Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - Halo Companies, Inc. | halo_10q63010ex32.htm |
| EX-31.1 - EXHIBIT 31.1 - Halo Companies, Inc. | halo_10q63010ex311.htm |
| EX-31.2 - EXHIBIT 31.2 - Halo Companies, Inc. | halo_10q63010ex312.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_______________
FORM
10-Q
_______________
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2010
|
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
HALO
COMPANIES, INC.
(Exact
name of registrant as specified in Charter)
|
Delaware
|
000-15862
|
13-3018466
|
||
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Commission
File No.)
|
(IRS
Employee Identification No.)
|
One
Allen Center, Suite 500
700
Central Expressway South
Allen,
Texas 75013
(Address
of Principal Executive Offices)
_______________
214-644-0065
(Issuer
Telephone number)
_______________
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2)has been subject to such filing requirements for the past 90
days.
Yes
[X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
[ ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company filer.
See definition of “accelerated filer” and “large accelerated filer”
in Rule 12b-2 of the Exchange Act (Check one):
Large
Accelerated Filer [ ]
Accelerated Filer [ ]
Non-Accelerated Filer [ ]
Smaller Reporting Company [X]
Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act.
Yes
[ ] No [X]
State the
number of shares outstanding of each of the issuer’s classes of common equity,
August 1, 2010: 43,795,640 shares of Common Stock, $.001 par
value per share outstanding.
INDEX
PART
I. FINANCIAL INFORMATION
|
Item
1.
|
||
|
3
|
||
|
4
|
||
|
5
|
||
|
6
|
||
|
7-20
|
||
|
Item
2.
|
21-25
|
|
|
Item
3.
|
25
|
|
|
Item
4T.
|
25
|
|
PART
II. OTHER INFORMATION
|
||
|
Item
1.
|
26
|
|
|
Item
1A.
|
26
|
|
|
Item
2.
|
26
|
|
|
Item
3.
|
26
|
|
|
Item
4.
|
26
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|
|
Item
5.
|
26
|
|
|
Item
6.
|
27
|
|
|
27
|
||
Item 1. Financial
Statements
|
Halo
Companies, Inc. and Subsidiaries
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
June
30, 2010
|
December
31, 2009
|
|||||||
|
(unaudited)
|
||||||||
| ASSETS | ||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 24,303 | $ | 86,090 | ||||
|
Restricted
Cash
|
115,440 | 193,130 | ||||||
|
Trade
accounts receivable, net of allowance for doubtful
|
||||||||
|
accounts
of $186,758 and $207,074, respectively
|
2,488,044 | 2,194,068 | ||||||
|
Prepaid
expenses and other assets
|
71,763 | 180,974 | ||||||
|
Total
current assets
|
2,699,550 | 2,654,262 | ||||||
|
PROPERTY,
EQUIPMENT AND SOFTWARE, net
|
391,293 | 420,578 | ||||||
|
INVESTMENTS
IN UNCONSOLIDATED ENTITIES
|
31,617 | |||||||
|
DEPOSITS
AND OTHER ASSETS
|
132,664 | 32,664 | ||||||
|
TOTAL
ASSETS
|
3,255,124 | 3,107,504 | ||||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Lines
of credit
|
$ | 240,000 | $ | 250,000 | ||||
|
Accounts
payable
|
258,075 | 141,796 | ||||||
|
Accrued
liabilities (including $75,828 and
|
||||||||
|
$30,499
to related parties, respectively)
|
248,547 | 259,462 | ||||||
|
Deferred
revenue
|
33,572 | 36,840 | ||||||
|
Current
portion of subordinated debt
|
77,000 | - | ||||||
|
Current
portion of notes payable to related parties
|
282,647 | 494,615 | ||||||
|
Current
portion of notes payable
|
421,951 | 247,570 | ||||||
|
Total
current liabilities
|
1,561,792 | 1,430,283 | ||||||
|
NOTES
PAYABLE, LESS CURRENT PORTION
|
- | 281,847 | ||||||
| NOTES PAYABLE TO RELATED PARTY, LESS CURRENT PORTION | - | 46,141 | ||||||
|
SUBORDINATED
DEBT, LESS CURRENT PORTION
|
297,936 | - | ||||||
|
DERIVATIVE
LIABILITY
|
93,289 | - | ||||||
|
DEFERRED
RENT
|
286,699 | 187,039 | ||||||
|
Total
liabilities
|
2,239,716 | 1,945,310 | ||||||
|
EQUITY
|
||||||||
|
Series
Z Convertible Preferred Stock, par value $0.01 per share; 101,884
shares
|
||||||||
|
authorized;
0 shares issued and outstanding at June 30, 2010
|
- | - | ||||||
|
Preferred
Stock, par value $0.001 per share; 898,116 shares
|
||||||||
|
authorized;
0 shares issued and outstanding at June 30, 2010
|
- | - | ||||||
|
Series
X Convertible Preferred Stock, par value $0.01 per share; 125,000
shares
|
||||||||
|
authorized;
101,777 shares issued and outstanding at June 30, 2010
|
1,018 | - | ||||||
|
liquidation
preference of $1,017,770
|
||||||||
|
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 June 30, 2010
|
||||||||
|
liquidation
preference of $750,000
|
500 | 500 | ||||||
|
Series
B Convertible Preferred Stock;
|
||||||||
|
500,000
shares issued and outstanding at June 30, 2010
|
||||||||
|
liquidation
preference of $1,000,000
|
500 | 500 | ||||||
|
Series
C Convertible Preferred Stock;
|
||||||||
|
152,000
shares issued and outstanding at June 30, 2010
|
||||||||
|
liquidation
preference of $380,000
|
152 | 152 | ||||||
|
Common
stock, par value $0.001 per share; 375,000,000 and
375,000,000
|
||||||||
|
shares
authorized; 43,423,397 and 42,232,437 shares issued and
|
||||||||
|
outstanding
at June 30, 2010 and December 31, 2009, respectively
|
43,372 | 42,232 | ||||||
|
Additional
paid-in capital
|
5,912,199 | 3,839,952 | ||||||
|
Accumulated
deficit
|
(4,872,722 | ) | (2,671,031 | ) | ||||
|
Total
equity
|
1,085,019 |
|
1,212,305 | |||||
|
NONCONTROLLING
INTEREST
|
(69,611 | ) | (50,111 | ) | ||||
|
Total
shareholders' equity
|
1,015,408 |
|
1,162,194 | |||||
|
TOTAL
LIABILITIES AND EQUITY
|
$ | 3,255,124 |
|
$ | 3,107,504 | |||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|||||||
|
Halo
Companies, Inc. and Subsidiaries
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
For
the Three Months Ended
|
For
the Six Months Ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
REVENUE
|
$ | 2,055,272 | $ | 2,494,867 | $ | 4,087,197 | $ | 4,821,893 | ||||||||
|
OPERATING
EXPENSES
|
||||||||||||||||
|
Sales
and marketing expenses
|
409,552 | 306,554 | 821,040 | 631,636 | ||||||||||||
|
General
and administrative expenses (including $17,700, $20,785,
|
||||||||||||||||
|
$35,400,
and $40,075 to related parties, respectively)
|
982,004 | 638,929 | 1,879,402 | 1,227,083 | ||||||||||||
|
Salaries,
wages, and benefits (including $89,308, $0,
|
||||||||||||||||
|
$321,357
and $0 of stock-based compensation)
|
1,297,221 | 1,188,459 | 2,754,344 | 2,304,152 | ||||||||||||
|
Total
operating expenses
|
2,688,777 | 2,133,942 | 5,454,786 | 4,162,871 | ||||||||||||
|
OPERATING
INCOME (LOSS)
|
(633,505 | ) | 360,925 | (1,367,589 | ) | 659,022 | ||||||||||
|
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
|
Income
from unconsolidated entities
|
7,118 | - | 7,118 | - | ||||||||||||
|
Loss
on change in fair value of derivative
|
(12,039 | ) | - | (43,864 | ) | - | ||||||||||
|
Interest
expense (including $26,705, $8,746, $51,932,
|
||||||||||||||||
|
and
$32,616 to related parties, respectively)
|
(60,280 | ) | (18,852 | ) | (105,050 | ) | (49,554 | ) | ||||||||
|
Net
income (loss) from operations, before income tax provision
|
(698,706 | ) | 342,073 | (1,509,385 | ) | 609,468 | ||||||||||
|
INCOME
TAX PROVISION
|
(22,870 | ) | - | (22,870 | ) | - | ||||||||||
|
NET
INCOME (LOSS)
|
(675,836 | ) | 342,073 | (1,486,515 | ) | 609,468 | ||||||||||
|
Loss
attributable to the noncontrolling interest
|
9,375 | 9,121 | 19,500 | 9,121 | ||||||||||||
|
NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
$ | (666,461 | ) | $ | 351,194 | $ | (1,467,015 | ) | $ | 618,589 | ||||||
|
Earning
per share:
|
||||||||||||||||
|
Basic
|
$ | (0.016 | ) | $ | 0.009 | $ | (0.034 | ) | $ | 0.015 | ||||||
|
Diluted
|
$ | (0.016 | ) | $ | 0.009 | $ | (0.034 | ) | $ | 0.015 | ||||||
|
Weighted
Average Shares Outstanding
|
||||||||||||||||
|
Basic
|
42,807,741 | 40,056,000 | 42,802,715 | 40,056,000 | ||||||||||||
|
Diluted
|
42,807,741 | 40,956,220 | 42,802,715 | 40,885,782 | ||||||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
For
the Six Months Ended June 30, 2010 and 2009
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Halo
Companies, Inc. Common Stock
|
Halo
Companies, Inc. Series Z Convertible Preferred Stock
|
Halo
Companies, Inc. Series X 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
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
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 Series B Convertible
Preferred Stock for cash
|
- | - | - | - | - | - | - | - | 219,800 | 219 | - | - | 439,381 | - | - | 439,600 | ||||||||||||||||||||||||||||||||||||||||||
|
Dividends
declared
|
- | - | - | - | - | - | - | - | - | - | - | - | (21,465 | ) | - | - | (21,465 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Net
income attributable to common shareholders
|
- | - | - | - | - | - | - | - | - | - | - | - | - | 618,589 | - | 618,589 | ||||||||||||||||||||||||||||||||||||||||||
|
Allocation
of loss to noncontrolling interest
|
- | - | - | - | - | - | - | - | - | - | - | - | - | - | (9,121 | ) | (9,121 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Balance
at
June
30, 2009
|
40,056,000 | $ | 40,056 | - | $ | - | - | $ | - | 500,000 | $ | 500 | 309,710 | $ | 309 | - | $ | - | $ | 1,683,654 | $ | (156,484 | ) | $ | (9,121 | ) | $ | 1,558,914 | ||||||||||||||||||||||||||||||
|
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 | ||||||||||||||||||||||||||||||||||||||||
|
Stock-based
compensation expense
|
- | - | - | - | - | - | - | - | - | - | - | - | 321,357 | - | - | 321,357 | ||||||||||||||||||||||||||||||||||||||||||
|
Exercise
of Stock Options
|
60,100 | 60 | - | - | - | - | - | - | - | - | - | - | 542 | - | - | 602 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance
of Common Stock shares as payment
of
stock and discretionary dividends (FN 15)
|
1,080,456 | 1,080 | - | - | - | - | - | - | - | - | - | - | 733,596 | (734,676 | ) | - | - | |||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series X Convertible Preferred Stock for cash (FN 15) | - | - | - | - | 68,577 | 686 | - | - | - | - | - | - | 685,084 | - | - | 685,770 | ||||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance
of Series X Convertible Preferred
Stock in exchange for
debt (FN 15)
|
- | - | - | - | 33,200 | 332 | - | - | - | - | - | - | 331,668 | - | - | 332,000 | ||||||||||||||||||||||||||||||||||||||||||
|
Net
loss attributable to common shareholders
|
- | - | - | - | - | - | - | - | - | - | - | - | - | (1,467,015 | ) | - | (1,467,015 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Allocation
of loss to noncontrolling interest
|
- | - | - | - | - | - | - | - | - | - | - | - | - | - | (19,500 | ) | (19,500 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Balance
at
June
30, 2010
|
43,372,993 | $ | 43,372 | - | $ | - | 101,777 | $ | 1,018 | 500,000 | $ | 500 | 500,000 | $ | 500 | 152,000 | $ | 152 | $ | 5,912,199 | $ | (4,872,722 | ) | $ | (69,611 | ) | $ | 1,015,408 | ||||||||||||||||||||||||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Halo
Companies, Inc. and Subsidiaries
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
| (Unaudited) | ||||||||
|
For
the Six Months Ended
|
||||||||
|
June
30, 2010
|
June
30, 2009
|
|||||||
|
CASH
FLOWS FROM OPERATIONS
|
||||||||
|
Net
income (loss)
|
$ | (1,467,015 | ) | $ | 618,589 | |||
|
Adjustments
to reconcile net income to net cash
|
||||||||
|
used
in operating activities
|
||||||||
|
Depreciation
|
72,181 | 16,311 | ||||||
|
Bad
debt expense
|
820,283 | 503,376 | ||||||
|
Earnings
from investments in unconsolidated entities
|
(7,118 | ) | - | |||||
|
Stock
based compensation
|
321,357 | - | ||||||
|
Noncontrolling
interest
|
(19,500 | ) | (19,246 | ) | ||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(1,114,259 | ) | (1,578,012 | ) | ||||
|
Restricted
cash
|
77,690 | 22,014 | ||||||
|
Prepaid
expenses and other current assets
|
109,211 | 15,539 | ||||||
|
Accounts
payable
|
116,279 | (13,284 | ) | |||||
|
Accrued
liabilities
|
(10,915 | ) | 4,907 | |||||
|
Derivative
Liability
|
93,289 | - | ||||||
|
Deferred
rent
|
99,660 | 44,210 | ||||||
|
Deferred
revenue
|
(3,268 | ) | 16,984 | |||||
|
Net
cash used in operating activities
|
(912,125 | ) | (368,612 | ) | ||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Investment
in joint venture
|
(24,499 | ) | - | |||||
|
Purchases
of property and equipment
|
(42,896 | ) | (172,007 | ) | ||||
|
Deposits
|
(100,000 | ) | - | |||||
|
Net
cash used in investing activities
|
(167,395 | ) | (172,007 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Proceeds
received from issuance of preferred stock
|
331,999 | 439,600 | ||||||
|
Issuance
of common stock for the exercise of stock options
|
602 | - | ||||||
|
Net
payments on lines of credit
|
(10,000 | ) | (248,400 | ) | ||||
|
Proceeds
from notes payable
|
- | 541,000 | ||||||
|
Principal
payments on notes payable
|
(107,466 | ) | (33,459 | ) | ||||
|
Proceeds
from notes payable to related parties
|
553,355 | 80,000 | ||||||
|
Principal
payments on notes payable to related parties
|
(125,693 | ) | (162,946 | ) | ||||
|
Proceeds
from subordinated debt
|
420,000 | - | ||||||
|
Debt
discount for subordinated debt
|
(45,064 | ) | - | |||||
|
Dividends
paid to shareholders
|
- | (21,798 | ) | |||||
|
Net
cash provided by financing activities
|
1,017,733 | 593,997 | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(61,787 | ) | 53,378 | |||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
86,090 | 180,349 | ||||||
|
CASH
AND CASH EQUIVALENTS, ending of period
|
$ | 24,303 | $ | 233,727 | ||||
|
SUPPLEMENTAL
INFORMATION
|
||||||||
|
Cash
paid for taxes
|
$ | 16,000 | $ | - | ||||
|
Cash
paid for interest
|
$ | 60,509 | $ | 47,737 | ||||
|
NONCASH
SUPPLEMENTAL INFORMATION
|
||||||||
|
Conversion
of debt
|
$ | 685,771 | $ | - | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Notes To
Consolidated Financial Statements
June 30,
2010
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, Suite 500, 700 Central Expy South,
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 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 with the Delaware
Secretary of State 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.
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 services, 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 June 30, 2010, and for the
three and six month periods ended June 30, 2010 and 2009 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.
Certain
financial information that is normally included in annual financial statements
prepared in accordance with GAAP, but is not required for interim reporting
purposes, have been condensed.
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 (i) the weighted average length of time from when the creditor was
enrolled with HDS, to (ii) the time HDS received a contractually obligated
settlement offer, per creditor, on all accounts since the inception of HDS, to
(iii) 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 99.2% of total accounts receivable at June 30,
2010.
UNet
Income Per Common Share
Basic net
income per share is computed by dividing (i) net income available to common
shareholders (numerator), by (ii) 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
June 30, 2010 and 2009, there were 3,510,469 and 956,167 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 June 30, 2010 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 three and six months
ended June 30, 2010 include the combined financial results of HCI, HGI, HCS,
HDS, HGM, HGR, HBI, HLMS, HSIS, HCIS (defined below), HFS, and
HPA. All significant intercompany transactions and balances have been
eliminated in consolidation.
The
consolidated financial statements of the Company for the three and six months
ended June 30, 2009 include the combined financial results of HGI, HCS, HDS,
HGM, HGR, HBI, HLMS, HSIS, and HFS. 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. Previously, ninety-five
percent of these funds were 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 were released to the Company after 90 days,
less amounts withheld to cover potential losses by the bank. During
April 2010, the Company updated the agreement such that $100,000 in total funds
would be kept by the bank to cover potential losses by the bank and 100% of all
future cash collections from customers are made available to the Company as
determined by the bank, normally within 7 business days. As a result
of the updated agreement, $100,000 of restricted cash was reclassified to
deposits and other assets. At the time of the updated agreement, the
Company had approximately $125,000 in the 90 day reserve account and as such
received approximately $25,000 back into its operating cash
account.
U
Deposits
Deposits and other assets include
$100,000 in funds kept by a merchant bank to cover potential losses by the bank
from customer cancellations. The remaining balance includes $32,664
in deposits held with the Company’s office facilities lessor.
Property
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.
UInvestment
in Unconsolidated Entities
During
the six months ended June 30, 2010, HGM began operations in a joint venture
agreement with another entity for the purposes of providing mortgage banking
services to consumers. HGM accounts for the 49% investment in the
joint venture under the equity method.
Equity
method investments are included in investments in unconsolidated
entities. Earnings on these investments are recorded in income from
unconsolidated entities in the consolidated statements of
operations. As of June 30, 2010, the investment in the joint venture
was $31,617. Income earned on the joint venture for the three and six
months ended June 30, 2010 was $7,118 and $7,118.
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. U
Long-Lived
Assets
Long-lived
assets are reviewed on an annual basis or whenever events or changes in
circumstance indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets held and used is generally
measured by a comparison of the carrying amount of an asset to undiscounted
future net cash flows expected to be generated by that asset. If it is
determined that the carrying amount of an asset may not be recoverable, an
impairment loss is recognized for the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Fair value is the
estimated value at which the asset could be bought or sold in a transaction
between willing parties. There were no impairment charges for the
three or six months ended June 30, 2010 and 2009.
Equity-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 has been no new stock compensation awarded
since September 30, 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 (i) the date on which the counterparty’s
performance is complete, or (ii) the date on which it is probable that
performance will occur.
Fair Value of Financial
Instruments
The carrying value of cash, cash
equivalents, receivables, accounts payable and accruals approximate fair value
due to the short maturity of these items.
We consider the warrants related to its
Subordinated Debt to be derivatives, and we record the fair value of the
derivative liabilities in our consolidated balance sheets. Changes in
fair value of the derivative liabilities are included in loss on change in fair value of
derivative in the consolidated statements of operations.
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.
The
Company accounts for its position in tax uncertainties under ASC
740-10. ASC 740-10 establishes standards for accounting for uncertainty in
income taxes. ASC 740-10 provides several clarifications related to uncertain
tax positions. Most notably, a “more likely-than-not” standard for initial
recognition of tax positions, a presumption of audit detection and a measurement
of recognized tax benefits based on the largest amount that has a greater than
50 percent likelihood of realization. ASC 740-10 applies a two-step process to
determine the amount of tax benefit to be recognized in the financial
statements. First, the Company must determine whether any amount of the tax
benefit may be recognized. Second, the Company determines how much of the tax
benefit should be recognized (this would only apply to tax positions that
qualify for recognition.) 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 three and six months ended June 30,
2010.
Deferred
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.
UNon-controlling
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 HSIS’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 non-controlling 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
February 2010, the FASB amended ASC 855, “Subsequent Events”. The amended ASC no
longer requires a date to be disclosed in the footnotes. The
amendment of ASC 855 had no material impact on the Company’s financial position
and results of operations.
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 ASC 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 ASC will supersede
all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the ASC will
become non-authoritative. 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 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
December 2007, the FASB issued ASC 810 “Consolidation”. ASC 810
requires that (a) non-controlling (minority) interest be reported as a component
of shareholders' equity; (b) net income attributable to the parent and to the
non-controlling interest be separately identified in the consolidated statement
of operations; (c) changes in a parent's ownership interest while the parent
retains its controlling interest be accounted for as equity transactions; (d)
any retained non-controlling equity investment upon the deconsolidation of the
subsidiary be initially measured at fair value; and (e) sufficient disclosures
are provided that clearly identify and distinguish between the interest of the
parent and the interests of the non-controlling 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.
The Company maintains aggregate cash
balances, at times, with financial institutions, which are in excess of amounts
insured by the Federal Deposit Insurance Corporation (FDIC). During 2010, the
FDIC insured cash accounts up to $250,000. At June 30, 2010, the
Company’s cash accounts in different financial institutions were all 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
4. 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 deficit of
$4,872,722 as of June 30, 2010. However, of the accumulated deficit,
$1,721,181 of expense was incurred as stock-based compensation; $93,289 was loss
on change in fair value of derivative, both of which are non-cash
expenses. Further, $734,676 of the accumulated deficit is
related to the issuance of stock dividends, also non cash reductions in the
accumulated deficit. 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
5. PROPERTY, EQUIPMENT AND SOFTWARE
Property,
equipment and software consist of the following as of June 30, 2010 and December
31, 2009, respectively:
| Computers and purchased software | $ | 161,764 | $ | 155,973 | ||||
| Furniture and equipment | 436,716 | 430,755 | ||||||
| 598,480 | 586,728 | |||||||
| Less: accumulated depreciation | (207,187 | ) | (166,150 | ) | ||||
| $ | 391,293 | $ | 420,578 |
Depreciation
totaled $42,297, $72,181, $3,890, and $16,311 for the three and six months ended
June 30, 2010 and 2009.
NOTE
6. ACCRUED LIABILITIES
The Company accounted for $248,547 in
accrued liabilities at June 30, 2010. Included in this accrual was
$148,294 in salaries and wages payable, $78,138 in accrued interest, and $22,115
in other. The Company accounted for $259,462 in accrued liabilities
at December 31, 2009. Included in this accrual was $228,168 in
salaries and wages payable, $24,127 in accrued interest, and $7,167 in
other.
On March
6, 2009, the Company entered into a revolving line of credit (“LOC”) facility
with Legacy Texas Bank (“LTB”) which provides maximum borrowings of $250,000,
subject to a borrowing base, and bears interest at the bank’s rate as defined as
prime plus 1% (6% floor). 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. The $325,000 maximum
borrowing amount includes a $75,000 letter of credit to the Company’s business
office lessor. As of June 30, 2010, the Company has received net
advances totaling $240,000 under this LOC. As of December 31, 2009,
the Company had received net advances totaling $250,000 under this
LOC. The LOC is cross collateralized by all of the Company’s
assets.
Subsequent
to June 30, 2010, the Company modified and amended the LOC facility agreement
with LTB modifying the maturity date. The maturity date of the LOC is
now August 20, 2010. See further discussion in Notes Payable (Note
9).
NOTE
8. NOTES PAYABLE DUE TO RELATED PARTIES
On May
10, 2010, several related party note holders entered into irrevocable agreements
to cancel certain related party indebtedness owed to them for consideration in
full of the issuance of respective equivalent dollar amount of shares in the
Company’s Series X Preferred Stock, valued at $10.00 per share. The
transactions resulted in the net paydown of related party notes of $685,771 and
a corresponding increase in Series X Preferred Stock of 68,577 shares totaling
$685,771. Interest accrued on these related party note balances until
May 2010.
The
remaining notes payable due to related parties as of June 30, 2010, reside in
two notes as follows;
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 June 30, 2010, the amount outstanding under the Related Party Note totaled
$52,063, included in current portion of notes payable to related
parties. As of December 31, 2009, the amount outstanding under the
Related Party Note totaled $57,756, of which $46,141 was included in long term
liabilities.
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). Related Party Note 4 bears interest
at a rate of 8% per annum with a maturity date of April, 2010. All
interest and principal is due upon maturity. At December 31, 2009,
the amount outstanding under the Related Party Note 4 totaled
$30,000. 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 (Amended Related Party Note
4). 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. The note bears interest at a rate of
16% per annum with a maturity date of October 17, 2010. All interest
and principal is due upon maturity. As of June 30, 2010, the amount
outstanding under the Amended Related Party Note 4 totaled
$230,584.
The
Company incurred $26,705, $51,932, $8,746 and $32,616 of interest expense to
directors and other related parties during the three and six months ended June
30, 2010 and 2009. Accrued interest due to directors and other
related parties totaled $75,828 and $30,499 at June 30, 2010 and December 31,
2009, respectively.
NOTE
9. 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 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). As of June 30, 2010, the note payable
balance was $226,710, included in current portion of notes
payable. See below for maturity date.
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. As of June
30, 2010, the note payable balance was $132,898, included in current portion of
notes payable. See below for maturity date.
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. As of June 30, 2010, the note payable balance was $62,343,
all of which is included in current portion of notes payable. See
below for maturity date.
The notes
are collateralized by all of the Company’s assets. The notes have a
current maturity date of August 20, 2010.
NOTE
10. SUBORDINATED DEBT
During
January 2010, the Company authorized a $750,000 subordinated debt offering
(Subordinated Offering), which contain the issuance of notes paying a 16% coupon
with a 1% origination fee at the time of closing. The maturity date
of the notes is January 31, 2013. Repayment terms of the notes
include interest only payments 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 and Note 9. As of June 30,
2010, the Company has raised $420,000 in the Subordinated Offering.
As part
of the Subordinated Offering, the Company grants 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 are granted the Warrants pro rata based on
their percentage of investment relative to the $750,000 aggregate principal
amount of notes contemplated to be issued in the Subordinated
Offering. The Warrants shall have a term of seven years, exercisable
from January 31, 2015 to January 31, 2017. The Company will have a
call option any time prior to maturity, so long as the principal and interest on
the notes are fully paid, to purchase the Warrants for an aggregate of
$150,000. After the date of maturity until the date the Warrants are
exercisable, 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.
The
Company adopted the provisions of FASB ASC 815, “Derivatives and Hedging”
(FASB ASC 815). FASB ASC 815 requires freestanding contracts that are
settled in a company’s own stock to be designated as an equity instrument,
assets or liability. Under the provisions of FASB ASC 815, a contract designated
as an asset or liability must be initially recorded and carried at fair value
until the contract meets the requirements for classification as equity, until
the contract is exercised or until the contract expires. Accordingly,
the Company determined that the warrants should be accounted for as derivative
liabilities and has recorded the initial value as a debt discount which will be
amortized into interest expense using the effective interest
method. As of June 30, 2010, the balance of debt discount is $45,064,
included in subordinated debt balance. Subsequent changes to the
marked-to-market value derivative liability will be recorded in earnings as
derivative gains and losses. As of June 30, 2010, there were 112,000 warrants
outstanding with a derivative liability of $93,289. The warrants were
valued using the Black-Scholes model, which resulted in the fair value of the
warrants at $0.83 per share using the following assumptions;
|
June
30, 2010
|
|||||
|
Risk-free
rate
|
2.42
|
%
|
|||
|
Expected
volatility
|
96.49
|
%
|
|||
|
Expected
remaining life (in years)
|
6.59
|
||||
|
Dividend
yield
|
0.00
|
%
|
|||
For the
three and six months ended June 30, 2010 and 2009, the Company incurred legal
costs totaling $0, $0, $6,285 and $12,075, to a law firm owned by a director of
the Company.
For the
three and six months ended June 30, 2010 and 2009, the Company incurred
consulting costs totaling $17,700, $35,400, $10,000, and $19,000 to two separate
entities owned each by a director of the Company.
For the
three and six months ended June 30, 2010 and 2009, the Company incurred interest
expense to related parties (See Note 8).
For the
three and six months ended June 30, 2010 and 2009, the Company incurred rent
expense totaling $0, $0, $4,500 and $9,000, to an entity owned by two directors
of the Company.
NOTE
12. INCOME TAXES
For the three and six months ended June
30, 2010 and 2009, the quarterly effective federal tax rate of 0% varies from
the U.S. federal statutory rate primarily due to certain non-deductible expenses
and an increase in the valuation allowance associated with the net operating
loss carryforwards. Our deferred tax assets related to other state net operating
loss carryforwards remain fully reserved due to uncertainty of utilization of
those assets. The $22,870 reduction in the provision included on the
consolidated statements of operations is a provision to return true up for
statutory franchise tax.
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 June 30, 2010, 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 $2,900,000 available for federal income
tax purposes, which expire from 2010 to 2029. 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.
NOTE
13. 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 June 30, 2010 are as
follows:
| Years Ending December 31: | ||||
| 2010 | $ | 343,931 | ||
| 2011 | 779,663 | |||
| 2012 | 774,446 | |||
| 2013 | 774,050 | |||
| 2014 | 438,607 | |||
| Total Minimum lease commitments | $ | 3,110,697 | ||
For
the three and six months ended June 30, 2010 and 2009, the Company incurred
facilities rent expense totaling $148,971, $277,405, $80,979, and
$171,730.
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
14. 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. At September 30, 2009, pursuant
to the terms of the Merger Agreement, all options granted prior to the Merger
were assumed by the Company and any options available for issuance under the
Plan but unissued, have been forfeited and consequently the Company has no
additional shares subject to options or stock purchase rights available for
issuance under the Plan. As such, there were no options issued during
the three or six months ended June 30, 2010. As of June 30, 2010,
60,100 option shares have been exercised. Total stock options
outstanding through June 30, 2010 total 2,753,470. The weighted
average remaining contractual life of the outstanding options at June 30, 2010
is approximately 3.30 years.
A summary
of stock option activity in the Plan is as follows:
|
Weighted
|
||||||||||||
|
Exercise
|
Average
|
|||||||||||
|
Number
of
|
Price
|
Exercise
|
||||||||||
|
Options
|
Per
Option
|
Price
|
||||||||||
|
Outstanding
at December 31, 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 | |||||||
|
Granted
|
- | - | - | |||||||||
|
Exercised
|
(60,100 | ) |
0.01
|
0.01
|
||||||||
|
Canceled
|
(13,900 | ) |
0.01
– 1.59
|
0.60
|
||||||||
|
Outstanding
at June 30, 2010
|
2,753,470
|
$ | 0.01 – 1.59 | $ | 0.66 | |||||||
All stock
options granted under the Plan and as of June 30, 2010 became exercisable upon
the occurrence of the Merger that occurred on September 30,
2009. As such, equity-based compensation for the options will be
recognized in earnings from issuance date of the options over the vesting period
of the options effective September 30, 2009. Total compensation cost
to be expensed over the vesting period of stock options is
$2,299,244. For the three and six months ended June 30, 2010, stock
compensation expense totaled $89,308 and $321,357. For the year ended
December 31, 2009, stock compensation expense totaled $1,399,823. The
remaining $578,064 in future stock compensation expense is scheduled to be
recognized into earnings over the next 15 months.
NOTE
15. SHAREHOLDERS’ EQUITY
Common
Stock
During
June 2010, the Company’s Board of Directors declared a stock dividend of Halo
Companies Inc. common stock to all holders of HGI Series A Preferred, Series B
Preferred, and Series C Preferred (all defined below) for all accrued dividends
up through June 30, 2010. This resulted in an issuance of 300,284
shares of common stock valued at $204,176. The common stock was
valued using the Black-Scholes model, which resulted in the fair value of the
common stock at $0.68 per share. In addition to the stock
dividend, in June 2010, the Board also authorized to all HGI Series A Preferred,
Series B Preferred, and Series C Preferred holders a 25% discretionary stock
dividend calculated based on the cash value of each Series A Preferred, Series B
Preferred and Series C Preferred holders’ cumulative cash investment in the
respective HGI preferred shares to date. This resulted in the
issuance of 780,172 shares of common stock valued at $530,500. The
discretionary dividend was also valued using the Black-Scholes model resulting
in a fair value per share of common stock of $0.68. Collectively, the
stock dividend and discretionary stock dividend resulted in the issuance of
1,080,456 shares of common stock valued at $734,676. The issuance of
these shares resulted in an increase in the accumulated deficit of
$734,676.
During
the six months ended June 30, 2010, 60,100 shares of common stock were issued
via the exercise of stock options.
Total
common shares outstanding totaled 43,423,397 as of June 30, 2010.
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 Series A Preferred, Series B Preferred, and Series C Preferred and
exercise of any outstanding stock options issued under the HGI 2007 Stock Plan
into Series Z Convertible Preferred, they will automatically, without any action
on the part of the holders, be converted into common shares of the
Company. During the six months ended June 30, 2010, in connection
with the exercise of stock options into common stock noted above, 1,335 shares
of Series Z Convertible Preferred were automatically converted into shares of
the Company’s common stock leaving 898,116 shares of authorized undesignated
preferred stock in the Company in accordance with the Series Z Convertible
Preferred certificate of designation. As of June 30, 2010 there were
101,844 shares of Series Z Preferred authorized with zero shares issued and
outstanding.
The
Company authorized 125,000 shares of Series X Convertible Preferred Stock with a
par value of $0.01 per share (the “Series X Preferred”). The number
of shares of Series X Preferred may be decreased by resolution of the Board;
provided, however, that no decrease shall reduce the number of Series X
Preferred to less than the number of shares then issued and
outstanding. In the event any Series X Preferred Shares shall be
redeemed, (i) the Series X Preferred so redeemed shall be retired and cancelled
and shall not be reissued and (ii) the authorized number of Series X Preferred
Shares set forth in this section shall be automatically reduced by the number of
Series X Preferred Shares so redeemed and the number of shares of the
Corporation's undesignated Preferred Stock shall be deemed increased by such
number. The Series X Preferred Shares rank senior to the Company’s
common stock to the extent of $10.00 per Series X Preferred Shares and on a
parity with the Company’s common stock as to amounts in excess
thereof. The holders of Series X Preferred shall not have voting
rights. Holders of the Series X Preferred shall be entitled to
receive, when and as declared by the board of directors, dividends at an annual
rate of 9% payable in cash when declared by the board. Holders of
Series X Preferred have a liquidation preference per share equal to
$10.00. The liquidation preference was $1,017,770 as of June 30,
2010. As of June 30, 2010, there were 125,000 shares authorized with
101,777 shares issued and outstanding. Of the 101,777 shares issued
and outstanding, 68,577 shares were related to the conversion from notes payable
due to related parties discussed in Note 8. The remaining 33,200
shares were issued during the three months ended June 30, 2010 for cash
consideration.
The HGI Series A Convertible Preferred Stock (the “Series A
Preferred”) has a par value of $0.001 per share and has a liquidation preference
of the greater of (a) the consideration paid to the Company for such shares plus
all accrued but unpaid dividends, if any or (b) the per share amount the holders
of the Series A Preferred would be entitled to upon conversion, as defined in
the Series A Preferred certificate of designation. The liquidation
preference was $750,000, of which $0 is an accrued dividend at June 30,
2010. See Common Stock section above for stock dividends issued in
June 2010. Holders of the Series A Preferred are entitled to receive,
if declared by the board of directors, dividends at a rate of 8% payable in cash
or common stock of the Company. Following the Merger, the Series A
Preferred is convertible into the Company’s common stock at a conversion price
of $1.25 per share. The Series A Preferred is convertible, either at
the option of the holder or the Company, into shares of the Company’s Series Z
Convertible Preferred Stock, and immediately, without any action on the part of
the holder, converted into common stock of the Company. The Series A
Preferred is redeemable at the option of the Company at $1.80 per share prior to
conversion. As of June 30, 2010, there have been zero shares of
Series A Preferred converted or redeemed. The Series A Preferred does
not have voting rights. The Series A Preferred ranks senior to
the following capital stock of the Company: (a) Series B Preferred, and (b)
Series C Preferred.
The HGI
Series B Convertible Preferred Stock (the “Series B Preferred”) has a par value
of $0.001 per share and has a liquidation preference of the greater of (a) the
consideration paid to the Company for such shares plus all accrued but unpaid
dividends or (b) the per share amount the holders of the Series B Preferred
would be entitled to upon conversion. The liquidation preference was
$1,000,000, of which $0 is an accrued dividend at June 30, 2010. See
Common Stock section above for stock dividends issued in June
2010. Holders of the Series B Preferred are entitled to receive, if
declared by the board of directors, dividends at a rate of 8% payable in cash or
common stock of the Company. Following the Merger, the Series B
Preferred is convertible into the Company’s common stock at a conversion price
of $1.74 per share. The Series B Preferred is convertible, either at
the option of the holder or the Company, into shares of the Company’s Series Z
Convertible Preferred Stock, and immediately, without any action on the part of
the holder, converted into common stock of the Company. The Series B
Preferred is redeemable at the option of the Company at $2.30 per share prior to
conversion. As of June 30, 2010, there have been zero shares of
Series B Preferred converted or redeemed. The Series B Preferred does
not have voting rights. Series B Preferred ranks senior
to the following capital stock of the Company: the Series C
Preferred.
The HGI Series C Convertible Preferred
Stock (the “Series C Preferred”) has a par value of $0.001 per share and has a
liquidation preference of the greater of (a) the consideration paid to the
Company for such shares plus all accrued but unpaid dividends or (b) the per
share amount the holders of the Series C Preferred would be entitled to upon
conversion. The liquidation preference was $380,000, of which $0 is
an accrued dividend at June 30, 2010. See Common Stock section above
for stock dividends issued in June 2010. Holders of the Series C
Preferred are entitled to receive, if declared by the board of directors,
dividends at a rate of 8% payable in cash or common stock of the
Company. Following the Merger, the Series C Preferred is convertible
into the Company’s common stock at an initial conversion price of $2.27 per
share. The Series C Preferred is convertible, either at the option of
the holder or the Company, into shares of the Company’s Series Z Convertible
Preferred Stock, and immediately, without any action on the part of the holder,
converted into common stock of the Company. The Series C Preferred is
redeemable at the option of the Company at $2.75 per share prior to
conversion. As of June 30, 2010, there have been zero shares of
Series C Preferred converted or redeemed. The Series C
Preferred does not have voting rights. Series C Preferred ranks
senior to the following capital stock of the Company: None.
The
Company had issued and outstanding at June 30, 2010, 500,000 shares of Series A
Preferred, 500,000 shares of Series B Preferred, and 152,000 shares of Series C
Preferred, all with a par value of $0.001.
NOTE
16. SUBSEQUENT EVENTS
On July
19, 2010, the board of directors approved the Company’s 2010 Incentive Stock
Plan (2010 Stock Plan). The 2010 Stock Plan allows for the
reservation of 7,000,000 shares of the Company’s common stock for issuance under
the plan. The 2010 Stock Plan becomes effective July 19, 2010 and
terminates July 18, 2020. Prior to this filing, no shares have been
issued under the 2010 Stock Plan.
Subsequent
to June 30, 2010, several holders of HGI Series A Preferred, Series B Preferred,
and Series C Preferred converted 215,501 shares of preferred stock into 252,647
shares of common stock. These conversions were subject to the
conversion price per share discussed in Shareholders’ Equity (Note
15). These conversions represent approximately 19% of the Series A
Preferred, Series B Preferred, and Series C Preferred issued and outstanding
shares as of June 30, 2010.
There
were no other subsequent events to disclose.
Forward-Looking
Statements
Certain
statements contained in this Quarterly Report on Form 10-Q that are not
statements of historical fact constitute “forward-looking statements” within the
meaning of the safe harbor provisions of the United States Private Securities
Litigation Reform Act of 1995. Words such as “expect,” “estimate,” “project,”
“budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,”
“should,” “believes,” “predicts,” “potential,” “continue,” and similar
expressions are intended to identify such forward-looking statements but are not
the exclusive means of identifying such statements. Although the
Company believes that the current views and expectations reflected in these
forward-looking statements are reasonable, those views and expectations, and the
related statements, are inherently subject to risks, uncertainties, and other
factors, many of which are not under the Company’s control. Those
risks, uncertainties, and other factors could cause the actual results to differ
materially from those in the forward-looking statements. Those risks,
uncertainties, and factors include, but are not limited to: the level of
customer demand for and response to products and services offered by the
Company, including demand by the consumer financial services industry,
specifically the credit market and real estate markets, changes in economic
conditions of the various markets the Company serves; adequacy of financing;
reliance on key executive officers; successfully implementing the Company’s
growth strategy; a downturn in market conditions in any industry relating to the
services that we provide; the effects and duration of continuing economic
recession in the U.S. and other markets in which we operate; change in industry
laws and regulations. The Company expressly disclaims any obligation
to release publicly any updates or revisions to these forward-looking statements
to reflect any change in its views or expectations. The Company can give no
assurances that such forward-looking statements will prove to be
correct.
The
following discussion of the financial condition and results of operation of the
Company should be read in conjunction with the financial statements and the
notes to those statements included in this Report.
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.
Results
of Operations for the three and six months ended June 30, 2010 compared to the
three and six months ended June 30, 2009
Revenues
Revenue was down $439,595 or 18% to
$2,055,272 for the three months ended June 30, 2010 from $2,494,867 for the
three months ended June 30, 2009. Revenue was down $734,696 or 15% to
$4,087,197 for the six months ended June 30, 2010 from $4,821,893 for the six
months ended June 30, 2009. The difference is due to the overall
reduction in revenue primarily due to several factors including management’s
decision to implement a smaller marketing and customer lead budget and a reduced
sales team in HDS. The Company continues to implement marketing
dollars in several of its smaller subsidiaries in an effort to increase those
subsidiaries top line revenues as part of the Company’s long term growth
plans. Those subsidiaries include HGR, HSIS, HGM, and
HFS. These entities revenue growth offsets that of Halo’s primary
subsidiary. Halo continues to innovate and deploy its overall market
strategy and reinvent its ability to provide increasingly effective and
efficient services to consumers.
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 $102,998 or 34%
to $409,552 for the three months ended June 30, 2010 from $306,554 for the three
months ended June 30, 2009. Sales and marketing expenses
increased $189,404 or 30% to $821,040 for the six months ended June 30, 2010
from $631,636 for the six months ended June 30, 2009. This increase
is primarily attributable to the increased contract service commissions
associated with HGR, in which Halo pays its independent agents commissions on
the closing of residential real estate brokerage services. The
increase for the six months ended June 30, 2010 compared to the six months ended
June 30, 2009 is also attributable to the overall volume of lead generation
purchases during the first half of the six months ended June 30,
2010.
General and administrative expenses
increased $343,075 or 54% to $982,004 for the three months ended June 30, 2010
from $638,929 for the three months ended June 30, 2009. General and
administrative expenses increased $652,319 or 53% to $1,879,402 for the six
months ended June 30, 2010 from $1,227,083 for the six months ended June 30,
2009. This increase is attributable to the additional 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 Portfolio Advisors, LLC, and Halo Choice Insurance Services,
LLC, and in 2010 Halo Select Insurance Services, LLC, and as such, there have
been increased general and administrative expenses and costs involved to get
these companies operating. Additionally, as a result of now being a public
company, the Company has incurred increased costs related to its professional
fees that were not incurred for the six months ended June 30,
2009. These services primarily include legal and
accounting. Finally, the Company has seen a growth in its allowance
for doubtful accounts which is charged to bad debt expense, included within
general and administrative expenses. See significant accounting
policies contained in Note 2 to the consolidated financial
statements.
Salary, wages and benefits increased
$108,762 or 9% to $1,297,221 for the three months ended June 30, 2010 from
$1,188,459 for the three months ended June 30, 2009. Approximately
$89,308 or 82% of this increase is stock option compensation expense for any
options that had vested during the three months ended June 30,
2010. Stock option compensation expense was $0 for the three months
ended June 30, 2009. Salary, wages and benefits increased $450,192 or
20% to $2,754,344 for the six months ended June 30, 2010 from $2,304,152 for the
six months ended June 30, 2009. Approximately $321,357 or 71% of this
increase is stock option compensation expense for any options that had vested
during the six months ended June 30, 2010. Stock option compensation
expense was $0 for the six months ended June 30, 2009. As noted in
the significant accounting policies contained in Note 2 to the consolidated
financial statements, 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 the Merger occurring on September 30, 2009, the fair
value of such options is recognized in earnings over the vesting period of the
options beginning when the Merger occurred. Stock compensation
expense is a non-cash expense item. The remaining increase in 2010
from 2009 is attributable to additional costs associated with employee head
count and more executive and senior management personnel to accommodate Halo’s
overall business plan. As salaries, wages and benefits is the most
significant cost to the Company, management actively monitors this cost to
ensure it is in line with the Company’s business plan.
Although
overall sales and marketing expenses, general and administrative expenses, and
salaries, wages and benefits have continued to increase, the Company continues
to improve operational efficiencies and effectively manage fixed and variable
costs in line with its business plan of growing Halo Companies,
Inc.
The Company experienced losses of
$1,017,655 to a net loss of $666,461 for the three months ended June 30, 2010
from net income of $351,194 for the three months ended June 30,
2009. The Company experienced losses of $2,085,604 to a net loss
of $1,467,015 for the six months ended June 30, 2010 from net income of $618,589
for the six months ended June 30, 2009, primarily attributable to the reasons
noted above.
Significant
Accounting Policies
Certain critical accounting policies
affect the more significant judgments and estimates used in the preparation of
the Company’s consolidated financial statements. These policies are
contained in Note 2 to the consolidated financial statements and included in
Note 2 to the consolidated financial statements contained in our Annual Report
on Form 10-K for the year ended December 31, 2009. There have been no
significant changes in our significant accounting policies since the last fiscal
year end 2009.
Liquidity
and Capital Resources
As of June 30, 2010, we had cash and
cash equivalents of $24,303. The decrease of $61,787 in cash and cash
equivalents from December 31, 2009 was due to cash provided by financing
activities of $1,017,733 offset by a decrease in cash used in operating
activities of $912,125 and cash used in investing activities of
$167,395.
Net cash used in operating activities
was $912,125 for the six months ended June 30, 2010, compared to $368,612 net
cash used in operating activities for the six months ended June 30, 2009.
The net cash used in operating activities for the six months ended June 30, 2010
was due to a net loss of $1,467,015, adjusted primarily by the following: an
increase in depreciation of $72,181, an increase in bad debt expense of $820,283
an increase in amortization of share-based compensation expense of $321,357, a
decrease in prepaid expenses and other current assets of $109,211 for
amortization of prepaid consulting agreements, an increase in accounts payable
of $116,279, an increase in deferred rent of $99,660, and an increase in
derivative liability of $93,289, offset by an increase in accounts receivable of
$1,114,259. The remaining immaterial variance is related to changes
in operating assets and liabilities, a change in the noncontrolling interest
balance, and earnings from investment in an unconsolidated entity.
Net accounts receivable increased by
$293,976 or 13%. The increase was a result of the increase in gross
accounts receivable of $1,114,259 offset by an increase of $820,283 in bad debt
expense. Allowance for loan loss and bad debt expense 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
$187,039 at December 31, 2009 to $286,699 at June 30, 2010, and this increase
was related to the executed contractual commitment of additional office space in
the Company headquarters for which the Company negotiated deferred rental
payments. The increase in the derivative liability is related to
warrants issued in connection with the Company’s Subordinated Offering discussed
in Note 10 to the consolidated financial statements.
Net cash
used in investing activities was $167,395 for the six months ended June 30,
2010, compared to net cash used in investing activities of $172,007 for the six
months ended June 30, 2009. Our investing activities for the six months
ended June 30, 2010 consisted primarily of purchasing property and equipment of
$42,896 and an investment by Halo Group Mortgage, LLC, in a joint venture of
$24,499 related to our business plan of increasing revenues in our mortgage
brokerage subsidiary. Halo contributed $24,499, equal to a 49%
opening equity balance, in the joint venture. Under a qualitative and
quantitative analysis performed in accordance with ASC 810 “Consolidation,” Halo
does not meet the requirements of a variable interest entity for which Halo is
the primary beneficiary. As such, the equity method investment is
included on the balance sheet in Investments in Unconsolidated
Entities. The remaining $100,000 decrease is related to a
reclassification of restricted cash to deposits as the company renegotiated its
agreement with a merchant bank such that the merchant bank will hold $100,000 in
deposit to cover potential losses by the bank from customer
cancellations. See further discussion in Note 2 to the consolidated
financial statements.
Net cash provided by financing activities was
$1,017,733 for the six months ended June 30, 2010, compared to net cash provided
by financing activities of $593,997 for the six months ended June 30,
2009. Our financing activities for the six months ended June 30, 2010
consisted primarily of the proceeds received from issuance of Series X
Convertible preferred stock of $331,999 proceeds of $553,355 received from notes
payable to related parties, proceeds from subordinated debt of $420,000, offset
by $243,159 in payment of principal on notes payable, related party notes
payable, and net payments on the line of credit. The Company did
receive proceeds of $602 from the exercise of stock options during the six
months ended June 30, 2010. The remaining decrease is related to debt discount
for subordinated debt as discussed in Note 10 of the consolidated financial
statements.
As shown
below, at June 30, 2010, our contractual cash obligations totaled approximately
$4,475,295, all of which consisted of operating lease obligations and debt
principal repayment.
|
Payments
due by December 31,
|
||||||||||||||||||||
|
Contractual
Obligations
|
2010
|
2011-2012 | 2013-2014 |
2015
& Thereafter
|
Total
|
|||||||||||||||
|
Debt
Obligations
|
$ | 933,457 | $ | 214,141 | $ | 217,000 | $ | 0 | $ | 1,364,598 | ||||||||||
|
Operating
Lease Obligations
|
$ | 343,931 | $ | 1,554,109 | $ | 1,212,657 | $ | 0 | $ | 3,110,697 | ||||||||||
|
Total
Contractual Cash Obligations
|
$ | 1,277,388 | $ | 1,768,250 | $ | 1,429,657 | $ | 0 | $ | 4,475,295 | ||||||||||
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.
Other than operating leases discussed
in Note 13 to the consolidated financial statements, there are no off-balance
sheet transactions, arrangements, obligations (including contingent
obligations), or other relationships with unconsolidated entities or other
persons that have, or may have, a material effect on financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources of the
Company.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
Interest Rate
Risk. Our business is highly leveraged and, accordingly, is
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 4T. 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.
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.
None
Item 1A. Risk Factors
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
During the quarter ended
June 30, 2010, except as included in our Current Reports on Form 8-K, we have
not sold any equity securities not registered under the Securities
Act.
Item
3. Defaults Upon
Senior Securities
None
Item
4. Submission of
Matters to a Vote of Security Holders
None
Item
5. Other
Information
Effective
July 9, 2010, as filed in our Current Reports on Form 8-K, Scott McGuane ceased
serving as Chief Marketing and Sales Officer of the Company. In
exchange for certain releases, waivers and other covenants, the Company entered
into an Agreement with Mr. McGuane and agreed to pay him a cumulative amount of
$35,769.24 payable every other week in equal installments through September 28,
2010. The Company also agreed to modify the vesting schedule and
exercise terms of certain stock option awards Mr. McGuane was granted while
employed with the Company.
Effective
August 10, 2010, Jimmy Mauldin ceased serving as Chief
Strategy Officer of the Company. In exchange for certain
releases, waivers and other covenants, the Company entered into an Agreement
with Mr. Mauldin and agreed to pay him a cumulative amount of $120,000 payable
in equal monthly installments over a twelve month period.
31.1
Rule 13a-14(a) Certification of the Principal Executive
Officer.
31.2
Rule 13a-14(a) Certification of the Principal Financial
Officer.
32 Section 1350
Certifications.
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
Date:
August 12, 2010
|
By:
|
/s/
Brandon Cade Thompson
|
|
Brandon
Cade Thompson
|
||
|
Chief
Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
Date:
August 12, 2010
|
By:
|
/s/
Paul Williams
|
|
Paul
Williams
|
||
|
Chief
Financial Officer
|
||
|
(Principal
Financial and Accounting Officer)
|
||
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