Notes To Consolidated Financial Statements
December 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 7800 N. Dallas Parkway, Suite 320, Plano, Texas 75024. On August 1, 2016, the Company
moved from its previous office location 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. The Company is in the process of transitioning
out of the services provided by HAM and HPA to a technology and software related service offering to third parties through the
HGI subsidiary. 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, 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”).
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. HGI receivables are due when invoiced. As of December 31, 2016 and 2015,
the Company’s accounts receivable are made up of the following percentages; HAM at 26% and 47%, HPA at 51% and 53%, and HGI
at 23% 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 December 31, 2016 and December 31, 2015:
|
|
Balance at
Beginning
of Period
|
|
|
Increase in
the
Provision
|
|
|
Accounts
Receivable
Write-offs
|
|
|
Balance at
End of
Period
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
375,665
|
|
|
$
|
–
|
|
|
$
|
375,665
|
|
|
$
|
–
|
|
As of December 31, 2016
and 2015, the Company had no allowance for doubtful accounts.
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, 2016
and 2015, 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, 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 years ended December 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.
Deposits and Other Assets
At December 31, 2016,
deposits and other assets was $28,158 which is a security deposit relating to the sublease agreement for the premises located
at 7800 N. Dallas Parkway, Suite 320, Plano, TX 75024. At December 31, 2015, deposits and other assets was $10,000 to the
senior secured 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, 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 years ended December 31, 2016 or
2015.
The Company incurred no
penalties or interest for taxes for the years ended December 31, 2016 or 2015. The Company is subject to a three-year statute of
limitations by major tax jurisdictions. 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). The
Company does not believe this will have a material impact on our financial results.
On February 25, 2016, the
FASB completed its Leases project by issuing (“ASU 2016-02”),
Leases
(Topic 842). The new guidance establishes
the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases
with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the income statement. To that end, the new guidance (1) results in a more faithful representation of
the rights and obligations arising from leases by requiring lessees to recognize the lease assets and lease liabilities that arise
from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions,
such as information about variable lease payments and options to renew and terminate leases, (2) results in fewer opportunities
for organizations to structure leasing transactions to achieve a particular accounting outcome on the statement of financial position,
improves understanding and comparability of lessees’ financial commitments regardless of the manner they choose to finance
the assets used in their businesses, (3) aligns lessor accounting and sale and leaseback transactions guidance more closely to
comparable guidance in Topic 606, Revenue from Contracts with Customers, and Topic 610, Other Income, (4) provides users of financial
statements with additional information about lessors’ leasing activities and lessors’ exposure to credit and asset
risk as a result of leasing, and (5) clarifies the definition of a lease to address practice issues that were raised about the
previous definition of a lease and to align the concept of control, as it is used in the definition of a lease, more closely with
the control principle in both Topic 606, and Topic 810, Consolidation.
The new guidance is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective
transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. The Company will further study the implications of this statement in
order to evaluate the expected impact on its consolidated financial statements.
In March 2016, the FASB
issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 781), Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"), which amends and simplifies the accounting for share-based payment awards in three areas: (1) income
tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash
flows. For public companies, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. The Company will further study the implications of this statement in order to evaluate the expected
impact on its consolidated financial statements.
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, 2016, the FDIC insured deposit accounts up to $250,000. At December 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 Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
Halo Asset Management
|
|
$
|
38,319
|
|
|
$
|
975,688
|
|
Halo Portfolio Advisors
|
|
|
45,832
|
|
|
|
1,961,859
|
|
Other
|
|
|
1,134,173
|
|
|
|
163,894
|
|
Net Revenue
|
|
$
|
1,218,324
|
|
|
$
|
3,101,441
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Halo Asset Management
|
|
$
|
37,514
|
|
|
$
|
698,287
|
|
Halo Portfolio Advisors
|
|
|
60,897
|
|
|
|
750,385
|
|
Less: Corporate expenses (a)
|
|
|
(1,569,631
|
)
|
|
|
(3,229,662
|
)
|
Operating income (loss):
|
|
$
|
(1,471,220
|
)
|
|
$
|
(1,780,990
|
)
|
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 2016 and 2015, 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 years ended December
31, 2016 and 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
There is substantial doubt
about the Company’s ability to continue as a going concern within the next year and, as such, these financial statements
have been prepared accordingly. The Company has sustained recurring operating losses over the last several years and continues
to have negative operating cash flow. Also, the Company will need to restructure or modify its current liabilities in order to
avoid default including the promissory note that matured in 2016, further discussed in Note 10 below.
To mitigate this concern,
the Company will need to secure additional SaaS licensing or custom development agreements and/or additional financing to fully
implement its business plan, including continued growth and establishment of a successful brand in the technology as a service
industry. Additionally, 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 $15,117,073 as of December 31, 2016. However, of the accumulated deficit, $2,110,748 of expense was incurred
as stock-based compensation, $626,389 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 $3,922,656 total of these non-cash retained earnings reductions represents 26% of the total deficit
balance.
NOTE 6. PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and
software consist of the following as of December 31, 2016 and December 31, 2015, respectively:
Computers and purchased software
|
|
$
|
115,577
|
|
|
$
|
147,800
|
|
Furniture and equipment
|
|
|
214,227
|
|
|
|
203,427
|
|
|
|
|
329,804
|
|
|
|
351,227
|
|
Less: accumulated depreciation
|
|
|
(292,510
|
)
|
|
|
(304,055
|
)
|
|
|
$
|
37,294
|
|
|
$
|
47,172
|
|
Depreciation totaled $22,271
and $23,354 for the year ended December 31, 2016 and 2015, respectively. The Company wrote off $33,816 of fully depreciated assets
for the year ended December 31, 2016. 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 $1,785,338
in accrued liabilities at December 31, 2016. Included in this accrual is $740,669 in accrued interest ($267,339 of this balance
is related to interest on the secured asset promissory note discussed in more detail in Note 12) and $949,187 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 12) and $724,208 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 $209,825 2011
Related Party Note balance is included in current portion of notes payable to related parties as of December 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 December 31, 2020. 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, 2016, the 2011 Consolidated Related Party Note balance was $267,569 all of which is included in the long term 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. As of December 31, 2016, the outstanding balance was $940,476. 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. As of December 31, 2016, the outstanding advance balance was $345,000. 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. As of December 31, 2016, the outstanding advance
balance was $515,000. 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
December 31, 2016, the entire balance of $536,771 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, 2016,
the notes payable to related party balance totaled $2,834,641, $2,567,072 of which is included in current portion of notes payable
to related parties in the consolidated balance sheets. 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 $295,465
and $579,366 of interest expense to directors, officers, and other related parties during the years ended December 31, 2016 and
2015, respectively. Accrued interest due to directors and other related parties totaled $473,189 at December 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 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. On October 10, 2016, the note matured and the Company entered a series of forbearance extension agreements
through December 31, 2016. As of the date of this filing, the Company is in negotiations with the note holder with regard to a
long-term restructuring of the note payable. As of December 31, 2016, the note payable balance was $2,417,096, which includes capitalized
interest of $917,096. As of December 31, 2015, the note payable balance was $2,099,475, which includes capitalized interest of
$599,475.
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, 2016 and 2015, 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, 2016, there were 105,333 warrants outstanding with a derivative liability of $520. As of December
31, 2015, there were 105,333 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 less than $0.01 per share using the following assumptions:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Risk-free rate
|
|
|
.44%
|
|
|
|
.65%
|
|
Expected volatility
|
|
|
429.63%
|
|
|
|
543.97%
|
|
Expected remaining life (in years)
|
|
|
0.08
|
|
|
|
1.00
|
|
Dividend yield
|
|
|
0.00%
|
|
|
|
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 December 31, 2016, the remaining balance of this note totals $65,000, all of which 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.
During June 2016, the Company
entered into a $425,000 subordinated term note. The note pays an 12% coupon rate with a maturity date of June 30, 2017. As part
of the promissory note, the Company was required to pay origination fees and expenses associated with this note agreement in the
amount of $25,500 with the remaining $399,500 in proceeds to be used for general corporate purposes. There are no warrants associated
with this subordinated term note. Repayment terms of the note include interest only payments through December 31, 2016. Thereafter,
level monthly payments of principal and interest are made as calculated on a 36-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 the holder of the note payable discussed in Note 9 above. During July 2016, the note amount was increased by $150,000 with all
other terms remaining the same. As part of principal increase, the Company was required to pay origination fees and expenses associated
with this note agreement in the amount of $9,000 with the remaining $141,000 in proceeds to be used for general corporate purposes.
As of December 31, 2016, the remaining balance of this note totals $575,000, of which $555,500 is included in current portion of
subordinated debt which is net of the accumulated $19,500 in origination fees and expenses.
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, 2016, the entire accrued interest balance
of $267,339 is included in current portion of accrued and other liabilities. 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.
NOTE 13. RELATED PARTY TRANSACTIONS
For the year ended December
31, 2016 and 2015, HAM recognized monthly servicing fee revenue totaling $33,217 and $360,395, respectively, from an entity that
is an affiliate of the Company. Additionally, for the years ended December 31, 2016 and 2015, the Company incurred $0 and $125,000,
respectively, in the write off of a note receivable it invested during the three months ended June 30, 2015 in the same affiliate
of the Company. The write offs are included in general and administrative expenses on the consolidated statements of operations
and discussed further in section Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
below.
For the year ended December
31, 2016 and 2015, the Company incurred interest expense to related parties (See Note 9).
For the year ended December
31, 2016 and 2015 the Company incurred $0 and $20,000, respectively, in expense for business development services to an entity
that is an affiliate of the Company.
For the years ended December
31, 2016 and 2015, the Company incurred $15,000 and $35,000, respectively, in consulting expense 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, 2016 and 2015:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Tax benefit calculated at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Permanent differences
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
State Income tax
|
|
|
(0.3
|
)
|
|
|
(0.4
|
)
|
Total
|
|
|
33.6
|
|
|
|
33.4
|
|
|
|
|
|
|
|
|
|
|
Increase to valuation allowance
|
|
|
(30.6
|
)
|
|
|
(33.9
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(0.5
|
)%
|
|
|
(0.5
|
)%
|
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, 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 $8,700,000 available for federal income tax purposes, which expire from
2024 to 2036. 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, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Net non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
21,576
|
|
|
$
|
18,173
|
|
Capital loss carryover
|
|
|
635,743
|
|
|
|
635,743
|
|
Stock compensation
|
|
|
279,111
|
|
|
|
279,111
|
|
Deferred Compensation
|
|
|
322,724
|
|
|
|
246,231
|
|
Deferred Revenue
|
|
|
–
|
|
|
|
6,800
|
|
Other
|
|
|
8,074
|
|
|
|
1,732
|
|
Net operating loss carry-forward
|
|
|
2,955,330
|
|
|
|
2,584,498
|
|
Net
|
|
|
4,222,558
|
|
|
|
3,772,288
|
|
Less valuation allowance
|
|
|
(4,222,558
|
)
|
|
|
(3,772,288
|
)
|
Net deferred taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
NOTE 15. COMMITMENTS AND CONTINGENCIES
The Company leases its
office facilities under a non-cancelable operating sub-lease which provides for a minimum monthly rental payment. Pursuant to an
office sub-lease dated June 24, 2016 the Company is obligated to make $9,386 monthly cash payments commencing October 1, 2016,
escalating up to $9,704 on March 1, 2017, and again to $10,022 on March 1, 2018 through the termination date of December 31, 2019.
Future minimum rental obligations
as of December 31, 2016 are as follows:
Years Ending December 31:
|
|
|
|
2017
|
|
$
|
115,813
|
|
2018
|
|
|
119,630
|
|
2019
|
|
|
120,267
|
|
2020
|
|
|
–
|
|
Thereafter
|
|
|
–
|
|
Total minimum lease commitments
|
|
$
|
355,710
|
|
For the year ended December
31, 2016 and 2015, the Company incurred facilities rent expense totaling $46,813 and $72,599, respectively.
In the ordinary course
of conducting its business, the Company may be subject to loss contingencies including possible disputes or lawsuits.
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, 2016, 438,300 option shares have been exercised. Total stock options
outstanding as of December 31, 2016, total 170,000. The weighted average remaining contractual life of the outstanding options
at December 31, 2016 is approximately 0.8 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, 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 December 31, 2016
|
|
|
170,000
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
All stock options granted
under the Plan and as of December 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 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, 2016,
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 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 2017. 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 December 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 December 31, 2016, there were 82,508 shares of Series Z Preferred authorized with zero
shares issued and 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, 2016. 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 $840,887, of which $281,388 is an accrued (but undeclared) dividend
as of December 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 December 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 $708,879,
of which $248,967 is an accrued (but undeclared) dividend as of December 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 December 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 $479,090,
of which $169,090 is an accrued (but undeclared) dividend as of December 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 December
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 December 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 18. SUBSEQUENT EVENTS
There were no other subsequent
events to disclose.