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EX-31.1 - EXHIBIT 31.1 - Halo Companies, Inc. | halo_10k123109ex311.htm |
EX-31.2 - EXHIBIT 31.2 - Halo Companies, Inc. | halo_10k123109ex312.htm |
EX-32.1 - EXHIBIT 32.1 - Halo Companies, Inc. | halo_10k123109ex321.htm |
EX-21.1 - EXHIBIT 21.1 - Halo Companies, Inc. | halo_10k123109ex211.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_______________
FORM
10-K
_______________
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
HALO
COMPANIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
000-15862
|
13-3018466
|
||
(State
or other jurisdiction of
incorporation
or organization)
|
(Commission
File No.)
|
(IRS
Employee Identification No.)
|
One
Allen Center, Suite 500
700
Central Expressway South
Allen,
Texas 75013
(Address
of Principal Executive Offices)
_______________
214-644-0065
(Issuer
Telephone number)
_______________
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.
Yes
[ ] No [X]
Indicate
by check mark whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
[X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
[ ] No [ ]
-1-
Indicate
by check mark if disclosures of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company filer.
See definition of “accelerated filer” and “large accelerated filer”
in Rule 12b-2 of the Exchange Act (Check one):
Large
Accelerated Filer [ ]
Accelerated Filer [ ]
Non-Accelerated Filer [
] Smaller Reporting Company
[X]
Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act.
Yes
[ ] No [X]
As of
June 30, 2009, the aggregate market value of the registrant’s Common Stock held
by non-affiliates of the issuer was approximately $632,221 based on the last
sales price of the issuer’s Common Stock, as reported by Bloomberg LP Investor
Services. This amount excludes the market value of all shares as to
which any executive officer, director or person known to the registrant to be
the beneficial owner of at least 5% of the registrant’s Common Stock may be
deemed to have sole or shared voting power.
The
number of shares outstanding of the registrant’s Common Stock as of March 10,
2010 was 42,232,437.
DOCUMENTS
INCORPORATED BY REFERENCE
Listed
below are documents incorporated herein by reference and the part of this Report
into which each such document is incorporated:
None
-2-
HALO
COMPANIES, INC.
FORM
10-K
Part
I
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Item
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Item
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Item
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Item
2.
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Part
II
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Item
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PART
III
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Part
IV
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Item
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Certain
statements in this Report are “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this
Report, words such as “may,” “should,” “seek,” “believe,” “expect,”
“anticipate,” “estimate,” “project,” “plan,” “goal,” “intend,” “strategy” and
similar expressions are intended to identify forward-looking statements
regarding events, conditions and financial trends that may affect the Company’s
future plans, operations, business strategies, operating results and financial
position. Forward-looking statements are subject to a number of known
and unknown risks and uncertainties (including the risks contained in the
section of this report entitled “Risk Factors”) that could cause the Company’s
actual results, performance or achievements to differ materially from those
described or implied in the forward-looking statements and its goals and
strategies to not be achieved.
You are
cautioned not to place undue reliance on forward-looking statements, which speak
only as of the date of this Report. The Company does not undertake
any responsibility to publicly update or revise any forward-looking statement or
report.
PART
I
General
Halo
Companies, Inc. (“Halo” or the “Company”) was incorporated under the laws of the
State of Delaware on December 9, 1986. Its principal executive
offices are located at One Allen Center, 700 Central Expy South, Suite 500,
Allen, Texas 75013 and its telephone number is 214-644-0065.
Pursuant
to an Agreement and Plan of Merger dated September 17, 2009 (the “Merger
Agreement”), by and among GVC Venture Corp., a Delaware corporation, GVC Merger
Corp., a Texas corporation and wholly owned subsidiary of the Company and Halo
Group, Inc., a Texas corporation (“HGI”), GVC Merger Corp. merged with and into
HGI, with HGI remaining as the surviving corporation and becoming a subsidiary
of the Company (the “Merger”). The Merger was effective as of
September 30, 2009, upon the filing of a certificate of merger with the Texas
Secretary of State. The Company subsequently filed a restated
Certificate of Incorporation effective December 11, 2009 which, among other
things, effected a name change from GVC Venture Corp. to Halo Companies,
Inc.
For
accounting purposes, the Merger has been accounted for as a reverse acquisition,
with HGI as the accounting acquirer (legal acquiree). On the
effective date of the Merger, HGI’s business became the business of the
Company. 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.
As of
December 31, 2009, after completion of the merger and amending and restating its
Certificate of Incorporation, the Company had outstanding 42,232,437 shares of
Common Stock with a par value of $0.001. Also as of December
31, 2009, the Company was awaiting regulatory approval from the Financial
Industry Regulatory Authority (FINRA) in regards to the following corporate
actions, in compliance with listing requirements of the Over the Counter
Bulletin Board (OTCBB): (a) a reverse split of the Company’s Common Stock, (b)
the above-mentioned name change, and (c) the issuance of a new stock
symbol. The regulatory approval was granted on February 24, 2010 with
an effective date of February 25, 2010. The Company’s new stock
symbol is HALN.
Business
Overview
Halo is a
holding company with subsidiaries operating primarily in the consumer financial
services industry, providing services related to personal debt, credit,
mortgage, real estate, loan modification and insurance.
Products and Services
Halo
works with its clients, who are consumers who may be in various stages of
financial need, to assist in reducing their debt, correcting their credit
profile, securing a home mortgage, buying or selling a residence, providing
proper insurance for their assets, mitigating potential home loss, and educating
them in financial matters. The following outline briefly describes
Halo’s various subsidiaries and the products and services they
offer:
UHalo Group Mortgage,
LLCU Halo
Group Mortgage is a full-service mortgage brokerage institution in the retail
lending environment. Currently licensed in four southwestern states,
Halo Group Mortgage specializes in partnering banks with both current and
potential home owners to obtain mortgages.
UHalo Debt Solutions,
Inc.U Halo
Debt Solutions provides debt settlement services, negotiating and settling
various types of unsecured debt on behalf of its clients. The
Company’s primary goal is to help clients achieve an unsecured debt-free
lifestyle. The Company’s programs provide affordable payment plans,
based upon each client’s personal financial situation. Halo Debt
Solutions provides these services to its clients consistent with industry
standards for debt negotiation and educational support.
UHalo Credit Solutions,
LLCU Halo
Credit Solutions uses proprietary credit repair management software to dispute
inaccuracies and errors in consumer credit reports on behalf of its
clients. Each client exits the program with a guaranteed accurate
credit report, as verified by credit reporting agencies.
UHalo Group Realty,
LLCU Halo
Group Realty, a real estate agency, provides real estate services to home buyers
and sellers, including marketing and listing services and home value
appraisals. Halo realizes that most of its clients have real estate
needs and, because of the existing business relationship with other Halo
subsidiaries, these clients are often willing to utilize the services of Halo
Group Realty.
UHalo Loan Modification
Services, LLCU Halo
Loan Modification Services has developed a process that puts its
clients/borrowers into a systematic and streamlined work-out process to
establish affordable, long-term mortgages.
UHalo Select Insurance
Services, LLCU Halo
Select Insurance Services is a member in Halo Choice Insurance Services, LLC, a
company in which it owns a 49% interest. Halo Select Insurance
Services is currently licensed in Texas and can write additional business in
Arkansas, Louisiana, Mississippi, and Oklahoma through one of its affiliate
companies. Halo Choice Insurance Services represents the lines
of hundreds of insurance companies, including State Auto, Safeco, Travelers,
CNA, Progressive, and Hartford. Halo Choice Insurance Services’
relationships with these insurers give Halo Choice Insurance Services the
opportunity to offer competitively-priced auto, home, life, health, small
business and other insurance products to its clients.
UHalo Benefits,
Inc.U
Formerly named Halo Group Consulting, Inc., Halo Benefits offers to its
clients a variety of financial tools, including debt settlement, foreclosure
avoidance, credit repair, bankruptcy counseling, and financial education through
the product Halo
Care. By marshalling the resources of other Halo subsidiaries,
Halo Benefits offers these financial services to individuals through
associations, insurance companies and employers’ benefit services
groups.
UHalo
Portfolio Advisors, LLCU Halo Portfolio Advisors
leverages the complete Halo business-to-consumer suite of services to market
turnkey solutions to lenders. In today’s economy, lenders are experiencing an
overflow of distressed assets. Many debt servicers are currently
overwhelmed with imposed programs that require more resources such as people,
money and time to be effective. Halo’s technology systems are bundled with
transparency, accountability, efficiency, speed, and flexibility. This unique
strategy directs borrowers into an intelligent, results-driven process that
establishes affordable, long-term mortgages while also achieving an improved
return for lenders and investors, when compared to foreclosure.
UHalo Financial Services,
LLCU Halo
Financial Services recently began operations and is primarily focused in the
consumer debt education, analysis and debt workout program. Halo
Financial Services utilizes cutting edge technology and algorithms to produce
the best scenario determined for each individual. The technology is derived from
thousands of case studies which were evaluated and logged with consideration
based on multiple factors. Factors include state, region, income level, debt
load, type of debt, and many others. This entity is focused on
providing the Company additional opportunities in the market as its business
model takes into consideration the ever increasing regulatory issues surrounding
this consumer market.
Competition
The
consumer financial services industry is highly competitive, and there is
considerable competition from major institutions in Halo’s lines of business,
including national financial institutions, real estate agencies and insurance
companies, as well as specialty consumer financial services companies offering
one or more of the products and services offered by Halo. The
development and commercialization of new products and services to address
consumers’ financial needs is highly competitive, and there will be considerable
competition from major companies seeking to expand their own product and service
offerings. Many of Halo’s competitors have substantially more resources than
Halo, including both financial and technical resources. Additionally,
competition for highly qualified employees is intense.
Intellectual
Property
The Company maintains copyrights on all
of its printed marketing materials, web pages and proprietary
software. Halo’s goal is to preserve the Company’s trade secrets, and
operate without infringing on the proprietary rights of other
parties.
To help protect its proprietary
know-how, which is not patentable, Halo currently relies and will in the future
rely on trade secret protection and confidentiality agreements to protect its
interest. To this end, Halo requires all of its employees,
consultants, advisors and other contractors to enter into confidentiality
agreements that prohibit the disclosure of confidential information and, where
applicable, require disclosure and assignment to Halo of the ideas,
developments, discoveries and inventions important to its business.
Employees
As of December 31, 2009, the Company
had approximately 88 full-time employees. None of the Company’s
employees is covered by a collective bargaining agreement. Halo
believes that it maintains good relationships with its employees.
Legal
Proceedings
The Company is not currently involved
in any material legal proceedings.
Government
Regulation
The services provided by the Company,
through its subsidiaries, are extensively regulated by federal and state
authorities in the United States. Halo believes it is in compliance
with federal and state qualification and registration requirements in order that
it may continue to provide services to its clients consistent with applicable
laws and regulations.
Our limited operating history may
not serve as an adequate basis to judge our future prospects and results of
operations. Halo has a relatively limited operating
history. Our limited operating history and the unpredictability of
the consumer financial industry make it difficult for investors to evaluate our
business. An investor in our securities must consider the risks,
uncertainties and difficulties frequently encountered by companies in rapidly
evolving markets.
We will need additional financing to
implement our business plan. The Company will need additional
financing to fully implement its business plan in a manner that not only
continues to expand already established direct-to-consumer approach, but also
allows the Company to establish a stronger brand name in all the areas which it
operates, including mortgage servicing distressed asset sectors. In
particular, the Company will need substantial additional financing
to:
·
|
effectuate
its business plan and further develop its product and service
lines;
|
·
|
expand
its facilities, human resources, and infrastructure;
and
|
·
|
increase
its marketing efforts and lead
generation.
|
There are
no assurances that additional financing will be available on favorable terms, or
at all. If additional financing is not available, the Company will
need to reduce, defer or cancel development programs, planned initiatives and
overhead expenditures. The failure to adequately fund its capital
requirements could have a material adverse effect on the Company’s business,
financial condition and results of operations. Moreover, the sale of
additional equity securities to raise financing will result in additional
dilution to the Company’s stockholders, and incurring additional indebtedness
could involve the imposition of covenants that restrict the Company
operations.
Our products and services are
subject to changes in applicable laws and regulations. The
Company’s business is particularly subject to changing federal and state laws
and regulations related to the provision of financial services to
consumers. The Company’s continued success depends in part on its
ability to anticipate and respond to these changes, and the Company may not be
able to respond in a timely or commercially appropriate manner. If
the Company fails to adjust its products and services in response to changing
legal and/or regulatory requirements, the ability to deliver its products and
services may be hindered which, in turn, could have a material adverse effect on
the Company’s business, financial condition and results of
operations.
We may continue to encounter
substantial competition in our business. The Company believes
that existing and new competitors will continue to improve their products and
services, as well as introduce new products and services with competitive price
and performance characteristics. The Company expects that it must
continue to innovate, and to invest in product development and productivity
improvements, to compete effectively in the several markets in which the Company
participates. Halo’s competitors could develop a more efficient
product or service or undertake more aggressive and costly marketing campaigns
than those implemented by the Company, which could adversely affect the
Company’s marketing strategies and could have a material adverse effect on the
Company’s business, financial condition and results of operations.
Important
factors affecting the Company’s current ability to compete successfully
include:
·
|
lead
generation and marketing costs;
|
·
|
service
delivery protocols;
|
·
|
branded
name advertising; and
|
·
|
product
and service pricing.
|
In
periods of reduced demand for the Company’s products and services, the Company
can either choose to maintain market share by reducing product service pricing
to meet the competition or maintain its product and service pricing, which would
likely sacrifice market share. Sales and overall profitability would
be reduced in either case. In addition, there can be no assurance
that additional competitors will not enter the Company’s existing markets, or
that the Company will be able to continue to compete successfully against its
competition.
We may not successfully manage our
growth. Our success will depend upon the expansion of our
operations and the effective management of our growth, which will place
significant strain on our management and our administrative, operational and
financial resources. To manage this growth, we may need to expand our
facilities, augment our operational, financial and management systems and hire
and train additional qualified personnel. If we are unable to manage
our growth effectively, our business would be harmed.
We rely on key executive officers,
and their knowledge of our business and technical expertise would be difficult
to replace. We are highly dependent on our executive
officers. If one or more of the Company’s senior executives or other
key personnel are unable or unwilling to continue in their present positions,
the Company may not be able to replace them easily or at all, and the Company’s
business may be disrupted. Competition for senior management
personnel having relevant industry expertise is intense, the pool of qualified
candidates is very limited, and we may not be able to retain the services of our
senior executives or attract and retain high-quality senior executives in the
future. Such failure could have a material adverse effect on the
Company’s business, financial condition and results of operations.
We may never pay dividends to our
common stockholders. The Company currently intends to retain
its future earnings to support operations and to finance expansion and,
therefore, the Company does not anticipate paying any cash dividends in the
foreseeable future other than to the holders of the Series A, Series B, and
Series C preferred stock of HGI, a first-tier subsidiary of the
Company.
The
declaration, payment and amount of any future dividends on common stock will be
at the discretion of the Company’s Board of Directors, and will depend upon,
among other things, earnings, financial condition, capital requirements, level
of indebtedness and other considerations the Board of Directors considers
relevant. There is no assurance that future dividends will be paid on
common stock or, if dividends are paid, the amount thereof.
Our common stock is quoted through
the OTC Bulletin Board, which may have an unfavorable impact on our stock price
and liquidity. The Company’s common stock is quoted on the OTC
Bulletin Board, which is a significantly more limited market than the New York
Stock Exchange, American Stock Exchange or NASDAQ. The trading volume
may be limited by the fact that many major institutional investment funds,
including mutual funds, follow a policy of not investing in Bulletin Board
stocks because they are considered speculative and volatile.
The
trading volume of the Company’s common stock has been and may continue to be
limited and sporadic. As a result, the quoted price for the Company’s
common stock on the OTC Bulletin Board may not necessarily be a reliable
indicator of its fair market value.
Additionally,
the securities of small capitalization companies may trade less frequently and
in more limited volume than those of more established companies. The
market for small capitalization companies is generally volatile, with wide price
fluctuations not necessarily related to the operating performance of such
companies.
Our common stock is subject to price
volatility unrelated to our operations. The market price of
the Company’s common stock could fluctuate substantially due to a variety of
factors, including market perception of the Company’s ability to achieve its
planned growth, the Company’s operating results and that of other companies in
the same industry, trading volume in the Company’s common stock, general
conditions in the economy and the financial markets, or other developments
affecting the Company or its competitors.
Our common stock is classified as a
“penny stock.” Rule 3a51-1 of the Securities Exchange Act of
1934 establishes the definition of a “penny stock”, for purposes relevant to us,
as any equity security that has a minimum bid price of less than $5.00 per share
or with an exercise price of less than $5.00 per share, subject to a limited
number of exceptions which are not available to us. It is likely that
the Company’s common stock will be considered a penny stock for the immediate
foreseeable future.
For any
transaction involving a penny stock, unless exempt, the penny stock rules
require that a broker or dealer approve a person’s account for transactions in
penny stocks and the broker or dealer receive from the investor a written
agreement to the transaction setting forth the identity and quantity of the
penny stock to be purchased. In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must obtain financial
information and investment experience and objectives of the person and make a
reasonable determination that the transactions in penny stocks are suitable for
that person and that the particular person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The
broker or dealer must also provide disclosure to its customers, prior to
executing trades, about the risks of investing in penny stocks in both public
offerings and in secondary trading, the commissions payable to both the
broker-dealer and the registered representative, and the rights and remedies
available to an investor in cases of fraud in penny stock
transactions.
Because
of these regulations, broker-dealers may not wish to furnish the necessary
paperwork and disclosures and/or may encounter difficulties in their attempt to
buy or sell shares of the Company’s common stock, which may in turn affect the
ability of Company stockholders to sell their shares.
Accordingly,
this classification severely and adversely affects any market liquidity for the
Company’s common stock, and subjects the shares to certain risks associated with
trading in penny stocks. These risks include difficulty for investors
in purchasing or disposing of shares, difficulty in obtaining accurate bid and
ask quotations, difficulty in establishing the market value of the shares, and a
lack of securities analyst coverage.
None.
The
Company’s corporate offices are located at 700 Central Expressway South, Suite
500, Allen, Texas 75013, where Halo has 34,524 square feet of office space under
lease. Pursuant to an office lease dated November 12, 2007, as
amended, the Company is required to make monthly lease payments of $32,663, with
an increase in May 2010 to $49,789 and in November 2010 to $60,346 per
month. The lease expires on August 14, 2014.
The
Company is not aware of any legal proceeding that is pending against the Company
or to which any of its property is the subject.
PART
II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES.
Market
Information
The
Company’s Common Stock is currently traded in the over-the-counter market and
quoted under the symbol HALN.OB (formerly, and as of December 31, 2009, under
the symbol GPAX.OB). The following are the high and low sales prices for the
Company’s Common Stock for the periods reflected below, as reported by Bloomberg
LP Investor Services:
UFiscal Year Ended December 31,
2009
|
UHigh
|
ULow
|
First
Quarter
|
$.03
|
$.03
|
Second
Quarter
|
$.08
|
$.02
|
Third
Quarter
|
$.60
|
$.03
|
Fourth
Quarter
|
$.40
|
$.05
|
UFiscal Year Ended December 31,
2008
|
UHigh
|
ULow
|
First
Quarter
|
$.10
|
$.09
|
Second
Quarter
|
$.09
|
$.03
|
Third
Quarter
|
$.09
|
$.09
|
Fourth
Quarter
|
$.09
|
$.03
|
The above
prices reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions.
Holders
The approximate number of stockholders
of record of the Company’s Common Stock on December, 31 2009 was 3,060. The
Company estimates that, in addition, there are approximately 1,700 stockholders
with shares held in “street name.”
Dividends
We intend
to retain future earnings for use in our business and do not anticipate paying
cash dividends in the foreseeable future.
Recent
Sales of Unregistered Securities
During the fiscal year ended December
31, 2009, except as included in our Quarterly Reports on Form 10-Q or in our
Current Reports on Form 8-K, we have not sold any equity securities
not registered under the Securities Act.
Repurchases
of Equity Securities
The Company did not repurchase any of
its equity securities during the year ended December 31, 2009.
Item 6. SELECTED FINANCIAL DATA.
Not applicable.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Forward-Looking
Statements
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to help you understand our
historical results of operations during the periods presented and our financial
condition. This MD&A should be read in conjunction with our financial
statements and the accompanying notes, and contains forward-looking statements
that involve risks and uncertainties. See the section entitled “Forward-Looking
Statements” above.
Company
Overview
The Company, through its subsidiaries,
operates primarily in the consumer financial services industry, providing
services related to personal debt, credit, mortgage, real estate, loan
modification and insurance. The Company works with its clients, who
are consumers who may be in various stages of financial need, to assist in
reducing their debt, correcting their credit profile, securing a home mortgage,
buying or selling a residence, providing proper insurance for their assets,
mitigating potential home loss, and educating them in financial
matters.
Plan of
Operations
It is the intent of the Company to
continue expanding its direct-to-consumer business, both organically, as well as
potentially through acquisition. The Company also plans to increase
its concentration on the business-to-business marketing strategy, specifically
in the mortgage servicing industry. The Company has supplemented its
operating cash-flow with debt and equity financing to support its growth in
marketing and business development. The Company intends to pursue additional
funding through debt, subordinated debt, and equity financing to continue its
expansion and growth efforts. Specific details relating to previous debt and
equity financing can be found in the Liquidity and Capital Resources section
below and within Notes 5, 6, and 7 to the consolidated financial statements
contained in Item 8 of this Annual Report on Form 10-K.
Results
of Operations for the year ended December 31, 2009 Compared to the year ended
December 31, 2008
Revenues
Revenue increased $4,127,460 or 83%
from $4,986,496 for the year ended December 31, 2008 to $9,113,956 for the year
ended December 31, 2009. The increase is primarily due to the growth
of Halo Debt Solutions and this subsidiary’s overall improved market strategy
and ability to provide increasingly effective and efficient debt settlement
services to consumers. Halo Debt Solutions has adopted innovative
strategies to deploy marketing efforts directly to consumers and has developed
close, cooperative relationships with creditors, allowing for substantial
revenue growth.
Operating
Expenses
Sales and
marketing expenses include advertising, marketing and customer lead purchases,
and direct sales costs incurred including appraisals, credit reports, and
contract service commissions. Sales and marketing expenses increased
$608,599 or 78% from $776,790 for the year ended December 31, 2008 to $1,385,389
for the year ended December 31, 2009. This increase is
primarily attributable to the increased overall volume of lead generation
purchases for the year ended December 31, 2009, which has resulted in
substantial growth in revenues noted above.
General and Administrative expenses
increased $1,600,620 or 96% from $1,665,058 for the year ended December 31, 2008
to $3,265,678 for the year ended December 31, 2009. This increase is
primarily attributable to increased costs associated with rent expense to office
a growing workforce and variable general and administrative costs incurred to
grow revenues. Several new subsidiaries began operations during 2009,
including Halo Loan Modification Services, LLC, Halo Select Insurance Services,
LLC, and Halo Choice Insurance Services, LLC, and as such, there have been
increased general and administrative expenses and costs involved to get these
companies operating. Additionally, in association with the Merger, professional
service fees increased significantly for the year ended December 31,
3009. These services include legal, accounting, auditing, business
valuation, compliance, and consulting. A portion of these expenses is
non-recurring and should decrease in future periods.
Salary, wages and benefits increased
$3,695,080 or 140% from $2,630,906 for the year ended December 31, 2008 to
$6,325,986 for the year ended December 31, 2009. Approximately
$2,300,000 of the increase is attributable to increased costs associated with
employee head count and the hiring of more executive and senior management
personnel to accommodate a growing business. The remaining increase
of $1,399,823 is stock option compensation expense for any options that had
vested as of December 31, 2009. Stock option compensation expense was
$0 for the year ended December 31, 2008 compared to $1,399,823 for the year
ended December 31, 2009. As noted in the significant accounting
policies below, the fair value of stock options at the date of grant is
determined via the Black Scholes model and, since the options were exercisable
upon the occurrence of a specified event, the fair value of such options is
recognized in earnings over the vesting period of the options beginning when the
specified event becomes probable of occurrence. Stock compensation
expense is a non-cash expense item.
Although
overall Sales and Marketing expenses and General and Administrative expenses
have increased, the Company continues to improve operational efficiencies,
increase staffing at a modest rate and effectively manage fixed and variable
costs.
Other
Income
For the year ended December 31, 2009,
the Company recognized $75,000 in Other Income related to cash consideration
received by HGI from the Allen Economic Development Corporation (“AEDC”),
whereby the AEDC provided an economic development grant to the
Company. This grant was given to the Company to stimulate business
and commercial activity in the city of Allen, and, in return, Halo agreed to
retain its offices in Allen, TX for the duration of the office lease agreement
discussed previously under Item 2 herein.
The Company experienced additional
losses of $1,772,473 from a net loss of $123,485 for the year ended December 31,
2008 to a net loss of $1,895,958 for the year ended December 31,
2009. This increase in loss is primarily attributable to the
$1,399,823 in stock option compensation expense noted
above. Excluding the $1,399,823 in stock option compensation expense
for the year ended December 31, 2009, the Company had a loss of $496,135 for the
year ended December 31, 2009.
Significant
Accounting Policies
Certain critical accounting policies
affect the more significant judgments and estimates used in the preparation of
the Company’s consolidated financial statements. These policies are
contained in Note 2 to the consolidated financial statements and summarized
here.
URevenue
Recognition and Accounts Receivable
The Company generally recognizes
revenue in the period in which services are provided. HDS recognizes
its revenue over the average service period, defined as the average length of
time it takes to receive a contractually obligated settlement offer from each
creditor, calculated on the entire HDS client base, currently eight
months. The service being provided for each client is evaluated at an
individual creditor level, thus the revenue recognition period estimate is
calculated at an individual creditor level. The estimate is derived
by comparing the weighted average length of time from when the creditor was
enrolled with HDS to the time HDS received a contractually obligated settlement
offer, per creditor, on all accounts since the inception of HDS to the weighted
average length of time all other creditors that are currently enrolled at the
time of the estimate that have not received a contractually obligated settlement
offer. This dual approach ensures a holistic representation of the service
period. There are several factors that can affect the average service period,
including economic conditions, number of clients enrolled, operational
efficiencies, the time of year, and creditor dispositions. Therefore,
the average service period is analyzed on a quarterly basis ensuring an accurate
revenue recognition period estimate. In the event that the average
service period estimate changes, HDS will prospectively accrete the remaining
revenue to be recognized on current clients and recognize all future revenue
pursuant to the new estimate. Provisions for discounts, refunds and
bad debt are provided over the period the related revenue is recognized. Cash
receipts from customers in advance of revenue recognized are recorded as
deferred revenue.
Revenue recognition periods for HDS
customer contracts are shorter than the related payment
terms. Accordingly, HDS accounts receivable is the amount recognized
as revenue less payments received on account. 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 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.
UUse of
Estimates and Assumptions
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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 valuation of equity based
compensation.
UPrinciples
of Consolidation
The
consolidated financial statements of the Company for the year ended December 31,
2009 include the combined financial results of HGI, HCS, HDS, HGM, HGR,
HBI, HLMS, HSIS, HCIS, HFS, and HPA. All significant intercompany
transactions and balances have been eliminated in consolidation.
The
consolidated financial statements of the Company for the year ended December 31,
2008 include the combined financial results of HGI, HCS, HDS, HGM, HGR, and
HBI. All significant intercompany transactions and balances have been
eliminated in consolidation.
UEquity-Based
Compensation
The
Company accounts for equity instruments issued to employees in accordance with
ASC 718 “Compensation-Stock Compensation” (formerly SFAS No. 123 (revised 2004),
Share-Based Payment (“SFAS 123R”)). Under ASC 718, the fair value of
stock options at the date of grant which are contingently exercisable upon the
occurrence of a specified event is recognized in earnings over the vesting
period of the options beginning when the specified events become probable of
occurrence. The specified event (Merger) occurred on September 30,
2009. As of September 30, 2009, there was no active market for the
Company’s common stock and management has not been able to identify a similar
publicly held entity that can be used as a benchmark. Therefore, as a
substitute for volatility, the Company used the historical volatility of the Dow
Jones Small Cap Consumer Finance Index, which is generally representative of the
Company’s size and industry. All transactions in which goods or
services are the consideration received for the issuance of equity instruments
are accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably
measurable. The measurement date of the fair value of the equity
instrument issued is the earlier of the date on which the counterparty’s
performance is complete or the date on which it is probable that performance
will occur.
Liquidity
and Capital Resources
As of December 31, 2009, we had
cash and cash equivalents of $86,090. The decrease in cash and cash
equivalents from December 31, 2008 was due to cash used operating activities of
$1,454,945, cash used in investing activities of $235,421, offset by an increase
in cash provided by financing activities of $1,596,107.
Net cash used in operating activities
was $1,454,945 for the twelve months ended December 31, 2009, compared to
$790,671 net cash used in operating activities for the year ended
December 31, 2008. The net cash used in operating activities for the
year ended December 31, 2009 was due to net loss of $1,740,299, adjusted
primarily by the following: an increase in depreciation and amortization of
$71,052, an increase in bad debt expense of $1,640,659, an increase in
amortization of share-based compensation expense of $1,399,823, an increase in
accounts receivable of $2,758,751, an increase in accounts payable of $136,468,
and an increase in deferred rent of $63,050.
Accounts receivable increased by
$1,118,092 or 104%. The increase was a result of the increase in
gross accounts receivable of $2,758,751 offset by an increase of $1,640,659 in
bad debt expense. Allowance for loan loss is discussed in significant
accounting policies above. The increase in accounts receivable was
primarily related to the increase in growth in overall sales volume of customers
and revenue of Halo Debt Solutions.
The accounts payable increase is
primarily the result of the Company’s increase in general and administrative
costs which has resulted in an increase in monthly vendor commitments and
payables. The Company pro-actively manages the timing and aging of
vendor payables throughout the year. Deferred rent increased from
$123,989 at December 31, 2008 to $187,039 at December 31, 2009, and this
increase was related to executed contractual commitment additional office
space in the Company headquarters during the fiscal year for which the Company
negotiated deferred rental payments.
Net cash used in investing activities
was $235,421 for the year ended December 31, 2009, compared to net cash
used in investing activities of $211,450 for the year ended December 31,
2008. Our investing activities for the year ended December 31, 2009
consisted primarily of purchasing property and equipment of
$269,159. The growth in property and equipment is primarily
attributable to the new communication equipment, computer equipment, and office
furniture purchased throughout the year in connection with the increase in the
Company’s workforce.
Net cash provided by financing
activities was $1,596,107 for the year ended December 31, 2009, compared to
net cash provided by financing activities of $1,128,944 for the year ended
December 31, 2008. Our financing activities for the year ended December
31, 2009 consisted primarily of the proceeds received from the issuance of
preferred stock of $1,182,404, proceeds from notes payable of $641,000, proceeds
from notes payable from related parties of $255,000, offset by $447,127 in
payment of principal on notes payable, related party notes payable, and net
payments on the line of credit. The Company did pay $28,999 in
dividends during the year ended December 31, 2009.
As shown
below, at December 31, 2009, our contractual cash obligations totaled
approximately $4,432,325, all of which consisted of operating lease obligations
and debt principal
repayment.
Payments
due by Period
|
||||||||||||||||||||
Contractual
Obligations
|
Less
than 1 Year
|
1-3
years
|
4-5
years
|
More
than 5
years
|
Total
|
|||||||||||||||
Debt
Obligations
|
$ | 742,185 | $ | 277,602 | $ | 50,386 | $ | 0 | $ | 1,070,173 | ||||||||||
Operating
Lease Obligations
|
$ | 595,386 | $ | 1,554,109 | $ | 1,212,657 | $ | 0 | $ | 3,362,152 | ||||||||||
Total
Contractual Cash Obligations
|
$ | 1,337,571 | $ | 1,831,711 | $ | 1,263,043 | $ | 0 | $ | 4,432,325 |
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the Company will need
additional financing to fund additional material capital expenditures and to
fully implement its business plan in a manner that not only continues to expand
the already established direct-to-consumer approach, but also allows the Company
to establish a stronger brand name in all the areas which it operates, including
mortgage servicing of distressed asset sectors.
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 as a way to supplement the cash flows generated by
operations. The Company has a backlog of fees under contract in
addition to the Company’s accounts receivable balance. The failure to
adequately fund its capital requirements could have a material adverse effect on
the Company’s business, financial condition and results of
operations. Moreover, the sale of additional equity securities to
raise financing will result in additional dilution to the Company’s
stockholders, and incurring additional indebtedness could involve the imposition
of covenants that restrict Company operations. Management is
trying to raise additional capital through sales of common stock as well as
seeking financing from third parties, via both debt and equity, to balance the
Company’s cash requirements and to finance specific capital
projects.
Off
Balance Sheet Transactions and Related Matters
Other than operating leases discussed
in Note 10 to the consolidated financial statements, there are no off-balance
sheet transactions, arrangements, obligations (including contingent
obligations), or other relationships with unconsolidated entities or other
persons that have, or may have, a material effect on financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources of the Company.
Item
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Interest Rate
Risk. Our business is highly leveraged and, accordingly, is
highly sensitive to fluctuations in interest rates. Any significant increase in
interest rates could have a material adverse affect on our financial condition
and ability to continue as a going concern.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
The
financial statements required by this item are included in this report in Part
IV, Item 15 beginning on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
Item
9A(T). CONTROLS AND PROCEDURES.
Disclosure
Controls and Procedures
As of the end of the period covered by
this report, the Company’s principal executive officer and principal financial
officer evaluated the effectiveness of the Company’s “disclosure controls and
procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934. Based on that evaluation, the officers concluded that, as
of the date of the evaluation, the Company’s disclosure controls and procedures
were effective to provide reasonable assurance that information required to be
disclosed in the Company’s periodic filings under the Securities Exchange Act of
1934 is accumulated and communicated to management, including the officers, to
allow timely decisions regarding required disclosure. It should be noted that a
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that it will detect or uncover failures
within the Company to disclose material information otherwise required to be set
forth in the Company’s periodic reports.
Report
of Management on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Our internal control over
financial reporting is a process designed by, or under the supervision of the
Company’s principal executive officer and principal financial officer, to
provide reasonable assurance to the Company’s management and Board of Directors
regarding the reliability of financial reporting and the preparation and fair
presentation of published financial statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). Internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the Company’s transactions and dispositions of the Company’s
assets; (2) provide reasonable assurance that the Company’s transactions are
recorded as necessary to permit preparation of the Company’s financial
statements in accordance with GAAP, and that receipts and expenditures are being
made only in accordance with authorizations of the Company’s management and
directors; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the Company’s financial
statements.
The
Company’ management assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2009. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission in Internal Control – Integrated
Framework. Based on this assessment, the Company’s management
concluded that, as of December 31, 2009, the Company’s internal control over
financial reporting is effective based on those criteria.
This
Annual Report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
Annual Report.
Changes
in Internal Control Over Financial Reporting
During
the period covered by this report, there were no changes in the Company’s
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item 9B. OTHER INFORMATION.
None.
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE.
Directors
and Executive Officers
On
September 30, 2009, the effective date of the Merger, the officers and
directors of the Company prior to the merger resigned, with the exception of
Bernard Zimmerman, who resigned as an officer and remained as a director until
December 31, 2009. Immediately following the resignations of the
former directors, Mr. Zimmerman (in his capacity as the sole remaining director
of GVC Venture Corp.) filled the vacancies resulting from the resignations, by
electing to the Board of Directors each of Brandon C. Thompson, Paul Williams,
Jimmy Mauldin, T. Craig Friesland and Richard G. Morris and the new Board of
Directors elected new executive officers of the Company. On January 1,
2010, Tony Chron, President of the Company, was elected to the Board of
Directors to fill the vacancy left by Bernard Zimmerman’s departure. Set forth
below is certain information regarding the persons who currently serve as
directors and executive officers of the Company.
UName
|
UAge
|
UPositions
with the Company
|
Brandon
C. Thompson
|
30
|
Chairman
of the Board, Chief Executive Officer and Director
|
Paul
Williams
|
53
|
Vice
Chairman of the Board, Chief Financial Officer, Treasurer, Assistant
Secretary and Director
|
Tony
J. Chron
|
55
|
President
and Director
|
Jimmy
Mauldin
|
60
|
Chief
Strategy Officer and Director
|
T.
Craig Friesland
|
38
|
Chief
Legal Officer, Secretary and Director
|
Richard
G. Morris
|
55
|
Director
|
Scott
McGuane
|
47
|
Chief
Marketing & Sales Officer
|
Brandon
C. Thompson
Brandon
C. Thompson, 30, currently serves as Chairman of the Board and Chief Executive
Officer of the Company. Mr. Thompson was a co-founder of HGI and has
served as the Chairman of the Board of Directors and Chief Executive Officer of
HGI since its founding in January 2007. Commencing in March 2003, Mr.
Thompson served as a Loan Officer with Morningstar Mortgage, LLC, a mortgage
company, and eventually acquired the assets of that company through Halo Funding
Group, LLC in February 2005, which was ultimately consolidated into HGI in
January 2007. Following this acquisition, Mr. Thompson founded and has served as
Chairman, President, and Chief Executive Officer of Halo Credit Solutions, LLC,
Halo Debt Solutions, Inc., and Halo Group Consulting, Inc. In January
2007, upon the founding of HGI, Mr. Thompson contributed his interest in these
companies, as well as his interest in Halo Funding Group, LLC (currently named
Halo Group Mortgage, LLC), to HGI. The breadth of Mr. Thompson’s
entrepreneurial and consumer services experience led the Board of Directors to
believe this individual is qualified to serve as a director of the
Company. Mr. Thompson was nominated for the Ernst & Young
Entrepreneur of the Year Award, has served on the advisory board of Independent
Bank of Texas. Mr. Thompson graduated from Abilene Christian University with a
degree in Finance.
Paul
Williams
Paul
Williams, 53, currently serves as Vice Chairman of the Board, Chief Financial
Officer, Treasurer and Assistant Secretary of the Company. Mr.
Williams was a co-founder of HGI, has served as Vice Chairman of the Board,
Chief Financial Officer and Treasurer of HGI since its founding in January 2007
and as Assistant Secretary since late September 2009. Mr. Williams
has over 30 years of business experience primarily in the capital markets and
mergers and acquisitions. Since October 2007, Mr. Williams has also
served as an executive officer for Bison Financial Group, Inc., a business
development company, and as an executive officer for Blue Star Equities, Inc., a
capital markets company, since September 2007. From November 1999 to the
present, Mr. Williams has also served as the managing member of Lincoln America
Investments, LLC, a real estate and equity investment company. From
January 15, 2006 to March 12, 2008, Mr. Williams served as an officer and
director of NeXplore Corporation. In June 2007, NeXplore and its
executive team received an administrative order from the Arkansas Securities
Department, suspending their ability to offer or sell securities in the
state. Mr. Williams has previously served three terms on the Board of
the Texas Economic Development Council in Austin, and presently serves on the
Board of the Chamber of Commerce in Frisco, Texas. Mr. Williams
graduated from Austin College in Sherman, Texas with a double-major in Economics
and Business Administration. He also graduated from the Institute of
Organization Management, affiliated with the U.S. Chamber of
Commerce. The breadth of Mr. Williams’ entrepreneurial and financial
services experience led the Board of Directors to believe this individual is
qualified to serve as a director of the Company.
Tony
J. Chron
Tony J.
Chron, 55, joined the Company in late September 2009 as its
President. Mr. Chron brings to the Company over 33 years of business
experience in both public and private companies. From 1997 to
September 2009, Mr. Chron was a Senior Partner with Trademark Property Company,
a major mixed-use and retail developer, and served in various executive
capacities including, most recently, as Chief Operating Officer and Executive
Vice President. Mr. Chron also served on Trademark Property’s
Executive Committee. From 1986-1992 Mr. Chron served as Associate
Corporate Counsel and Director of Real Estate and Property Management for Pier 1
Imports, Inc., a specialty retailer. In 1992, following Pier 1
Imports’ purchase of Sunbelt Nursery Group, Inc., Mr. Chron served as General
Counsel and Vice-President of Real Estate for Sunbelt, a specialty nursery
retailer, and following the purchase by Frank’s Nursery & Crafts, Inc. of a
49% interest in Sunbelt, as Vice President of Store Development for Frank’s, a
specialty retailer, where he remained until 1994. From 1994 until
1997 Mr. Chron served as Vice President of Real Estate and Real Estate Legal for
Michael Stores, Inc., a specialty retailer. Mr. Chron earned a Doctor
of Jurisprudence degree from South Texas College of Law in 1983. He
also has a BS degree from Abilene Christian University. Mr. Chron has
been a licensed attorney in the State of Texas for more than twenty-six
years. The breadth of Mr. Chron’s professional and legal experience
led the Board of Directors to believe this individual is qualified to serve as a
director of the Company.
Jimmy
Mauldin
Jimmy
Mauldin, 60, currently serves as Chief Strategy Officer of the
Company. Mr. Mauldin was a co-founder of HGI, has served in various
capacities with HGI, including as President, Director, and Chief Strategy
Officer, since its founding in January 2007. Mr. Mauldin joined the
company which is currently named Halo Credit Solutions, LLC in June of
2005. In 2002, Mauldin founded Fund America Now, LLC, a national
fund-raising company, and served as Chairman, President, and Chief Executive
Officer. He also established and serves as a director for the Halo
Institute for Financial Education, a Section 501(c)(3) nonprofit
corporation. The breadth of Mr. Mauldin’s entrepreneurial experience
led the Board of Directors to believe this individual is qualified to serve as a
director of the Company.
T.
Craig Friesland
T. Craig
Friesland, 38, currently serves as Chief Legal Officer and Secretary of the
Company. Mr. Friesland was a co-founder of HGI and has served as a
Director and Chief Legal Officer since its inception in January
2007. He also practices law in his own firm, Law Offices of T. Craig
Friesland, founded in January 2005. Prior to establishing his own
firm, Mr. Friesland practiced law with Haynes and Boone, LLP, one of the largest
law firms in Texas, from September 1998 through December 2004. Mr.
Friesland earned his law degree at Baylor University School of Law in
1998. He also has a Master of Business Administration degree from
Baylor University and a Bachelor of Business Administration degree in Finance
from The University of Texas at Austin. Mr. Friesland was admitted to
the State Bar of Texas in 1998. The breadth of Mr. Friesland’s
professional legal experience led the Board of Directors to believe this
individual is qualified to serve as a director of the Company.
Richard
G. Morris
Richard
G. Morris, 55, currently serves as a Director of the Company. Mr.
Morris was a co-founder of HGI, and has served as a Director since its inception
in January 2007. Prior to joining the Company, he served in various
positions with United Parcel Service from 1976 until March 2002, most recently,
from January 2001 to March 2002 as one of its three District Operations
Managers. In that role, Mr. Morris was responsible for 5,400
employees, a staff of 18 senior managers, a monthly operating budget of
approximately $28 million, and revenues in excess of $35
million. After departing UPS, in July 2002, Mr. Morris became the
principal owner of Rammco Distributors, Incorporated, an equipment rental
company which he still owns. In July 2004, Mr. Morris co-founded Blue
River Development, Inc., a real estate investment and development company, and
is currently the sole owner and operator of this company. In August
2008, Mr. Morris acquired Port City, Inc., a plastics manufacturing company
which Mr. Morris also currently owns and operates. The breadth of Mr.
Morris’ entrepreneurial, managerial and operational experience led the Board of
Directors to believe this individual is qualified to serve as a director of the
Company.
Scott
McGuane
Scott
McGuane, 47, currently serves as Chief Marketing and Sales Officer of the
Company. Mr. McGuane joined the Company in January 2009 as its
President and in late September 2009 ceded that position to Mr. Tony Chron and
assumed the role of Chief Marketing & Sales Officer. Mr. McGuane
brings to the Company more than twenty years of experience in financial
services; retail lending and residential mortgage lending. Prior to
joining the Company, Mr. McGuane served as Executive Vice President and Head of
Retail Lending for Accredited Home Lenders, Inc., a residential mortgage lender,
from July 2008 to January 2009, as Senior Vice President and Director of Retail
Lending for Bear Stearns, a broker dealer, from April 2006 to July 2008, and as
Senior Vice President and Managing Director of Retail Mortgage Lending for
CitiFinancial Mortgage Co., an indirect subsidiary of Citigroup, from November
2002 to April 2006. Prior to joining the Company, Mr. McGuane
provided consulting for strategic planning, mergers and acquisitions, process
reengineering and change management across a wide range of industries, including
start-up ventures, non-profits, banking, telecommunications, energy and public
utilities. He has successfully managed lead system development,
licensing, operational responsibilities, and marketing efforts such as branding,
point-of-sale, branch offices, online, direct mail, and
telemarketing. Mr. McGuane received his Master of Business
Administration at Southern Methodist University and a Bachelor of Science from
Central Washington University.
There are
no family relationships among those serving as executive officers or directors
of the Company, except that Jimmy Mauldin is Mr. Thompson’s father-in-law and
Tony Chron is Mr. Thompson’s uncle. There are no arrangements or
other understandings between any of the Company’s directors or officers or
any other person pursuant to which any new officer or director was or is to be
selected as an officer or director.
The
directors will serve in such capacity until the Company’s next annual
meeting of stockholders. Our Restated Certificate of Incorporation
provides that our Board of Directors shall (exclusive of the number of directors
any series of preferred stock may have the right to elect as a separate class)
consist of a minimum of three and a maximum of twelve directors, as determined
by the Board. Officers serve at the pleasure of the
Board.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), requires officers,
directors and persons who beneficially own more than 10% of a class of our
equity securities registered under the Exchange Act to file reports of ownership
and changes in ownership with the Securities and Exchange
Commission. Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to us during fiscal year 2009 and Forms 5 and
amendments thereto furnished to us with respect to fiscal year 2009, or written
representations that Form 5 was not required for fiscal year 2009, we believe
that all Section 16(a) filing requirements applicable to each of our officers,
directors and greater-than-ten percent stockholders were fulfilled in a timely
manner. We have notified all known beneficial owners of more than 10%
of our common stock of their requirement to file ownership reports with the
Securities and Exchange Commission.
Code
of Ethics
We do not
currently have a Code of Ethics applicable to our principal executive,
financial, and accounting officers.
No
Committees of the Board of Directors; No Financial Expert
We do not
presently have a separately constituted audit committee, compensation committee,
nominating committee, executive committee or any other committees of our Board
of Directors. Nor do we have an audit committee “financial
expert”. At present, our entire Board of Directors acts as our audit
committee. None of the members of our Board of Directors meets the
definition of “audit committee financial expert” as defined in Item 407(d) of
Regulation S-K promulgated by the Securities and Exchange
Commission. We have not retained an audit committee financial expert
because we do not believe that we can do so without undue cost and
expense. Moreover, we believe that the present members of our Board
of Directors, taken as a whole, have sufficient knowledge and experience in
financial affairs to effectively perform their duties.
Item 11. EXECUTIVE COMPENSATION.
Summary
Compensation Table
The
particulars of compensation paid to the following persons during the fiscal
period ended December 31, 2009 and 2008 are set out in the summary compensation
table below:
·
|
our
Chief Executive Officer (Principal Executive Officer);
|
|
·
|
our
Chief Financial Officer (Principal Financial
Officer);
|
·
|
each
of our three most highly compensated executive officers, other than the
Principal Executive Officer and the Principal Financial Officer, who were
serving as executive officers at the end of the fiscal year ended December
31, 2009; and
|
|
·
|
up
to two additional individuals for whom disclosure would have been provided
under the item above but for the fact that the individual was not serving
as our executive officer at the end of the fiscal year ended December 31,
2009;
|
(collectively,
the “ Named Executive Officers
”):
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
Year
|
Salary
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All
Other Compensation
($)
|
Total
($)
|
Brandon
C. Thompson, CEO
|
2009
|
$151,632
|
-0-
|
-0-
|
-0-
|
$151,632
|
Paul
Williams, CFO
|
2009
|
$154,159
|
-0-
|
-0-
|
-0-
|
$154,159
|
Scott
McGuane, CM&SO
|
2009
|
$126,228
|
-0-
|
$625,210
|
-0-
|
$751,438
|
Jimmy
Mauldin, CSO
|
2009
|
$118,872
|
-0-
|
-0-
|
-0-
|
$118,872
|
Tony
J. Chron, President
|
2009
|
$44,167
|
-0-
|
$85,939
|
-0-
|
$130,106
|
Summary
Compensation
The
Company has no employment agreements with any of its Directors or executive
officers.
For the
fiscal year ended December 31, 2009 no outstanding stock options or other
equity-based awards were repriced or otherwise materially
modified. No stock appreciation rights have been granted to any of
our Directors or executive officers and none of our Directors or executive
officers exercised any stock options or stock appreciation
rights. There are no non-equity incentive plan agreements with any of
our Directors or executive officers.
Mr.
McGuane was granted two separate stock option awards in January and August 2009,
for the purchase of 500,000 shares and 250,000 shares,
respectively. Both stock option awards were granted pursuant to the
HGI 2007 Stock Plan and have a standard 2 year vesting period. The
Grant Date Fair Value of the options was $410,140 and $215,070, respectively,
calculated at $.082 and $0.86 per share, respectively. During the
year ended December 31, 2009, options for 125,000 shares vested, creating a
stock compensation expense of $102,535.
Mr. Chron
was granted a stock option award in July, 2009 for the purchase of 100,000
shares. This stock option award was granted pursuant to the HGI 2007
Stock Plan and has a standard 2 year vesting period. The Grant Date
Fair Value of the options was $85,939, calculated at $0.86 per
share. During the year ended December 31, 2009, none of such options
vested and accordingly there was no related stock compensation
expense.
Outstanding
Equity Awards
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
||||||||||
OPTION AWARDS |
STOCK
AWARDS
|
|||||||||
Name
|
Number
of Securities Underlying Unexercised options
(#)
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or
Units
of
Stock
that
have
not Vested
(#)
|
Market
Value
of
Shares
or
Units
of
Stock
that
have
not Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
that
have
not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
other
Rights
that
have
not
Vested
($)
|
|
Brandon
C. Thompson,
CEO
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Paul
Williams, CFO
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Scott
McGuane, CM&SO
|
125,000
|
0
|
625,000
|
$0.94-$1.59
|
01/26/2014
08/21/2014
|
0
|
0
|
0
|
0
|
|
Jimmy
Mauldin, CSO
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Tony
Chron, President
|
0
|
0
|
100,000
|
$1.59
|
07/16/2014
|
0
|
0
|
0
|
0
|
Compensation
of Directors
For the
fiscal year ended December 31, 2009 and prior to the Merger, the Company’s
directors received no compensation for their services as directors. Halo has not
established any standard arrangements pursuant to which directors have been
compensated for their services, although all directors are reimbursed for
out-of-pocket expenses, including those incurred in connection with attendance
at Board of Directors meetings. The Company may establish a
compensation plan for its directors in the future.
Employment
Contracts, Termination of Employment, Change-in-Control
Arrangements
There are
no employment or other contracts or arrangements with officers or Directors.
There are no compensation plans or arrangements, including payments to be made
by us, with respect to our officers, Directors or consultants that would result
from the resignation, retirement or any other termination of such Directors,
officers or consultants. There are no arrangements for Directors, officers,
employees or consultants that would result from a
change-in-control.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The
following table sets forth certain information with respect to the beneficial
ownership, as of March 10, 2010 of the Company’s common stock, which is the
Company’s only outstanding class of voting securities, and the voting power
resulting from such beneficial ownership, by
·
|
each
stockholder known by the Company to be the beneficial owner of more than
5% of the Company’s outstanding common stock;
|
·
|
each
director of the Company;
|
·
|
each
executive officer of the Company; and
|
||
·
|
all
directors and executive officers of the Company as a
group.
|
UBeneficial
Owner (1)
|
Amount
and Nature
of
Beneficial
UOwnership
|
Percent
Uof
Class (3)
|
Brandon
C. Thompson (2)
|
20,551,109
|
48.7%
|
Jimmy
Mauldin(2)
|
9,014,487
|
21.3%
|
Paul
Williams(2)
|
4,500,243
|
10.7%
|
T.
Craig Friesland(2)
|
2,250,122
|
5.3%
|
Richard
G. Morris(2)
|
2,069,447
(4)
|
4.9%
|
Tony
J. Chron (2)
|
1,208,177
(5)
|
2.9%
|
Scott
McGuane (2)
|
312,517
(6)
|
*
|
Directors
and executive officers as a group (seven persons)
|
39,906,102
(7)
|
95.0%
|
(1) We
understand that, except as noted below, each beneficial owner has sole voting
and investment power with respect to all shares attributable to that
owner.
(2) The
address for each such beneficial owner is Suite 500, 700 Central Expressway
South, Allen, Texas 75013.
(3) Asterisk
indicates that the percentage is less than one percent.
(4) Includes
(a) 3,822 shares of the Company’s Series Z preferred stock (172,009 shares of
the Company’s common stock into which such Series Z preferred stock will be
convertible) issuable upon exercise of HGI stock options and (b) 3,194 shares of
the Company’s Series Z preferred stock (143,758 shares of the Company’s common
stock into which such Series Z preferred stock will be convertible) issuable
upon conversion of HGI preferred stock.
(5) Includes
(a) 978 shares of the Company’s Series Z preferred stock (44,002 shares of the
Company’s common stock into which such Series Z preferred stock is convertible)
issuable upon conversion of HGI preferred stock and (b) 556 shares of the
Company’s Series Z preferred stock (25,001 shares of the Company’s common stock
into which such Series Z preferred stock will be convertible) issuable upon
exercise of HGI stock options.
(6) Represents
shares issuable upon exercise of HGI stock options.
(7) Includes
(a) 11,322 shares of the Company’s Series Z preferred stock (509500 shares of
the Company’s common stock into which such Series Z preferred stock will be
convertible) issuable upon exercise of HGI stock options and (b) 3,194 shares of
the Company’s Series Z preferred stock (143,758 shares of the Company’s common
stock into which such Series Z preferred stock will be convertible) issuable
upon conversion of HGI preferred stock.
We are
unaware of any contract or other arrangement the operation of which may at a
subsequent date result in a change of control of our Company.
Securities
authorized for issuance under equity compensation plans
The
following table provides information as of the end of the most recently
completed fiscal year, with respect to Company compensation plans (including
individual compensation arrangements) under which equity securities of the
Company are authorized for issuance.
Equity
Compensation Plan Information
|
|||
A(1)
|
B
|
C
|
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
A)
|
Equity
compensation plans approved by security holders
|
2,827,623(2)
|
$0.66
|
-0-
|
Equity
compensation plans not approved by security holders
|
-0-
|
-0-
|
-0-
|
Total
|
2,827,623
|
$0.66
|
-0-
|
(1)
|
As
a consequence of the Merger, outstanding options as to 1,794,422 of the
Company’s shares vested.
|
(2)
|
Includes
2,827,623 shares subject to stock options under the HGI 2007 Stock
Plan.
|
Following
is a brief description of the material features of each compensation plan under
which equity securities of the Company are authorized for issuance, which was
adopted without the approval of the Company security holders:
Prior to
the Merger, HGI granted stock options to certain employees and contractors
under the HGI 2007 Stock Plan. Pursuant to the terms of the
Merger and the terms of the HGI 2007 Stock Plan, the Company’s common stock will
be issued upon the exercise of the HGI stock options. At December 31,
2009, pursuant to the terms of the Merger Agreement, all options available for
issuance under the HGI 2007 Stock Plan have been forfeited and consequently the
Company has no additional shares subject to options or stock purchase rights
available for issuance under the HGI 2007 Stock Plan. Currently
outstanding options under the 2007 Stock Plan vest over a period no greater than
two years, are contingently exercisable upon the occurrence of specified events
as defined by the option agreements, and expire upon termination of employment
or five years from the date of grant.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
Transactions
with Related Persons, Promoters and Certain Control Persons
Since the beginning of the fiscal year
January 1, 2009 and except as disclosed below, none of the following persons has
had any direct or indirect material interest in any transaction to which the
Company was or is a party, or in any proposed transaction to which
the Company proposes to be a party:
·
|
any
director or officer of the Company;
|
·
|
any
proposed director of officer of the
Company;
|
·
|
any
person who beneficially owns, directly or indirectly, shares carrying more
than 5% of the voting rights attached to the Company’s common stock;
or
|
·
|
any
member of the immediate family of any of the foregoing persons (including
a spouse, parents, children, siblings, and
in-laws).
|
The
Company is indebted to Brandon C. Thompson, Chairman of the Board of Directors,
Chief Executive Officer and a director of the Company, in the aggregate amount
of $209,000, which amount is evidenced by promissory notes in the original
principal amounts of $149,000, $40,000 and $20,000,
respectively. Each of such notes carries an interest rate of
8%. As of December 31, 2009, an aggregate amount of $209,000 was
outstanding on these notes. The aggregate amount of interest paid by
the Company on this indebtedness during the fiscal year ended December 31, 2009
was $21,150.
The
Company is indebted to Jimmy Mauldin, Chief Strategy Officer and a director of
Halo, in the aggregate amount of $149,000, which amount is evidenced by
promissory notes in the original principal amounts of $99,000, $15,000, $20,000
and $15,000, respectively. Each of such notes carries an interest
rate of 8% with the exception of the last $15,000 note which carries an interest
rate of 0.71%. As of December 31, 2009, an aggregate amount of
$134,000 was outstanding on these notes. The aggregate amount of
interest paid by the Company on this indebtedness during the fiscal year ended
December 31, 2009 was $5,570.
Director
Independence; Board Leadership Structure
The
Company’s common stock is quoted through the OTC Bulletin Board
System. For purposes of determining whether members of the Company’s
Board of Directors are “independent,” the Company’s Board utilizes the standards
set forth in the NASDAQ Stock Market Marketplace Rules. At present,
the Company’s entire Board serves as its Audit, Compensation and Nominating
Committees. The Company’s Board of Directors has determined that, of
the Company’s present directors, Richard G. Morris, constituting one of the six
members of the Board, is an “independent director,” as defined under NASDAQ’s
Marketplace Rules, for purposes of qualifying as independent members of the
Board and an Audit, Compensation and Nominating Committee of the Board, but that
Brandon C. Thompson, Paul Williams, Jimmy Mauldin, Tony J. Chron, and T. Craig
Friesland are not “independent directors” since they serve as executive officers
of the Company. In reaching its conclusion, the Board determined that
Mr. Morris does not have a relationship with the Company that, in the Board’s
opinion, would interfere with his exercise of independent judgment in carrying
out the responsibilities of a director, nor does Mr. Morris have any of the
specific relationships set forth in NASDAQ’s Marketplace Rules that would
disqualify him from being considered an independent director.
Since the
effective date of the Merger, the Company has not changed the structure of its
Board of Directors and currently, Mr. Brandon C. Thompson serves as both
Chairman of the Board and Chief Executive Officer. As noted above,
Mr. Richard G. Morris is the sole independent director and, as a recent addition
to the Board of Directors, Mr. Morris has not taken on any supplemental role in
his capacity as director. It is anticipated that additional
independent directors will be added to the Board, however, the Company’s Board
of Directors has not set a timetable for such action.
In light
of the recent change in the Company’s business (following the Merger), the
Company’s Board of Directors is of the view that the current leadership
structure is suitable for the Company at its present stage of development, and
that the interests of the Company are best served by the combination of the
roles of Chairman of the Board and Chief Executive Officer.
As a
matter of regular practice, and as part of its oversight function, the Company’s
Board of Directors undertakes a review of the significant risks in respect of
the Company’s business. Such review is conducted in concert with the
Company’s in-house legal staff, and is supplemented as necessary by outside
professionals with expertise in substantive areas germane to the Company’s
business. With the Company’s current governance structure, the
Company’s Board of Directors and senior executives are, by and large, the same
individuals, and consequently, there is not a significant division of oversight
and operational responsibilities in managing the material risks facing the
Company.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
following information summarizes the fees billed to us by Montgomery Coscia
Greilich LLP for professional services rendered for the fiscal year ended
December 31, 2009 and by KBA Group LLP for services rendered for the fiscal year
ended December 31, 2008.
UAudit
FeesU . Fees billed for
audit services by Montgomery Coscia Greilich L.L.P. were $33,937 in fiscal year
2009. Fees billed for audit services by KBA Group LLP were $35,000 in fiscal
year 2009 related to the audit for the year ended December 31, 2008. Audit fees
include fees associated with the annual audit and the reviews of the Company’s
quarterly reports on Form 10-Q, and other SEC filings.
UAudit-Related
FeesU . The Company did not
pay any audit-related service fees to Montgomery Coscia Greilich L.L.P. or KBA
Group LLP, other than the fees described above, for services rendered during
fiscal year 2009 or 2008.
UTax
FeesU . Fees billed for tax
compliance by Montgomery Coscia Greilich L.L.P. were $6,896 in fiscal year
2009. The Company did not pay and tax fees to KBA Group LLP for
services rendered during fiscal year 2009 or 2008.
UAll
Other FeesU . Other Fees billed by
Montgomery Coscia Greilich L.L.P. were $2,286 in fiscal year
2009. The Company was not billed for fees for any other services by
KBA Group LLP not described above in fiscal year 2009 or 2008.
Consistent
with SEC policies regarding auditor independence, the audit committee has
responsibility for appointing, setting compensation, approving and overseeing
the work of the independent auditor. In recognition of this
responsibility, the audit committee pre-approves all audit and permissible
non-audit services provided by the independent auditor. The Board of
Directors serves as the audit committee for the Company.
PART
IV
Item 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
(a)
Financial Statements and financial statement schedules
(1) and (2)
The financial statements and financial statement schedules required to be filed
as part of this report are set forth in Item 8 of Part II of this
report.
(3) Exhibits.
See Item 15(b) below.
(b)
Exhibits required by Item 601 of Regulation S-K
Exhibit No. | Description | |
2.1 | Agreement and Plan of Merger dated as of September 17, 2009, by and among Halo Group, Inc., GVC Venture Corp. and GVC Merger Corp. (filed as Exhibit 2.1 to Form 8-K filed with the Commission on September 17, 2009, and incorporated herein by reference). | |
3.1 | Restated Certificate of Incorporation of GVC Venture Corp. changing the name of the Company to Halo Companies, Inc., filed with the Secretary of State of the State of Delaware on December 11, 2009 (filed as Exhibit 3.1 to Form 8-K filed with the Commission on December 15, 2009, and incorporated herein by reference). | |
3.2 | Amendment to Restated Certificate of Incorporation of Halo Companies, Inc., filed with the Secretary of State of the State of Delaware on December 11, 2009 (filed as Exhibit 3.2 to Form 8-K filed with the Commission on December 15, 2009, and incorporated herein by reference). | |
3.3 | Amended By-Laws of Halo Companies, Inc., as amended through December 11, 2009 (filed as Exhibit 3.3 to Form 8-K filed with the Commission on December 15, 2009, and incorporated herein by reference). | |
21.1 | List of subsidiaries | |
31.1 | Sarbanes-Oxley Section 302(a) Certification of Brandon C. Thompson | |
31.2 | Sarbanes-Oxley Section 302(a) Certification of Paul Williams | |
32.1 | Sarbanes-Oxley Section 906 Certifications |
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date:
March 24, 2010
|
By:
|
/s/
Brandon Cade Thompson
|
Brandon
Cade Thompson
|
||
Chief
Executive Officer
|
||
(Principal
Executive Officer)
|
||
Date:
March 24, 2010
|
By:
|
/s/
Paul Williams
|
Paul
Williams
|
||
Chief
Financial Officer
|
||
(Principal
Financial Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature | CCapacity | Date |
/s/ Brandon Cade ThompsonU | ||
Brandon Cade Thompson | Chairman, CEO, Director | March 24, 2010 |
/s/ Paul Williams | ||
Paul Williams | Vice Chairman, CFO, Director | March 24, 2010 |
/s/ Tony ChronU | ||
Tony Chron | President, Director | March 24, 2010 |
/s/ Jimmy Mauldin | ||
Jimmy Mauldin | Chief Strategy Officer, Director | March 24, 2010 |
/s/ T Craig Friesland | ||
T Craig Friesland | Chief Legal Officer, Director | March 24, 2010 |
/s/ Richard Morris | ||
Richard Morris | Director | March 24, 2010 |
UU
-27-
HALO
COMPANIES, INC.
DECEMBER
31, 2009
The
following consolidated financial statements of the Company are contained in this
Report on the pages indicated:
F-2
|
|
Report of Independent Certified Public Accountants |
F-3
|
Consolidated
Financial Statements:
|
|
F-4
|
|
F-5
|
|
F-6
|
|
F-7
|
|
F-8
|
To the
Board of Directors and
Stockholders
of Halo Companies, Inc.
We have
audited the accompanying consolidated balance sheet of Halo Companies, Inc. as
of December 31, 2009, and the related consolidated statements of operations,
changes in shareholders’ equity and cash flows for the year then ended.
Halo Companies, Inc. management is responsible for these financial statements.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Halo Companies, Inc. as of December
31, 2009, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying financial statements have been prepared assuming Halo Companies,
Inc. will continue as a going concern. As discussed in Note 3 to the
financial statements, Halo Companies, Inc. has incurred losses since its
inception and has not yet established profitable operations. These factors raise
substantial doubt about the ability of the Company to continue as a going
concern. Management’s plans in regards to these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/s/ MONTGOMERY COSCIA
GREILICH LLP
Montgomery
Coscia Greilich LLP
Plano,
Texas
March 24,
2010
To the
Shareholders of
Halo
Group, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheet of Halo Group, Inc. and
Subsidiaries (the “Company”) as of December 31, 2008 and the related
consolidated statements of operations, changes in shareholders’ equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America.
Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in material respects, the financial position of Halo Group, Inc. and
Subsidiaries as of December 31, 2008 and the results of its operations and cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/
KBA GROUP LLP
KBA Group
LLP
Dallas,
Texas
March 24,
2009
Halo
Companies, Inc. and Subsidiaries
December
31, 2009
|
December
31, 2008
|
|||||||
ASSETS | ||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 86,090 | $ | 180,349 | ||||
Restricted
Cash
|
193,130 | 250,842 | ||||||
Trade
accounts receivable, net of allowance for doubtful
|
||||||||
accounts
of $207,074 and $90,767, respectively
|
2,194,068 | 1,075,976 | ||||||
Prepaid
expenses and other assets
|
180,974 | 33,608 | ||||||
Total
current assets
|
2,654,262 | 1,540,775 | ||||||
PROPERTY,
EQUIPMENT AND SOFTWARE, net
|
420,578 | 222,471 | ||||||
DEPOSITS
|
32,664 | 32,664 | ||||||
TOTAL
ASSETS
|
3,107,504 | 1,795,910 | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT
LIABILITIES
|
||||||||
Lines
of credit
|
$ | 250,000 | $ | 373,300 | ||||
Accounts
payable
|
141,796 | 48,264 | ||||||
Accrued
liabilities (including $30,499 and
|
||||||||
$31,113
to related parties, respectively)
|
259,462 | 184,421 | ||||||
Dividends
payable
|
- | 6,870 | ||||||
Deferred
revenue
|
36,840 | 23,584 | ||||||
Amounts
due to related party
|
- | 6,171 | ||||||
Current
portion of notes payable to related parties
|
494,615 | 498,000 | ||||||
Current
portion of notes payable
|
247,570 | - | ||||||
Total
current liabilities
|
1,430,283 | 1,140,610 | ||||||
NOTES
PAYABLE, LESS CURRENT PORTION
|
281,847 | - | ||||||
NOTES PAYABLE TO RELATED PARTY, LESS CURRENT PORTION | 46,141 | - | ||||||
DEFERRED
RENT
|
187,039 | 123,989 | ||||||
Total
liabilities
|
1,945,310 | 1,264,599 | ||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Series
Z Convertible Preferred Stock, par value $0.01 per share; 103,219
shares
|
||||||||
authorized;
0 shares issued and outstanding at December 31, 2009
|
- | - | ||||||
Preferred
Stock, par value $0.001 per share; 896,781 shares
|
||||||||
authorized;
0 shares issued and outstanding at December 31, 2009
|
- | - | ||||||
Halo
Group, Inc. Preferred stock, par value $0.001 per share; 2,000,000 shares
authorized
|
||||||||
Series
A Convertible Preferred Stock;
|
||||||||
500,000
shares issued and outstanding at December 31, 2009
|
||||||||
liquidation
preference of $771,145
|
500 | 500 | ||||||
Series
B Convertible Preferred Stock;
|
||||||||
500,000
shares issued and outstanding at December 31, 2009
|
||||||||
liquidation
preference of $1,014,523
|
500 | 90 | ||||||
Series
C Convertible Preferred Stock;
|
||||||||
152,000
shares issued and outstanding at December 31, 2009
|
||||||||
liquidation
preference of $380,000
|
152 | - | ||||||
Common
stock, par value $0.001 per share; 375,000,000 and
45,000,000
|
||||||||
shares
authorized; 42,232,437 and 40,056,000 shares issued and
|
||||||||
outstanding
at December 31, 2009 and 2008, respectively
|
42,232 | 40,056 | ||||||
Additional
paid-in capital
|
3,839,952 | 1,265,738 | ||||||
Accumulated
deficit
|
(2,671,031 | ) | (775,073 | ) | ||||
Total
shareholders' equity
|
1,212,305 | 531,311 | ||||||
NONCONTROLLING
INTEREST
|
(50,111 | ) | - | |||||
Total
shareholders' equity
|
1,162,194 | 531,311 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 3,107,504 | $ | 1,795,910 | ||||
The accompanying notes are an integral part of these consolidated financial statements. |
Halo
Companies, Inc. and Subsidiaries
For
the Year Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
REVENUE
(including $0 and $7,500 from related parties,
respectively)
|
$ | 9,113,956 | $ | 4,986,496 | ||||
OPERATING
EXPENSES
|
||||||||
Sales
and marketing expenses
|
1,385,389 | 776,790 | ||||||
General
and administrative expenses (including $69,625 and
|
||||||||
$91,178
to related parties, respectively)
|
3,265,678 | 1,665,058 | ||||||
Salary,
wages, and benefits (including $1,399,823 and $0
|
||||||||
of
stock-based compensation)
|
6,325,986 | 2,630,906 | ||||||
Total
operating expenses
|
10,977,053 | 5,072,754 | ||||||
OPERATING
LOSS
|
(1,863,097 | ) | (86,258 | ) | ||||
OTHER
INCOME (EXPENSE)
|
||||||||
Other
income
|
74,577 | - | ||||||
Interest
expense (including $50,088 and $35,787
|
||||||||
to
related parties, respectively)
|
(91,167 | ) | (37,227 | ) | ||||
Net
loss from operations, before income tax provision
|
(1,879,687 | ) | (123,485 | ) | ||||
INCOME
TAX PROVISION
|
66,382 | - | ||||||
NET
LOSS
|
(1,946,069 | ) | (123,485 | ) | ||||
Loss
attributable to the noncontrolling interest
|
50,111 | - | ||||||
NET
LOSS ATTRIBUTABLE TO HALO COMPANIES, INC.
|
$ | (1,895,958 | ) | $ | (123,485 | ) | ||
Earning
per share:
|
||||||||
Basic
& Diluted
|
$ | (0.046 | ) | $ | (0.003 | ) | ||
Weighted
Average Shares Outstanding
|
||||||||
Basic
& Diluted
|
41,144,219 | 40,056,000 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
Halo
Companies, Inc. and Subsidiaries
For the
Years Ended December 31, 2009 and 2008
Halo
Companies, Inc. Common Stock
|
Halo
Companies, Inc. Series Z Convertible Preferred Stock
|
Halo
Group, Inc. Series A Convertible Preferred Stock
|
Halo
Group, Inc. Series B Convertible Preferred Stock
|
Halo
Group, Inc. Series C Convertible Preferred Stock
|
Additional
Paid-in Capital
|
Accumulated
Deficit
|
Noncontrolling
Interest
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
40,056,000 | $ | 40,056 | - | - | 169,335 | $ | 169 | - | $ | - | - | $ | - | $ | 611,046 | $ | (651,588 | ) | $ | - | $ | (317 | ) | ||||||||||||||||||||||||||||||||
Issuance
of Series A Convertible Preferred Stock for
cash
|
- | - | - | - | 330,665 | 331 | - | - | - | - | 495,667 | - | - | 495,998 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of Series B
Convertible Preferred
Stock for cash
|
- | - | - | - | - | - | 87,500 | 88 | - | - | 174,912 | - | - | 175,000 | ||||||||||||||||||||||||||||||||||||||||||
Dividends
declared
|
- | - | - | - | - | - | - | - | - | - | (20,705 | ) | - | - | (20,705 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of Series B
Convertible Preferred
Stock as payment of dividends
|
- | - | - | - | - | - | 2,410 | 2 | - | - | 4,818 | - | - | 4,820 | ||||||||||||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | - | - | - | (123,485 | ) | - | (123,485 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
40,056,000 | 40,056 | - | - | 500,000 | 500 | 89,910 | 90 | - | - | 1,265,738 | (775,073 | ) | - | 531,311 | |||||||||||||||||||||||||||||||||||||||||
Issuance
of Common Stock (FN 12)
|
134,035 | 134 | - | - | - | - | - | - | - | - | 212,982 | - | - | 213,116 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of Series B
Convertible Preferred
Stock for cash
|
- | - | - | - | - | - | 401,202 | 401 | - | - | 802,003 | - | - | 802,404 | ||||||||||||||||||||||||||||||||||||||||||
Issuance
of Series B Convertible Preferred Stock as dividend
reinvestment
|
- | - | - | - | - | - | 8,888 | 9 | - | - | 17,767 | - | - | 17,776 | ||||||||||||||||||||||||||||||||||||||||||
Issuance
of Series C Convertible Preferred Stock for
cash
|
- | - | - | - | - | - | - | - | 152,000 | 152 | 379,848 | - | - | 380,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance
of Common Stock shares as payment of discretionary dividend (FN
12)
|
165,094 | 165 | - | - | - | - | - | - | - | - | (165 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||
Dividends
declared
|
- | - | - | - | - | - | - | - | - | - | (39,905 | ) | - | - | (39,905 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of Halo
Companies, Inc. Common
Stock
pursuant to the merger agreement (FN
12) |
1,877,308 | 1,877 | - | - | - | - | - | - | - | - | (198,139 | ) | - | - | (196,262 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based
compensation expense
|
- | - | - | - | - | - | - | - | - | - | 1,399,823 | - | - | 1,399,823 | ||||||||||||||||||||||||||||||||||||||||||
Net
loss attributable to Halo Companies, Inc.
|
- | - | - | - | - | - | - | - | - | - | - | (1,895,958 | ) | - | (1,895,958 | ) | ||||||||||||||||||||||||||||||||||||||||
Allocation
of loss to noncontrolling interest
|
- | - | - | - | - | - | - | - | - | - | - | - | (50,111 | ) | (50,111 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2009
|
42,232,437 | $ | 42,232 | - | $ | - | 500,000 | $ | 500 | 500,000 | $ | 500 | 152,000 | $ | 152 | $ | 3,839,952 | $ | (2,671,031 | ) | $ | (50,111 | ) | $ | 1,162,194 | |||||||||||||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
Halo
Companies, Inc. and Subsidiaries
For
the Year Ended
|
||||||||
December
31, 2009
|
December
31, 2008
|
|||||||
CASH
FLOWS FROM OPERATIONS
|
||||||||
Net
loss
|
$ | (1,895,958 | ) | $ | (123,485 | ) | ||
Adjustments
to reconcile net income to net cash
|
||||||||
used
in operating activities
|
||||||||
Depreciation
and amortization
|
71,052 | 45,734 | ||||||
Bad
debt expense
|
1,640,659 | 558,715 | ||||||
Stock
based compensation
|
1,399,823 | - | ||||||
Noncontrolling
interest
|
(50,111 | ) | - | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(2,758,751 | ) | (1,377,276 | ) | ||||
Restricted
cash
|
57,712 | (167,923 | ) | |||||
Prepaid
expenses and other current assets
|
65,750 | (10,625 | ) | |||||
Deposits
|
- | (9,468 | ) | |||||
Accounts
payable
|
(136,468 | ) | 17,489 | |||||
Accrued
liabilities
|
75,041 | 128,595 | ||||||
Deferred
rent
|
63,050 | 123,989 | ||||||
Deferred
revenue
|
13,256 | 23,584 | ||||||
Net
cash used in operating activities
|
(1,454,945 | ) | (790,671 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Cash
acquired at merger
|
33,738 | - | ||||||
Purchases
of property and equipment
|
(269,159 | ) | (211,450 | ) | ||||
Net
cash used in investing activities
|
(235,421 | ) | (211,450 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
received from issuance of preferred stock
|
1,182,404 | 670,998 | ||||||
Net
payments on lines of credit
|
(123,300 | ) | 302,237 | |||||
Proceeds
from notes payable
|
641,000 | - | ||||||
Principal
payments on notes payable
|
(111,583 | ) | (24,369 | ) | ||||
Proceeds
from notes payable to related parties
|
255,000 | 212,000 | ||||||
Principal
payments on notes payable to related parties
|
(212,244 | ) | (22,002 | ) | ||||
Payments
made to related parties
|
(6,171 | ) | (905 | ) | ||||
Dividends
paid to shareholders
|
(28,999 | ) | (9,015 | ) | ||||
Net
cash provided by financing activities
|
1,596,107 | 1,128,944 | ||||||
Net
(decrease) increase in cash and cash equivalents
|
(94,259 | ) | 126,823 | |||||
CASH
AND CASH EQUIVALENTS, beginning of period
|
180,349 | 53,526 | ||||||
CASH
AND CASH EQUIVALENTS, ending of period
|
$ | 86,090 | $ | 180,349 | ||||
SUPPLEMENTAL
INFORMATION
|
||||||||
Cash
paid for interest
|
$ | 89,128 | $ | 36,142 | ||||
Cash
paid for taxes - Texas Franchise Tax
|
$ | 23,568 | $ | - | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
Halo
Companies, Inc.
December 31, 2009
NOTE
1. ORGANIZATION AND RECENT DEVELOPMENTS
UMerger
Halo
Companies, Inc. (“Halo” or the “Company”) was incorporated under the laws of the
State of Delaware on December 9, 1986. Its principal executive
offices are located at One Allen Center, 700 Central Expy South, Suite 500,
Allen, Texas 75013 and its telephone number is 214-644-0065.
Pursuant
to an Agreement and Plan of Merger dated September 17, 2009 (the “Merger
Agreement”), by and among GVC Venture Corp., a Delaware corporation, together
with its subsidiaries, GVC Merger Corp., a Texas corporation and wholly owned
subsidiary of the Company and Halo Group, Inc., a Texas corporation “HGI”), GVC
Merger Corp. merged with and into HGI, with HGI remaining as the surviving
corporation and becoming a subsidiary of the Company (the
“Merger”). The Merger was effective as of September 30, 2009, upon
the filing of a certificate of merger with the Texas Secretary of
State. The Company subsequently filed a restated Certificate of
Incorporation effective December 11, 2009 which, among other things, effected a
name change from GVC Venture Corp. to Halo Companies, Inc.
Pursuant
to the terms of the Merger Agreement, upon the conversion of all HGI preferred
stock and the exercise of all presently outstanding HGI stock options, former
HGI common stockholders, preferred stockholders and option holders own
approximately 44,527,202 shares, or 95.96%, of the Company’s common stock and
pre-Merger Company stockholders own 1,875,101 shares, or 4.04%, of the Company’s
common stock.
Immediately
following the Merger, and pursuant to the terms of the Merger Agreement, the
former officers and directors of the Company resigned with the exception of Mr.
Zimmerman, who, acting in his capacity as the sole director, elected Brandon C.
Thompson, Paul Williams, Jimmy Mauldin, T. Craig Friesland and Richard G. Morris
to the Company’s Board of Directors.
For
accounting purposes, the Merger has been accounted for as a reverse acquisition,
with HGI as the accounting acquirer (legal acquiree). On the
effective date of the Merger, HGI’s business became the business of the
Company. 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.
As of
December 31, 2009, the Company awaited regulatory approval from the Financial
Industry Regulatory Authority (FINRA) in regards to the following corporate
actions, in compliance with listing requirements of the Over the Counter
Bulletin Board (OTCBB) (a) reverse split, (b) name change, and (c) new stock
symbol. The regulatory approval was granted on February 24, 2010 with
an effective date of February 25, 2010. Also on December 31, 2009,
Bernard Zimmerman resigned from the Board of Directors of the
Company. On January 1, 2010, Tony Chron, President of the
Company, was elected to the Board of Directors to fill the vacancy left by
Bernard Zimmerman’s departure.
UNature
of Business
HGI was
formed on January 25, 2007 and through its wholly-owned subsidiaries Halo Debt
Solutions, Inc. (“HDS”), Halo Group Mortgage, LLC (“HGM”), Halo Group Realty,
LLC (“HGR”), Halo Credit Solutions, LLC (“HCS”), Halo Benefits, Inc. (“HBI”),
previously doing business as Halo Group Consulting, Inc. (HGC), Halo Loan
Modification Services, LLC (“HLMS”), Halo Select Insurance Services, LLC
(“HSIS”), Halo Financial Services, LLC (“HFS”), and Halo Portfolio Advisors, LLC
(HPA), provides debt settlement, mortgage brokerage, real estate brokerage,
credit restoration, association benefit services, loan modification services,
insurance brokerage, and financial education to customers throughout the United
States. HPA exists to market all of the Company’s operations into
turnkey solutions for strategic business to business opportunities with major
debt servicers and lenders. The Company’s corporate office is located
in Allen, Texas.
NOTE
2. SIGNIFICANT ACCOUNTING POLICIES
The
accompanying Consolidated Financial Statements as of December 31, 2009 and 2008
include the accounts of the Company and have been prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP). Certain balances have been reclassified in prior period to be
consistent with current year presentation.
URevenue
Recognition and Accounts Receivable
The Company generally recognizes
revenue in the period in which services are provided. HDS recognizes
its revenue over the average service period, defined as the average length of
time it takes to receive a contractually obligated settlement offer from each
creditor, calculated on the entire HDS client base, currently eight
months. The service being provided for each client is evaluated at an
individual creditor level, thus the revenue recognition period estimate is
calculated at an individual creditor level. The estimate is derived
by comparing the weighted average length of time from when the creditor was
enrolled with HDS to the time HDS received a contractually obligated settlement
offer, per creditor, on all accounts since the inception of HDS to the weighted
average length of time all other creditors that are currently enrolled at the
time of the estimate that have not received a contractually obligated settlement
offer. This dual approach ensures a holistic representation of the service
period. There are several factors that can affect the average service period,
including economic conditions, number of clients enrolled, operational
efficiencies, the time of year, and creditor dispositions. Therefore,
the average service period is analyzed on a quarterly basis ensuring an accurate
revenue recognition period estimate. In the event that the average
service period estimate changes, HDS will prospectively reamortize the remaining
revenue to be recognized on current clients and recognize all future revenue
pursuant to the new estimate. Provisions for discounts, refunds and
bad debt are provided over the period the related revenue is recognized. Cash
receipts from customers in advance of revenue recognized are recorded as
deferred revenue.
Revenue recognition periods for HDS
customer contracts are shorter than the related payment
terms. Accordingly, HDS accounts receivable is the amount recognized
as revenue less payments received on account. 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 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.
HDS
receivables represent 99.5% of total accounts receivable at December 31,
2009.
UNet Loss
Per Common Share
Basic net
income per share is computed by dividing net income available to common
shareholders (numerator) by the weighted average number of common shares
outstanding during the period (denominator). Diluted net income per
share is computed using the weighted average number of common shares and
dilutive potential common shares outstanding during the period. At
December 31, 2009 and 2008, there were 3,136,694 and 703,397 shares,
respectively, underlying potentially dilutive convertible preferred stock and
stock options outstanding. These shares were not included in weighted
average shares outstanding for the period ending December 31, 2009 because their
effect is anti-dilutive due to the Company’s reported net loss.
UUse of
Estimates and Assumptions
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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 valuation of equity based
compensation.
U
Principles
of Consolidation
The
consolidated financial statements of the Company for the year ended December 31,
2009 include the combined financial results of HCI, HGI, HCS, HDS, HGM, HGR,
HBI, HLMS, HSIS, HCIS, HFS, and HPA. All significant intercompany
transactions and balances have been eliminated in consolidation.
The
consolidated financial statements of the Company for the year ended December 31,
2008 include the combined financial results of HGI, HCS, HDS, HGM, HGR, and
HBI. All significant intercompany transactions and balances have been
eliminated in consolidation.
UCash and
Cash Equivalents
The
Company considers all liquid investments with a maturity of 90 days or less to
be cash equivalents.
URestricted
Cash
Restricted
cash represents collections from customers that are processed and held by a
merchant bank in the ordinary course of business. Ninety-five percent of these
funds are made available to the Company as determined by the bank, normally
within 7 business days. Five percent of funds collected from
customers by the bank are released to the Company after 90 days, less amounts
withheld to cover potential losses by the bank.
UProperty
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization 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 and amortization 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 operations.
UInternally
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 HGI subsidiaries. The Company accounts for computer software
used in the business in accordance with Accounting Standards Codification (ASC)
350 “Intangibles-Goodwill and Other” (formerly Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use). 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 the preliminary project stage is complete, management
with the relevant authority authorizes and commits to the funding of the
software project, and 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 the significant portion of costs incurred for internally
developed software came from the preliminary project stage and
post-implementation stages; as such, no costs for internally developed software
were capitalized.
ULong-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, 2009 and 2008.
UEquity-Based
Compensation
The
Company accounts for equity instruments issued to employees in accordance with
ASC 718 “Compensation-Stock Compensation” (formerly SFAS No. 123 (revised 2004),
Share-Based Payment (“SFAS 123R”)). Under ASC 718, the fair value of
stock options at the date of grant which are contingently exercisable upon the
occurrence of a specified event is recognized in earnings over the vesting
period of the options beginning when the specified events become probable of
occurrence. The specified event (Merger) occurred on September 30,
2009. As of September 30, 2009, there was no active market for the
Company’s common shares and management has not been able to identify a similar
publicly held entity that can be used as a benchmark. Therefore, as a
substitute for volatility, the Company used the historical volatility of the Dow
Jones Small Cap Consumer Finance Index, which is generally representative of the
Company’s size and industry. There have been no new stock compensation options
awarded during the three months ended December 31, 2009. All
transactions in which goods or services are the consideration received for the
issuance of equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date of the
fair value of the equity instrument issued is the earlier of the date on which
the counterparty’s performance is complete or the date on which it is probable
that performance will occur.
UIncome
Taxes
The
Company accounts for income taxes in accordance with ASC 740 “Income Taxes”
(formerly SFAS No. 109, Accounting for Income Taxes and FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
Statement No. 109” (“FIN 48”)). 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
sheet.
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. If the realization
of these assets is not likely based on these factors, a valuation allowance is
established against the deferred tax assets.
Effective
January 1, 2009, the Company was required to adopt ASC 740-10. ASC 740-10
establishes standards for accounting for uncertainty in income taxes. ASC 740-10
provides several clarifications related to uncertain tax positions. Most
notably, a “more likely-than-not” standard for initial recognition of tax
positions, a presumption of audit detection and a measurement of recognized tax
benefits based on the largest amount that has a greater than 50 percent
likelihood of realization. ASC 740-10 applies a two-step process to determine
the amount of tax benefit to be recognized in the financial statements. First,
the Company must determine whether any amount of the tax benefit may be
recognized. Second, the Company determines how much of the tax benefit should be
recognized (this would only apply to tax positions that qualify for
recognition.) No additional liabilities have been recognized as a result of the
implementation. The Company has not taken a tax position that, if challenged,
would have a material effect on the financial statements or the effective tax
rate during the year ended December 31, 2009.
Accrued
Liabilities
The Company accounted for $259,462 in
accrued liabilities at December 31, 2009. Included in this accrual
was $178,325 in salaries and wages payable, $33,597 in accrued interest, $42,814
in Texas Franchise Tax and $4,726 in other. The Company accounted for
$184,421 in accrued liabilities at December 31, 2008. Included in
this accrual was $145,436 in salaries and wages payable, $31,557 in accrued
interest, and $7,428 in other.
UAADeferred
Rent
The Company’s operating leases for its
office facilities contain free rent periods during the lease
term. For these types of leases the Company recognizes rent expense
on a straight line basis over the minimum lease term and records the difference
between the amounts charged to expense and the amount paid as deferred rent.
UNoncontrolling
Interest
On
January 1, 2009, HSIS entered into a joint venture with another entity to form
Halo Choice Insurance Services, LLC (HCIS). HSIS contributed 49% of
the opening equity balance. Under a qualitative analysis performed in
accordance with ASC 810 “Consolidation” (formerly FIN 46(R): Consolidation of
Variable Interest Entities), HCIS is a variable interest entity and HSIS is the
primary beneficiary as HCIS’s parent company, HGI, acts as the sole manager of
the entity and HSIS, effective January 1, 2010, has the exclusive and
irrevocable right and option to purchase all the membership interests of the
co-joint venture entity for a contractually determined price. Based
on this analysis, HSIS has consolidated HCIS with the non-controlling 51%
interest included in minority interest on the balance sheet and statement of
operations.
Recently
Issued Accounting Pronouncements
In the
third quarter of 2009, the Company adopted the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (ASC). The ASC is the single
official source of authoritative, nongovernmental GAAP, other than guidance
issued by the SEC. The adoption of the ASC did not have any impact on the
financial statements included herein.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-13,
“Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging
Issues Task Force” (“ASU 2009-13”). ASU 2009-13 provides principles
for allocation of consideration among its multiple-elements, allowing more
flexibility in identifying and accounting for separate deliverables under an
arrangement. The ASU introduces an estimated selling price method for valuing
the elements of a bundled arrangement if vendor-specific objective evidence or
third-party evidence of selling price is not available, and significantly
expands related disclosure requirements. This standard is effective on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may
be on a retrospective basis, and early application is permitted. The Company
does not expect the adoption of this statement to have a material effect on its
consolidated financial statements or disclosures.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring
Liabilities at Fair Value,” (“ASU 2009-05”). ASU 2009-05 provides guidance on
measuring the fair value of liabilities and is effective for the first interim
or annual reporting period beginning after its issuance. The Company’s adoption
of ASU 2009-05 did not have an effect on its disclosure of the fair value of its
liabilities.
In June
2009, the FASB issued ASC 105, “Generally Accepted Accounting Principles” This
statement’s objective is to communicate that the FASB Accounting Standards
Codification TM will
become the single official source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. On the effective date of this
Statement, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other nongrandfathered non-SEC accounting
literature not included in the Codification will become nonauthoritative. This
Statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009; and the Company adopted this standard
in the third quarter of 2009. The adoption of ASC 105 did not have a material
effect on the Company’s financial statements.
In June
2009, the FASB issued ASC 810, “Consolidation”. This statement, among other
things, requires a qualitative rather than a quantitative analysis to determine
the primary beneficiary of a variable interest entity ("VIE"); requires
continuous assessments of whether an enterprise is the primary beneficiary of a
VIE; enhances disclosures about an enterprise's involvement with a VIE; and
amends certain guidance for determining whether an entity is a VIE. Under ASC
810, a VIE must be consolidated if the enterprise has both (a) the power to
direct the activities of the VIE that most significantly impact the entity's
economic performance, and (b) the obligation to absorb losses or the right to
receive benefits from the VIE that could potentially be significant to the VIE.
ASC 810 will be effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, and for interim
periods within that first annual reporting period. Earlier
application is prohibited. Management does not expect that the adoption of ASC
810 will have a material effect on the Company’s financial position and results
of operations.
In June
2009, the FASB issued ASC 860, “Transfers and Services”. This statement, and
requires more information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets. ASC 860 also eliminates the
concept of a "qualifying special-purpose entity", changes the requirements for
derecognizing financial assets and requires additional disclosures. ASC 860 must
be applied as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, and for interim periods within that
first annual reporting period. Earlier application is
prohibited. Management does not expect that the adoption of ASC 860
will have a material effect on the Company’s financial position and results of
operations.
In May
2009, the FASB issued ASC 855, “Subsequent Events”. This statement’s objective
is to establish principles and requirements for subsequent events, including (a)
the period after the balance sheet date to evaluate, (b) circumstances that
would be considered a subsequent event and (c) disclosure
requirements. ASC 855 is effective for fiscal years ending after June 15,
2009. The adoption of ASC 855 had no material impact on the Company’s
financial position and results of operations.
In
December 2007, the FASB issued ASC 810 “Consolidation”. ASC 810
requires (a) that noncontrolling (minority) interest be reported as a component
of shareholders' equity; (b) that net income attributable to the parent and to
the noncontrolling interest be separately identified in the consolidated
statement of operations; (c) that changes in a parent's ownership interest while
the parent retains its controlling interest be accounted for as equity
transactions; (d) that any retained noncontrolling equity investment upon the
deconsolidation of the subsidiary be initially measured at fair value; and (e)
that sufficient disclosures are provided that clearly identify and distinguish
between the interest of the parent and the interests of the noncontrolling
owners. ASC 810 is effective for fiscal years beginning after December 15, 2008,
and applied to the Company in the quarter ended September 30, 2009. The Company
revised its disclosures regarding minority interest, but there was no material
effect from the adoption of ASC 810.
NOTE
3. GOING CONCERN
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the Company will need
additional financing to fully implement its business plan in a manner that not
only continues to expand already established direct-to-consumer approach, but
also allows the Company to establish a stronger brand name in all the areas
which it operates, including mortgage servicing distressed asset
sectors.
There are
no assurances that additional financing will be available on favorable terms, or
at all. If additional financing is not available, the Company will
need to reduce, defer or cancel development programs, planned initiatives and
overhead expenditures. The failure to adequately fund its capital
requirements could have a material adverse effect on the Company’s business,
financial condition and results of operations. Moreover, the sale of
additional equity securities to raise financing will result in additional
dilution to the Company’s stockholders, and incurring additional indebtedness
could involve the imposition of covenants that restrict the Company
operations. The Company has incurred an accumulated net loss
$2,671,031 as of December 31, 2009. However, of the accumulated net
loss, $1,399,823 of expense was incurred as stock-based compensation which is a
non-cash expense. Management is trying to raise additional
capital through sales of common stock as well as seeking financing from third
parties. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
NOTE
4. PROPERTY, EQUIPMENT AND SOFTWARE
Property,
equipment and software consist of the following as of December 31, 2009 and
December 31, 2008, respectively:
Computers and purchased software | $ | 155,973 | $ | 111,631 | ||||
Furniture and equipment | 430,755 | 205,938 | ||||||
586,728 | 317,569 | |||||||
Less: accumulated depreciation | (166,150 | ) | (95,098 | ) | ||||
$ | 420,578 | $ | 222,471 |
Depreciation
and amortization totaled $71,052 and $45,734 for the years ended December 31,
2009 and 2008.
NOTE
5. LINES OF CREDIT
On March
6, 2009, the Company entered into a new revolving line of credit (“LOC”)
facility with Legacy Texas Bank (“LTB”) which provides maximum borrowings of
$250,000, subject to a borrowing base, bears interest at the bank’s rate as
defined as prime plus 1% (6% floor) and matures in November
2010. On September 6, 2009, the Company increased the line of credit
$75,000 to a maximum borrowing amount of $325,000, subject to a borrowing base,
with the same interest rate and maturity date of November 2010. The
$325,000 maximum borrowing amount includes a $75,000 letter of credit to the
Company’s business office lessor. The $75,000 letter of credit
expires November 2010. As of December 31, 2009, the Company has
received net advances totaling $250,000 under this new LOC. The LOC
is cross collateralized by all of the Company’s assets.
In
connection with the new LOC, the Company paid off and closed a $300,000 line of
credit in March of 2009 that it held with Independent Bank of
Texas. Outstanding borrowings under the line of credit totaled
$300,000 at December 31, 2008. Additionally, the Company paid off a
$73,000 line of credit in March 2009 it held with Chase Bank. The
balance remained at $0 until August 2009, at which time the line of credit was
closed with Chase Bank. Outstanding borrowings under the line of
credit totaled $73,300 at December 31, 2008.
NOTE
6. NOTES PAYABLE DUE TO RELATED PARTIES
The
Company entered into three promissory notes totaling $397,000 with two board of
directors for the purchase of their member interests in HGM and HCS (the “Board
of Director Notes”). The Board of Director Notes bear interest at a
rate of 8% per annum and matures in February 2011, with the exception of $20,000
in principal amount of the notes, which bears interest at a rate of 8% and
matures in October 2011. All interest and principal is due on demand
by the board of directors, but if no demand is made then upon
maturity. The Board of Director Notes are subordinate to the
LOC and notes payable. As of December 31, 2009, and December 31,
2008, amounts outstanding under the Board of Director Notes totaled $268,000 and
$271,000.
During
2007 the Company entered into two unsecured promissory notes with a director for
working capital advances made to the Company, totaling $60,000 (the “Director
Loans”). The Director Loans bear interest at a rate of 8% per annum,
are due on demand by the director, but if no demand is made then upon maturity
in November 2010. All interest and principal is due upon maturity. As
of December 31, 2009, and December 31, 2008, amounts outstanding under the
Director Loans totaled $60,000 and $60,000.
During
2008 the Company entered into three unsecured promissory notes with two related
parties (the “Related Notes”) for working capital advances made to the Company
in the amounts of $39,000, $50,000 and $100,000. The $39,000 note has
no stated interest rate and matures in October 2010, but is extendable upon
request by the Company. As of December 31, 2009 and December 31,
2008, outstanding principal on this note totaled $0 and $17,000. The $50,000
note bore interest at 10% payable monthly, and originally matured December 2009
but was paid in full in January 2009. Outstanding principal on this
note totaled $50,000 at December 31, 2008. The $100,000 note bore
interest at a flat fee of $15,000, matured in January 2009, and was paid in full
on the maturity date. Outstanding principal on this note totaled
$100,000 at December 31, 2008.
During
January 2009 the Company entered into one unsecured promissory note with a
director for a working capital advance to the Company in the amount of $15,000
(the “Director Note”). The Director Note bears interest at a rate of
8% per annum and matures in January 2011. All interest and principal
is due upon maturity. As of December 31, 2009, the amount outstanding
under the Director Note totaled $15,000.
During
April 2009 the Company entered into one unsecured promissory note with a related
party for a working capital advance to the Company in the amount of $65,000 (the
“Related Party Note”). The Related Party Note bears interest at a
rate of 8% per annum and is a monthly installment note with final maturity of
April 2011. All interest and principal is due upon
maturity. As of December 31, 2009, the amount outstanding under the
Related Party Note totaled $57,756, of which $46,141 is included in long term
liabilities.
During
October 2009 the Company entered into two unsecured promissory notes with
related parties for working capital advances to the Company in the amount of
$60,000 (Related Party Note 2) and $15,000 (Related Party Note
3). The Related Party Note 2 and Related Party Note 3 bear interest
at a rate of 0.71% per annum with original maturity December 26, 2009 and
December 27, 2009, respectively. The maturity date was extended to
April 16, 2010 and April 1, 2010, respectively. All interest and
principal is due upon maturity. As of December 31, 2009, the amount
outstanding under the Related Party Note 2 and Related Party Note 3 totaled
$60,000 and $15,000, respectively.
During
November 2009 the Company entered into one unsecured promissory note with a
related party for a working capital advance to the Company in the amount of
$60,000 (Related Party Note 4). The Related Party Note 4 bears
interest at a rate of 8% per annum with original maturity November 17,
2009. The maturity date was extended to April, 2010. All
interest and principal is due upon maturity. As of December 31, 2009,
the amount outstanding under the Related Party Note 4 totaled
$30,000.
During
December 2009 the Company entered into two unsecured promissory notes with
related parties for working capital advances to the Company in the amount of
$20,000 (Related Party Note 5) and $20,000 (Related Party Note
6). The Related Party Note 5 and Related Party Note 6 bear interest
at a rate of 8% per annum with original maturity January 8, 2010. The
maturity date was extended to April 16, 2010 and April 1, 2010,
respectively. All interest and principal is due upon
maturity. As of December 31, 2009, the amount outstanding under the
Related Party Note 5 and Related Party Note 6 totaled $20,000 and $15,000,
respectively.
The
Company incurred $50,088 and $35,787 of interest expense to directors and other
related parties during the year ended December 31, 2009 and
2008. Accrued interest due to directors and other related parties
totaled $30,499 at December 31, 2009.
NOTE
7. NOTES PAYABLE
On March
6, 2009, the Company entered into a 36 month secured promissory note with Legacy
Texas Bank in the amount of $374,000. The proceeds of this note
payable were used to pay off the two lines of credit as discussed in Note
5. The note bears interest at the Federal Home Loan Bank (FHLB) 2.5
to 3 year rate plus 3.25% (6.16% fixed rate over the term of the note) and
matures March 2012. As of December 31, 2009, the note payable balance
was $286,725, of which $164,116 is included in long term
liabilities.
The note
is collateralized by all of the Company’s assets. Additionally, the
note contains certain affirmative covenants including the debt service coverage
and debt to net worth ratios. At December 31, 2009 the Company was in
violation of the debt service coverage covenant. Subsequent to year end, and
prior to this filing, LTB granted a covenant waiver from December 31, 2009 until
November 2010, at which time the Company expects to be in compliance with all
covenants.
On
April 15, 2009, the Company entered into a 60 month secured promissory note with
Legacy Texas Bank in the amount of $167,000. The proceeds of this
note payable were used to purchase communication equipment. The note
bears interest at 7% per annum with monthly installments and a final maturity in
April 2014. The note is collateralized by all of the Company’s
assets. As of December 31, 2009, the note payable balance was
$147,981, of which $117,731 is included in long term liabilities.
On
November 9, 2009, the Company entered into a 12 month secured promissory note
with Legacy Texas Bank in the amount of $100,000. The proceeds of
this note payable were used to fund working capital. The note bears
interest at 7% per annum with eleven monthly installments and one final balloon
payment due upon maturity in November 2010. The note is
collateralized by all of the Company’s assets. As of December 31,
2009, the note payable balance was $94,711, all of which is included in current
liabilities.
Future
scheduled principal payments as of December 31, 2009 are as
follows:
Years Ending December 31: | ||||
2010 | $ | 247,570 | ||
2011 | 160,741 | |||
2012 | 68,760 | |||
2013 | 37,407 | |||
2014 | 14,939 | |||
Total scheduled principal payments | $ | 529,417 |
NOTE 8. RELATED PARTY
TRANSACTIONS
For the
year ended December 31, 2009 and 2008, the Company incurred legal costs totaling
$12,675 and $12,532, to a law firm owned by a director of the
Company.
For the
year ended December 31, 2009 and 2008, the Company incurred consulting costs
totaling $45,550 and $71,146, to two separate entities owned each by a director
of the Company.
For the
year ended December 31, 2009 and 2008, the Company incurred interest expense to
related parties (See Note 6).
For the
year ended December 31, 2009 and 2008, the Company incurred rent expense
totaling $11,400 and $7,500, to an entity owned by two directors of the
Company.
NOTE
9. INCOME TAXES
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, 2009, the Company
believed it was more likely than not that future tax benefits from net operating
loss carryforwards 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”) carryforwards of approximately $3,500,000 available for federal income
tax purposes, which expire from 2010 to 2029. A portion of the NOLs
relating to GVC Venture Corp. are subject to certain annual
limitations. Certain substantial ownership changes, as defined in
Internal Revenue Code Section 382, limit the utilization of the available NOLs
(the Section 382 Limitation). The Section 382 Limitation is
calculated by multiplying the fair market value of the loss corporation
immediately preceding the change of ownership by the long-term, tax-exempt rate
prescribed by the IRS.
Because of the changes in ownership
that occurred on June 30, 2004 and September 30, 2009, 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.
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, 2009 and 2008:
Years
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Tax
benefit calculated at statutory rate
|
(34.0 | %) | (34.0 | %) | ||||
Permanent
Differences
|
16.9 | 2.6 | ||||||
State
Income Tax
|
2.6 | - | ||||||
Other
|
(10.2 | ) | (43.7 | ) | ||||
Total
|
(24.7 | ) | (75.1 | ) | ||||
Increase
to Valuation Allowance
|
28.6 | 75.1 | ||||||
Provision
for income taxes
|
3.9 | % | - |
Significant
components of the Company’s deferred income tax assets and liabilities as of
December 31, 2009 and 2008 are as follows:
At
December 31, 2009
|
At
December 31, 2008
|
|||||||
Current
deferred tax liability:
|
||||||||
Accrual
to cash adjustment
|
$ | (727,648 | ) | $ | (311,894 | ) | ||
Net
non-current deferred tax assets:
|
||||||||
Property
and equipment
|
(43,187 | ) | (20,694 | ) | ||||
Deferred
rent
|
63,593 | 45,876 | ||||||
Stock
compensation
|
232,091 | - | ||||||
Other
|
1,887 | - | ||||||
Net
operating loss carryforward
|
1,188,119 | 516,215 | ||||||
Net
|
714,855 | 229,503 | ||||||
Less
valuation allowance
|
(714,855 | ) | (229,503 | ) | ||||
Net
deferred taxes
|
$ | – | $ | – |
NOTE
10. COMMITMENTS AND CONTINGENCIES
The
Company leases its office facilities and various equipment under non-cancelable
operating leases which provide for minimum monthly rental
payments. Pursuant to an office lease dated November 12, 2007, as
amended on September 14, 2009, Halo Group is required to make monthly lease
payments of $32,663, with an increase in May 2010 to $49,789 per month and in
November 2010 to $61,199 per month. The lease expires on August 14,
2014. Future minimum rental obligations under leases as of December 31, 2009 are
as follows:
Years Ending December 31: | ||||
2010 | $ | 595,386 | ||
2011 | 779,663 | |||
2012 | 774,446 | |||
2013 | 774,050 | |||
2014 | 438,607 | |||
Total Minimum lease commitments | $ | 3,362,152 |
For
the years ended December 31, 2009 and 2008, the Company incurred rent expense
totaling $362,659 and $254,952.
In
the ordinary course of conducting its business, the Company may be subject to
loss contingencies including possible disputes or
lawsuits. Management believes that the outcome of such contingencies
will not have a material impact on the Company’s financial position or results
of future operations.
NOTE
11. 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 vest over a period no greater than two years, are
contingently exercisable upon the occurrence of a specified event as defined by
the option agreements, and expire upon termination of employment or five years
from the date of grant. During the year ended December
31, 2009, the Company issued 1,464,420 stock options with an exercise price in a
range from $0.94-1.59 per share. No options have been exercised at
December 31, 2009. Total stock options outstanding through December
31, 2009 total 2,827,470. At December 31, 2009, pursuant to the terms
of the Merger agreement, all options available for issuance under the Plan have
been forfeited and consequently the Company has no additional shares subject to
options or stock purchase rights available for issuance under the
Plan.
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, 2007
|
1,032,000 | $ | 0.01 | $ | 0.01 | |||||||
Granted
|
453,250 | 0.01 – .94 | 0.06 | |||||||||
Exercised
|
- | - | - | |||||||||
Canceled
|
(4,000 | ) | 0.01 | 0.01 | ||||||||
Outstanding
at December 31, 2008
|
1,481,250 | $ | 0.01 – 0.94 | $ | 0.06 | |||||||
Granted
|
1,464,420 | .94 – 1.59 | 1.25 | |||||||||
Exercised
|
- | - | - | |||||||||
Canceled
|
(118,200 | ) | 0.01 – 1.59 | 0.44 | ||||||||
Outstanding
at December 31, 2009
|
2,827,470 | $ | 0.01 – 1.59 | $ | 0.66 |
All stock
options granted as of December 31, 2009 are contingently exercisable upon the
occurrence of a specified event as defined in the option agreements. The
specified event (Merger) occurred on September 30, 2009. As such,
equity-based compensation for the contingently exercisable options will be
recognized in earnings from issuance date of the options over the vesting period
of the options effective September 30, 2009 when the Merger became probable of
occurrence. Total compensation cost to be expensed over the vesting
period of stock options is $2,310,910. For the year ended December
31, 2009, stock compensation expense totaled $1,399,823. The
remaining $911,087 in future stock compensation expense is scheduled to be
recognized into earnings over the next 18 to 24 months.
The fair
value of each option granted during the year ended December 31, 2009 and 2008,
was estimated on the date of grant by management using the Black-Scholes option
pricing model with the following assumptions used:
2009 | 2008 | |
Expected volatility | 30 - 38% | 57% |
Risk free rate | 2 - 2.5% | 2% |
Dividend yield | None | None |
Expected life | 5 years | 5 years |
The
weighted average remaining contractual life of the outstanding options at
December 31, 2009 is approximately 3.78 years. The grant date
weighted average fair value of options per share issued during the year ended
December 31, 2009 was $0.84.
NOTE
12. SHAREHOLDERS’ EQUITY
Common
Stock
As a
result of the Merger, the Company issued 305,504,813 common shares to former HGI
shareholders and effectuated a 7.57 to 1 reverse stock split. The
7.57 to 1 reverse stock split resulted in former HGI shareholders retaining
40,355,129 common shares and the Company’s pre-Merger shareholders retaining
1,877,308 common shares of the Company. As a result of the
Merger, the pre-Merger HGI shareholders retained approximately 96% and
the Company’s pre-Merger shareholders retained approximately 4% of the Company’s
common interest on a fully dilutive basis. The effect of the Company
issuing 305,504,813 common shares to the pre-Merger HGI shareholders
and affecting a 7.57 to 1 reverse split of the common shares denominated the
Company shares in to that of HGI common shares pre-Merger. At the
effective time of the Merger, the legal existence of GVC Merger Corp.
ceased.
To
facilitate the Merger, the Company exchanged 896,781 Series Z Convertible
preferred shares for 40,355,129 common shares of HGI pre-Merger which were
subsequently exchanged for 40,355,133 common shares of the Company on December
11, 2009 when the Company amended and restated its then existing Certificate of
Incorporation. The Certificate of Incorporation was amended and
restated to (a) change the Company’s name to Halo Companies, Inc., (b) increase
the number of authorized shares of common stock from 50 million to 375 million,
(c) eliminate the 80% voting threshold requirements for certain corporate
actions and (d) modify certain provisions relating to the terms of
directors.
During
the year ended December 31, 2009, prior to the Merger, the Company issued
134,035 common shares as a prepayment for several consulting service agreements
whereby individuals and/or entities have been engaged to provide consulting
services for a period not to extend more than one year from date of
issuance. The fair value of the consulting services to be provided
was determined using the fair value of the common stock received on the date of
issuance.
On August
27, 2009, prior to the Merger, the Company issued 165,094 common shares as a
discretionary stock dividend to all Preferred Stock A holders and Preferred
Stock B holders prior to the issuance of any Preferred Stock C.
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 $0.001 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 Preferred Stock A, Preferred Stock B, and Preferred Stock C and
outstanding stock options 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. On
December 11, 2009, 896,781 shares of Series Z Convertible Preferred outstanding
immediately following the Merger were automatically converted into shares of the
Company’s common stock leaving 896,781 shares of undesignated preferred stock in
the Company in accordance with the Series Z Convertible Preferred certificate of
designation. As of December 31, 2009, there were no Series Z
Convertible Preferred issued.
The HGI
Series A Convertible Preferred Stock (the “Preferred Stock A”) 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 Preferred Stock
A would be entitled to upon conversion, as defined in the Preferred Stock A
certificate of designation. The liquidation preference was $771,145,
of which $21,145 is an accrued dividend at December 31, 2009. Holders
of the Preferred Stock A 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. Following the Merger, the Preferred Stock A is convertible
into the Company’s common stock at a conversion price of $1.25 per
share. The Preferred Stock A 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 Preferred Stock A is
redeemable at the option of the Company at $1.80 per share prior to
conversion. The Preferred Stock A does not have voting
rights. Preferred Stock A ranks senior to the following capital
stock of the Company: (a) Preferred Stock B and Preferred Stock
C During the year ended December 31, 2009, the Company declared
dividends on its Preferred Stock A totaling $39,905.
During
the year ended December 31, 2009, the Company issued 401,202 shares of HGI
Series B Convertible Preferred Stock (the “Preferred Stock B”), for total cash
consideration of $802,404. An additional 8,888 shares were issued for
the year ended December 31, 2009 as a dividend reinvestment for a total value of
$17,776. The Preferred Stock B 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 or (b) the per
share amount the holders of the Preferred Stock B would be entitled to upon
conversion. The liquidation preference was $1,014,523, of which
$14,523 is an accrued dividend at December 31, 2009. Holders of the
Preferred Stock B 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. Following the Merger, the Preferred Stock B is convertible
into the Company’s common stock a conversion price of $1.74 per
share. The Preferred Stock B 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 Preferred Stock B is
redeemable at the option of the Company at $2.30 per share prior to
conversion. The Preferred Stock B does not have voting
rights. Preferred Stock B ranks senior to the following
capital stock of the Company: (a) the Preferred Stock
C.
During
the year ended December 31, 2009, the Company issued 152,000 shares of HGI
Series C Convertible Preferred Stock (the “Preferred Stock C”), for total cash
consideration of $380,000. The Preferred Stock C 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 or (b) the per share amount the holders of the Preferred Stock C would
be entitled to upon conversion. The liquidation preference was
$380,000 at December 31, 2009. Holders of the Preferred Stock C 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. Following the
Merger, the Preferred Stock C is convertible into the Company’s common stock at
an initial conversion price of $2.27 per share. The Preferred Stock C
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 Preferred Stock C is redeemable at the option of the
Company at $2.75 per share prior to conversion. The Preferred Stock
C does not have voting rights. Preferred
Stock C ranks senior to the following capital stock of the Company: None.
The
Company had outstanding at December 31, 2009, after completion of the Merger and
amending and restating the Certificate of Incorporation 500,000 shares of
Preferred Stock A, 500,000 shares of Preferred Stock B, and 152,000 shares of
Preferred Stock C, all with a par value of $0.001.
NOTE
13. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances, at
times, with financial institutions, which are in excess of amounts insured by
the Federal Deposit Insurance Corporation (FDIC). During 2009, the FDIC insured
cash accounts from $100,000 to $250,000. At December 31, 2009, the
cash balance of $86,090 was less than the $250,000 FDIC insured
amount.
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
14. SUBSEQUENT EVENTS
Subsequent
events have been evaluated through March 24, 2010, which is the date the
financial statements were available to be issued.
On
January 21, 2010, the Company entered into one unsecured promissory note with a
related party for a working capital advance to the Company in the amount of
$230,771. This note includes the refinancing of the $60,000
outstanding Related Party Note 2 and the $20,000 outstanding Related Party Note
5 and the associated $771 of accrued interest from those respective related
party notes. All outstanding balances of Related Party Note 2 and
Related Party Note 5 are considered paid in full effective on the date of this
note. The note bears interest at a rate of 16% per annum with a
maturity date of April 16, 2010. All interest and principal is due
upon maturity.
On
January 5, 2010, the Company entered into one unsecured promissory note with a
related party for a working capital advance to the Company in the amount of
$230,584. This note includes the refinancing of the $30,000
outstanding Related Party Note 4 and the associated $584 of accrued interest
from the respective related party note. All outstanding balances of
the Related Party Note 4 are considered paid in full effective on the date of
this note. The note bears interest at a rate of 16% per annum with a
maturity date of April 5, 2010. All interest and principal is due
upon maturity.
During
January 2010, the Company entered into a $750,000 subordinated debt offering
(Subordinated Offering), which contemplates the issuance of notes paying a 16%
coupon with a 1% origination fee at the time of closing. The maturity
date of such notes is January 31, 2013. Repayment terms of such notes
include interest only payments for the first six months of term through July 31,
2010. 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 holders of notes
issued in the Subordinated Offering are subordinated to any and all liens
granted by the Company to a commercial bank or other qualified financial
institution in connection with lines of credit or other loans extended to the
Company in an amount not to exceed $2,000,000, and liens granted by the Company
in connection with the purchase of furniture, fixtures or
equipment. This includes the Legacy Texas Bank debt disclosed in Note
7. Through March 24, 2010, the date through which subsequent events
have been evaluated, the Company has raised $170,000 in the Subordinated
Offering. As part of the Subordinated Offering, the Company also will
grant 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 $.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 will be
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 be exercisable five (5)
years from January 31, 2010. 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, Company will have a call option to purchase the Warrants for
$200,000. The call option purchase prices assume a cumulative debt
raise of $750,000.
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