Securities registered pursuant to Section
12(g) of the Act: Common Stock, $.001 par value
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Indicate by check mark whether the issuer: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Indicate by check mark if disclosures of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
of this Form 10-K. [X]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark whether the registrant is a shell company
as defined in Rule 12b-2 of the Exchange Act.
As of June 30, 2015, the aggregate market value of the registrant’s
Common Stock held by non-affiliates of the issuer was approximately $76,009 based on the last sales price of the issuer’s
Common Stock, as reported by OTCMarkets. This amount excludes the market value of all shares as to which any executive officer,
director or person known to the registrant to be the beneficial owner of at least 5% of the registrant’s Common Stock may
be deemed to have sole or shared voting power.
The number of shares outstanding of the registrant’s Common
Stock as of March 30, 2016 was 48,562,750.
Listed below are documents incorporated herein by reference and
the part of this Report into which each such document is incorporated:
Certain statements contained
in this Report that are not statements of historical fact constitute “forward-looking statements.” Words such as “may,”
“seek,” “expect,” “anticipate,” “estimate,” “project,” “budget,”
“goal,” “forecast,” “anticipate,” “intend,” “plan,” “may,”
“will,” “could,” “should,” “strategy,” “believes,” “predicts,”
“potential,” “continue,” and similar expressions are intended to identify such forward-looking statements
but are not the exclusive means of identifying such statements. Although the Company believes that the current views and expectations
reflected in these forward-looking statements are reasonable, those views and expectations, and the Company’s future plans,
operations, business strategies, operating results and financial position, are inherently subject to risks, uncertainties, and
other factors, many of which are not under the Company’s control. Those risks, uncertainties, and other factors
could cause the actual results to differ materially from those in the forward-looking statements. Those risks, uncertainties,
and factors (including the risks contained in the section of this report titled “Risk Factors”) that could cause the
Company’s actual results, performance or achievements to differ materially from those described or implied in the forward-looking
statements and its goals and strategies to not be achieved. You are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date of this Report. The Company expressly disclaims any obligation to release publicly any updates
or revisions to these forward-looking statements to reflect any change in its views or expectations. The Company can give no assurances
that such forward-looking statements will prove to be correct.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS,
AND CORPORATE GOVERNANCE.
Directors and Executive Officers
Set forth below is certain
information regarding the persons who were directors and executive officers at any time during the fiscal year 2015.
Name
|
Age
|
Positions with the Company
|
Brandon C. Thompson
|
36
|
Chairman of the Board, Chief Executive Officer and Director
|
|
|
|
Paul Williams
|
59
|
Vice Chairman of the Board, Chief
Financial Officer, Treasurer, Assistant Secretary and Director
|
|
|
|
T. Craig Friesland
|
44
|
Secretary and Director
|
|
|
|
Richard G. Morris
|
61
|
Director
|
|
|
|
Jimmy Mauldin
|
66
|
Director
|
|
|
|
Reif Chron*
|
37
|
President and Chief Legal Counsel
|
|
|
|
Robert A. Boyce
|
53
|
Chief Operating Officer
|
|
|
|
Robbie Hicks*
|
36
|
Chief Accounting Officer and Controller
|
Brandon C. Thompson
Brandon C. Thompson,
36, currently serves as Chairman of the Board and Chief Executive Officer of the Company. Mr. Thompson was a co-founder of
HGI and has served as the Chairman of the Board of Directors and Chief Executive Officer of HGI since its founding in January
2007. Commencing in March 2003, Mr. Thompson served as a Loan Officer with Morningstar Mortgage, LLC, a mortgage company, and
eventually acquired the assets of that company through Halo Funding Group, LLC in February 2005, which was ultimately
consolidated into HGI in January 2007. Following this acquisition, Mr. Thompson founded and has served as Chairman,
President, and Chief Executive Officer of Halo Credit Solutions, LLC, Halo Debt Solutions, Inc., and Halo Group Consulting,
Inc. In January 2007, upon the founding of HGI, Mr. Thompson contributed his interest in these companies, as well
as his interest in Halo Funding Group, LLC (currently named Halo Group Mortgage, LLC), to HGI. The breadth of Mr.
Thompson’s entrepreneurial and consumer services experience led the Board of Directors to believe this individual is
qualified to serve as a director of the Company. Mr. Thompson was nominated for the Ernst & Young Entrepreneur of the
Year Award, has served on the advisory board of Independent Bank of Texas. Mr. Thompson graduated from Abilene Christian
University with a degree in Finance.
Paul Williams
Paul Williams,
59, currently serves as Vice Chairman of the Board, Chief Financial Officer, Treasurer and Assistant Secretary of the Company.
Mr. Williams was a co-founder of HGI, has served as Vice Chairman of the Board, Chief Financial Officer (thru August 2012) and
Treasurer of HGI since its founding in January 2007 and as Assistant Secretary since late September 2009. Mr. Williams
has over 30 years of business experience primarily in the capital markets and mergers and acquisitions. Since October
2007, Mr. Williams has also served as an executive officer for Bison Financial Group, Inc., a business development company, and
as an executive officer for Blue Star Equities, Inc., a capital markets company, since September 2007. From November 1999 to the
present, Mr. Williams has also served as the managing member of Lincoln America Investments, LLC, a real estate and equity investment
company. From January 15, 2006 to March 12, 2008, Mr. Williams served as an officer and director of NeXplore Corporation. In June
2007, NeXplore and its executive team received an administrative order from the Arkansas Securities Department, suspending their
ability to offer or sell securities in the state. Mr. Williams has previously served three terms on the Board of the Texas Economic
Development Council in Austin. In 2007 he served as Chairman of the Board of the Frisco Chamber of Commerce and in 2009 was recognized
by the Dallas Business Journal as the CFO of the Year for companies under $50MM in revenues. Mr. Williams graduated from Austin
College in Sherman, Texas with a double-major in Economics and Business Administration. He also graduated from the Institute
of Organization Management, affiliated with the U.S. Chamber of Commerce. The breadth of Mr. Williams’ entrepreneurial and
financial services experience led the Board of Directors to believe this individual is qualified to serve as a director of the
Company.
T. Craig Friesland
T. Craig Friesland, 44,
currently serves as Secretary of the Company and served as Chief Legal Officer until October of 2010. Mr. Friesland was a co-founder
of HGI and had served as a Director and Chief Legal Officer since its inception in January 2007. He also practices law
in his own firm, Law Offices of T. Craig Friesland, founded in January 2005. Prior to establishing his own firm, Mr.
Friesland practiced law with Haynes and Boone, LLP, one of the largest law firms in Texas, from September 1998 through December
2004. Mr. Friesland earned his law degree at Baylor University School of Law in 1998. He also has a Master
of Business Administration degree from Baylor University and a Bachelor of Business Administration degree in Finance from The University
of Texas at Austin. Mr. Friesland was admitted to the State Bar of Texas in 1998. The breadth of Mr. Friesland’s
professional legal experience led the Board of Directors to believe this individual is qualified to serve as a director of the
Company.
Richard G. Morris
Richard G. Morris, 61,
currently serves as a Director of the Company. Mr. Morris was a co-founder of HGI, and has served as a Director since its inception
in January 2007. Prior to joining the Company, he served in various positions with United Parcel Service from 1976 until
March 2002, most recently, from January 2001 to March 2002 as one of its three District Operations Managers. In that
role, Mr. Morris was responsible for 5,400 employees, a staff of 18 senior managers, a monthly operating budget of approximately
$28 million, and revenues in excess of $35 million. After departing UPS, in July 2002, Mr. Morris became the principal
owner of Rammco Distributors, Incorporated, an equipment rental company which he still owns. In July 2004, Mr. Morris
co-founded Blue River Development, Inc., a real estate investment and development company, and is currently the sole owner and
operator of this company. In August 2008, Mr. Morris acquired Port City, Inc., a plastics manufacturing company which
Mr. Morris also currently owns and operates. The breadth of Mr. Morris’ entrepreneurial, managerial and operational experience
led the Board of Directors to believe this individual is qualified to serve as a director of the Company.
Jimmy Mauldin
Jimmy Mauldin, 66, served
as Chief Strategy Officer of the Company until August 6, 2010. Mr. Mauldin was a co-founder of HGI, has served in various capacities
with HGI, including as President, Director, and Chief Strategy Officer, since its founding in January 2007. Mr. Mauldin
joined the company which is currently named Halo Credit Solutions, LLC in June of 2005. In 2002, Mauldin founded Fund
America Now, LLC, a national fund-raising company, and served as Chairman, President, and Chief Executive Officer. Mr. Mauldin
rejoined the Board of Directors on March 27, 2015. The breadth of Mr. Mauldin’s entrepreneurial experience led the Board
of Directors to believe this individual is qualified to serve as a director of the Company.
Reif O. Chron
Reif O. Chron, 37, currently
serves as President and General Counsel of the Company. Mr. Chron joined Halo in March of 2009 to serve as General Counsel. Mr.
Chron studied Accounting at Texas A&M University and subsequently graduated with his Juris Doctorate from Washington University
School of Law. Prior to attending Washington University, Mr. Chron spent time at Pricewaterhouse Coopers LLP where he specialized
in tax planning for high net worth clients. Mr. Chron also worked at Trademark Property Company, where he participated in several
projects, including a $160 million real estate portfolio sale to Heritage Property Investment Trust, a new 400,000 square foot
shopping center in Flowood, MS and a $100 million lifestyle center located in the Woodlands, TX. Mr. Chron also compiled market
research that has led to three new development projects. After earning his law degree, he practiced as a real estate attorney at
Kelly Hart & Hallman where his experience includes the negotiation, due diligence review, documentation, and closing of sophisticated
real estate transactions, including the acquisition and disposition of office buildings, hotels, commercial tracts and ranch land
as well as representing developers in the acquisition, leasing and management of shopping centers and mixed-use projects. On October
5, 2015, Mr. Reif Chron, President and General Counsel, tendered his resignation.
Robert A. Boyce, Jr.
Robert A. Boyce, Jr., 53,
currently serves as Chief Operating Officer of the Company. Mr. Boyce joined Halo in June of 2011 bringing over 27 years of business
operating experience in public companies and the private sector. For the five years prior to joining Halo, Mr. Boyce managed and
operated commercial real estate holdings in Texas and commercial agricultural properties in Mississippi. From 1990 to 2005, Mr.
Boyce held various executive positions for United Agri Products (and its related entities), which prior to being taken public by
the Apollo Group, was a wholly-owned subsidiary of ConAgra Foods. While with UAP, Mr. Boyce held the positions of President of
Verdicon, the non-crop distribution business with revenues of $300 million; Executive Vice President of United Agri Products responsible
for $1.2 billion in revenue; and President and General Manager for two independent operating companies with revenue of $200 million.
Prior to joining UAP, Mr. Boyce worked for Helena Chemical Company and ICI Americas. Throughout his career, Mr. Boyce has served
on national and regional industry-related boards. He is a graduate from the University of Mississippi, B.B.A., 1984.
Robbie Hicks
Robbie Hicks, 36, currently
serves as Chief Accounting Officer and Controller of the Company. Mr. Hicks joined Halo in April of 2009 as the Company’s
Controller. In this capacity, Mr. Hicks has been responsible for the preparation and timely filing of the Company’s annual
and quarterly financials with the Securities Exchange Commission, all accounting functions including accounting policy and procedure
and implementation, treasury management, and internal management reporting to the Company’s Executive Committee and Board
of Directors. Prior to joining the Company, Mr. Hicks was an audit manager with KPMG LLP, servicing its financial services
clients in the Dallas metro area. Several clients included a public national bank, a large mortgage servicing company,
and several private investment companies. Mr. Hicks is a certified public accountant in the State of Texas. He
is a 2003 graduate of Texas Tech University where he received both his B.B.A and Master of Science in Accounting. On November 6,
2015, Mr. Robbie Hicks, Chief Accounting Officer, tendered his resignation.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), requires officers, directors and persons who beneficially own
more than 10% of a class of our equity securities registered under the Exchange Act to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished
to us during fiscal year 2011 and Forms 5 and amendments thereto furnished to us with respect to fiscal year 2011, or written representations
that Form 5 was not required for fiscal year 2011, we believe that except as noted below, all Section 16(a) filing requirements
applicable to each of our officers, directors and greater-than-ten percent stockholders were fulfilled in a timely manner. We have
notified all known beneficial owners of more than 10% of our common stock of their requirement to file ownership reports with the
Securities and Exchange Commission.
Code of Ethics
We do not currently have a Code of Ethics applicable
to our principal executive, financial, and accounting officers.
No Committees of the Board of Directors; No Financial Expert
We do not presently have
a separately constituted audit committee, compensation committee, nominating committee, executive committee or any other committees
of our Board of Directors. Nor do we have an audit committee “financial expert”. At present, our entire
Board of Directors acts as our audit committee. None of the members of our Board of Directors meets the definition of “audit
committee financial expert” as defined in Item 407(d) of Regulation S-K promulgated by the Securities and Exchange Commission.
We have not retained an audit committee financial expert because we do not believe that we can do so without undue cost and expense.
Moreover, we believe that the present members of our Board of Directors, taken as a whole, have sufficient knowledge and experience
in financial affairs to effectively perform their duties.
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The particulars of compensation
paid to the following persons during the fiscal period ended December 31, 2015 and 2014 are set out in the summary compensation
table below:
|
·
|
our Chief Executive Officer (Principal Executive Officer);
|
|
·
|
our Chief Accounting Officer (Principal Financial Officer);
|
|
·
|
each of our three most highly compensated executive officers, other than the Principal Executive Officer and the Principal Financial Officer, who were serving as executive officers at the end of the fiscal year ended December 31, 2015 and 2014; and
|
|
·
|
up to two additional individuals for whom disclosure would have been provided under the item above but for the fact that the individual was not serving as our executive officer at the end of the fiscal year ended December 31, 2015 and 2014;
|
(collectively, the “
Named Executive Officers
”):
SUMMARY COMPENSATION TABLE
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
Brandon C. Thompson,
CEO, Principal
Executive Officer
|
2015*
2014*
|
$250,000
$250,000
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-$400,000-***
-0-
|
$650,000
$250,000
|
Robbie Hicks, CAO
Principal Financial
Officer**
|
2015
2014
|
$150,000
$150,000
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$150,000
$150,000
|
Reif
Chron, President
& General Counsel**
|
2015*
2014
|
$166,666
$250,000
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-$400,000-***
-0-
|
$566,666
$250,000
|
* 2015 and 2014 Salary
includes both gross cash payments made and deferred compensation accrued during the year ended December 31, 2015 and 2014, respectively.
** On November 6, 2015,
Mr. Robbie Hicks, Chief Accounting Officer, tendered his resignation. On October 5, 2015, Mr. Reif Chron, President and General
Counsel, tendered his resignation.
*** 2015 incentive compensation,
which payment of such amounts have been deferred.
Summary Compensation
The Company has no employment
agreements with any of its Directors or executive officers.
For the fiscal year ended
December 31, 2015, no outstanding stock options or other equity-based awards were re-priced or otherwise materially modified. No
stock appreciation rights have been granted to any of our Directors or executive officers and none of our Directors or executive
officers exercised any stock options or stock appreciation rights. There are no non-equity incentive plan agreements with any of
our Directors or executive officers.
Outstanding Equity Awards at Fiscal Year-end
This section is not applicable to any named executive officer as
of 12/31/2015.
Compensation of Directors
DIRECTOR COMPENSATION
|
Name
|
Fees earned or
Paid in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
T. Craig Friesland
|
$14,400
|
-0-
|
-0-
|
-0-
|
$14,400
|
Richard G. Morris
|
$14,400
|
-0-
|
-0-
|
-0-
|
$14,400
|
Paul Williams
|
$14,400
|
-0-
|
-0-
|
-0-
|
$14,400
|
Jimmy Mauldin
|
$50,000
|
-0-
|
-0-
|
-0-
|
$50,000
|
Employment Contracts, Termination of Employment, Change-in-Control
Arrangements
There is no employment
or other contracts or arrangements with officers or Directors. There are no compensation plans or arrangements, including payments
to be made by us, with respect to our officers, Directors or consultants that would result from the resignation, retirement or
any other termination of service in respect of such Directors, officers or consultants. There are no arrangements for Directors,
officers, employees or consultants that would result from a change-in-control.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners and Management
The following table sets
forth certain information with respect to the beneficial ownership, as of March 30, 2016 of the Company’s common stock, which
is the Company’s only outstanding class of voting securities, and the voting power resulting from such beneficial ownership,
by
|
·
|
each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company’s outstanding common stock;
|
|
·
|
each director of the Company;
|
|
·
|
each executive officer of the Company; and
|
|
·
|
all directors and executive officers of the Company as a group.
|
Beneficial Owner (1)
|
|
Amount and Nature
of Beneficial
Ownership
|
|
|
Percent
of
Class (3)
|
|
|
|
|
Brandon C. Thompson (2)
|
|
|
|
|
|
|
20,051,110
|
|
|
37.8%
|
Jimmy Mauldin(2)
|
|
|
|
|
|
|
8,500,000
|
|
|
16.0%
|
Paul Williams(2)
|
|
|
|
|
|
|
4,395,243
|
|
|
8.3%
|
T. Craig Friesland(2)
|
|
|
|
|
|
|
2,250,122
|
|
|
4.2%
|
Richard G. Morris(2)
|
|
|
|
|
|
|
4,037,997 (3)
|
|
|
7.6%
|
Directors and executive officers as a group (seven persons)
|
|
|
|
|
|
|
39,234,472 (3)
|
|
|
73.9%
|
(1)
We understand that, except as noted below, each beneficial owner has sole voting and investment power with respect to all shares
attributable to that owner.
(2)
The address for each such beneficial owner is 18451 N. Dallas Parkway, Suite 100, Dallas, Texas 75287.
(3)
Includes 40,000 shares of Series E convertible preferred stock (conversion rate of 50 common shares per share of Series E) for
a total of 2,000,000 shares issuable upon conversion of the preferred stock.
Changes in Control
We are unaware of any contract or other arrangement
the operation of which may at a subsequent date result in a change of control of our Company.
Securities authorized for issuance under
equity compensation plans
The following table provides
information as of the end of the most recently completed fiscal year, with respect to Company compensation plans (including individual
compensation arrangements) under which equity securities of the Company are authorized for issuance.
Equity Compensation Plan Information
|
|
A(1)
|
B
|
C
|
Plan category
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column A)
|
Equity compensation plans approved by security holders
|
170,000(1)
|
$0.01
|
-0-
|
Equity compensation plans not approved by security holders
|
20,000
|
$0.34
|
-6,980,000-
|
Total
|
190,000
|
$0.04
|
-6,980,000-
|
|
(1)
|
Includes 170,000 shares subject to stock options under the HGI 2007 Stock Plan.
|
Following is a brief description
of the material features of each compensation plan under which equity securities of the Company are authorized for issuance, which
was adopted without the approval of the Company security holders:
Prior to the merger in
2009, HGI granted stock options to certain employees and contractors under the HGI 2007 Stock Plan. Pursuant to the terms of the
merger and the terms of the HGI 2007 Stock Plan, the Company’s common stock will be issued upon the exercise of the HGI stock
options. At December 31, 2009, pursuant to the terms of the merger agreement, all options available for issuance under the HGI
2007 Stock Plan have been forfeited and consequently the Company has no additional shares subject to options or stock purchase
rights available for issuance under the HGI 2007 Stock Plan. Currently outstanding options under the HGI 2007 Stock Plan have fully
vested and expire upon termination of employment or five years from the date of grant. This plan is discussed in further detail
in Note 16 to the consolidated financials.
On July 19, 2010, the board
of directors approved the Company’s 2010 Incentive Stock Plan (2010 Stock Plan). The 2010 Stock Plan allows for the reservation
of 7,000,000 shares of the Company’s common stock for issuance under the plan. The 2010 Stock Plan became effective July
19, 2010 and terminates July 18, 2020. As of December 31, 2015, 20,000 shares were granted under the 2010 Stock Plan.
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons, Promoters and Certain Control
Persons
Since the beginning of the fiscal year January
1, 2015 and except as disclosed below, none of the following persons has had any direct or indirect material interest in any transaction
to which the Company was or is a party, or in any proposed transaction to which the Company proposes to be a party:
|
·
|
any director or officer of the Company;
|
|
·
|
any proposed director or officer of the Company;
|
|
·
|
any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to the Company’s common stock; or
|
|
·
|
any member of the immediate family of any of the foregoing persons (including a spouse, parents, children, siblings, and in-laws).
|
As of December 31, 2014,
the Company was indebted to Reif Chron, President and Chief Legal Officer, for $70,000 in proceeds on working capital advances
he made to the Company. During the twelve months ended December 31, 2015, the officer advanced an additional $100,000 in working
capital and deferred compensation of an additional $200,000 from the Company and was repaid $25,000. As of December 31, 2015, the
debt balance was $345,000. The debt accrues interest at a rate of 15%.
As of December 31, 2014,
the Company was indebted to Cade Thompson, CEO and Director of the Board, for $115,000 in proceeds on working capital advances
he made to the Company. During the twelve months ended December 31, 2015, the officer deferred compensation for an additional $400,000
from the Company. As of December 31, 2015, the debt balance was $515,000. The debt accrues interest at a rate of 15%.
As of December 31, 2014,
a Company director, Rick Morris, had an outstanding advance to the Company of $500,000, for short term capital. During the twelve
months ended December 31, 2015, in exchange for an additional extension and renewal of the loan the director agreed to an interest
penalty of $300,000 and the director further agreed to convert all accrued interest of $460,476. As of December 31, 2015, the debt
balance was $960,476. The debt accrues interest at a rate of 15%.
During 2011, the Company
entered into one unsecured promissory note with Tony Chron, Director of the Company, in the amount of $250,000. The note accrued
interest of $52,426. During 2011, the note and accrued interest were consolidated into one note balance of $302,426, with future
payments to be made per the note amortization schedule. As of December 31, 2015 the remaining total principal on this consolidated
note balance was $197,636. The balance accrues interest at an annual rate of 6%.
During 2010, Martin Williamson
invested $1,200,000 in the $20,000,000 Equitas Housing Fund 25% Secured Promissory Note Offering. In May 2013, the $1,200,000 of
principal balance was paid in full, along with $150,000 of the outstanding accrued interest balance. Halo and the secured asset
promissory note holder agreed to include the remaining accrued interest in a promissory note due December 31, 2016. The new promissory
note will accrue interest at a 10% annual rate, with interest only payments due periodically and final balloon payment due at maturity.
As of December 31, 2015, the accrued interest balance was $245,663. Mr. Williamson is Reif Chron’s stepfather.
Prior to and during 2014,
the Company had a related party note with an entity owned by the father of Jimmy Mauldin, a beneficial owner, totaling $370,639.
The note currently bears interest of 6% and has a maturity date of September 15, 2016. As of December 31, 2015, the note balance
was $267,569.
During 2015 and 2014, the
Company incurred $20,000 and $10,000, respectively, in expense for business development services to an entity that is an affiliate
of the Company. The affiliate is owned by Reif Chron and Cade Thompson.
Director Independence; Board Leadership Structure
The Company’s common
stock is quoted through the OTC System. For purposes of determining whether members of the Company’s Board of Directors are
“independent,” the Company’s Board utilizes the standards set forth in the NASDAQ Stock Market Marketplace Rules.
At present, the Company’s entire Board serves as its Audit, Compensation and Nominating Committees. The Company’s Board
of Directors has determined that, of the Company’s present directors, both Richard G. Morris and T. Craig Friesland, constituting
two of the four members of the Board, is an “independent director,” as defined under NASDAQ’s Marketplace Rules,
for purposes of qualifying as independent members of the Board and an Audit, Compensation and Nominating Committee of the Board,
but that Brandon C. Thompson and Paul Williams are not “independent directors” since they currently serve as or in
the past three years have served as executive officers of the Company. In reaching its conclusion, the Board determined that both
Mr. Morris and Mr. Friesland do not have a relationship with the Company that, in the Board’s opinion, would interfere with
his exercise of independent judgment in carrying out the responsibilities of a director, nor does Mr. Morris have any of the specific
relationships set forth in NASDAQ’s Marketplace Rules that would disqualify him from being considered an independent director.
Since the effective date
of the merger in 2009, the Company has not changed the structure of its Board of Directors and currently, Mr. Brandon C. Thompson
serves as both Chairman of the Board and Chief Executive Officer. As noted above, Mr. Richard G. Morris and Mr. T. Craig Friesland
are the only independent directors and, neither Mr. Morris nor Mr. Friesland have taken on any supplemental role in their capacity
as director. It is anticipated that additional independent directors will be added to the Board, however, the Company’s Board
of Directors has not set a timetable for such action.
The Company’s Board
of Directors is of the view that the current leadership structure is suitable for the Company at its present stage of development,
and that the interests of the Company are best served by the combination of the roles of Chairman of the Board and Chief Executive
Officer.
As a matter of regular
practice, and as part of its oversight function, the Company’s Board of Directors undertakes a review of the significant
risks in respect of the Company’s business. Such review is conducted in concert with the Company’s in-house legal staff,
and is supplemented as necessary by outside professionals with expertise in substantive areas germane to the Company’s business.
With the Company’s current governance structure, the Company’s Board of Directors and senior executives are, by and
large, the same individuals, and consequently, there is not a significant division of oversight and operational responsibilities
in managing the material risks facing the Company.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following information
summarizes the fees billed to us by Whitley Penn LLP for professional services rendered for the fiscal year ended December 31,
2015 and 2014, respectively.
Audit Fees
. Fees
billed or remainder to be billed for audit services by Whitley Penn LLP were $58,500 for fiscal year 2015 and $75,000 for fiscal
year 2014. Audit fees include fees associated with the annual audit and the reviews of the Company’s quarterly reports on
Form 10-Q, and other SEC filings.
Audit-Related Fees
.
The Company
did not pay any audit-related service fees to Whitley Penn LLP, other than the fees described above, for services rendered during
fiscal year 2015 or 2014.
Tax Fees
. Fees
billed or remainder to be billed for tax compliance services by Whitley Penn LLP were $6,000 for fiscal year 2015 and $9,500 for
fiscal year 2014.
All Other Fees
.
Other Fees billed
by Whitley Penn LLP were $0 in fiscal year 2015 and 2014.
Consistent with SEC policies
regarding auditor independence, the audit committee has responsibility for appointing, setting compensation, approving and overseeing
the work of the independent auditor. In recognition of this responsibility, the audit committee pre-approves all audit and
permissible non-audit services provided by the independent auditor. The Board of Directors serves as the audit committee for the
Company.
The accompanying notes
are an integral part of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
Notes To Consolidated
Financial Statements
December 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.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying Consolidated
Financial Statements for the years ended December 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”).
Revenue Recognition, Accounts Receivable
and Deferred Revenue
The Company recognizes
revenue in the period in which services are earned and realizable. To further understand the Company’s business, HAM earns
fees from its clients for its boarding and initial asset management fee, success fees, and its monthly servicing fee. The boarding
and initial asset management services are performed in the first 30-60 days of assets being boarded and include; IRR analysis of
loans boarded, detailed asset level workout exit strategy analysis, boarding the assets onto HAM’s proprietary software platform
and the integrated servicing platform, identification and oversight of custodial files, oversight of mortgage/deed assignment from
previous servicer, oversight of title policy administration work, and delinquent property tax research and exposure review. HAM’s
monthly success fees are earned for completing its default and asset disposition services including note sales, originating owner
finance agreements, and cash sales of REO properties owned by the client. HAM’s servicing fees are earned monthly and are
calculated on a monthly unit price for assets under management.
HAM and HPA receivables
are typically paid the month following services performed. HGI receivables are due when invoiced. As of December 31, 2015 and 2014,
the Company’s accounts receivable are made up of the following percentages; HAM at 47% and 84%, HPA at 53% and 11%, and HGI
at 0% and 5%, 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 December 31, 2015 and December 31, 2014:
|
|
|
Balance at Beginning of Period
|
|
|
|
Increase in the Provision
|
|
|
|
Accounts Receivable Write-offs
|
|
|
|
Balance at End of Period
|
|
Year ended December 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, 2015
and 2014, the Company’s allowance for doubtful accounts is made up of the following percentages; HAM at 0% and 96% and HPA
at 0% and 4%, respectively. The HAM and HPA allowance was related to one client. The client was in a court appointed receivership
and the Company was awaiting final outcome of its receivable claim into the receivership to determine any potential recoverability.
As of December 31, 2015, the Company has written-off all outstanding accounts receivables of this client.
Net Income (Loss) Per Common Share
Basic net income (loss)
per share is computed by dividing (i) net income (loss) available to common shareholders (numerator), by (ii) the weighted average
number of common shares outstanding during the period (denominator). Diluted net income (loss) per share is computed using the
weighted average number of common shares and dilutive potential common shares outstanding during the period. At December 31, 2015
and 2014, there were 4,518,626 and 4,518,626 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 years ended
December 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 years ended December 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.
Deposits and Other Assets
At December 31, 2015, deposits
and other assets was $10,000 ($40,000 in total origination fees offset by $30,000 in accumulated amortization) for the senior unsecured
promissory note discussed in Note 10. The fees are to be amortized over the life of the promissory note. At December 31, 2014,
deposits and other assets was $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 years ended December 31, 2015 and 2014.
Equity-Based Compensation
The Company accounts for
equity instruments issued to employees in accordance with ASC 718 “Compensation-Stock Compensation”. Under ASC 718,
the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options beginning
when the specified events become probable of occurrence. All transactions in which goods or services are the consideration received
for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument
issued is the earlier of (i) the date on which the counterparty’s performance is complete, or (ii) the date on which it
is probable that performance will occur.
Income Taxes
The Company accounts for
income taxes in accordance with ASC 740 “Income Taxes”. ASC 740 requires the use of the asset and liability method
whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. These differences result in deferred tax assets and liabilities, which are included in the Company’s
consolidated balance sheets.
The Company then assesses
the likelihood of realizing benefits related to such assets by considering factors such as historical taxable income and the Company’s
ability to generate sufficient taxable income of the appropriate character within the relevant jurisdictions in future years. Based
on the aforementioned factors, if the realization of these assets is not likely a valuation allowance is established against the
deferred tax assets.
The Company accounts for
its position in tax uncertainties under ASC 740-10. ASC 740-10 establishes standards for accounting for uncertainty in income taxes.
ASC 740-10 provides several clarifications related to uncertain tax positions. Most notably, a “more likely-than-not”
standard for initial recognition of tax positions, a presumption of audit detection and a measurement of recognized tax benefits
based on the largest amount that has a greater than 50 percent likelihood of realization. ASC 740-10 applies a two-step process
to determine the amount of tax benefit to be recognized in the financial statements. First, the Company must determine whether
any amount of the tax benefit may be recognized. Second, the Company determines how much of the tax benefit should be recognized
(this would only apply to tax positions that qualify for recognition.) 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 year ended December 31, 2015 or 2014.
The Company incurred no
penalties or interest for taxes for the year ended December 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, 2012, 2013 and 2014. 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,
as amended, for annual periods beginning after December 15, 2017, 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 2018.
NOTE 3. CONCENTRATIONS OF CREDIT RISK
The Company maintains aggregate
cash balances, at times, with financial institutions, which are in excess of amounts insured by the Federal Deposit Insurance Corporation
(“FDIC”). During the year ended December 31, 2015, the FDIC insured deposit accounts up to $250,000. At December 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 Year Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Revenue
|
|
|
|
|
|
|
|
|
Halo Asset Management
|
|
$
|
975,688
|
|
|
$
|
1,315,722
|
|
Halo Portfolio Advisors
|
|
|
1,961,859
|
|
|
|
1,165,569
|
|
Other
|
|
|
163,894
|
|
|
|
63,750
|
|
Net Revenue
|
|
$
|
3,101,441
|
|
|
$
|
2,545,041
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Halo Asset Management
|
|
$
|
698,287
|
|
|
$
|
571,167
|
|
Halo Portfolio Advisors
|
|
|
750,385
|
|
|
|
204,378
|
|
Other
|
|
|
–
|
|
|
|
–
|
|
Less: Corporate expenses (a)
|
|
|
(3,229,662
|
)
|
|
|
(2,039,625
|
)
|
Operating income (loss):
|
|
$
|
(1,780,990
|
)
|
|
$
|
(1,264,080
|
)
|
a.
|
|
Corporate
expenses include salaries, benefits and other expenses, including rent and general and
administrative expenses, related to corporate office overhead and functions that benefit
all operating segments. Corporate expenses also include interest expense. Corporate expenses
are expenses that the Company does not directly allocate to any segment above. Allocating
these indirect expenses to operating segments would require an imprecise allocation methodology.
Further, there are no material amounts that are the elimination or reversal of transactions
between the above reportable operating segments.
|
The assets of the Company
consist primarily of cash, trade accounts receivable, and property, equipment and software. Cash is managed at the corporate level
of the Company and not at the segment level. Each of the remaining primary assets has been discussed in detail, including the applicable
operating segment for which the assets and liabilities reside, in the consolidated notes to the financial statements. As such,
the duplication is not warranted in this footnote.
All debt of the Company
is recorded at the corporate parent companies HCI and HGI. In 2015 and 2014, all interest expense is included in corporate expenses
above. Interest expense is discussed in further detail in Notes 9, 10, 11 and 12.
For the year ended December
31, 2015 and 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 $13,645,853 as of December 31, 2015. However, of the accumulated deficit, $2,110,748 of expense was incurred
as stock-based compensation, $604,119 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 $3,900,386 total of these non-cash retained earnings reductions represents 29% of the total deficit
balance.
NOTE 6. PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and
software consist of the following as of December 31, 2015 and December 31, 2014, respectively:
Computers and purchased software
|
|
$
|
147,800
|
|
|
$
|
158,899
|
|
Furniture and equipment
|
|
|
203,427
|
|
|
|
203,427
|
|
|
|
|
351,227
|
|
|
|
362,326
|
|
Less: accumulated depreciation
|
|
|
(304,055
|
)
|
|
|
(291,800
|
)
|
|
|
$
|
47,172
|
|
|
$
|
70,526
|
|
Depreciation totaled $23,354
and $43,830 for the year ended December 31, 2015 and 2014, respectively. The Company did not retire any assets for the year ended
December 31, 2015. The depreciation is included in general and administrative expenses in the consolidated statements of operations.
NOTE 7. INVESTMENTS IN PORTFOLIO ASSETS
In December 2010, Equitas
Housing Fund, LLC (“EHF”), a subsidiary of the Company, entered into an agreement to purchase non-performing mortgage
notes secured by the property, across the United States, for 6.6% of unpaid principal balance. Total purchase price of the investment
was $300,000. Payments of $20,759 were received during 2011 and applied to the investment. During 2011, the seller’s estate,
including the above mentioned non-performing mortgage notes purchased for $300,000 were placed into receivership with a court appointed
receiver of the seller. The receiver has asserted ownership of the assets in receivership, including the referenced mortgage notes.
As the Company’s right to these assets had been impaired, the Company assessed its ability to reclaim the assets as remote
and an impairment of the investment in portfolio assets was warranted. Accordingly, the Company recognized impairment of the assets
of $279,241 as of December 31, 2011. As of December 31, 2015, the Company has reached a final outcome with the receivership and
does not expect to recover any further value in the future.
NOTE 8. ACCRUED AND OTHER LIABILITIES
The Company had $1,328,662
in accrued liabilities at December 31, 2015. Included in this accrual is $423,623 in accrued interest ($245,663 of this balance
is related to interest on the secured asset promissory note discussed in more detail in Note 12) and $724,208 in deferred compensation
to several senior management personnel. 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 9. NOTES PAYABLE TO RELATED PARTIES
During March 2011, the
Company entered into one unsecured promissory note with a related party (a previous company director) in the amount of $250,000
(the “2011 Related Party Note”). The 2011 Related Party Note had a fixed interest amount of $50,000 and a maturity
date of July 31, 2011. On September 20, 2011, the 2011 Related Party Note was amended to include the 2011 Related Party Note plus
$52,426 of accrued interest for a total note balance of $302,426. The 2011 Related Party Note has a 6% interest rate and is a monthly
installment note with final balloon payment at maturity in September 2014. At the time of the filing of these consolidated financial
statements, the Company and the related party had not finalized an extended maturity date, and as such the entire $197,636 2011
Related Party Note balance is included in current portion of notes payable to related parties as of December 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 December
31, 2015, the 2011 Consolidated Related Party Note balance was $267,569 all of which 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. During the twelve months ended
December 31, 2015, in exchange for an additional extension and renewal of the loan the director agreed to an interest penalty of
$300,000 and the director further agreed to convert all accrued interest of $460,476 into a new debt agreement due October 1, 2016.
As of December 31, 2015, the outstanding balance was $960,476. The entire balance is included in current portion of notes payable
to related parties. The debt accrues 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 twelve months ended December 31, 2015, the President advanced an additional $100,000 in working
capital and deferred compensation of an additional $200,000 from the Company and was repaid $25,000.
As of December 31, 2015, the outstanding advance balance was $345,000 and is due December 28, 2016. The entire balance is included
in current portion of notes payable to related parties. The debt accrues interest at a rate of 15%.
As
of December 31, 2013, the Company’s CEO and Director of the Board had an outstanding advance balance of $115,000 for short
term capital. During the twelve months ended December 31, 2015, the CEO deferred compensation of an additional $400,000
from the Company. As of December 31, 2015, the outstanding advance balance was $515,000 and is
due December 28, 2016. The entire balance is included in current portion of notes payable to related parties. The debt accrues
interest at a rate of 15%.
During the twelve months
ended December 31, 2015, the Company redeemed the remaining outstanding shares of Series X Preferred Stock in exchange for promissory
notes due on December 28, 2016. The CEO was issued a promissory note from the Company of $209,000. A Company director was issued
a promissory note from the Company of $267,771. A related party was issued a promissory note from the Company of $60,000. The entire
balance of $537,661 is included in the current portion of notes payable to related parties. The debt accrues with an interest rate
of 8%.
As of December 31, 2015,
the notes payable to related party balance totaled $2,822,452, all of which 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 $579,366
and $109,674 of interest expense to directors, officers, and other related parties during the years ended December 31, 2015 and
2014, respectively. Accrued interest due to directors and other related parties totaled $177,724 at December 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 10. NOTE PAYABLE
In October 2013, the Company
entered into a senior unsecured convertible promissory note agreement of $1,500,000. The terms of the note include an interest
rate of 15% with a maturity date of October 10, 2016. The Company, although not required, is entitled to capitalize any accrued
interest into the outstanding principal balance of the note up until maturity. At the maturity date, all unpaid principal and accrued
interest is due. As part of the promissory note, the Company was required to pay origination fees and expenses associated with
this note agreement (discussed in Other Assets Note 2), pay the subordinated debt originated in January 2010, pay $375,000 to a
related party note held by a director, with the remaining use of proceeds for general corporate purposes including payment of deferred
compensation to several management personnel. Additionally, the noteholder has the right, but not the obligation, to convert up
to $1,000,000 of the principal balance of the note into common shares of the Company. The $1,000,000 maximum conversion ratio would
entitle the noteholder to a maximum total of 10% of the then outstanding common stock of the Company, calculated on a fully diluted
basis. Any conversion of the principal amount of this note into common stock would effectively lower the outstanding principal
amount of the note. As of December 31, 2015, the note payable balance was $2,099,475, which includes capitalized interest of $599,475.
As of December 31, 2014, the note payable balance was $1,805,000, which includes capitalized interest of $305,000.
NOTE 11. 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 10) which required the use of those financing
proceeds to pay down the subordinated debt. As of December 31, 2015 and 2014, the remaining balance was $0.
As
part of the Subordinated Offering, the Company granted to investors common stock purchase warrants (the “Warrants”)
to purchase an aggregate of 200,000 shares of common stock of the Company at an exercise price of $0.01 per share. The 200,000
shares of common stock contemplated to be issued upon exercise of the Warrants are based on an anticipated cumulative debt raise
of $750,000. The investors are granted the Warrants pro rata based on their percentage of investment relative to the $750,000 aggregate
principal amount of notes contemplated to be issued in the Subordinated Offering. The Warrants shall have a term of seven years,
exercisable from January 31, 2015 to January 31, 2017. The Company will have a call option any time prior to maturity, so long
as the principal and interest on the notes are fully paid, to purchase the Warrants for an aggregate of $150,000. After the date
of maturity until the date the Warrants are exercisable, the Company will have a call option to purchase the Warrants for $200,000.
The call option purchase price assumed a cumulative debt raise of $750,000.
The Company follows the
provisions of ASC 815, “Derivatives and Hedging”. ASC 815 requires freestanding contracts that are settled in a company’s
own stock to be designated as an equity instrument, assets or liability. Under the provisions of ASC 815, a contract designated
as an asset or liability must be initially recorded and carried at fair value until the contract meets the requirements for classification
as equity, until the contract is exercised or until the contract expires. Accordingly, the Company determined that the warrants
should be accounted for as derivative liabilities and has recorded the initial value as a debt discount which will be amortized
into interest expense using the effective interest method. As of December 31, 2013, the balance of the debt discount was $0 (fully
amortized). Subsequent changes to the marked-to-market value of the derivative liability will be recorded in earnings as derivative
gains and losses. As of December 31, 2015, there were 105,333 warrants outstanding with a derivative liability of $2,434. As of
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:
|
|
December 31, 2015
|
|
December 31, 2014
|
Risk-free rate
|
|
|
.65
|
%
|
|
|
.66
|
%
|
Expected volatility
|
|
|
543.97
|
%
|
|
|
620.37
|
%
|
Expected remaining life (in years)
|
|
|
1.00
|
|
|
|
2.00
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
During August 2012, the
Company entered into an additional $25,000 subordinated term note with a then current holder of the Company’s subordinated
debt. The note pays an 18% coupon rate with a maturity date of August 31, 2015. There are no warrants associated with this subordinated
term note. Repayment terms of the note include interest only payments through February 28, 2013. Thereafter, level monthly payments
of principal and interest are made as calculated on a 60 month payment amortization schedule with final balloon payment due at
maturity. The rights of the holder of this note is subordinated to any and all liens granted by the Company to a commercial bank
or other qualified financial institution in connection with lines of credit or other loans extended to the Company in an amount
not to exceed $2,000,000, and liens granted by the Company in connection with the purchase of furniture, fixtures or equipment.
As of December 31, 2015, the remaining balance of this note totals $0 as the balance was paid in full. 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 December 31, 2015, the remaining balance of this note totals $85,000, 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 12. SECURED ASSET PROMISSORY NOTE
During
December 2010, the Company authorized a debt offering to be secured by real estate assets purchased in connection with Equitas
Housing Fund, LLC, (“Equitas Offering”). The Equitas Offering 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 December 31, 2015, the entire accrued interest balance
of $245,663
is included in current portion of accrued and other
liabilities. As such, as of December 31, 2014, the entire accrued interest balance of $223,987 is included in current portion of
accrued and other liabilities.
NOTE 13. RELATED PARTY TRANSACTIONS
For the year ended December
31, 2015 and 2014, HAM recognized monthly servicing fee revenue totaling $360,395 and $431,940, respectively, from an entity that
is an affiliate of the Company. Further, the facilities rent expense of $72,599 incurred during 2015 was paid to the same affiliate.
For the year ended December
31, 2015 and 2014, the Company incurred interest expense to related parties (See Note 9).
For the year ended December
31, 2015 and 2014 the Company incurred $20,000 and $10,000, respectively, in expense for business development services to an entity
that is an affiliate of the Company.
NOTE 14. INCOME TAXES
The following table summarizes
the difference between the actual tax provision and the amounts obtained by applying the statutory tax rates
to the income or loss before income taxes for the years ended December 31, 2015 and 2014:
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Tax benefit calculated at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Permanent differences
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
State Income tax
|
|
|
(0.4
|
)
|
|
|
(1.7
|
)
|
Total
|
|
|
33.4
|
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
|
Increase to valuation allowance
|
|
|
(33.9
|
)
|
|
|
(34.6
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(0.5
|
)%
|
|
|
(2.6
|
)%
|
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 including net losses. In assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment. At December 31, 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 $7,600,000 available for federal income tax
purposes, which expire from 2024 to 2035. Separately, because of the changes in ownership that occurred on June 30, 2004
and September 30, 2009, prior to GVC merging with HCI, and based on the Section 382 Limitation calculation, the Company will be
allowed approximately $6,500 per year of GVC Venture Corp.’s federal NOLs generated prior to June 30, 2004 until they would
otherwise expire. The Company would also be allowed approximately $159,000 per year of GVC Venture Corp.’s federal NOLs generated
between June 30, 2004 and September 30, 2009 until they would otherwise expire.
Significant components
of the Company’s deferred income tax assets and liabilities as of December 31, 2015 and 2014 are as follows:
|
|
2015
|
|
|
2014
|
|
Net current deferred tax assets:
|
|
|
|
|
|
|
|
|
Bad debt allowance
|
|
$
|
–
|
|
|
$
|
127,726
|
|
Net
|
|
|
–
|
|
|
|
127,726
|
|
Net non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
18,173
|
|
|
|
10,470
|
|
Capital loss carryover
|
|
|
635,743
|
|
|
|
635,743
|
|
Stock compensation
|
|
|
279,111
|
|
|
|
279,111
|
|
Deferred Compensation
|
|
|
246,231
|
|
|
|
170,000
|
|
Deferred Revenue
|
|
|
6,800
|
|
|
|
–
|
|
Other
|
|
|
1,732
|
|
|
|
2,559
|
|
Net operating loss carry-forward
|
|
|
2,584,498
|
|
|
|
1,939,304
|
|
Net
|
|
|
3,772,288
|
|
|
|
3,164,913
|
|
Less valuation allowance
|
|
|
(3,772,288
|
)
|
|
|
(3,164,913
|
)
|
Net deferred taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
NOTE 15. COMMITMENTS AND CONTINGENCIES
The Company leases various
office equipment, each under a non-cancelable operating lease providing for minimum monthly rental payments. In relation to its
office facilities, 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 December 31, 2015 are as follows:
Years Ending December 31:
|
|
|
|
2016
|
|
$
|
4,312
|
|
Thereafter
|
|
|
–
|
|
Total minimum lease commitments
|
|
$
|
4,312
|
|
For the year ended
December 31, 2015 and 2014, the Company incurred facilities rent expense totaling $72,599 and $122,741, 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 3
rd
Amended Petition in which they dropped any claim of fraud including fraudulent inducement,
fraud, conversion and civil conspiracy and added a new “control person” claim which was not subject to the no evidence
Motion for Summary Judgment heard on August 9, 2013. On September 25, 2013, Defendants no evidence Motion for Summary Judgment
was granted in its entirety. Defendants subsequently filed a no evidence Motion for Summary Judgment on the final remaining “control
person” claim which was heard before the court on October 21, 2013. On December 18, 2013 a final Order Granting Defendant’s
Second No-Evidence Motion of Final Summary Judgment was signed. The Plaintiff’s subsequently filed a motion for new trial.
Following a hearing, the Plaintiff’s motion for new trial was denied by operation of law. The Plaintiff’s Filed a Notice
of Appeal on March 11, 2014. 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. On October 30, 2015 Plaintiffs/Appellants filed a Motion for Involuntary Dismissal with the Court of Appeals for
the Sixth District of Texas at Texarkana, Texas asking that the court dismiss the case on the basis that the United States District
Court, Eastern District of Texas, Sherman Division entered an order permanently barring all Stewardship Creditors from continuing
and/or asserting or prosecuting any claims or causes of action against Halo. Because Appellants in this action fall within the
definition of “Stewardship Creditors” they are barred from continuing to pursue this appeal thereby divesting the Court
of Appeals for the Sixth District of Texas, Sherman Division, of jurisdiction over this appeal. On November 6, 2015, the court
granted the above mentioned Involuntary Motion to Dismiss and on January 20, 2016 the final mandate was issued.
As noted above, the Company,
in conjunction with its Directors and Officers insurance carrier, is defending the matter vigorously. Based on the facts alleged
and the proceedings to date, the Company believes that the Plaintiffs’ allegations will prove to be false, and that accordingly,
it is not probable or reasonably possible that a negative outcome for the Company or the remaining Defendants will occur.
As with any action of this type the timing and degree of any effect upon the Company are uncertain. If the outcome of the action
is adverse to the Company, it could have a material adverse effect on our business prospects, financial position, and results of
operation.
The Company and certain
of its affiliates, officers and directors named as defendants in an insurance action filed on April 27, 2012 in the United States
District Court for the Northern District of Texas. The Plaintiffs allege that it had no duty to indemnify the Company, its affiliates,
officers or directors because the claims set forth in the lawsuit mentioned herein above were not covered by the insurance policy
issued by Plaintiff in favor of Defendants. The action sought declaratory judgment that the Plaintiff had no duty to indemnify
the Defendants pursuant to the insurance policy that Defendants purchased from Plaintiff. The Company took the position that Plaintiff’s
claim had no merit, and defended the matter vigorously. Additionally, Defendants filed a counterclaim against the insurer alleging
breach of contract, violation of the Texas Insurance Code and violation of the duty of good faith and fair dealing. On March 12,
2013, Plaintiff and Defendants entered into an agreement whereby Plaintiff’s and Defendant’s claims, are to be dismissed
without prejudice while the underlying liability suit in the 191st District Court of Dallas County proceeds. An Agreed Motion to
Dismiss Without Prejudice was filed on March 12, 2013, and the parties are awaiting the court’s entry of the Agreed Order
of Dismissal Without Prejudice.
As noted above, the Company
has defended this matter vigorously. Based on the status of the litigation, it is not probable or reasonably possible that a negative
outcome for the Company or the remaining Defendants will occur. As with any action of this type the timing and degree of any effect
upon the Company are uncertain. If the outcome of the action is adverse to the Company, it could have a material adverse effect
on our financial position.
The
Company and certain of its affiliates, officers and directors have been named as defendants in an action filed on July 19, 2012
in the United States District Court for the Northern District of Texas. The Plaintiff alleges that it has no duty to defend or
indemnify the Company, its affiliates, officers or directors because the claims set forth in the lawsuit mentioned herein above
are not covered by the insurance policy written by Plaintiff in favor or Defendants. The action seeks declaratory judgment
that the Plaintiff has no duty to defend or indemnify the Defendants pursuant to the insurance policy that Defendants purchased
from Plaintiff. Initially, the Company took the position that Plaintiff’s claims had no merit, and defended the matter vigorously.
Additionally, Defendants filed a counterclaim against the insurer alleging breach of contract, violation of the Texas Insurance
Code and violation of the duty of good faith and fair dealing. Plaintiff has filed a Motion for Summary Judgment seeking a judgment
that it owes no duty to defend or indemnify Defendants. After careful consideration, Defendants decided not to oppose the Motion
for Summary Judgment and a response in opposition was not filed. The Motion for Summary Judgment was granted in part and the remaining
matter remains pending before the court.
Based on the current status
of the litigation, the Company believes it is not probable or reasonably possible that a negative outcome for the Company or the
remaining Defendants will occur. As with any action of this type the timing and degree of any effect upon the Company are uncertain.
If the outcome of the action is adverse to the Company, it could have a material adverse effect on our financial position.
NOTE 16. STOCK OPTIONS
The Company granted stock
options to certain employees under the HGI 2007 Stock Plan, as amended (the “Plan”). The Company was authorized to
issue 2,950,000 shares subject to options, or stock purchase rights under the Plan. These options (i) vest over a period no greater
than two years, (ii) are contingently exercisable upon the occurrence of a specified event as defined by the option agreements,
and (iii) expire three months following termination of employment or five years from the date of grant depending on whether or
not the options were granted as incentive options or non-qualified options. At September 30, 2009, pursuant to the terms of the
merger, all options granted prior to the merger were assumed by the Company and any options available for issuance under the Plan
but unissued, have been forfeited and consequently the Company has no additional shares subject to options or stock purchase rights
available for issuance under the Plan. As of December 31, 2015, 438,300 option shares have been exercised. Total stock options
outstanding as of December 31, 2015 total 170,000. The weighted average remaining contractual life of the outstanding options at
December 31, 2015 is approximately 1.8 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 December 31, 2015
|
|
|
170,000
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
All stock options granted
under the Plan and as of December 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. Total compensation cost expensed over the vesting period of stock options
was $2,103,948, all of which was expensed as of September 30, 2011.
On July 19, 2010, the board
of directors approved the Company’s 2010 Incentive Stock Plan (“2010 Stock Plan”). The 2010 Stock Plan allows
for the reservation of 7,000,000 shares of the Company’s common stock for issuance under the plan. The 2010 Stock Plan became
effective July 19, 2010 and terminates July 18, 2020. As of December 31, 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. Total compensation cost expensed over the vesting
period of the stock options was $6,800, all of which was expensed in the year ended December 31, 2012. As of December 31, 2015,
none of the shares issued under the 2010 Stock Plan have been exercised.
NOTE 17. SHAREHOLDERS’ (DEFICIT) EQUITY
Common Stock
On December 13, 2010 (“the
Closing”), the Company was party to an Assignment and Contribution Agreement (the “Agreement”). Pursuant
to the terms of Agreement, the members of Equitas Asset Management, LLC, (“EAM”), a non Halo entity, which owned 100%
of the interests of Equitas Housing Fund, LLC (“EHF”), assigned and contributed 100% of the interests of EAM to HAM
(a Halo subsidiary) in exchange for shares of 21,200,000 shares of the Company’s Common Stock, $0.001 par value, of the Company.
The Agreement did not constitute a business combination.
The Company issued 7,500,000
shares of Halo common stock in exchange for $3,000,000 in debt or equity capital. The aggregate of 7,500,000 shares of Halo common
stock will be subject to clawback (and cancellation) by Halo in the event that EAM does not generate at least three million dollars
($3,000,000) in new capital to Halo within twelve months following the closing. Halo shall have the right to claw back 2.5 shares
of Halo common stock for every dollar not raised within the twelve months. Any cash generated by EAM will need to be designated
for use in Halo’s general operations and not that of the EHF business to release the clawback rights.
The Company issued 13,700,000
shares of Halo common stock for the purchase of intangible assets owned by EAM which included trade secrets and business processes
used in the EHF business. The aggregate 13,700,000 shares of Halo common stock shall be subject to clawback (and cancellation)
by Halo in the event that EAM fails to generate at least $10,000,000 of net operating cash flows from the EHF business within twenty-four
months following the closing. Halo shall have the right to claw back 1.37 shares of Halo common for every dollar not generated
from the net operating cash flows of the EHF business. Once the $10,000,000 in net operating cash flows from the EHF business is
generated, the clawback rights will be released.
In applying the guidance
of ASC 505 “Equity” to the above transactions, the clawback provisions create a performance commitment that has not
been met. As such, although the transaction did provide for a grant date at which time the equity shares are issued and outstanding,
the equity shares have not met the measurement date requirements required by ASC 505. Accordingly, the par value of the shares
issued and outstanding have been recorded at the grant date and as the clawback rights are released and the measurement dates established,
the fair value of the transactions will be determined and recorded. The pro-rata fair value of equity issued in connection with
fund raising efforts at each measurement date will be recorded as debt issuance costs or a reduction in the equity proceeds raised
by the counter party. The pro-rata fair value of equity issued in connection with the purchase of intangible assets at the measurement
date will be recorded as amortization expense because the amortization period of the underlining asset purchase and the clawback
release rights are commensurate.
As mentioned above, the
Agreement provides for “clawback” provisions, pursuant to which all of the shares of Halo Common Stock issued to the
member of EAM are subject to forfeiture in the event certain financial metrics are not timely achieved. The financial metrics call
for significant cash generation by EHF within the first 12 months, and within the first 24 months following the closing date. We
refer you to Section 2(b)(i) and (ii) of the Agreement, for the specifics of the clawback provisions. As of December 31, 2012,
no cash was generated by EHF. The times to meet both the 12 month and 24 month financial metrics have lapsed and the metrics have
not been met. Based upon the events that have transpired, and the lack of progress toward the financial metrics, the Company demanded
that the recipients of the shares of Halo Common Stock give effect to both clawback provisions and immediately forfeit back all
of the Halo shares issued to such recipients – an aggregate of 21,200,000 shares. Additionally, the Company has instructed
the Company’s transfer agent to cancel all of the shares of Company Common Stock issued pursuant to the Agreement. As of
December 31, 2014, the Company’s transfer agent had 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.
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 during 2016. 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 consolidated
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 48,562,750 at December 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 December 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 $0 as of December 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. During December 2015, the Company exercised its redemption right and redeemed
the remaining issued and outstanding 53,677 shares in exchange for promissory notes. As such, as of December 31, 2015, there were
no shares authorized, issued or outstanding.
In April 2012, the Company
authorized 100,000 shares of Series E Convertible Preferred Stock (the “Series E Preferred”) with a par value of $0.001
per share, at ten dollars ($10.00) per share with a conversion rate of fifty (50) shares of the Company’s common stock for
one share of Series E Preferred. The number of shares of Series E Preferred may be decreased by resolution of the Board; provided,
however, that no decrease shall reduce the number of Series E Preferred to less than the number of shares then issued and outstanding.
In the event any Series E Preferred Shares shall be converted, (i) the Series E Preferred so converted shall be retired and cancelled
and shall not be reissued and (ii) the authorized number of Series E Preferred Shares set forth shall be automatically reduced
by the number of Series E Preferred Shares so converted and the number of shares of the Corporation's undesignated Preferred Stock
shall be deemed increased by such number. The Series E Preferred Shares rank senior to the Company’s common stock to the
extent of $10.00 per Series E Preferred Shares and on a parity with the Company’s common stock as to amounts in excess thereof.
The holders of Series E Preferred shall not have voting rights. Holders of the Series E Preferred shall be entitled to receive,
when and as declared by the board of directors, dividends at an annual rate of 9% payable in cash or common stock when declared
by the board. Holders of Series E Preferred have a liquidation preference per share equal to $10.00. The liquidation preference
was $700,000 as of December 31, 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
December 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 $771,697, of which $212,469 is an accrued (but undeclared) dividend
as of December 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 December 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 $634,695,
of which $174,783 is an accrued (but undeclared) dividend as of December 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 December 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 $427,773,
of which $117,773 is an accrued (but undeclared) dividend as of December 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 December
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 December 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 18. SUBSEQUENT EVENTS
There were no other subsequent
events to disclose.