset pool. The Company believes that the country is
in a long-term deleveraging cycle whereby home financing will continue to be difficult to obtain. For this same reason, we believe
that investors will continue to be able to purchase assets in bulk from large institutional sellers at deep discounts and Halo’s
goal is to establish itself, with the help of its unique technology platform and key servicing and vendor relationships, as the
premier asset manager/servicer in the distressed non-performing loan and REO industry.
HPA
services include portfolio strategy consulting, default management, asset/liability management, asset preservation management,
debt restructuring, portfolio acquisition and liquidation support. In addition, HPA also focuses its work with asset managers,
investors and servicers to provide a custom, tailored workout program that will improve the performance of the assets or notes
through a myriad of creative analytic and retention strategies. HPA utilizes Halo’s proprietary in-house technology to provide
a customized analysis of a Client’s position. HPA then custom tailors a solution for the Client which provides the Client
analytics on which assets or notes to monetize first and what options are best utilized to monetize each individual asset or note.
The current economic environment
finds lenders and servicers drowning in an overflow of defaulted assets and Halo recognizes the cause behind a typical troubled
asset is often not one, but several contributing factors. HPA’s workout program allows for management of a diverse portfolio
of loans. HPA’s technology systems are bundled with transparency, accountability, efficiency, speed, and flexibility. This
unique strategy delivers Clients an intelligent, results-driven process that achieves an improved return for lenders, investors
and servicers. Halo’s operational support services allow endless opportunities for strategic relationships with major distressed
asset managers and servicers.
Our
management team is well-positioned to execute its business plan. At its core, the plan seeks to execute on delivering asset management,
valued analytics, and consumer financial rehabilitation to mid-size institutional and private investors.
Significant effort and
investment capital has been incurred by the Company over the past ten years in order to attract and maintain a qualified and capable
staff, develop proprietary software platforms, and implement systems, procedures, and infrastructure to execute the business plan
on a large scale. Given the short time frame this current market opportunity has existed, we have a significant competitive advantage
over others who may try to execute the same business plan.
Results of Operations
for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013
To completely understand
the Company’s results, the below discussion should be read in conjunction with Note 4 Operating Segments of the consolidated
financial statements.
Revenues
For the three months ended
September 30, 2014, revenue decreased $176,028 and 24% to $555,466 from $731,494 for the three months ended September 30, 2013.
The variance is primarily attributable to a (1) revenue decrease of $82,775 in HAM and (2) revenue decrease of $93,523 in HPA.
The HAM revenue decrease of $82,775 is primarily attributable to a decrease in success fees and asset management fees. The HPA
revenue decrease of $93,523 is primarily attributable to (1) the decrease of assets under property preservation management, (2)
decrease of asset units the Company performed portfolio strategy consulting and portfolio acquisition support for, (3) offset
by increase of assets for which broker price opinion (asset valuation) work was performed.
For the nine months ended
September 30, 2014, revenue decreased $2,624,133 and 57% to $1,975,659 from $4,599,792 for the nine months ended September 30,
2013. The decrease is primarily related to the third quarter decrease of $176,028 noted above, the second quarter decrease of
$2,155,176, as well the $292,929 decrease in revenue for the three months ended March 31, 2014 compared to the three months ended
March 31, 2013. The $2,155,176 decrease was primarily attributable to a $1,700,000 significant success fee transaction that occurred
during the quarter ended June 30, 2013 (sale of a majority of one of HAM’s customer’s assets to another existing Halo
customer) and a revenue decrease of $450,740 in HPA.
As
discussed in Note 2 of the consolidated financial statements, HAM revenues include boarding and initial asset management fees,
success fees, and its monthly servicing fee. Overall, looking forward to the remainder of 2014, the Company continues to
evaluate and refine its sales and marketing process to increase its earning potential. This process has and will continue to include
management evaluating its sales methodology, sale closing efficiency, personnel and incentives, marketing sources, technology
support, asset count, type of assets under management, customer base, and vendor relationships and pricing strategies. The Company
is actively seeking growth of its asset units under management, both organically and via new client relationships.
Operating Expenses
Sales and marketing expenses
include direct sales costs and marketing incurred in HPA for property preservation, tax and title reporting, eviction filing,
mobile notary services, asset valuation, credit reports, and all other contract service commissions. For the three months ended
September 30, 2014, sales and marketing expenses decreased $43,497 and 13% to $300,992 for the three months ended September 30,
2014 from $344,489 for the three months ended September 30, 2013. The decrease is primarily related to the variable expense associated
with the above noted decrease in revenues in HPA (for property preservation management and portfolio acquisition support offset
by an increase in asset valuation work) over the same time period. For the nine months ended September 30, 2014, sales and marketing
expenses decreased $598,755 and 44% to $767,197 for the nine months ended September 30, 2014 from $1,365,952 for the nine months
ended September 30, 2013, primarily for the reasons noted above.
General
and administrative expenses increased $22,982 and 17% to $160,084 for the three months ended September 30, 2014 from $137,102
for the three months ended September 30, 2013. The variance is primarily attributable to the one time reduction in rent expense
during the three months ended September 30, 2013 in which the final settlement with the Company’s previous office lessor
released previously recognized rent expense (i.e. a positive income statement impact) which at the time was included in accounts
payable and deferred rent. This one time reduction in the third quarter 2013 is offset by the overall reduction of the current
quarters monthly rent compared to the three months ended September 30, 2013. Other
variances over the same time period include reduced depreciation expense, health and general
insurance expense, monthly utilities, legal expense. General and administrative expenses decreased $161,332 and 23% to 535,748
for the nine months ended September 30, 2014 from $697,080 for the nine months ended September 30, 2013, primarily attributable
to the reduction in rent and other decreases noted above.
Salaries, wages and benefits
decreased $177,234 and 31% to $386,103 for the three months ended September 30, 2014 from $563,337 for the three months ended
September 30, 2013. Salaries, wages and benefits decreased $409,127 and 24% to $1,311,525 for the nine months ended September
30, 2014 from $1,720,652 for the nine months ended September 30, 2013. The decrease is primarily attributable to a reduction in
overall employee headcount primarily in HAM. Looking forward to the remainder of 2014, the Company will continue to gauge its
headcount in the HAM subsidiary in line with the growth of asset units managed under HAM. As salaries, wages and benefits are
the most significant cost to the Company, management actively monitors this cost to ensure it is in line with our business plan.
The Company experienced
a decrease in its bottom line of $73,691 and 22% to a net loss of $408,726 for the three months ended September 30, 2014 from
net loss of $335,035 for the three months ended September 30, 2013, primarily attributable to the reasons noted above. The Company
experienced a decrease in its bottom line of $1,502,931 and 277% to a net loss of $960,882 for the nine months ended September
30, 2014 from net income of $542,049 for the nine months ended September 30, 2013, primarily attributable to the reasons noted
above.
Significant Accounting Policies
Certain critical accounting
policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial
statements. These policies are contained in Note 2 to the consolidated financial statements and included in Note 2 to the consolidated
financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant
changes in our significant accounting policies since the last fiscal year end 2013.
Liquidity and Capital Resources
As of September 30, 2014,
the Company had cash and cash equivalents of $35,363. The decrease of $91,685 in cash and cash equivalents from December 31, 2013
was due to net cash used in operating activities of $560,701 and net cash used in investing activities of $700, offset by net
cash provided by financing activities of $469,716.
Net cash used in operating
activities was $560,701 for the nine months ended September 30, 2014, compared to $887,579 net cash provided by operating activities
for the nine months ended September 30, 2013. The net cash used in operating activities for the nine months ended September
30, 2014 was due to net loss of $960,882, adjusted primarily by the following: (1) a decrease in accounts payable of $63,014 and
deferred rent of $169,349, (2) offset by an increase in accrued and other liabilities of $383,368 (includes long term accrued
interest), a decrease in gross trade accounts receivable of $21,890, and non cash capitalization of interest in the note payable
of $190,228 (discussed in Note 10 of the consolidated financial statements). The remaining immaterial variance is related to non
cash depreciation and amortization of loan origination costs, bad debt expense, non cash gain on the change in fair value of derivative,
and a decrease in other assets.
The decrease in accounts
payable of $63,014 is primarily related to the decrease in sales and marking expenses and general and administrative expenses
as well as the overall cash flow management of the Company. The decrease in deferred rent of $169,349 is due to the final settlement
with the office lessor, further discussed in Note 1 of the consolidated financial statements. The Company notes the deferred rent
balance has continued to decrease as the landlord settlement payments are made towards the outstanding balance.
The $383,368
increase in accrued and other liabilities is primarily related to the $331,167 increase in deferred compensation to a portion
of the management team and a $56,757 increase in accrued interest on notes payable to related parties as discussed in Note 9 to
the consolidated financials. The remaining immaterial offsetting variance in made up of a decrease in other liabilities.
Net cash used in investing
activities was $700 for the nine months ended September 30, 2014, compared to net cash provided by investing activities of $104,210
for the nine months ended September 30, 2013.
Net cash provided by financing
activities was $469,716 for the nine months ended September 30, 2014, compared to net cash used in financing activities of $1,094,135
for the nine months ended September 30, 2013. Financing activities for the nine months ended September 30, 2014 consisted primarily
of the $480,000 in proceeds received from notes payable to related parties, offset by $6,117 and $4,167 in principal payments
on notes payable to related parties and subordinated debt, respectively.
As shown below, at September
30, 2014, our contractual cash obligations totaled approximately $3,191,986, all of which consisted of operating lease obligations
and debt principal and accrued interest repayment.
| |
Payments due by December 31, |
Contractual Obligations | |
2014 | |
2015-2016 | |
2017-2018 | |
2019 & Thereafter | |
Total |
Debt Obligations | |
$ | 1,130,769 | | |
$ | 2,041,546 | | |
$ | 0 | | |
$ | 0 | | |
$ | 3,172,315 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Operating Lease Obligations | |
$ | 5,070 | | |
$ | 14,601 | | |
$ | 0 | | |
$ | 0 | | |
$ | 19,671 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Contractual Cash Obligations | |
$ | 1,135,839 | | |
$ | 2,056,147 | | |
$ | 0 | | |
$ | 0 | | |
$ | 3,191,986 | |
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. 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.
Off Balance Sheet Transactions and
Related Matters
Other than operating leases
discussed in Note 15 to the consolidated financial statements, there are no off-balance sheet transactions, arrangements, obligations
(including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have,
a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources of the Company.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk.
Interest
Rate Risk. Our business is highly leveraged and, accordingly, is sensitive to fluctuations in interest rates. Any
significant increase in interest rates could have a material adverse effect on our financial condition and ability to continue
as a going concern.
Item 4T. Controls and
Procedures.
As of the end of
the period covered by this report, our principal executive officer and principal financial officer, evaluated the effectiveness
of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934. Based on that evaluation, we concluded that, as of the date of the evaluation, our disclosure controls and procedures
were effective to provide reasonable assurance that information required to be disclosed in our periodic filings under the Securities
Exchange Act of 1934 is accumulated and communicated to management, including the officers, to allow timely decisions regarding
required disclosures. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise
required to be set forth in the Company’s periodic reports.
During the period
covered by this report, there were no changes in our internal control over financial reporting that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
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 191st 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 3rd 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. The Plaintiffs
have requested multiple extensions to their time to file their brief on the Appeal. After having multiple extensions granted,
the Plaintiff’s requested that the Appeals court stay the Appeal pending the outcome of the Company’s approved settlement
agreement with the court appointed Receiver for James G. Temme and Stewardship Fund, LLC, appointed by the Federal Court in the
Eastern District of Texas. The State Appeals court has currently granted the Plaintiff’s request for stay.
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 191st 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.
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.
See Note 15 to the consolidated financial statements for more information.
Item 1A. Risk Factors
Our
limited operating history may not serve as an adequate basis to judge our future prospects and results of operations. The
Company has a relatively limited operating history. Our limited operating history and the unpredictability of the distressed real
estate and mortgage services industry make it difficult for investors to evaluate our business. An investor in our securities
must consider the risks, uncertainties and difficulties frequently encountered by companies in rapidly evolving markets.
We
will need additional financing to implement our business plan. The Company will need additional financing to fully implement
its business plan in a manner that not only continues to expand an already established direct-to-consumer approach, but also allows
the Company to establish a stronger brand name in all the areas in which it operates, including mortgage servicing and distressed
asset sectors. In particular, the Company will need substantial financing to:
| · | further
develop its product and service lines and expand them into new markets; |
| · | expand
its facilities, human resources, and infrastructure; |
| · | increase
its marketing efforts and lead generation; and |
| · | expand
its business into purchasing and servicing distressed asset portfolios. |
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 the imposition of covenants that restrict
the Company’s operations.
Our
products and services are subject to changes in applicable laws and government regulations. In the United States, we are regulated
pursuant to laws applicable to businesses in general. And in some areas of our business, we are subject to specific laws regulating
the availability of certain material related to, or to the obtaining of, personal information. Adverse developments in the legal
or regulatory environment relating to the debt collection, mortgage servicing and mortgage origination industries in the United
States could have a material adverse effect on our business, financial condition and operating results. A number of legislative
and regulatory proposals from the federal government and various state governments in the areas of debt collection, mortgage servicing,
mortgage origination, consumer protection, advertising, and privacy, among others, have been adopted or are now under consideration.
We are unable at this time to predict which, if any, of the proposals under consideration may be adopted and, with respect to
proposals that have been or will be adopted, whether they will have a beneficial or an adverse effect on our business, financial
condition and operating results.
For the
mortgage origination and mortgage servicing industries in particular, legislation in the United States has been pervasive and
is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments
and agencies have issued extensive rules and regulations, some of which carry substantial penalties for failure to comply. These
laws and regulations increase the cost of doing business and, consequently, affect profitability. Since new legislation affecting
the mortgage origination and mortgage servicing industries is commonplace and existing laws and regulations are frequently amended
or reinterpreted, the company is unable to predict the future cost or impact of complying with these laws and regulations. However,
the Company considers the cost of regulatory compliance a necessary and manageable part of its business. Further, the Company
has been able to plan for and comply with new regulatory initiatives without materially altering its operating strategies.
Specific
laws which affect Halo Asset Management and Halo Portfolio Advisors in particular are the following: The Secure and Fair Enforcement
for Mortgage Licensing Act of 2008 (“S.A.F.E. Act”), the Fair Debt Collection Practices Act (“FDCPA”),
and the Real Estate Settlement Procedures Act (“Regulation X” or “RESPA”). Currently, the Company believes
it is fully compliant with each of these laws. The Company believes that these laws, as currently enacted, provide barriers to
entry for potential competitors, by virtue of their respective bonding and licensing requirements, and the overall cost of compliance.
The Company believes that Halo Asset Management and Halo Portfolio Advisors maintain a competitive advantage in the marketplace
because of these barriers to entry.
In addition
to the referenced federal laws and regulations, state mortgage origination and mortgage servicing laws and regulations also affect
the Halo Asset Management and Halo Portfolio Advisors businesses, by providing further barriers to entry as well as additional
compliance and enforcement procedures for our unlicensed, noncompliant competition. The Company believes it is currently compliant
with all relevant state laws and regulations in the states in which the Company does business, however, if the relevant laws and
regulations were to change in the states where the Company has its highest concentration of business, such change could have an
adverse impact on the Company’s operating strategy and overall revenues.
We
rely on key executive officers, and their knowledge of our business and technical expertise would be difficult to replace. We
are highly dependent on our executive officers. If one or more of the Company’s senior executives or other key personnel
are unable or unwilling to continue in their present positions, the Company may not be able to replace them easily or at all,
and the Company’s business may be disrupted. Such failure could have a material adverse effect on the Company’s business,
financial condition and results of operations.
We
may never pay dividends to our common stockholders. The Company currently intends to retain its future earnings to support
operations and to finance expansion and therefore the Company does not anticipate paying any cash dividends in the foreseeable
future other than to holders of Halo Group preferred stock.
The declaration,
payment and amount of any future dividends on common stock will be at the discretion of the Company’s Board of Directors,
and will depend upon, among other things, earnings, financial condition, capital requirement, level of indebtedness and other
considerations the Board of Directors considers relevant. There is no assurance that future dividends will be paid on common stock
or, if dividends are paid, the amount thereof.
Our
common stock is quoted through the OTCQB, which may have an unfavorable impact on our stock price and liquidity. The Company’s
common stock is quoted on the OTCQB, which is a significantly more limited market than the New York Stock Exchange or NASDAQ.
The trading volume may be limited by the fact that many major institutional investment funds, including mutual funds, follow a
policy of not investing in Bulletin Board stocks and certain major brokerage firms restrict their brokers from recommending Over
the Counter stock because they are considered speculative and volatile.
The trading
volume of the Company’s common stock has been and may continue to be limited and sporadic. As a result, the quoted price
for the Company’s common stock on the OTC Bulletin Board may not necessarily be a reliable indicator of its fair market
value.
Additionally,
the securities of small capitalization companies may trade less frequently and in more limited volume than those of more established
companies. The market for small capitalization companies is generally volatile, with wide price fluctuations not necessarily related
to the operating performance of such companies.
Our
common stock is subject to price volatility unrelated to our operations. The market price of the Company’s common stock
could fluctuate substantially due to a variety of factors, including market perception of the Company’s ability to achieve
its planned growth, operating results of it and other companies in the same industry, trading volume of the Company’s common
stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company or its
competitors.
Our
common stock is classified as a “penny stock.”
Rule 3a51-1
of the Securities Exchange Act of 1934 establishes the definition of a “penny stock,” for purposes relevant to us,
as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to a limited number of exceptions which are not available to us. It is likely that the Company’s common
stock will be considered a penny stock for the immediately foreseeable future.
For any
transactions involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s
account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction
setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions
in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person
and make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient
knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The
broker or dealer must also provide disclosures to its customers, prior to executing trades, about the risks of investing in penny
stocks in both public offerings and in secondary trading in commissions payable to both the broker-dealer and the registered representative,
and the rights and remedies available to an investor in cases of fraud in penny stock transactions.
Because
of these regulations, broker-dealers may not wish to furnish the necessary paperwork and disclosures and/or may encounter difficulties
in their attempt to buy or sell shares of the Company’s common stock, which may in turn affect the ability of Company stockholders
to sell their shares.
Accordingly,
this classification severely and adversely affects any market liquidity for the Company’s common stock, and subjects the
shares to certain risks associated with trading in penny stocks. These risks include difficulty for investors in purchasing or
disposing of shares, difficulty in obtaining accurate bid and ask quotations, difficulty in establishing the market value of the
shares, and a lack of securities analyst coverage.
We may continue to
encounter substantial competition in our business. The Company believes that existing and new competitors will continue to
improve their products and services, as well as introduce new products and services with competitive price and performance characteristics.
The Company expects that it must continue to innovate, and to invest in product development and productivity improvements, to
compete effectively in the several markets in which the Company participates. Halo’s competitors could develop a more efficient
product or service or undertake more aggressive and costly marketing campaigns than those implemented by the Company, which could
adversely affect the Company’s marketing strategies and could have a material adverse effect on the Company’s business,
financial condition and results of operations.
Important factors affecting
the Company’s current ability to compete successfully include:
| · | lead
generation and marketing costs; |
| · | service
delivery protocols; |
| · | branded
name advertising; and |
| · | product
and service pricing. |
In periods of reduced
demand for the Company’s products and services, the Company can either choose to maintain market share by reducing product
service pricing to meet the competition or maintain its product and service pricing, which would likely sacrifice market share.
Sales and overall profitability would be reduced in either case. In addition, there can be no assurance that additional competitors
will not enter the Company’s existing markets, or that the Company will be able to continue to compete successfully against
its competition.
We may not successfully
manage our growth. Our success will depend upon the expansion of our operations and the effective management of our growth,
which will place significant strain on our management and our administrative, operational and financial resources. To manage this
growth, we may need to expand our facilities, augment our operational, financial and management systems and hire and train additional
qualified personnel. If we are unable to manage our growth effectively, our business would be harmed.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
Item 6. Exhibits
31.1
Rule 13a-14(a) Certification of the Principal Executive Officer.
31.2
Rule 13a-14(a) Certification of the Principal Financial Officer.
32
Section 1350 Certifications.
SIGNATURES
In accordance with the requirements
of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
November 14, 2014 |
By: |
/s/
Brandon Cade Thompson |
|
Brandon
Cade Thompson |
|
Chief
Executive Officer |
|
(Principal
Executive Officer) |
|
|
Date:
November 14, 2014 |
By: |
/s/
Robbie Hicks |
|
Robbie
Hicks |
|
Chief
Accounting Officer |
|
(Principal
Financial Officer) |
Exhibit
31.1
Rule 13a-14(a) Certification
of the Principal Executive Officer
I, Brandon Cade Thompson,
Chief Executive Officer, certify that:
1. | | I
have reviewed this quarterly report on Form 10-Q of Halo Companies, Inc. |
2. | | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
3. | | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
4. | |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | | Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared; |
(b) | | Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles; |
(c) | | Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and |
(d) | | Disclosed in this report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
(a) | | All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and |
(b) | | Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal control over financial reporting. |
Date: November
14, 2014 |
By: |
/s/
Brandon Cade Thompson |
|
Brandon
Cade Thompson |
|
Chief
Executive Officer |
|
(Principal
Executive Officer) |
Exhibit
31.2
Rule 13a-14(a) Certification
of the Principal Financial Officer
I,
Robbie Hicks, Chief Accounting Officer, certify that:
1. | |
I have reviewed this quarterly report on Form 10-Q of Halo Companies, Inc. |
2. | | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
3. | | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
4. | | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | | Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared; |
(b) | | Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles; |
(c) | | Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and |
(d) | | Disclosed in this report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
(a) | | All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and |
(b) | | Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal control over financial reporting. |
Date: November
14, 2014 |
By: |
/s/
Robbie Hicks |
|
Robbie
Hicks |
|
Chief
Accounting Officer |
|
(Principal
Financial Officer) |
Exhibit 32
CERTIFICATION PURSUANT TO 18
U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
The undersigned, the Chief
Executive Officer and the Chief Accounting Officer of Halo Companies, Inc. (the “Company”), each certify that, to
his knowledge on the date of this certification:
| 1. | The
quarterly report of the Company for the period ended September 30, 2014 as filed with
the Securities and Exchange Commission on this date (the “Report”) fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and |
| 2. | The
information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company. |
Date: November
14, 2014 |
By: |
/s/
Brandon Cade Thompson |
|
Brandon
Cade Thompson |
|
Chief
Executive Officer |
|
(Principal
Executive Officer) |
|
|
Date: November
14, 2014 |
By: |
/s/
Robbie Hicks |
|
Robbie
Hicks |
|
Chief
Accounting Officer |
|
(Principal
Financial Officer) |
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