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.
The accompanying notes are an integral part of these consolidated financial statements.
Notes To Consolidated Financial Statements
March 31, 2016
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.
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.
Halo has determined that
the asset management and portfolio services have threatened sustainability long term and need to shift its resources to pursue
other lines of revenue. Fortunately, management has been analyzing this trend for some time and made moves to begin capitalizing
on its internally developed technology assets. As further discussed in Note 2 below, Halo has successfully secured multiple software
license and support agreements and will continue to evaluate the best method to deliver and monetize Halo’s technology assets
in the market.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated
financial statements are unaudited; however, in the opinion of management, all adjustments considered necessary for fair presentation
of the results of the interim periods have been included (consisting of normal recurring accruals). The accompanying consolidated
financial statements as of March 31, 2016, and for the three months ended March 31, 2016 and 2015, include the accounts of the
Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim information. Accordingly, the financial statements do not include all of the information and footnotes required by
GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2016,
are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
Revenue Recognition, Accounts Receivable
and Deferred Revenue
The Company recognizes
revenue in the period in which services are earned and realizable. To further understand the Company’s business, HAM earns
fees from its clients for its boarding and initial asset management fee, success fees, and its monthly servicing fee. The boarding
and initial asset management services are performed in the first 30-60 days of assets being boarded and include; IRR analysis of
loans boarded, detailed asset level workout exit strategy analysis, boarding the assets onto HAM’s proprietary software platform
and the integrated servicing platform, identification and oversight of custodial files, oversight of mortgage/deed assignment from
previous servicer, oversight of title policy administration work, and delinquent property tax research and exposure review. HAM’s
monthly success fees are earned for completing its default and asset disposition services including note sales, originating owner
finance agreements, and cash sales of REO properties owned by the client. HAM’s servicing fees are earned monthly and are
calculated on a monthly unit price for assets under management.
The Company is currently
exploring potential opportunities with several client relationships that would allow the Company to implement its internally developed
asset management software platform as an external service for those customers. This is commonly known as Software as a Service
(“SaaS”).
Cash receipts from customers in advance of revenue recognized are recorded
as deferred revenue and will be earned over the entire SaaS contract period.
HAM and HPA receivables
are typically paid the month following services performed. As of March 31, 2016 and December 31, 2015, the Company’s accounts
receivable are made up of the following percentages; HAM at 21% and 55%, HPA at 67% and 45%, and HGI at 12% and 0% respectively.
The Company maintains allowances
for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management
considers the following factors when determining the collectability of specific customer accounts: past transaction history with
the customer, current economic and industry trends, and changes in customer payment terms. The Company provides for estimated uncollectible
amounts through an increase to the allowance for doubtful accounts and a charge to earnings based on actual historical trends and
individual account analysis. Balances that remain outstanding after the Company has used reasonable collection efforts are written-off
through a charge to the allowance for doubtful accounts. The below table summarizes the Company’s allowance for doubtful
accounts as of March 31, 2016 and December 31, 2015:
|
|
Balance at
Beginning
of Period
|
|
|
Increase
in the
Provision
|
|
|
Accounts
Receivable
Write-offs
|
|
|
Balance
at End of
Period
|
|
Three Months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
375,665
|
|
|
$
|
0
|
|
|
$
|
375,655
|
|
|
$
|
0
|
|
Net Income (Loss) Per Common Share
Basic net income (loss)
per share is computed by dividing (i) net income (loss) available to common shareholders (numerator), by (ii) the weighted average
number of common shares outstanding during the period (denominator). Diluted net income (loss) per share is computed using the
weighted average number of common shares and dilutive potential common shares outstanding during the period. At March 31, 2016
and 2015, there were 4,518,626 and 4,630,626 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 three months
ended March 31, 2016 and 2015 because their effect is anti-dilutive due to the Company’s reported net loss.
Use of Estimates and Assumptions
The preparation of consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Significant estimates include the Company’s revenue recognition method and derivative liabilities.
Principles of Consolidation
The consolidated financial
statements of the Company for the three months ended March 31, 2016 and 2015 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.
Property, Equipment and Software
Property, equipment, and
software are stated at cost. Depreciation is provided in amounts sufficient to relate the cost of the depreciable assets to operations
over their estimated service lives, ranging from three to seven years. Provisions for depreciation are made using the straight-line
method.
Major additions and improvements
are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the
cost of the property and equipment and the related accumulated depreciation are removed from the respective accounts, and any resulting
gains or losses are credited or charged to other general and administrative expenses.
Fair Value of Financial Instruments
The
carrying
value of trade accounts receivable, accounts payable, and accrued and other liabilities approximate fair value due to the short
maturity of these items. The estimated fair value of the notes payable and subordinated debt approximates the carrying amounts
as they bear market interest rates.
The Company considers the
warrants related to its subordinated debt to be derivatives, and the Company records the fair value of the derivative liabilities
in the consolidated balance sheets. Changes in fair value of the derivative liabilities are included in gain (loss) on change in
fair value of derivative in the consolidated statements of operations. The Company’s derivative liability has been classified
as a Level III valuation according to Accounting Standards Codification (“ASC”) 820.
Internally Developed Software
Internally developed legacy
application software consisting of database, customer relations management, process management and internal reporting modules
are used in each of the Company’s subsidiaries. The Company accounts for computer software used in the business in accordance
with ASC 350 “Intangibles-Goodwill and Other”. ASC 350 requires computer software costs associated with internal use
software to be charged to operations as incurred until certain capitalization criteria are met. Costs incurred during the preliminary
project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application
development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during
configuration, coding, and testing activities. Capitalization begins when (i) the preliminary project stage is complete, (ii)
management with the relevant authority authorizes and commits to the funding of the software project, and (iii) it is probable
both that the project will be completed and that the software will be used to perform the function intended. Management has determined
that a significant portion of costs incurred for internally developed software came from the preliminary project and post-implementation
stages; as such, no costs for internally developed software were capitalized.
Long-Lived Assets
Long-lived assets are reviewed
on an annual basis or whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets held and used is generally measured by a comparison of the carrying amount of an asset to undiscounted
future net cash flows expected to be generated by that asset. If it is determined that the carrying amount of an asset may not
be recoverable, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value
of the asset. Fair value is the estimated value at which the asset could be bought or sold in a transaction between willing parties.
There were no impairment charges for the three months ended March 31, 2016 and 2015.
Income Taxes
The Company accounts for
income taxes in accordance with ASC 740 “Income Taxes”. ASC 740 requires the use of the asset and liability method
whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. These differences result in deferred tax assets and liabilities, which are included in the Company’s
consolidated balance sheets.
The Company then assesses
the likelihood of realizing benefits related to such assets by considering factors such as historical taxable income and the Company’s
ability to generate sufficient taxable income of the appropriate character within the relevant jurisdictions in future years. Based
on the aforementioned factors, if the realization of these assets is not likely a valuation allowance is established against the
deferred tax assets.
The Company accounts for
its position in tax uncertainties under ASC 740-10. ASC 740-10 establishes standards for accounting for uncertainty in income taxes.
ASC 740-10 provides several clarifications related to uncertain tax positions. Most notably, a “more likely-than-not”
standard for initial recognition of tax positions, a presumption of audit detection and a measurement of recognized tax benefits
based on the largest amount that has a greater than 50 percent likelihood of realization. ASC 740-10 applies a two-step process
to determine the amount of tax benefit to be recognized in the financial statements. First, the Company must determine whether
any amount of the tax benefit may be recognized. Second, the Company determines how much of the tax benefit should be recognized
(this would only apply to tax positions that qualify for recognition.) The Company has not taken a tax position that, if challenged,
would have a material effect on the financial statements or the effective tax rate during the three months ended March 31, 2016
or 2015.
The Company incurred no
penalties or interest for taxes for the three months ended March 31, 2016 or 2015. 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
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 three months ended March 31, 2016, the FDIC insured deposit accounts up to $250,000. At March
31, 2016, the Company’s cash accounts were all less than the $250,000 FDIC insured amount and as such were insured in full.
Financial instruments that
potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable.
In the normal course of
business, the Company extends unsecured credit to its customers. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its estimate of amounts which will eventually become uncollectible. In the event
of complete non-performance by the Company’s customers, the maximum exposure to the Company is the outstanding accounts receivable
balance at the date of non-performance.
NOTE 4. OPERATING SEGMENTS
The
Company
has several operating segments as listed below and as defined in Note 1. The results for these operating segments are based on
our internal management structure and review process. We define our operating segments by service industry. If the management structure
and/or allocation process changes, allocations may change. See the following summary of operating segment reporting;
Operating Segments
|
|
For the Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
Halo Asset Management
|
|
$
|
30,328
|
|
|
$
|
240,899
|
|
Halo Portfolio Advisors
|
|
|
41,028
|
|
|
|
1,178,868
|
|
Halo Group, Inc.
|
|
|
115,000
|
|
|
|
73,750
|
|
Net Revenue
|
|
$
|
186,356
|
|
|
$
|
1,493,517
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Halo Asset Management
|
|
$
|
29,534
|
|
|
$
|
119,426
|
|
Halo Portfolio Advisors
|
|
|
32,936
|
|
|
|
473,338
|
|
Other
|
|
|
–
|
|
|
|
–
|
|
Less: Corporate expenses (a)
|
|
|
(230,932
|
)
|
|
|
(1,060,190
|
)
|
Operating income (loss):
|
|
$
|
(168,462
|
)
|
|
$
|
(467,426
|
)
|
|
a.
|
Corporate expenses include salaries, benefits and other expenses, including rent and general and
administrative expenses, related to corporate office overhead and functions that benefit all operating segments. Corporate expenses
also include interest expense. Corporate expenses are expenses that the Company does not directly allocate to any segment above.
Allocating these indirect expenses to operating segments would require an imprecise allocation methodology. Further, there are
no material amounts that are the elimination or reversal of transactions between the above reportable operating segments.
|
The assets of
the Company consist primarily of cash, trade accounts receivable, and property, equipment and software. Cash is managed at the
corporate level of the Company and not at the segment level. Each of the remaining primary assets has been discussed in detail,
including the applicable operating segment for which the assets and liabilities reside, in the consolidated notes to the financial
statements. As such, the duplication is not warranted in this footnote.
All debt of the
Company is recorded at the corporate parent companies HCI and HGI. All interest expense is included in corporate expenses above.
Interest expense is discussed in further detail in Notes 8, 9, 10 and 11.
For the three
months ended March 31, 2016 or 2015, 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 $13,814,315 as of March 31, 2016. However, of the accumulated deficit, $2,110,748 of expense was incurred
as stock-based compensation, $609,456 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 $3,905,723 total of these non-cash retained earnings reductions represents 28% of the total deficit
balance.
NOTE 6. PROPERTY, EQUIPMENT AND
SOFTWARE
Property, equipment
and software consist of the following as of March 31, 2016 and December 31, 2015, respectively:
Computers and purchased software
|
|
$
|
147,800
|
|
|
$
|
147,800
|
|
Furniture and equipment
|
|
|
203,427
|
|
|
|
203,427
|
|
|
|
|
351,227
|
|
|
|
351,227
|
|
Less: accumulated depreciation
|
|
|
(309,392
|
)
|
|
|
(304,055
|
)
|
|
|
$
|
41,835
|
|
|
$
|
47,172
|
|
Depreciation totaled $5,337
and $6,223 for the three months ended March 31, 2016 and 2015, respectively.
NOTE 7. ACCRUED AND OTHER LIABILITIES
The Company had $1,460,985
in accrued liabilities at March 31, 2016. Included in this accrual is $496,977 in accrued interest ($251,082 of this balance is
related to interest on the secured asset promissory note discussed in more detail in Note 11). The accrual also includes $788,177
in deferred compensation to several senior management personnel. 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 11). The accrual also includes $724,208 in deferred compensation to several
senior management personnel.
NOTE 8. NOTES PAYABLE TO RELATED PARTIES
During March 2011, the
Company entered into one unsecured promissory note with a related party (a previous company director) in the amount of $250,000
(the “2011 Related Party Note”). The 2011 Related Party Note had a fixed interest amount of $50,000 and a maturity
date of July 31, 2011. On September 20, 2011, the 2011 Related Party Note was amended to include the 2011 Related Party Note plus
$52,426 of accrued interest for a total note balance of $302,426. The 2011 Related Party Note has a 6% interest rate and is a monthly
installment note with final balloon payment at maturity in September 2014. At the time of the filing of these consolidated financial
statements, the Company and the related party had not finalized an extended maturity date, and as such the entire $197,636 2011
Related Party Note balance is included in current portion of notes payable to related parties as of March 31, 2016. As of December
31, 2015, the 2011 Related Party Note was $197,636, 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, 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 March 31,
2016, 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, 2015,
a Company director had an outstanding advance to the Company of $960,476 for short term capital. As of March 31, 2016, the outstanding
advance balance was $960,476 and is due October 1, 2016; as such 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, 2015,
the Company’s President and Chief Legal Officer had an outstanding advance balance of $345,000 for short term capital. As
of March 31, 2016, the outstanding advance balance was $345,000 and is due December 28, 2016; as such 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, 2015,
the Company’s CEO and Director of the Board had an outstanding advance balance of $515,000 for short term capital. As of
March 31, 2016, the outstanding advance balance was $515,000 and is due December 28, 2016; as such 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. As of
March 31, 2016 the entire balance of $536,771 is included in the current portion of notes payable to related parties. The debt
accrues interest with an interest rate of 8%.
As of March 31, 2016, 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, 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.
The Company incurred $73,354
and $32,667 of interest expense to directors, officers, and other related parties during the three months ended March 31, 2016
and 2015, respectively. Accrued interest due to directors and other related parties totaled $251,313 at March 31, 2016, all of
which is included in accrued and other current liabilities. 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.
NOTE 9. NOTE PAYABLE
In October 2013, the Company
entered into a senior unsecured convertible promissory note agreement of $1,500,000. The terms of the note include an interest
rate of 15% with a maturity date of October 10, 2016. The Company, although not required, is entitled to capitalize any accrued
interest into the outstanding principal balance of the note up until maturity. At the maturity date, all unpaid principal and accrued
interest is due. As part of the promissory note, the Company was required to pay origination fees and expenses associated with
this note agreement (discussed in Other Assets Note 2), pay the subordinated debt originated in January 2010, pay $375,000 to a
related party note held by a director, with the remaining use of proceeds for general corporate purposes including payment of deferred
compensation to several management personnel. Additionally, the noteholder has the right, but not the obligation, to convert up
to $1,000,000 of the principal balance of the note into common shares of the Company. The $1,000,000 maximum conversion ratio would
entitle the noteholder to a maximum total of 10% of the then outstanding common stock of the Company, calculated on a fully diluted
basis. Any conversion of the principal amount of this note into common stock would effectively lower the outstanding principal
amount of the note. As of March 31, 2016, the note payable balance was $2,179,062, which includes capitalized interest of $679,062.
As of December 31, 2015, the note payable balance was $2,099,475, which includes capitalized interest of $599,475.
NOTE 10. SUBORDINATED DEBT
During January 2010, the
Company authorized a $750,000 subordinated debt offering (“Subordinated Offering”), which consisted of the issuance
of notes paying a 16% coupon with a 1% origination fee at the time of closing. The maturity date of the notes was originally January
31, 2013, however, the subordinated debt holders agreed to an extended maturity date of December 31, 2013. In October 2013, the
Company entered into a senior unsecured convertible promissory note (discussed in Note 9) which required the use of those financing
proceeds to pay down the subordinated debt. As such, as of December 31, 2015, the remaining balance was $0.
As
part of the Subordinated Offering, t
he Company granted to investors common stock purchase warrants (the “Warrants”)
to purchase an aggregate of 200,000 shares of common stock of the Company at an exercise price of $0.01 per share. The 200,000
shares of common stock contemplated to be issued upon exercise of the Warrants are based on an anticipated cumulative debt raise
of $750,000. The investors are granted the Warrants pro rata based on their percentage of investment relative to the $750,000 aggregate
principal amount of notes contemplated to be issued in the Subordinated Offering. The Warrants shall have a term of seven years,
exercisable from January 31, 2015 to January 31, 2017. The Company had a call option any time prior to maturity, so long as the
principal and interest on the notes are fully paid, to purchase the Warrants for an aggregate of $150,000. After the date of maturity
until the date the Warrants are exercisable, the Company will have a call option to purchase the Warrants for $200,000. The call
option purchase price assumed a cumulative debt raise of $750,000.
The Company follows the
provisions of ASC 815, “Derivatives and Hedging”. ASC 815 requires freestanding contracts that are settled in a company’s
own stock to be designated as an equity instrument, assets or liability. Under the provisions of ASC 815, a contract designated
as an asset or liability must be initially recorded and carried at fair value until the contract meets the requirements for classification
as equity, until the contract is exercised or until the contract expires. Accordingly, the Company determined that the warrants
should be accounted for as derivative liabilities and has recorded the initial value as a debt discount which was amortized into
interest expense using the effective interest method. As of December 31, 2013, the balance of the debt discount was $0 (fully amortized).
Subsequent changes to the marked-to-market value of the derivative liability are recorded in earnings as derivative gains and losses.
As of March 31, 2016 and December 31, 2015, 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 $0.01 per share using the
following assumptions:
|
|
March 31, 2016
|
|
Risk-free rate
|
|
|
0.62
|
%
|
Expected volatility
|
|
|
197
|
%
|
Expected remaining life (in years)
|
|
|
0.80
|
|
Dividend yield
|
|
|
0.00
|
%
|
During October 2014, the
Company entered into an additional $100,000 subordinated term note with the current holder of the Company’s subordinated
debt. The note pays an 18% coupon rate with a maturity date of September 30, 2017. There are no warrants associated with this
subordinated term note. Repayment terms of the note include interest only payments through March 31, 2015. Thereafter, level monthly
payments of principal and interest are made as calculated on a 60 month payment amortization schedule with final balloon payment
due at maturity. The rights of the holder of this note is subordinated to any and all liens granted by the Company to a commercial
bank or other qualified financial institution in connection with lines of credit or other loans extended to the Company in an
amount not to exceed $3,500,000, and liens granted by the Company in connection with the purchase of furniture, fixtures or equipment.
As of March 31, 2016, the remaining balance of this note totals $80,000, of which $20,000 is included in current portion of subordinated
debt. 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.
NOTE 11. SECURED ASSET PROMISSORY NOTE
During December
2010, the Company authorized a debt offering to be secured by real estate assets purchased in connection with Equitas Housing Fund,
LLC, (“Equitas Offering”). The Equitas Offering generated $1,200,000 in proceeds. Of the $1,200,000 in proceeds received
in December 2010, $300,000 was used to acquire non-performing, residential mortgage notes and the balance was used for mortgage
note workout expenses and operational expenses of Halo Asset Management. The Secured Asset Promissory Notes consisted of a 25%
coupon. In May 2013, the Secured Asset Promissory Note was paid in full, along with $150,000 of the outstanding accrued interest
balance. Halo and the secured asset promissory note holder agreed to include the remaining accrued interest in a promissory note
due December 31, 2014. The promissory note will accrue interest at a 10% annual rate, with interest only payments due periodically
and final balloon payment due at maturity. At the time of the filing of these consolidated financial statements, the Company and
note holder have not finalized an extended maturity date. As such, as of March 31, 2016, the entire accrued interest balance of
$251,082 is included in current portion of accrued interest. As of December 31, 2015, the entire accrued interest balance of $245,663
is included in current portion of accrued interest. For the three months ended March 31, 2016 and 2015, the Company incurred $5,419
and $5,419 respectively, in interest expense on the note.
NOTE 12. RELATED PARTY TRANSACTIONS
For the three months ended
March 31, 2016 and 2015, HAM recognized monthly servicing fee revenue totaling $25,226 and $110,217, respectively, from an entity
that is an affiliate of the Company. Further, facilities rent expense discussed in Note 14 was paid to the same affiliate.
For the three months ended
March 31, 2016 and 2015, the Company incurred interest expense to related parties (See Note 8).
For the three months ended
March 31, 2016 and 2015, the Company incurred $0 and $20,000 in commission expense to an entity that is an affiliate of the Company.
For the three months ended
March 31, 2016 and 2015, the Company incurred $10,000 and $5,000 in consulting expense to an entity that is an affiliate of the
Company.
NOTE 13. INCOME TAXES
For the three months ended
March 31, 2016 and 2015, the effective tax rate of 0% varies from the U.S. federal statutory rate primarily due to state income
taxes, net losses, certain non-deductible expenses and an increase in the valuation allowance associated with the net operating
loss carryforwards. Our deferred tax assets related to net operating loss carryforwards remain fully reserved due to uncertainty
of utilization of those assets.
Deferred tax assets and
liabilities are computed by applying the effective U.S. federal and state income tax rate to the gross amounts of temporary differences
and other tax attributes. In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies
in making this assessment. At December 31, 2015 and March 31, 2016, 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 $7,700,000 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.
NOTE 14. COMMITMENTS AND CONTINGENCIES
The Company leases various
office equipment, each under a non-cancelable operating lease providing for minimum monthly rental payments. In relation to its
office facilities, the Company has not entered into any additional office lease whereby it is contractually committed. The Company
currently pays for its office space on a month to month basis, and will continue to do so for the foreseeable future.
Future minimum rental obligations
as of March 31, 2016 are as follows:
Years Ending December 31:
|
|
|
|
|
2016
|
|
$
|
2,464
|
|
Thereafter
|
|
|
–
|
|
Total minimum lease commitments
|
|
$
|
2,464
|
|
For the three months ended
March 31, 2016 and 2015, the Company incurred facilities rent expense totaling $0 and $21,780, 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. The Court granted the Agreed Order of Dismissal Without Prejudice.
The Company and certain
of its affiliates, officers and directors have been named as defendants in an action filed on July 19, 2012 in the United States
District Court for the Northern District of Texas. The Plaintiff alleges that it has no duty to defend or indemnify the Company,
its affiliates, officers or directors because the claims set forth in the lawsuit mentioned herein above are not covered by the
insurance policy written by Plaintiff in favor or Defendants. The action seeks declaratory judgment that the Plaintiff has no duty
to defend or indemnify the Defendants pursuant to the insurance policy that Defendants purchased from Plaintiff. Initially, the
Company took the position that Plaintiff’s claims had no merit, and defended the matter vigorously. Additionally, Defendants
filed a counterclaim against the insurer alleging breach of contract, violation of the Texas Insurance Code and violation of the
duty of good faith and fair dealing. Plaintiff has filed a Motion for Summary Judgment seeking a judgment that it owes no duty
to defend or indemnify Defendants. After careful consideration, Defendants decided not to oppose the Motion for Summary Judgment
and a response in opposition was not filed. The Motion for Summary Judgment was granted.
NOTE 15. STOCK OPTIONS
The Company granted stock
options to certain employees under the HGI 2007 Stock Plan, as amended (the “Plan”). The Company was authorized to
issue 2,950,000 shares subject to options, or stock purchase rights under the Plan. These options (i) vest over a period no greater
than two years, (ii) are contingently exercisable upon the occurrence of a specified event as defined by the option agreements,
and (iii) expire three months following termination of employment or five years from the date of grant depending on whether or
not the options were granted as incentive options or non-qualified options. At September 30, 2009, pursuant to the terms of the
merger, all options granted prior to the merger were assumed by the Company and any options available for issuance under the Plan
but unissued, have been forfeited and consequently the Company has no additional shares subject to options or stock purchase rights
available for issuance under the Plan. As of March 31, 2016, 438,300 option shares have been exercised. Total stock options outstanding
as of March 31, 2016 total 170,000. The weighted average remaining contractual life of the outstanding options at March 31, 2016
is approximately 1.5 years.
A summary of stock option activity in the Plan
is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number of
|
|
|
Price
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Per Option
|
|
|
Price
|
|
Outstanding at December 31, 2014
|
|
|
170,000
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Canceled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2015
|
|
|
170,000
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Canceled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at March 31, 2016
|
|
|
170,000
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
All stock options granted
under the Plan and as of March 31, 2016 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 March 31, 2016, 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 March 31, 2016 none
of the shares issued under the 2010 Stock Plan have been exercised.
NOTE 16. SHAREHOLDERS’ (DEFICIT) EQUITY
Common Stock
On December 13, 2010 (“the
Closing”), the Company was party to an Assignment and Contribution Agreement (the “Agreement”). Pursuant to the
terms of Agreement, the members of Equitas Asset Management, LLC, (“EAM”), a non Halo entity, which owned 100% of the
interests of Equitas Housing Fund, LLC (“EHF”), assigned and contributed 100% of the interests of EAM to HAM (a Halo
subsidiary) in exchange for shares of 21,200,000 shares of the Company’s Common Stock, $0.001 par value, of the Company.
The Agreement did not constitute a business combination.
The Company issued 7,500,000
shares of Halo common stock in exchange for $3,000,000 in debt or equity capital. The aggregate of 7,500,000 shares of Halo common
stock 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 was sent to the Company’s transfer
agent to immediately cancel those respective outstanding shares of that Agreement. Upon receipt by the transfer agent of the stock
certificates noted above, the transfer agent did cancel the respective 21,200,000 shares of common stock. 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. Some of the shares were returned to the Company by the Transfer Agent requiring
a medallion guarantee. The Company expects to have these shares cancelled sometime in 2016. Secondarily, the Company is actively
pursuing the procurement of an additional physical certificate from a respective individual still in possession of the common stock
certificate. As of the time of 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 March 31, 2016.
Preferred Stock
In
connection with the merger, the Company authorized 1,000,000 shares of Series Z Convertible Preferred Stock with a par value of
$0.01 per share (the “Series Z Convertible Preferred”).
The number of shares of Series Z Preferred Stock may
be decreased by resolution of the Board; provided, however, that no decrease shall reduce the number of Series Z Preferred Shares
to less than the number of shares then issued and outstanding. In the event any Series Z Preferred Shares shall be converted,
(i) the Series Z Preferred Shares so converted shall be retired and cancelled and shall not be reissued and (ii) the authorized
number of Series Z Preferred Shares set forth in this section shall be automatically reduced by the number of Series Z Preferred
Shares so converted and the number of shares of the Corporation’s undesignated Preferred Stock shall be deemed increased
by such number. The Series Z Convertible Preferred is convertible into common shares at the rate of 45 shares of common per one
share of Series Z Convertible Preferred. The Series Z Convertible Preferred has liquidation and other rights in preference to all
other equity instruments. Simultaneously upon conversion of the remaining Series A Preferred, Series B Preferred, and Series C
Preferred and exercise of any outstanding stock options issued under the HGI 2007 Stock Plan into Series Z Convertible Preferred,
they will automatically, without any action on the part of the holders, be converted into common shares of the Company. Since the
merger, in connection with the exercise of stock options into common stock and converted Series A Preferred, Series B Preferred
and Series C Preferred as noted above, 82,508
shares of Series Z Convertible Preferred were automatically
authorized and converted into shares of the Company’s common stock leaving 917,492 shares of authorized undesignated Preferred
Stock in the Company in accordance with the Series Z Convertible Preferred certificate of designation.
As of March 31,
2016, 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. 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. The liquidation preference was $536,770 as of March 31, 2015. 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 March 31, 2016, 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 March 31, 2015. Each share of Series E Preferred, if not previously converted by the holder, will automatically
be converted into common stock at the then applicable conversion rate after thirty-six months from the date of purchase. As of
March 31, 2016, 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 $788,572, of which $229,074 is an accrued (but undeclared) dividend
as of March 31, 2016. Holders of the Series A Preferred are entitled to receive, if declared by the board of directors, dividends
at a rate of 8% payable in cash or common stock of the Company. The Series A Preferred is convertible into the Company’s
common stock at a conversion price of $1.25 per share. The Series A Preferred is convertible, either at the option of the holder
or the Company, into shares of the Company’s Series Z Convertible Preferred Stock, and immediately, without any action on
the part of the holder, converted into common stock of the Company. The Series A Preferred is redeemable at the option of the Company
at $1.80 per share prior to conversion. As of March 31, 2016, 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 $647,767,
of which $187,855 is an accrued (but undeclared) dividend as of March 31, 2016. Holders of the Series B Preferred are entitled
to receive, if declared by the board of directors, dividends at a rate of 8% payable in cash or common stock of the Company. The
Series B Preferred is convertible into the Company’s common stock at a conversion price of $1.74 per share. The Series B
Preferred is convertible, either at the option of the holder or the Company, into shares of the Company’s Series Z Convertible
Preferred Stock, and immediately, without any action on the part of the holder, converted into common stock of the Company. The
Series B Preferred is redeemable at the option of the Company at $2.30 per share prior to conversion. As of March 31, 2016, 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 $436,702,
of which $126,702 is an accrued (but undeclared) dividend as of March 31, 2016. Holders of the Series C Preferred are entitled
to receive, if declared by the board of directors, dividends at a rate of 8% payable in cash or common stock of the Company. The
Series C Preferred is convertible into the Company’s common stock at an initial conversion price of $2.27 per share. The
Series C Preferred is convertible, either at the option of the holder or the Company, into shares of the Company’s Series
Z Convertible Preferred Stock, and immediately, without any action on the part of the holder, converted into common stock of the
Company. The Series C Preferred is redeemable at the option of the Company at $2.75 per share prior to conversion. As of March
31, 2016, there have been 28,000 shares of Series C Preferred converted or redeemed. The Series C Preferred does not have voting
rights. Series C Preferred ranks senior to the following capital stock of the Company: None.
The Company had issued
and outstanding at
March 31, 2016
,
372,999 shares of Series
A Preferred, 229,956 shares of Series B Preferred, and 124,000 shares of Series C Preferred, all with a par value of $0.001.
NOTE 17. SUBSEQUENT EVENTS
There were no subsequent
events to disclose.