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 March
31, 2015
[_] |
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.) |
18451 N. Dallas Parkway, Suite 100
Dallas, Texas 75287
(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, May 15, 2015: 48,556,083 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 March 31, 2015 (unaudited) and December 31, 2014 |
3 |
|
Consolidated
Statements of Operations (unaudited) for the three months ended March 31, 2015 and 2014 |
4 |
|
Consolidated
Statements of Changes in Shareholders’ Deficit (unaudited) for the three months ended March 31, 2015 and 2014 |
5 |
|
Consolidated
Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and 2014 |
6 |
|
Notes
to Consolidated Financial Statements |
7-22 |
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations |
23-27 |
Item
3. |
Quantitative
and Qualitative Disclosures about Market Risk |
27 |
Item
4T. |
Controls
and Procedures |
28 |
PART II. OTHER INFORMATION
Item
1. |
Legal
Proceedings |
28-29 |
Item
1A. |
Risk
Factors |
29-32 |
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds |
32 |
Item
3. |
Defaults
upon Senior Securities |
32 |
Item
4. |
Mine
Safety Disclosures |
32 |
Item
5. |
Other
Information |
32 |
Item
6. |
Exhibits |
32 |
|
SIGNATURES |
33 |
Part 1 – Financial
Information
Item 1. Financial Statements
Halo Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS | |
| |
|
| |
March 31, 2015 | |
December 31, 2014 |
| |
(Unaudited) | |
|
| |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | |
Cash and cash equivalents | |
$ | 165,662 | | |
$ | 72,982 | |
Trade accounts receivable, net of allowance for doubtful | |
| | | |
| | |
accounts of $0 and $375,665, respectively | |
| 140,625 | | |
| 141,634 | |
Total current assets | |
| 306,287 | | |
| 214,616 | |
| |
| | | |
| | |
PROPERTY, EQUIPMENT AND SOFTWARE, net | |
| 64,303 | | |
| 70,526 | |
OTHER ASSETS | |
| 20,000 | | |
| 23,333 | |
TOTAL ASSETS | |
$ | 390,590 | | |
$ | 308,475 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS' DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable | |
$ | 575,218 | | |
$ | 485,869 | |
Accrued and other liabilities (including $121,853 and | |
| | | |
| | |
$166,992 to related parties, respectively) | |
| 1,470,366 | | |
| 915,900 | |
Deferred revenue | |
| 112,850 | | |
| 1,800 | |
Current portion of subordinated debt | |
| 34,583 | | |
| 31,250 | |
Current portion of notes payable to related parties | |
| 943,293 | | |
| 959,365 | |
Total current liabilities | |
| 3,136,310 | | |
| 2,394,184 | |
| |
| | | |
| | |
SUBORDINATED DEBT, LESS CURRENT PORTION | |
| 80,000 | | |
| 85,000 | |
NOTES PAYABLE TO RELATED PARTIES, LESS CURRENT PORTION | |
| 173,237 | | |
| 179,358 | |
NOTE PAYABLE | |
| 1,873,536 | | |
| 1,805,000 | |
DERIVATIVE LIABILITY | |
| 2,434 | | |
| 2,434 | |
Total liabilities | |
| 5,265,517 | | |
| 4,465,976 | |
| |
| | | |
| | |
SHAREHOLDERS' DEFICIT | |
| | | |
| | |
Series Z Convertible Preferred Stock, par value $0.01 per share; 82,508 shares | |
| | | |
| | |
authorized; 0 shares issued and outstanding at March 31, 2015 and December 31, 2014 | |
| — | | |
| — | |
Preferred Stock, par value $0.001 per share; 917,492 shares | |
| | | |
| | |
authorized; 0 shares issued and outstanding at March 31, 2015 and December 31, 2014 | |
| — | | |
| — | |
Series X Convertible Preferred Stock, par value $0.01 per share; 53,677 and 143,677 shares authorized; | |
| | | |
| | |
53,677 and 143,677 shares issued and outstanding, liquidation preference of $536,770 and | |
| 537 | | |
| 1,437 | |
$1,436,770 at March 31, 2015 and December 31, 2014 | |
| | | |
| | |
Series E Convertible Preferred Stock, par value $0.001 per share; 100,000 shares authorized; | |
| | | |
| | |
70,000 shares issued and outstanding at March 31, 2015 and December 31, 2014, | |
| | | |
| | |
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 March 31, 2015 and December 31, 2014, | |
| | | |
| | |
liquidation preference of $725,523 | |
| 373 | | |
| 373 | |
Series B Convertible Preferred Stock; | |
| | | |
| | |
229,956 shares issued and outstanding at March 31, 2015 and December 31, 2014, | |
| | | |
| | |
liquidation preference of $596,494 | |
| 230 | | |
| 230 | |
Series C Convertible Preferred Stock; | |
| | | |
| | |
124,000 shares issued and outstanding at March 31, 2015 and December 31, 2014, | |
| | | |
| | |
liquidation preference of $402,134 | |
| 124 | | |
| 124 | |
Common Stock, par value $0.001 per share; 375,000,000 shares authorized; | |
| | | |
| | |
48,556,083 and 66,364,083 shares issued and outstanding | |
| | | |
| | |
at March 31, 2015 and December 31, 2014 | |
| 48,556 | | |
| 66,364 | |
Additional paid-in capital | |
| 7,407,472 | | |
| 7,638,764 | |
Accumulated deficit | |
| (12,332,289 | ) | |
| (11,864,863 | ) |
Total shareholders' deficit | |
| (4,874,927 | ) | |
| (4,157,501 | ) |
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | |
$ | 390,590 | | |
$ | 308,475 | |
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 |
| |
March 31, |
| |
2015 | |
2014 |
REVENUE (including $110,217 and | |
| | | |
| | |
$103,575 from related parties, respectively) | |
$ | 1,493,517 | | |
$ | 592,288 | |
| |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | |
Sales and marketing expenses | |
| 707,892 | | |
| 259,424 | |
General and administrative expenses (including | |
| | | |
| | |
$46,780 and $29,742 to related parties, respectively) | |
| 231,032 | | |
| 181,491 | |
Salaries, wages, and benefits | |
| 905,941 | | |
| 497,329 | |
Total operating expenses | |
| 1,844,865 | | |
| 938,244 | |
| |
| | | |
| | |
OPERATING INCOME (LOSS) | |
| (351,348 | ) | |
| (345,956 | ) |
| |
| | | |
| | |
OTHER INCOME (EXPENSE) | |
| | | |
| | |
Gain on change in fair value of derivative | |
| — | | |
| 3,015 | |
Interest expense (including $32,667 and $21,750 | |
| | | |
| | |
to related parties, respectively) | |
| (116,078 | ) | |
| (92,795 | ) |
Net income (loss) from operations, before income tax provision | |
| (467,426 | ) | |
| (435,736 | ) |
| |
| | | |
| | |
INCOME TAX PROVISION | |
| — | | |
| — | |
| |
| | | |
| | |
NET INCOME (LOSS) | |
$ | (467,426 | ) | |
$ | (435,736 | ) |
| |
| | | |
| | |
Loss per share: | |
| | | |
| | |
Basic | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
| |
| | | |
| | |
Weighted Average Shares Outstanding | |
| | | |
| | |
Basic | |
| 57,460,083 | | |
| 66,364,083 | |
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 Three Months Ended March 31, 2015 and 2014
(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 |
| Total |
| |
Shares | |
Amount | |
Shares | |
Amount | |
Shares | |
Amount | |
Shares | |
Amount | |
Shares | |
Amount | |
Shares | |
Amount | |
| | |
| | |
| | |
| |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
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 | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
| — | |
| (435,736 | ) |
| (435,736 | ) |
| |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
Balance at March 31, 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 | |
$ | (11,036,519 | ) |
$ | (3,329,157 | ) |
| |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
Balance at December 31, 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 | |
$ | (11,864,863 | ) |
$ | (4,157,501 | ) |
| |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
Redemption of Series X Convertible Preferred | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
Stock per settlement agreement (FN 16) | |
— | |
| — | |
(90,000 | ) |
| (900 | ) |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
| (249,100 | ) |
| — | |
| (250,000 | ) |
| |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
Cancellation of Common Shares per | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
settlement agreement (FN 16) | |
(17,808,000 | ) |
| (17,808 | ) |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
| 17,808 | |
| — | |
| — | |
| |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
Net loss | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
— | |
| — | |
| — | |
| (467,426 | ) |
| (467,426 | ) |
| |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
Balance at March 31, 2015 | |
48,556,083 | |
$ | 48,556 | |
53,677 | |
$ | 537 | |
70,000 | |
$ | 70 | |
372,999 | |
$ | 373 | |
229,956 | |
$ | 230 | |
124,000 | |
$ | 124 | |
$ | 7,407,472 | |
$ | (12,332,289 | ) |
$ | (4,874,927 | ) |
| |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| | |
| | |
| | |
The accompanying
notes are an integral part of these consolidated financial statements.
Halo Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)
| |
March 31, 2015 | | |
March 31, 2014 | |
CASH FLOWS FROM OPERATIONS | |
| | | |
| | |
| |
| | | |
| | |
Net (loss) income | |
$ | (467,426 | ) | |
$ | (435,736 | ) |
Adjustments to reconcile net (loss) income to net cash | |
| | | |
| | |
provided by (used in) operating activities: | |
| | | |
| | |
Depreciation | |
| 6,223 | | |
| 14,373 | |
Amortization of loan origination costs | |
| 3,333 | | |
| 3,333 | |
Capitalization of interest into note payable and notes payable to related parties | |
| 71,343 | | |
| 58,923 | |
Bad debt expense | |
| — | | |
| 62 | |
Gain on change in fair value of derivative | |
| — | | |
| (3,015 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 1,009 | | |
| 4,689 | |
Deposits and other assets | |
| — | | |
| 2,923 | |
Accounts payable | |
| (160,652 | ) | |
| (144,528 | ) |
Accrued and other liabilities | |
| 554,466 | | |
| 126,633 | |
Deferred rent | |
| — | | |
| (63,506 | ) |
Deferred revenue | |
| 111,050 | | |
| 46,725 | |
Net cash provided by (used in) operating activities | |
| 119,347 | | |
| (389,124 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds from notes payable to related parties | |
| — | | |
| 405,000 | |
Principal payments on notes payable to related parties | |
| (25,000 | ) | |
| (4,856 | ) |
Principal payments on subordinated debt | |
| (1,667 | ) | |
| (1,667 | ) |
Net cash (used in) provided by financing activities | |
| (26,667 | ) | |
| 398,477 | |
| |
| | | |
| | |
Net increase in cash and cash equivalents | |
| 92,680 | | |
| 9,353 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, beginning of period | |
| 72,982 | | |
| 127,048 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, end of period | |
$ | 165,662 | | |
$ | 136,401 | |
| |
| | | |
| | |
SUPPLEMENTAL INFORMATION | |
| | | |
| | |
Cash paid for interest | |
$ | 82,899 | | |
$ | 23,742 | |
NONCASH SUPPLEMENTAL INFORMATION | |
| | | |
| | |
Cancellation of stock for future settlement payment | |
$ | 250,000 | | |
$ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
Halo
Companies, Inc.
Notes
To Consolidated Financial Statements
March
31, 2015
NOTE
1. ORGANIZATION AND RECENT DEVELOPMENTS
Halo
Companies, Inc. (“Halo”, “HCI” or the “Company”) was incorporated under the laws of the State
of Delaware on December 9, 1986. Its principal executive offices are located at 18451 N. Dallas Parkway, Suite 100, Dallas, Texas
75287. On December 15, 2014, the Company moved from its previous office location at 7668 Warren Parkway, Suite 350, Frisco, Texas
75034.
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.
During
March 2015, the Company entered into a $250,000 compromise and settlement agreement with the court appointed receivership holding
17,808,000 shares of the Company’s common stock. This stock was subject to the unearned “clawback” provisions
discussed in Note 16 below. The physical stock certificate has been sent to the Company’s transfer agent to immediately
cancel those respective outstanding shares of that Agreement. Further, this settlement agreement calls for a relinquishment and
abandonment of any and all claims against Halo on 90,000 shares of the Company’s Series X Preferred stock belonging to the
receivership (original liquidation value of $10 per share). Lastly, the Company had $375,665 in accounts receivable owed from
the receivership which had previously been fully reserved. With the settlement now in place, the Company wrote off this accounts
receivable balance and released the allowance reserve held. The Settlement requires $250,000 to be paid by the Company to the
receivership over a twelve month period with the start date April 1, 2015. As the receivership owed the Company $22,500 for success
fees previously earned (this receivable was not part of the $375,665 in fully reserved accounts receivable noted above), the first
$22,500 of the $250,000 owed will be settled via a reduction of the $22,500 accounts receivable balance for the April 1 and part
of the May 1, 2015 scheduled payments.
During
March 2015, an additional 1,272,000 shares of the company’s common stock, all subject to the clawback provisions of the
Agreement (defined in Note 16), have also been sent to the Company’s transfer agent to immediately cancel those respective
common shares of that Agreement but as of the time of this filing those shares have not yet been canceled. The Company expects
that to happen shortly. Secondarily, the Company is actively pursuing the procurement of an additional physical certificate from
a respective individual still in possession of the common stock certificate. As of the time of this Form 10-Q, 3,392,000 of the
21,200,000 shares issued as part of the Agreement remain outstanding.
On
March 27, 2015, Jimmy Mauldin was elected to the Board of Directors to fill the vacancy left by Tony Chron’s departure.
On
March 27, 2015, Paul Williams has been appointed to serve as Chief Financial Officer of the Company. Mr.
Williams currently serves as Vice Chairman of the Board, Treasurer and Assistant Secretary of the Company.
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 March 31, 2015, and for the three months ended March 31, 2015 and 2014, 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 months
ended March 31, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
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.
The
Company is currently exploring potential opportunities with several client relationships that would allow the Company to implement
its internally used asset management software platform as an external service for those customers. This is commonly known as Software
as a Service (“SaaS”). The Company entered into a SaaS contract with one client who prepaid for a 12 month service
plan during the three months ended March 2015. Cash receipts from customers in advance of revenue
recognized are recorded as deferred revenue and will be earned over the entire SaaS contract period. The Company is still
in its research phase of determining if this service line will remain ancillary or become a primary business component of the
Company.
HAM
and HPA receivables are typically paid the month following services performed. As of March 31, 2015 and 2014, the Company’s
accounts receivable are made up of the following percentages; HAM at 55% and 83% and HPA at 45% and 17%, respectively.
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 March 31, 2015 and December 31, 2014:
| |
| Balance
at Beginning of Period | | |
| Increase
in the Provision | | |
| Accounts
Receivable Write-offs | | |
| Balance
at End of Period | |
Three Months ended March 31, 2015 | |
| | | |
| | | |
| | | |
| | |
Allowance for doubtful
accounts | |
$ | 375,665 | | |
$ | 0 | | |
$ | 375,665 | | |
$ | 0 | |
Year ended December 31, 2014 | |
| | | |
| | | |
| | | |
| | |
Allowance for doubtful accounts | |
$ | 375,665 | | |
$ | 135 | | |
$ | 135 | | |
$ | 375,665 | |
As
of December 31, 2014, the Company’s allowance for doubtful accounts is made up of the following percentages; HAM at 96%
and HPA at 4%, respectively. The HAM and HPA allowance was related to one client in a court appointed receivership. As discussed
in Note 1 above, the March 2015 settlement agreement entered into by the Company and the receivership did not pay the fully reserved
accounts receivable. As such, the accounts receivable balance was written off and the allowance for doubtful accounts was fully
reduced to zero.
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 March 31, 2015 and 2014, there were 4,630,626 and 4,835,127 shares, respectively, underlying potentially dilutive convertible
preferred stock and stock options outstanding. These shares were not included in dilutive weighted average shares outstanding
for the three months ended March 31, 2015 and 2014 because their effect is anti-dilutive due to the Company’s reported net
loss.
Use
of Estimates and Assumptions
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates. Significant estimates include the Company’s revenue recognition method and derivative
liabilities.
Principles
of Consolidation
The
consolidated financial statements of the Company for the three months ended March 31, 2015 and 2014 include the financial results
of HCI, HGI, HBI, HPA and HAM. 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.
Other
Assets
At
March 31, 2015, other assets were $20,000 ($40,000 in total origination fees paid offset by $20,000 in accumulated amortization
of those fees) for the senior unsecured promissory note discussed in Note 9. The fees are to be amortized over the life of the
promissory note. At December 31, 2014, other assets were $23,333 ($40,000 in total origination fees offset by $16,667 in accumulated
amortization) for the senior unsecured promissory note.
Property,
Equipment and Software
Property,
equipment, and software are stated at cost. Depreciation is provided in amounts sufficient to relate the cost of the depreciable
assets to operations over their estimated service lives, ranging from three to seven years. Provisions for depreciation are made
using the straight-line method.
Major
additions and improvements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred.
Upon sale or retirement, the cost of the property and equipment and the related accumulated depreciation are removed from the
respective accounts, and any resulting gains or losses are credited or charged to other general and administrative expenses.
Fair
Value of Financial Instruments
The
carrying value of trade accounts receivable, accounts payable, and accrued and other liabilities approximate fair value due to
the short maturity of these items. The estimated fair value of the notes payable and subordinated debt approximates the carrying
amounts as they bear market interest rates.
The
Company considers the warrants related to its subordinated debt to be derivatives, and the Company records the fair value of the
derivative liabilities in the consolidated balance sheets. Changes in fair value of the derivative liabilities are included in
gain (loss) on change in fair value of derivative in the consolidated statements of operations. The Company’s derivative
liability has been classified as a Level III valuation according to Accounting Standards Codification (“ASC”) 820.
Internally
Developed Software
Internally
developed legacy application software consisting of database, customer relations management, process management and internal reporting
modules are used in each of the Company’s subsidiaries. The Company accounts for computer software used in the business
in accordance with ASC 350 “Intangibles-Goodwill and Other”. ASC 350 requires computer software costs associated with
internal use software to be charged to operations as incurred until certain capitalization criteria are met. Costs incurred during
the preliminary project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during
the application development stage are capitalized as property, equipment and software. These costs generally consist of internal
labor during configuration, coding, and testing activities. Capitalization begins when (i) the preliminary project stage is complete,
(ii) management with the relevant authority authorizes and commits to the funding of the software project, and (iii) it is probable
both that the project will be completed and that the software will be used to perform the function intended. Management has determined
that a significant portion of costs incurred for internally developed software came from the preliminary project and post-implementation
stages; as such, no costs for internally developed software were capitalized.
Long-Lived
Assets
Long-lived
assets are reviewed on an annual basis or whenever events or changes in circumstance indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets held and used is generally measured by a comparison of the carrying amount of
an asset to undiscounted future net cash flows expected to be generated by that asset. If it is determined that the carrying amount
of an asset may not be recoverable, an impairment loss is recognized for the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Fair value is the estimated value at which the asset could be bought or sold in a transaction
between willing parties. There were no impairment charges for the three months ended March 31, 2015 and 2014.
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.) 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 months ended March 31, 2015
or 2014.
The
Company incurred no penalties or interest for taxes for the three months ended March 31, 2015 or 2014. 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.
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 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
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 months ended March 31, 2015, the FDIC insured deposit
accounts up to $250,000. At March 31, 2015, 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 |
| |
March 31, |
| |
2015 | |
2014 |
Revenue: | |
| | | |
| | |
Halo Asset Management | |
$ | 240,899 | | |
$ | 302,517 | |
Halo Portfolio Advisors | |
| 1,178,868 | | |
| 289,771 | |
Other | |
| 73,750 | | |
| — | |
Net revenue | |
$ | 1,493,517 | | |
$ | 592,288 | |
| |
| | | |
| | |
Operating income (loss): | |
| | | |
| | |
Halo Asset Management | |
$ | 119,426 | | |
$ | 39,613 | |
Halo Portfolio Advisors | |
| 473,338 | | |
| 45,983 | |
Other | |
| — | | |
| — | |
Less: Corporate expenses (a) | |
| (1,060,190 | ) | |
| (521,332 | ) |
Operating income (loss): | |
$ | (467,426 | ) | |
$ | (435,736 | ) |
| 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. All interest expense is included in corporate expenses
above. Interest expense is discussed in further detail in Notes 8, 9, 10 and 11.
For
the three months ended March 31, 2015 or 2014, 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 $12,332,289 as of March 31, 2015. However, of the accumulated deficit, $2,110,748
of expense was incurred as stock-based compensation, $586,987 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 $3,883,254 total of these non-cash retained earnings reductions represents 31%
of the total deficit balance.
NOTE
6. PROPERTY, EQUIPMENT AND SOFTWARE
Property,
equipment and software consist of the following as of March 31, 2015 and December 31, 2014, respectively:
Computers and purchased software | |
$ | 158,899 | | |
$ | 158,899 | |
Furniture and equipment | |
| 203,427 | | |
| 203,427 | |
| |
| 362,326 | | |
| 362,326 | |
Less: accumulated
depreciation | |
| (298,023 | ) | |
| (291,800 | ) |
| |
$ | 64,303 | | |
$ | 70,526 | |
Depreciation
totaled $6,223 and $14,373 for the three months ended March 31, 2015 and 2014, respectively.
NOTE
7. ACCRUED AND OTHER LIABILITIES
The
Company had $1,470,366 in accrued liabilities at March 31, 2015. Included in this accrual is $351,259 in accrued interest ($229,406
of this balance is related to interest on the secured asset promissory note discussed in more detail in Note 11). The accrual
also includes $606,260 in deferred compensation and $367,626 in wages payable to several senior management personnel. Lastly,
the accrual also includes $138,171 in HPA vendor accruals for expense incurred and not yet billed as of March 31, 2015, and $7,050
in other. The Company had $915,900 in accrued liabilities at December 31, 2014. Included in this accrual is $392,756 in accrued
interest ($223,987 of this balance is related to interest on the secured asset promissory note discussed in more detail in Note
12) and $523,144 in deferred compensation to several senior management personnel.
NOTE
8. 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 $188,961 2011 Related Party Note balance is included in current portion of notes payable to related parties as of March
31, 2015. As of December 31, 2014, the 2011 Related Party Note was $186,154, 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, 2014,
the 2011 Consolidated Related Party Note balance was $267,569, of which $88,211 is included in current portion of notes payable
to related parties. As of March 31, 2015, the 2011 Consolidated Related Party Note balance was $267,569, of which $94,332 is included
in current portion of notes payable to related parties.
As
of December 31, 2014, a Company director had an outstanding advance to the Company of $500,000 for short term capital. As of March
31, 2015, the outstanding advance balance was $500,000. 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. Through March 31, 2015, the advance accrued interest at a rate of 15%.
As
of December 31, 2014, the Company’s President and Chief Legal Officer had an outstanding advance balance of $70,000 for
short term capital. During the three months ended March 31, 2015, the Company made $25,000 in principal advance repayments. As
of March 31, 2015, the outstanding advance balance was $45,000. 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 accrued interest at a rate of 15%.
As
of December 31, 2014, the Company’s CEO and Director of the Board had an outstanding advance balance of $115,000 for short
term capital. As of March 31, 2015, 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 accrued interest at a rate of 15%.
As
of March 31, 2015, the notes payable to related party balance totaled $1,116,530, of which $943,293 is included in current portion
of notes payable to related parties in the consolidated financial statements. As of December 31, 2014, the notes payable to related
party balance totaled $1,138,723, of which $959,365 is included in current portion of notes payable to related parties in the
consolidated financial statements.
The
Company incurred $32,667 and $21,750 of interest expense to directors, officers, and other related parties during the three months
ended March 31, 2015 and 2014, respectively. Accrued interest due to directors and other related parties totaled $121,853 at March
31, 2015, all of which is included in accrued and other current liabilities. Accrued interest due to directors and other related
parties totaled $166,992 at December 31, 2014, all of which is included in accrued and other current liabilities.
NOTE
9. 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 March 31, 2015, the note payable balance was $1,873,536,
which includes capitalized interest of $373,536. As of December 31, 2014, the note payable balance was $1,805,000, which includes
capitalized interest of $305,000.
NOTE
10. SUBORDINATED DEBT
During
January 2010, the Company authorized a $750,000 subordinated debt offering (“Subordinated Offering”), which consisted
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, the subordinated debt holders agreed to an extended maturity date of December 31, 2013.
In October 2013, the Company entered into a senior unsecured convertible promissory note (discussed in Note 9) 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 had 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 was 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
are recorded in earnings as derivative gains and losses. As of March 31, 2015 and December 31, 2014, there were 112,000 warrants
outstanding with a derivative liability of $2,434. 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:
|
|
March
31, 2015 |
|
|
Risk-free
rate |
|
|
0.55 |
% |
|
Expected volatility |
|
|
719 |
% |
|
Expected remaining life
(in years) |
|
|
2.00 |
|
|
Dividend yield |
|
|
0.00 |
% |
|
During
August 2012, the Company entered into an additional $25,000 subordinated term note with a then current holder of the Company’s
subordinated debt. The note pays an 18% coupon rate with a maturity date of August 31, 2015. There are no warrants associated
with this subordinated term note. Repayment terms of the note included 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 March 31, 2015, the remaining balance of this note totals $14,583, all of which is included in current
portion of subordinated debt. As of December 31, 2014, the remaining balance of this note totals $16,250, all of which is included
in current portion of subordinated debt.
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 are no warrants associated
with this subordinated term note. Repayment terms of the note include interest only payments through March 31, 2015. 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 $3,500,000, and liens granted by the Company in connection with the purchase of furniture,
fixtures or equipment. As of March 31, 2015, the remaining balance of this note totals $100,000, of which $20,000 is included
in current portion of subordinated debt. As of December 31, 2014, the remaining balance of this note totals $100,000, of which
$15,000 is included in current portion of subordinated debt.
NOTE
11. 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 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
consisted of a 25% coupon. 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 due December 31, 2014. The promissory note will accrue interest at a 10% annual rate, with interest only payments
due periodically and final balloon payment due at maturity. At the time of the filing of these consolidated financial statements,
the Company and note holder have not finalized an extended maturity date. As such, as of March 31, 2015, the entire accrued interest
balance of $229,406 is included in current portion of accrued interest. As of December 31, 2014, the entire accrued interest balance
of $223,987 is included in current portion of accrued interest. For the three months ended March 31, 2015 and 2014, the Company
incurred $5,419 and $5,419 respectively, in interest expense on the note.
NOTE
12. RELATED PARTY TRANSACTIONS
For
the three months ended March 31, 2015 and 2014, HAM recognized monthly servicing fee revenue totaling $110,217 and $103,575, respectively,
from an entity that is an affiliate of the Company. Further, facilities rent expense discussed in Note 14 was paid to the same
affiliate.
For
the three months ended March 31, 2015 and 2014, the Company incurred interest expense to related parties (See Note 8).
For
the three months ended March 31, 2015 and 2014, the Company incurred $20,000 and $0 in commission expense to an entity that is
an affiliate of the Company.
For
the three months ended March 31, 2015 and 2014, the Company incurred $5,000 and $0 in consulting expense to an entity that is
an affiliate of the Company.
NOTE
13. INCOME TAXES
For
the three months ended March 31, 2015 and 2014, the effective tax rate of 0% 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 March 31, 2015, 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 $6,100,000 available for federal income tax
purposes, which expire from 2024 to 2034. 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
14. 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, 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 March 31, 2015 are as follows:
Years Ending December 31: | | |
| | |
2015 | | |
$ | 9,531 | |
Thereafter | | |
| — | |
Total
minimum lease commitments | | |
$ | 9,531 | |
For
the three months ended March 31, 2015 and 2014, the Company incurred facilities rent expense totaling $21,780 and $29,742, respectively.
In
the ordinary course of conducting its business, the Company may be subject to loss contingencies including possible disputes
or lawsuits. The Company notes the following:
The
Company and certain of its affiliates, officers and directors have been named as defendants in an action filed on December 12,
2011 in the 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. On September 16, 2014 the Sixth Appellate District Court of Appeals of Texas issued an order
abating the Plaintiff’s appeal pending a final determination by the federal courts of an order issued by the federal district
court in a separate action directing the Plaintiff’s, among others, not to further pursue this separate litigation. For
administrative purposes, this case is abated and will be treated as closed. Any party may seek reinstatement by promptly filing
a motion with the Sixth Appellate District Court of Appeals of Texas showing that the injunction or order of the federal court
no longer restricts pursuit of this litigation and specifying what further action, if any, is required from the Court.
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
15. 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 March 31, 2015, 438,300 option shares have been exercised. Total
stock options outstanding as of March 31, 2015 total 170,000. The weighted average remaining contractual life of the outstanding
options at March 31, 2015 is approximately 2.5 years.
A
summary of stock option activity in the Plan is as follows:
| |
| |
| |
Weighted |
| |
| |
Exercise | |
Average |
| |
Number of | |
Price | |
Exercise |
| |
Options | |
Per
Option | |
Price |
| Outstanding
at December 31, 2013 | | |
| 681,700 | | |
$ | 0.01
– 1.59 | | |
$ | 1.00 | |
| Granted | | |
| — | | |
| — | | |
| — | |
| Exercised | | |
| — | | |
| — | | |
| — | |
| Canceled | | |
| (511,700 | ) | |
| 0.94
– 1.59 | | |
| 1.06 | |
| Outstanding
at December 31, 2014 | | |
| 170,000 | | |
$ | 0.01 | | |
$ | 0.01 | |
| Granted | | |
| — | | |
| — | | |
| — | |
| Exercised | | |
| — | | |
| — | | |
| — | |
| Canceled | | |
| — | | |
| — | | |
| — | |
| Outstanding
at March 31, 2015 | | |
| 170,000 | | |
$ | 0.01 | | |
$ | 0.01 | |
All
stock options granted under the Plan and as of March 31, 2015 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.
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 March 31, 2015, 20,000 shares had
previously been granted (all granted in the year ended December 31, 2012) 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. As
of March 31, 2015, none of the shares issued under the 2010 Stock Plan have been exercised.
NOTE
16. 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 was 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 had 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 would have
needed 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 was 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 had 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 was generated, the clawback rights would 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 would have been determined and recorded.
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.
As of December 31, 2014, 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. As of December
31, 2014, 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.
During
March 2015, the Company entered into a $250,000 compromise and settlement agreement with the court appointed receivership holding
17,808,000 shares of the Company’s 21,200,000 common stock noted above. The physical stock certificate has been sent to
the Company’s transfer agent to immediately cancel those respective outstanding shares of that Agreement. An additional
1,272,000 shares of the company’s common stock, all subject to the clawback provisions of the Agreement, have also been
sent to the Company’s transfer agent to immediately cancel those respective common shares of that Agreement but as of the
time of this filing those shares have not yet been canceled. The Company expects that to happen shortly. Secondarily, subject
to the clawback provisions of the Agreement, the Company is actively pursuing the procurement of an additional physical certificate
of 2,120,000 shares from a respective individual still in possession of the common stock certificate. As of the time of the filing
of these financials, 3,392,000 of the 21,200,000 shares issued as part of the Agreement remain outstanding.
The
Company’s total common shares outstanding totaled 48,556,083 at March 31, 2015.
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 March 31, 2015, 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 $536,770
as of March 31, 2015.
As
of December 31, 2014, there were 143,677 shares authorized with 143,677 shares issued and outstanding. During March 2015, as part
of the $250,000 compromise and settlement agreement with the court appointed receivership discussed above, the settlement agreement
calls for a relinquishment and abandonment of any and all claims against Halo on 90,000 shares of the Company’s Series X
Preferred stock belonging to the receivership. As such, as of March 31, 2015, there were 53,677 shares authorized, issued and
outstanding. The 53,677 shares were related to the 2010 conversion from notes payable due to related parties.
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 March 31, 2015. 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 March 31, 2015, 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 $725,523, of which $166,024 is an accrued
(but undeclared) dividend as of March 31, 2015. 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 March 31, 2015, 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 $596,494, of which $136,582 is an accrued (but undeclared) dividend as of March 31, 2015. 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 March 31, 2015, 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 $402,134, of which $92,134 is an accrued (but undeclared) dividend as of March 31, 2015. 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 March 31, 2015, 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 March 31, 2015, 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
17. SUBSEQUENT EVENTS
There
were no 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.
The
Company is currently exploring potential opportunities with several client relationships that would allow the Company to implement
its internally used asset management software platform as an external service for those customers. This is commonly known as Software
as a Service (“SaaS”). The Company entered into a consulting and development agreement with a customer during late
2014, and then entered into a SaaS contract with that client who prepaid for a 12 month service plan during the three months ended
March 2015. Cash receipts from customers in advance of revenue recognized are recorded as deferred
revenue and will be earned over the entire SaaS contract period. The Company is still in its research phase of determining
if this service line will remain ancillary or become a primary business component of the Company.
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 4,200 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 eleven 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 months ended March 31, 2015 compared to the three months ended March 31, 2014
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 March 31, 2015, revenue increased $901,229 and 152% to $1,493,517 from $592,288 for the three months ended
March 31, 2014. The variance is primarily attributable to a (1) revenue increase of $889,097 in HPA (2) revenue decrease of $61,618
in HAM and (3) revenue increase of $73,750 related to the Company’s SaaS contract which is discussed in Company Overview
section above.
The
HPA revenue increase of $889,097 and 300% for the three months ended March 31, 2015 compared to the three months ended March 31,
2014 is primarily attributable to portfolio acquisition support performed during the current quarter which directly resulted in
an increase in title reports, tax certification, property valuation analysis and the due diligence fee associated with this portfolio
acquisition support.
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. HAM revenues decreased $61,618 for the three months ended March 31, 2015 compared
to the three months ended March 31, 2014. Attributable to the variance, the Company saw a slight reduction in its asset management
fee, success fees, and monthly servicing fee during the three months ended March 31, 2015 compared to the three months ended March
31, 2014. This reduction is primarily attributable to less new boarding volume and the overall volume of assets being managed
during the three months ended March 31, 2015 compared to the three months ended March 31, 2014.
Overall,
looking forward to the remainder of 2015, 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. Sales and
marketing expenses increased $448,468 and 173% to $707,892 for the three months ended March 31, 2015 from $259,424 for the three
months ended March 31, 2014. The increase is primarily related to the variable expense associated with the above noted increase
in revenues in HPA (for portfolio acquisition support) over the same time period.
General
and administrative expenses increased $49,541 and 27% to $231,032 for the three months ended March 31, 2015 from $181,491 for
the three months ended March 31, 2014. The variance is primarily attributable to an increase in consulting fees (discussed in
the related party Note 12 to the consolidated financials), travel expense primarily related to establishing SaaS revenue, and
an increase in professional service fees rendered. The above increases are offset by a decrease in both health insurance expense
(due to less headcount as discussed below) and depreciation.
Salaries,
wages and benefits increased $408,612 and 82% to $905,941 for the three months ended March 31, 2015 from $497,329 for the three
months ended March 31, 2014. The increase is primarily attributable to an increase in variable wages payable to several senior
management personnel. The above increase is offset by a reduction in overall employee headcount primarily in HAM from the three
months ended March 31, 2015 compared to the three months ended March 31, 2014. Looking forward to the remainder of 2015, 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 an overall increase in its net loss of $31,690 and 7% to a net loss of $467,426 for the three months ended
March 31, 2015 from a net loss of $435,736 for the three months ended March 31, 2014, 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,
2014. There have been no significant changes in our significant accounting policies since the last fiscal year end 2014.
Liquidity
and Capital Resources
As
of March 31, 2015, the Company had cash and cash equivalents of $165,662. The increase of $92,680 in cash and cash equivalents
from December 31, 2014 was due to net cash provided by operating activities of $119,347, offset by net cash used in financing
activities of $26,667.
Net
cash provided by operating activities was $119,347 for the three months ended March 31, 2015, compared to $389,124 net cash used
in operating activities for the three months ended March 31, 2014. The net cash provided by operating activities for the
three months ended March 31, 2015 was due to net loss of $467,426, adjusted primarily by the following: an increase of $554,466
in accrued and other liabilities, an increase of $111,050 in deferred revenue, a decrease of $160,652 in accounts payable (specifically
related to cash flows from operating), and non cash capitalization of interest in the note payable of $71,343 (discussed in note
9 of the consolidated financial statements). The remaining immaterial variance is related to non cash depreciation and amortization,
and a decrease in gross trade accounts receivable.
The
$554,466 increase in accrued and other liabilities is primarily related to the increase in deferred compensation and wages payable
to a portion of the management team, vendor accruals for expense incurred in HPA for due diligence work (as discussed in the revenue
section above), offset by a decrease in accrued interest. The $111,050 increase in deferred revenue is a short term timing difference
between cash receipts and the Company’s revenue recognition for its SaaS contract (as discussed in Note 1 of the consolidated
financials).
On
the balance sheet, accounts payable increased by $89,349 at March 31, 2015 from December 31, 2015. This is the result of the $250,000
increase in accounts payable directly related the receivership settlement discussed in Note 1 to the consolidated financial statements
and included on the consolidated statements of cash flows as non cash supplemental information. The $250,000 receivership settlement
is offset by a $160,652 decrease in accounts payable (specifically related to cash flows from operating) for the three months
ended March 31, 2015 and is primarily related to the overall cash flow management of the Company.
Net
cash provided by investing activities remains unchanged for the three months ended March 31, 2015, as well as for the three months
ended March 31, 2014.
Net
cash used in financing activities was $26,667 for the three months ended March 31, 2015, compared to net cash provided by financing
activities of $398,477 for the three months ended March 31, 2014. Financing activities for the three months ended March 31, 2015
consisted primarily of the $25,000 and $1,667 in principal payments on notes payable to related parties and subordinated debt,
respectively.
As
shown below, at March 31, 2015, our contractual cash obligations totaled approximately $3,468,438, all of which consisted of operating
lease obligations and debt principal and accrued interest repayment.
| |
Payments
due by December 31, |
Contractual
Obligations | |
2015 | |
2016-2017 | |
2018-2019 | |
2020
&
Thereafter | |
Total |
Debt Obligations | |
$ | 1,297,005 | | |
$ | 2,161,902 | | |
$ | 0 | | |
$ | 0 | | |
$ | 3,458,907 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Operating Lease Obligations | |
$ | 9,531 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 9,531 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Contractual Cash
Obligations | |
$ | 1,306,536 | | |
$ | 2,161,902 | | |
$ | 0 | | |
$ | 0 | | |
$ | 3,468,438 | |
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 14 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. On September 16, 2014 the Sixth Appellate District Court of Appeals of Texas issued an order
abating the Plaintiff’s appeal pending a final determination by the federal courts of an order issued by the federal district
court in a separate action directing the Plaintiff’s, among others, not to further pursue this separate litigation. For
administrative purposes, this case is abated and will be treated as closed. Any party may seek reinstatement by promptly filing
a motion with the Sixth Appellate District Court of Appeals of Texas showing that the injunction or order of the federal court
no longer restricts pursuit of this litigation and specifying what further action, if any, is required from the Court.
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 14 to the consolidated financial statements for more information
Item
1A. Risk Factors
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 HAM and HPA 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 HAM and
HPA 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 HAM and HPA 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 OTCPink, which may have an unfavorable impact on our stock price and liquidity. The Company’s
common stock is quoted on the OTCPink marketplace, 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:
May 15, 2015 |
By: |
/s/
Brandon Cade Thompson |
|
Brandon
Cade Thompson |
|
Chief
Executive Officer |
|
(Principal
Executive Officer) |
|
|
Date:
May 15, 2015 |
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: May
15, 2015 |
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: May 15, 2015 |
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 March 31, 2015 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: May
15, 2015 |
By: |
/s/
Brandon Cade Thompson |
|
Brandon
Cade Thompson |
|
Chief
Executive Officer |
|
(Principal
Executive Officer) |
|
|
Date: May
15, 2015 |
By: |
/s/
Robbie Hicks |
|
Robbie
Hicks |
|
Chief
Accounting Officer |
|
(Principal
Financial Officer) |
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