10-K 1 haln_10k2012.htm 10-K haln_10k2012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
 
FORM 10-K
_______________
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2012
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  
HALO COMPANIES, INC.
 (Exact name of registrant as specified in its charter)
 
Delaware
 
000-15862
 
13-3018466
(State or other jurisdiction of
incorporation or organization)
 
(Commission File No.)
 
(IRS Employee Identification No.)

One Allen Center, Suite 500
700 Central Expressway South
Allen, Texas 75013
(Address of Principal Executive Offices)
  _______________
 
214-644-0065
(Issuer Telephone number)
_______________

 
Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.001 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes  o No x

Indicate by check mark whether the issuer:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x No o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x No o

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Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
 
Large Accelerated Filer  o     Accelerated Filer  o      Non-Accelerated Filer  o      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  o No x

As of June 30, 2012, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the issuer was approximately $2,229,130 based on the last sales price of the issuer’s Common Stock, as reported by OTCMarkets.  This amount excludes the market value of all shares as to which any executive officer, director or person known to the registrant to be the beneficial owner of at least 5% of the registrant’s Common Stock may be deemed to have sole or shared voting power.

The number of shares outstanding of the registrant’s Common Stock as of April 1, 2013 was 66,364,083.



DOCUMENTS INCORPORATED BY REFERENCE


Listed below are documents incorporated herein by reference and the part of this Report into which each such document is incorporated:


None
 
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HALO COMPANIES, INC.
FORM 10-K
TABLE OF CONTENTS
 
 
Forward-Looking Statements
 
     
 
Part I
 
     
Item 1.
Business.
-4-
Item 1A.
Risk Factors.
-6-
Item 1B.
Unresolved Staff Comments.
-9-
Item 2.
Properties.
-9-
Item 3.
Legal Proceedings.
-9-
Item 4.
Mine Safety Disclosures.
-10-
     
 
Part II
 
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
-10-
Item 6.
Selected Financial Data.
-11-
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
-11-
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
-17-
Item 8.
Financial Statements and Supplementary Data.
-18-
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
-18-
Item 9A.
Controls and Procedures.
-18-
Item 9B.
Other Information.
-19-
     
 
PART III
 
     
Item 10.  
Directors, Executive Officers and Corporate Governance.
-19-
Item 11.
Executive Compensation.
-22-
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
-24-
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
-27-
Item 14.
Principal Accounting Fees and Services.
-29-
     
 
Part IV
 
     
Item 15.
Exhibits, Financial Statement Schedules.
-29-
     
 
SIGNATURES
 
 
-3-

 
FORWARD-LOOKING STATEMENTS
 
Certain statements contained in this Report that are not statements of historical fact constitute “forward-looking statements.”  Words such as “may,” “seek,” “expect,” “anticipate,” “estimate,” “project,” “budget,” “goal,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “strategy,” “believes,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements but are not the exclusive means of identifying such statements.  Although the Company believes that the current views and expectations reflected in these forward-looking statements are reasonable, those views and expectations, and the Company’s future plans, operations, business strategies, operating results and financial position, are inherently subject to risks, uncertainties, and other factors, many of which are not under the Company’s control.  Those risks, uncertainties, and other factors could cause the actual results to differ materially from those in the forward-looking statements.  Those risks, uncertainties, and factors (including the risks contained in the section of this report titled “Risk Factors”) that could cause the Company’s actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements and its goals and strategies to not be achieved.  You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Report.  The Company expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any change in its views or expectations. The Company can give no assurances that such forward-looking statements will prove to be correct.

PART I
 
Item 1.  BUSINESS.
 
General

Halo Companies, Inc. (“Halo” or the “Company”) was incorporated under the laws of the State of Delaware on December 9, 1986.  Its principal executive offices are located at One Allen Center, Suite 500, 700 Central Expy South, Allen, Texas 75013 and its telephone number is 214-644-0065.  The Company’s stock symbol is HALN.

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.

Business Overview

The Company, through its subsidiaries, operates a nationwide distressed asset services company, providing technology-driven asset management, portfolio due diligence, acquisition, repositioning and liquidation strategies for the private investment and mortgage servicing industry. Founded in 2004, Halo began operating in the mortgage origination sector, expanding quickly to an award-winning consumer financial services company. Halo’s years of experience, key leadership and industry knowledge, laid the foundation for its emergence as a premier distressed asset services company.

Products and Services

Halo focuses its distressed asset services, portfolio due diligence, and asset liquidation strategies primarily on single family residential real estate across the United States for its business customers (typically distressed debt investors or debt servicers) to market turnkey solutions for improved performance and monetization of their portfolios.  In today’s economy, lenders are experiencing an overflow of distressed assets.  Many mortgage debt servicers are currently overwhelmed with externally imposed programs that are stretching the limits of their human resources, money and time. Halo’s technology systems are bundled with transparency, accountability, efficiency, and flexibility. This unique strategy directs borrowers into an intelligent, results-driven process that establishes affordable, long-term mortgages while also achieving an improved return for lenders and investors, when compared to foreclosure.

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 The following outline briefly describes Halo’s various subsidiaries and the services they offer.  The Company provides segment reporting in accordance with generally accepted accounting principles in Note 4 to the consolidated financial statements.  Halo sold four of its subsidiaries during 2012 as discussed in the recent developments section below.  The subsidiaries sold are not included in this section.

Halo Asset Management, LLC   Halo Asset Management (“HAM”) was formed as the operating company for a “fee for service” default and disposition asset management business model supporting our clients’ investment into funds of real estate owned (REO) properties or non-performing loans.  The client’s primary investment focus is to acquire properties in metropolitan areas with an emphasis on acquiring below replacement cost, undervalued or distressed properties through REO.  The Company has allocated many of its resources to the development and launch of HAM which management notes is the core business of the Company today and moving forward.  HAM will have access to the full gamut of operational efficiencies and stream line processes offered by the other Halo entities in order to properly service and provide necessary value added opportunities to the clients’ home owners and occupants in the homes that are purchased.  HAM created a unique business plan that takes advantage of two of the largest anomalies that exist in today’s residential real estate market: (1) the collapse of available capital for lending to a large percentage of the consumer market, and (2) the over-correction of home prices particularly in low-to moderate-income markets.

UHalo Portfolio Advisors, LLCU   Halo Portfolio Advisors (“HPA”) works with asset managers, investors and servicers to provide ongoing default management, asset/liability management, asset preservation management, portfolio acquisition and liquidation support.  Secondarily, HPA offers its customers custom tailored workout programs that will improve the performance of the assets or notes through a myriad of creative analytic and retention strategies.  HPA utilizes Halo’s proprietary, in-house technology to provide a proprietary, customized analysis of a Client’s position.  HPA then custom tailors a solution for the Client which provides the Client analytics on which assets or notes to monetize first and what options are best utilized to monetize each individual asset or note.

UHalo Select Insurance Services, LLCU   Halo Select Insurance Services (“HSIS”) is a member in Halo Choice Insurance Services, LLC (HCIS), and owns a 49% interest.  Halo Select Insurance Services serves as a health and life insurance brokerage marketing multiple carriers’ products primarily in limited benefit health, major medical, short term medical, and life insurance.  HSIS is currently licensed in multiple states.  Halo Choice Insurance Services represents the lines of multiple insurance companies, including State Auto, Safeco, Travelers, CNA, Progressive, and Hartford.  
 
Recent Developments

Looking back to the year ended December 31, 2012, management believed that operational and financial capital was best spent on our opportunities in HAM and HPA, and therefore, executed on its HAM and HPA business plan (further detailed in Item 7 below) while ensuring the remaining Halo entities were focused primarily on cash flow preservation and high efficiency (with less headcount).  As a result, the Company saw a material improvement in the bottom line for the year ended December 31, 2012 compared to the year ended December 31, 2011.  Further, the Company sold several of its smaller operating verticals as noted below.

In January 2012, based on management’s assessment of the Halo Group Realty, LLC (“HGR”) operating segment performance along with the Company’s continued focus and financial capitalization efforts on growing the asset management and portfolio advisor subsidiaries, the Company committed to a plan to sell the subsidiary entity.  On January 31, 2012, the Company sold HGR for $30,000.  On August 31, 2012, in a separate transaction, the Company sold the primary technology platform, including the source code, of HGR for $50,000.

In November 2012, the Company entered into a stock/unit purchase agreement for the sale of the Company’s subsidiaries Halo Debt Solutions, Inc. (“HDS”), Halo Financial Services, LLC (“HFS”), and Halo Credit Solutions (“HCS”).  The purchase agreement was for $350,000, which includes a $25,000 down payment at closing and promissory note financing for the remainder of the purchase price.  The purchaser has a prepayment option that allows for the buyer to pay a cumulative total of $250,000 by April 20, 2013 as full satisfaction of the $350,000.
 
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Competition

The asset management and financial services industries are highly competitive, and there is considerable competition from major institutions in Halo’s lines of business, including national financial institutions, real estate agencies and insurance companies, as well as specialty consumer financial services companies offering one or more of the products and services offered by Halo.  The development and commercialization of new products and services to address consumers’ financial needs is highly competitive, and there will be considerable competition from major companies seeking to expand their own product and service offerings. Many of Halo’s competitors have substantially more resources than Halo, including both financial and technical resources.  Additionally, competition is intense in obtaining highly qualified employees.

Intellectual Property

The Company maintains copyrights on its printed marketing materials, web pages and proprietary software.  Halo’s goal is to preserve the Company’s trade secrets, without infringing on the proprietary rights of other parties.

To help protect its proprietary know-how, which is not patentable, Halo currently relies and will in the future rely on trade secret protection and confidentiality agreements to protect its interest.  To this end, Halo requires all of its employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to Halo of the ideas, developments, discoveries and inventions important to its business.

Employees

As of December 31, 2012, the Company had ­­32 full-time employees.  None of the Company’s employees are covered by a collective bargaining agreement.  Halo believes that it maintains good relationships with its employees.

Government Regulation

The services provided by the Company, through its subsidiaries, are extensively regulated by federal and state authorities in the United States.  Halo believes it is in compliance with federal and state qualification and registration requirements in order that it may continue to provide services to its clients consistent with applicable laws and regulations.  See Risk Factors below for further discussion about the risks involved with Company’s regulatory environment.

Item 1A.  RISK FACTORS.
 
Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.  The Company has a relatively limited operating history.  Our limited operating history and the unpredictability of the distressed real estate and mortgage services industry make it difficult for investors to evaluate our business.  An investor in our securities must consider the risks, uncertainties and difficulties frequently encountered by companies in rapidly evolving markets.
 
We will need additional financing to implement our business plan.  The Company will need additional financing to fully implement its business plan in a manner that not only continues to expand an already established direct-to-consumer approach, but also allows the Company to establish a stronger brand name in all the areas in which it operates, including mortgage servicing and distressed asset sectors.  In particular, the Company will need substantial financing to:
 
·    
further develop its product and service lines and expand them into new markets;
·    
expand its facilities, human resources, and infrastructure;
·    
increase its marketing efforts and lead generation; and
·    
expand its business into purchasing and servicing distressed asset portfolios.
 
-6-

 
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’s operations.
 
Our products and services are subject to changes in applicable laws and government regulations.  In the United States, we are regulated pursuant to laws applicable to businesses in general.  And in some areas of our business, we are subject to specific laws regulating the availability of certain material related to, or to the obtaining of, personal information.  Adverse developments in the legal or regulatory environment relating to the debt collection, mortgage servicing and mortgage origination industries in the United States could have a material adverse effect on our business, financial condition and operating results.  A number of legislative and regulatory proposals from the federal government and various state governments in the areas of debt collection, mortgage servicing, mortgage origination, consumer protection, advertising, and privacy, among others, have been adopted or are now under consideration.  We are unable at this time to predict which, if any, of the proposals under consideration may be adopted and, with respect to proposals that have been or will be adopted, whether they will have a beneficial or an adverse effect on our business, financial condition and operating results.
 
For the mortgage origination and mortgage servicing industries in particular, legislation in the United States has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments and agencies have issued extensive rules and regulations, some of which carry substantial penalties for failure to comply. These laws and regulations increase the cost of doing business and, consequently, affect profitability. Since new legislation affecting the mortgage origination and mortgage servicing industries is commonplace and existing laws and regulations are frequently amended or reinterpreted, the company is unable to predict the future cost or impact of complying with these laws and regulations.  However, the Company considers the cost of regulatory compliance a necessary and manageable part of its business.  Further, the Company has been able to plan for and comply with new regulatory initiatives without materially altering its operating strategies.
 
Specific laws which affect Halo Asset Management and Halo Portfolio Advisors in particular are the following:  The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“S.A.F.E. Act”), the Fair Debt Collection Practices Act (“FDCPA”), and the Real Estate Settlement Procedures Act (“Regulation X” or “RESPA”).  Currently, the Company is fully compliant with each of these laws.  The Company believes that these laws, as currently enacted, provide barriers to entry for potential competitors, by virtue of their respective bonding and licensing requirements, and the overall cost of compliance.  The Company believes that Halo Asset Management and Halo Portfolio Advisors maintain a competitive advantage in the marketplace because the Company is already fully compliant with each of the referenced laws.
 
In addition to the referenced federal laws and regulations, state mortgage origination and mortgage servicing laws and regulations also affect the Halo Asset Management and Halo Portfolio Advisors businesses, by providing further barriers to entry as well as additional compliance and enforcement procedures for our unlicensed, noncompliant competition.  The Company is currently compliant with all relevant state laws and regulations in the states in which the Company does business, however, if the relevant laws and regulations were to change in the states where the Company has its highest concentration of business, such change could have an adverse impact on the Company’s operating strategy and overall revenues.
 
We rely on key executive officers, and their knowledge of our business and technical expertise would be difficult to replace.  We are highly dependent on our executive officers.  If one or more of the Company’s senior executives or other key personnel are unable or unwilling to continue in their present positions, the Company may not be able to replace them easily or at all, and the Company’s business may be disrupted.  Such failure could have a material adverse effect on the Company’s business, financial condition and results of operations.
 
We may never pay dividends to our common stockholders.  The Company currently intends to retain its future earnings to support operations and to finance expansion and therefore the Company does not anticipate paying any cash dividends in the foreseeable future other than to holders of Halo Group preferred stock.
 
The declaration, payment and amount of any future dividends on common stock will be at the discretion of the Company’s Board of Directors, and will depend upon, among other things, earnings, financial condition, capital requirement, level of indebtedness and other considerations the Board of Directors considers relevant.  There is no assurance that future dividends will be paid on common stock or, if dividends are paid, the amount thereof.
 
-7-

 
Our common stock is quoted through the OTCQB, which may have an unfavorable impact on our stock price and liquidity.  The Company’s common stock is quoted on the OTCQB, which is a significantly more limited market than the New York Stock Exchange or NASDAQ.  The trading volume may be limited by the fact that many major institutional investment funds, including mutual funds, follow a policy of not investing in Bulletin Board stocks and certain major brokerage firms restrict their brokers from recommending Over the Counter stock because they are considered speculative and volatile.
 
The trading volume of the Company’s common stock has been and may continue to be limited and sporadic.  As a result, the quoted price for the Company’s common stock on the OTC Bulletin Board may not necessarily be a reliable indicator of its fair market value.
 
Additionally, the securities of small capitalization companies may trade less frequently and in more limited volume than those of more established companies.  The market for small capitalization companies is generally volatile, with wide price fluctuations not necessarily related to the operating performance of such companies.
 
Our common stock is subject to price volatility unrelated to our operations.  The market price of the Company’s common stock could fluctuate substantially due to a variety of factors, including market perception of the Company’s ability to achieve its planned growth, operating results of it and other companies in the same industry, trading volume of the Company’s common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company or its competitors.
 
Our common stock is classified as a “penny stock.”
Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us.  It is likely that the Company’s common stock will be considered a penny stock for the immediately foreseeable future.
 
For any transactions involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.  In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
 
The broker or dealer must also provide disclosures to its customers, prior to executing trades, about the risks of investing in penny stocks in both public offerings and in secondary trading in commissions payable to both the broker-dealer and the registered representative, and the rights and remedies available to an investor in cases of fraud in penny stock transactions.
 
Because of these regulations, broker-dealers may not wish to furnish the necessary paperwork and disclosures and/or may encounter difficulties in their attempt to buy or sell shares of the Company’s common stock, which may in turn affect the ability of Company stockholders to sell their shares.
 
Accordingly, this classification severely and adversely affects any market liquidity for the Company’s common stock, and subjects the shares to certain risks associated with trading in penny stocks.  These risks include difficulty for investors in purchasing or disposing of shares, difficulty in obtaining accurate bid and ask quotations, difficulty in establishing the market value of the shares, and a lack of securities analyst coverage.

-8-

 
We may continue to encounter substantial competition in our business.  The Company believes that existing and new competitors will continue to improve their products and services, as well as introduce new products and services with competitive price and performance characteristics.  The Company expects that it must continue to innovate, and to invest in product development and productivity improvements, to compete effectively in the several markets in which the Company participates.  Halo’s competitors could develop a more efficient product or service or undertake more aggressive and costly marketing campaigns than those implemented by the Company, which could adversely affect the Company’s marketing strategies and could have a material adverse effect on the Company’s business, financial condition and results of operations.

Important factors affecting the Company’s current ability to compete successfully include:

·    
lead generation and marketing costs;
·    
service delivery protocols;
·    
branded name advertising; and
·    
product and service pricing.

In periods of reduced demand for the Company’s products and services, the Company can either choose to maintain market share by reducing product service pricing to meet the competition or maintain its product and service pricing, which would likely sacrifice market share.  Sales and overall profitability would be reduced in either case.  In addition, there can be no assurance that additional competitors will not enter the Company’s existing markets, or that the Company will be able to continue to compete successfully against its competition.

We may not successfully manage our growth.  Our success will depend upon the expansion of our operations and the effective management of our growth, which will place significant strain on our management and our administrative, operational and financial resources.  To manage this growth, we may need to expand our facilities, augment our operational, financial and management systems and hire and train additional qualified personnel.  If we are unable to manage our growth effectively, our business would be harmed.

Item 1B.  UNRESOLVED STAFF COMMENTS.

None.

Item 2.  PROPERTIES.

The Company’s corporate offices are located at 700 Central Expressway South, Suite 500, Allen, Texas 75013, where Halo has 24,297 square feet of office space under lease.  Pursuant to an office lease dated September 2, 2011, the Company is required to make monthly lease payments of $43,552 per month.  Currently, the lease is set to expire on August 28, 2014.

Item 3.  LEGAL PROCEEDINGS.
 
The Company and certain of its affiliates, officers and directors have been named as defendants in an action filed on December 12, 2011 in the 191st District Court of Dallas County, Texas.  The Plaintiffs alledge that the Company has misappropriated funds in connection with offerings of securities during 2010 and 2011.  The complaint further alleges that Defendants engaged in fraudulent inducement, negligent misrepresentation, fraud, breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, violation of the Texas Securities Act, and civil conspiracy.  The Plaintiff’s amended their Petition on April 24, 2012 and dropped the conversion and civil conspiracy claims.  The action seeks an injunction and a demand for accounting along with damages in the amount of $4,898,157.  The Company has taken the position that the Plaintiff’s claims have no merit, and accordingly is defending the matter vigorously.  Defendants have filed a general denial of the claims as well as a Motion to Designate Responsible Third Parties whom Defendants believe are responsible for any damages Plaintiffs may have incurred.  Defendants have also filed a Motion for Sanctions against the Plaintiffs and their counsel arguing, among other things, that (i) Plaintiffs’ claims are “judicially stopped” from moving forward by virtue of the fact that the same Plaintiffs previously filed suit against separate entities and parties with dramatically opposed and contradicting views and facts; (ii) Plaintiffs have asserted claims against Defendants without any basis in law or fact; and (iii) Plaintiffs have made accusations against Defendants that Plaintiffs know to be false.  Additionally, Defendants have filed a no evidence Motion for Summary Judgment which was scheduled to be heard in October of 2012.  The Plaintiff’s requested and were granted a six month continuance on the hearing of that motion.  The Plaintiff’s have also filed a Motion to Stay the case pending the outcome of the Company’s lawsuit with the insurance companies which the Company has opposed.  Initially the motion to stay was granted and Defendants moved for reconsideration.  The parties were alerted that the court had reversed the Stay on appeal but to date, the order reversing the Stay has not been entered.
 
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The Company and certain of its affiliates, officers and directors named as defendants in an insurance action filed on April 27, 2012 in the United States District Court for the Northern District of Texas.  The Plaintiffs allege that it had no duty to indemnify the Company, its affiliates, officers or directors because the claims set forth in the lawsuit mentioned herein above were not covered by the insurance policy issued by Plaintiff in favor of Defendants.  The action sought declaratory judgment that the Plaintiff had no duty to indemnify the Defendants pursuant to the insurance policy that Defendants purchased from Plaintiff.  The Company took the position that Plaintiff’s claim had no merit, and defended the matter vigorously.  Additionally, Defendants filed a counterclaim against the insurer alleging breach of contract, violation of the Texas Insurance Code and violation of the duty of good faith and fair dealing.  On March 12, 2013, Plaintiff and Defendants entered into an agreement whereby Plaintiff’s and Defendant’s claims, are to be dismissed without prejudice while the underlying liability suit in the 191st District Court of Dallas County proceeds.  An Agreed Motion to Dismiss Without Prejudice was filed on March 12, 2013, and the parties are awaiting the court’s entry of the Agreed Order of Dismissal Without Prejudice.
 
The Company and certain of its affiliates, officers and directors have been named as defendants in an action filed on July 19, 2012 in the United States District Court for the Northern District of Texas.  The Plaintiff alleges that it has no duty to defend or indemnify the Company, its affiliates, officers or directors because the claims set forth in the lawsuit mentioned herein above are not covered by the insurance policy written by Plaintiff in favor or Defendants.  The action seeks declaratory judgment that the Plaintiff has no duty to defend or indemnify the Defendants pursuant to the insurance policy that Defendants purchased from Plaintiff.  Initially, the Company took the position that Plaintiff’s claims had no merit, and defended the matter vigorously.  Additionally, Defendants filed a counterclaim against the insurer alleging breach of contract, violation of the Texas Insurance Code and violation of the duty of good faith and fair dealing.  Plaintiff has filed a Motion for Summary Judgment seeking a judgment that it owes no duty to defend or indemnify Defendants.  After careful consideration, Defendants decided not to oppose the Motion for Summary Judgment and a response in opposition was not filed.  The parties are currently awaiting the court’s ruling.
 
See Note 16 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for more information.
 
Item 4.  MINE SAFETY DISCLOSURES.

Not applicable.


PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES.

Market Information
 
The Company’s Common Stock is currently traded in the over-the-counter market and quoted under the symbol HALN. The following are the high and low sales prices for the Company’s Common Stock for the periods reflected below, as reported by Bloomberg LP Investor Services:
 
UFiscal Year Ended December 31, 2012
 
UHigh
   
ULow
 
First Quarter
  $ 1.01     $ .05  
Second Quarter
  $ .99     $ .20  
Third Quarter
  $ .25     $ .06  
Fourth Quarter
  $ .50     $ .05  
 
 
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UFiscal Year Ended December 31, 2011
 
UHigh
   
ULow
 
First Quarter
  $ .90     $ .10  
Second Quarter
  $ 1.01     $ .11  
Third Quarter
  $ .98     $ .12  
Fourth Quarter
  $ .13     $ .05  
 
The above prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
 
Holders
 
The Company estimates that there are approximately 4,539 shareholders including approximately 2,839 stockholders of record and approximately 1,700 stockholders with shares held in “street name”.
 
Dividends
 
We intend to retain future earnings for use in our business and do not anticipate paying cash dividends in the foreseeable future.
 
Recent Sales of Unregistered Securities

During the fiscal year ended December 31, 2012, except as included in our Quarterly Reports on Form 10-Q or in our Current Reports on Form  8-K, we have not sold any equity securities not registered under the Securities Act.

Repurchases of Equity Securities

During the year ended December 31, 2012, 8,500 Series X Preferred shares have been redeemed through a Halo selective discretionary redemption.  These shares were redeemed as part of a non-publicly announced program.  Series X Preferred par value is $0.01 per share and holds a liquidation preference of $10.00 per share.  Total consideration of $85,000 was paid for the redemption of the 8,500 shares.   The Company did not repurchase any other equity securities during the year ended December 31, 2012.

Item 6.  SELECTED FINANCIAL DATA.
 
Not applicable.
 
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Forward-Looking Statements
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our historical results of operations during the periods presented and our financial condition. This MD&A should be read in conjunction with our financial statements and the accompanying notes, and contains forward-looking statements that involve risks and uncertainties and assumptions that could cause our actual results to differ materially from management’s expectations.  See the sections entitled “Forward-Looking Statements” and “Risk Factors” above.

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Plan of Operations
 
Halo has developed a fee for service business model through Halo Asset Management for the monetization of non-performing, residential mortgage notes (“NPNs”) or foreclosed single family homes (“REO”) (collectively, “Assets”).  Halo provides investors and asset owners a complete suite of asset management and mortgage services including, but not limited to (i) portfolio due diligence such as valuation engines, tax research, portfolio bid management, cost allocations and decision support; (ii) acquisition services including portfolio reconciliation, title, and tax reporting, an investor portal, initial portfolio inspection and servicing transfer assistance; (iii) repositioning services including portfolio restructuring, valuations, document preparation engine, document e-vaulting and proprietary loan underwriting; (iv) asset management and mortgage servicing including portfolio accounting, servicing and loan management functions, escrow administration, payment processing, loss mitigation and default resolution; and (v) liquidation strategies including predictive liquidity waterfalls, portfolio liquidation analysis, market analysis and disposition support.  Halo focuses on the monetization and servicing of distressed real estate assets and finding a win-win solution for the asset owner/investor and the consumer.  Halo will board REO properties as well as sub-performing and non-performing first lien mortgages from banks, financial institutions and mortgage servicers which have been purchased by investors.  The majority of the assets will be either modified first lien mortgages or sold via owner finance, as opposed to a fire sale through a real estate network.  HAM, through its strategic sub-servicing relationship, will season the notes collecting cash flow payments from the borrower.  Following several months of seller financed payment seasoning, Halo will assist in the disposal of the performing Assets in bulk to various bulk performing asset buyers.    
 
For the NPN’s, Halo will attempt to restructure or modify the note for those borrowers who have a desire to stay in the home and have the capacity to afford the home.  For the borrowers who either lack the desire to stay in the home, or who lack the capacity to afford the home, Halo will get a deed-in-lieu of foreclosure from the borrower (which ensures the investor ownership of the underlying asset; not just the purchased note), often times through incentives, and take the home back to an REO.
 
For the REO’s, traditional apartment or home renters become buyers after a qualification and screening process because they are given the opportunity to purchase affordable homes with achievable and manageable down payments and subsequent monthly payments.  Halo originates land contracts or mortgage notes for the new home owners.  A land contract (sometimes known as an “installment contract” or “contract for deed”) is a contract between a seller and buyer on real property in which the seller provides the buyer financing to buy the property for an agreed-upon purchase price, and the buyer repays the loan in installments.  Under a land contract, the seller retains the legal title to the property, while permitting the buyer to take possession of it for most purposes other than legal ownership.  The sales price is typically paid in periodic installments.  As a general rule, the seller is obligated to convey legal title of the property to the buyer when the full purchase price has been paid including any interest.  This process creates entry level housing with built-in, fully amortized financing that equates to payments that are equivalent to what the buyers are currently paying in rent, and often as much as 35% less.
 
When the loans are “seasoned,” they are attractive investment vehicles to be either refinanced or sold in bulk.  Halo will attempt to refinance the rehabilitated borrowers through an FHA loan providing the Client with an exit at 90-95% of par value.  The notes of borrowers who did not achieve qualifying levels will be sold in bulk at a discount of par value on the remaining unpaid principle balance of the notes.
 
Currently, HAM is under contract to manage and service approximately 5,800 assets in various stages of their life-cycle including REO, non-performing loans, re-performing note modifications, and performing owner financed contract-for-deeds.  As the Company currently has the management, infrastructure, and physical work area capacity to scale and support additional assets under contract, it is actively seeking new clients as well as helping existing clients increase their respective asset pool.  The Company believes that the country is in a long term deleveraging cycle whereby home financing will continue to be difficult to obtain.  For this same reason, we believe that investors will continue to be able to purchase assets in bulk from large institutional sellers at deep discounts and Halo’s goal is to establish itself, with the help of its unique technology platform and key servicing and vendor relationships, as the premier asset manager/servicer in the distressed non-performing loan and REO industry.
 
HPA services include portfolio strategy consulting, default management, asset/liability management, asset preservation management, debt restructuring, portfolio acquisition and liquidation support.  In addition, HPA also focuses its work with asset managers, investors and servicers to provide a custom, tailored workout program that will improve the performance of the assets or notes through a myriad of creative analytic and retention strategies.  HPA utilizes Halo’s proprietary in-house technology to provide a customized analysis of a Client’s position.  HPA then custom tailors a solution for the Client which provides the Client analytics on which assets or notes to monetize first and what options are best utilized to monetize each individual asset or note.
 
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The current economic environment finds lenders and servicers drowning in an overflow of defaulted assets and Halo recognizes the cause behind a typical troubled asset is often not one, but several contributing factors. HPA’s workout program allows for management of a diverse portfolio of loans.  HPA’s technology systems are bundled with transparency, accountability, efficiency, speed, and flexibility.  This unique strategy delivers Clients an intelligent, results-driven process that achieves an improved return for lenders, investors and servicers.  Halo’s operational support services allow endless opportunities for strategic relationships with major distressed asset managers and servicers.
 
Our management team is well-positioned to execute its business plan.  At its core, the plan seeks to execute on delivering asset management, valued analytics, and consumer financial rehabilitation to mid-size institutional investors, while limiting the acquisition costs of consumer prospects for other Halo subsidiaries.
 
Significant effort and investment capital has been incurred by the Company over the past nine years in order to attract and maintain a qualified and capable staff, develop proprietary software platforms, and implement systems, procedures, and infrastructure to execute the business plan on a large-scale.  Given the short time frame this current market opportunity has existed, we have a significant competitive advantage over others who may try to execute the same business plan.

Results of Operations for the year ended December 31, 2012 compared to the year ended December 31, 2011

Revenues

For the year ended December 31, 2012, revenue was down $1,469,720 or 23% to $4,810,594 for the year ended December 31, 2012 from $6,280,314 for the year ended December 31, 2011.  The decrease is primarily related to the sale of HGR during January 2012.  Revenue in HGR decreased $1,029,827 or 90% to $116,008 for the year ended December 31, 2012 from $1,145,835 for the year ended December 31, 2011.  The remaining decrease is primarily associated with the reduction in revenue in HDS due to several factors including management’s decision in late 2010 to implement a smaller marketing and customer lead budget, a reduced sales team and the overall effect of the amended Federal Trade Commission’s (FTC) Telemarketing Sales Rule (“TSR”) applicable to debt settlement fees and the debt settlement industry in general.  HDS and HFS revenue were down $541,411 or 83% to $110,972 for the year ended December 31, 2012 from $652,383 for the year ended December 31, 2011.

The Company continues to focus on HAM and HPA subsidiaries as its primary revenue producers, both in the short term, and in its long term growth plans.  For the year ended December 31, 2012, HAM and HPA revenue totaled 89% of the Company’s total revenues compared to 65% of total revenues for the year ended December 31, 2011.  Offsetting the decrease above, HPA revenue increased $308,871 or 27% to $1,440,183 for the year ended December 31, 2012 from $1,131,312 for the year ended December 31, 2011.  This increase is a result of both having more assets under management throughout the year as well as the introduction of several additional services HPA provided during the year in its default management and asset preservation management services.  HAM revenues remained relatively flat with a decrease of $65,083 or 2% to $2,863,944 for the year ended December 31, 2012 from $2,929,027 for the year ended December 31, 2011.  Overall, looking forward to 2013 which is the second full calendar year that HAM has been operational, the Company continues to evaluate and refine its sales and marketing process to increase its earning potential.  This process has and will continue to include management evaluating its sales methodology, sale closing efficiency, personnel and incentives, lead sources, technology support, asset count, type of assets under management, and customer base.

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.  The majority of contract service commissions include those commissions directly associated with the Company’s sales in both HAM and HPA.  Sales and marketing expenses decreased $472,923 or 22% to $1,631,216 for the year ended December 31, 2012 from $2,104,139 for the year ended December 31, 2011.  This decrease is primarily due to the HGR subsidiary being sold in January 2012, and as such there were no commission costs incurred (nor revenue generated) by HGR for the year ended December 31, 2012, compared to HGR being fully operational for the year ended December 31, 2011.  The decrease is offset by an increase in variable contract service sales costs incurred in HPA for the year ended December 31, 2012 compared to the year ended December 31, 2011, consistent with the above noted increases in revenue in HPA and asset units under management over the same time period.

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General and administrative expenses decreased $1,540,732 or 53% to $1,386,616 for the year ended December 31, 2012 from $2,927,348 for the year ended December 31, 2011.  This decrease is a result of several items including; (a) an $896,460 decrease in bad debt expense associated with the allowance for doubtful accounts.  This decrease is in line with the overall decrease in revenue and accounts receivable of HDS as well as the one-time bad debt increase required during 2011 for one client in HPA and HAM, as discussed in Note 2 to the consolidated financial statements, (b) the one-time 2011 reduction fee expense of $257,012 for the reduction in rent space effective September 2011.  The reduction in lease space is discussed in further detail in Note 15 to the consolidated financial statements, (c) reduction of consulting costs and (d) multiple immaterial decreases in various general and administrative accounts attributable to fixed cost savings measures during 2012.  The above decreases are offset by additional legal expense incurred in defending the litigation matters discussed in Note 15 to the consolidated financial statements.

Salary, wages and benefits decreased $542,833 or 18% to $2,509,320 for the year ended December 31, 2012 from $3,052,153 for the year ended December 31, 2011.  Approximately $436,000 or 80% of the decrease is a reduction in overall employee headcount primarily from reduction in force efforts during 2011 at both the parent company and within HFS and HDS, consistent with senior leadership’s decision during 2011 to implement decreased marketing, salaries, and variable overhead and operational costs to HFS and HDS in order to increase efforts to grow revenue in various other Halo ventures discussed above.  The effect of this change was seen for the entire 2012 fiscal year compared to only partial effect of the change in the 2011 implementation year.  Payroll also decreased in early 2012 with the sale of HGR and then again in November 2012 with the sale of HDS, HFS, and HCS, as noted above.  The remaining $107,000 or 20% of the overall salary, wages and benefits decrease is stock option compensation expense for any options that had vested during the year ended December 31, 2011 compared to the year ended December 31, 2012.  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 was recognized into earnings over the vesting period of the options beginning September 30, 2009.  Stock compensation related to the 2007 stock plan is fully vested as of September 30, 2011.  The $6,800 in stock compensation expense for the year ended December 31, 2012 was associated with the 2010 incentive stock plan as discussed further in Note 16 to the consolidated financial statements.

The above decreases are offset by the increase in payroll in HAM as the company continues implementing its business plan.  Looking forward to 2013, the Company anticipates increasing its headcount in the HAM subsidiary in-line with the growth of asset units managed under HAM.  As salaries, wages and benefits are the most significant cost to the Company, management actively monitors this cost to ensure it is in line with our business plan.

Interest expense decreased $54,323 or 11% to $431,487 for the year ended December 31, 2012 from $485,810 for the year ended December 31, 2011.  The decrease is primarily attributable to the scheduled paydown of the Company’s note payable and subordinated debt balances, as well as both the refinancing of old and origination of new related party note payables with more favorable interest rates.  The decrease is offset by an increase in interest expense on the secured asset promissory note (due to the default interest rate of 28%) for nine months of the year ended December 31, 2012 versus the coupon rate of 25% during the year ended December 31, 2011.  The above is discussed in further detail in Notes 9-12 to the consolidated financial statements.

The Company experienced a decrease in its overall net loss of $1,503,742 or 60% to a net loss of $999,286 for the year ended December 31, 2012 from a net loss of $2,503,028 for the year ended December 31, 2011, 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 summarized here.

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URevenue Recognition and Accounts Receivable and Deferred Revenue

The Company recognizes revenue in the period in which services are earned and realizable.  To further understand the Company’s business, HAM earns fees from its clients for its boarding and initial asset management fee, success fees, and its monthly servicing fee.  The boarding and initial asset management services are performed in the first 30-60 days of assets being boarded and include; IRR analysis of loans boarded, detailed asset level workout exit strategy analysis, boarding the assets onto HAM’s proprietary software platform and the integrated servicing platform, identification and oversight of custodial files, oversight of mortgage/deed assignment from previous servicer, oversight of title policy administration work, and delinquent property tax research and exposure review.  HAM’s monthly success fees are earned for completing its default and asset disposition services including loan modification, notes sales, obtaining a deed in lieu of foreclosure, originating owner finance agreements, and cash sales of REO properties owned by the client.  HAM’s servicing fees are earned monthly and are calculated on a monthly unit price for assets under management.

Prior to the subsidiary sale in November 2012, with respect to any enrolled debt account, HFS recognized its revenue once a client made at least one payment to a creditor pursuant to a settlement agreement, debt management plan, or other valid contractual agreement between the client and the creditor. The revenue recognized on any enrolled account bared the same proportional relationship to the total revenue that would be recognized for renegotiating, settling, reducing, or altering the terms of the debt balance on all of a particular client’s enrolled accounts as the individual debt amount bears to the entire debt amount.   Settlements were in the form of a lump sum creditor settlement payment or via contractual payment plans.  Effective October 27, 2010, there were no new sales in HDS (until the subsidiary sale in November 2012 the servicing of existing customers was active, including collecting of fees already earned and owed on all existing customers).  Any new debt settlement business to the Company after October 27, 2010 was transacted in the HFS entity.  Cash receipts from customers (including boarding and initial asset management fees from clients of HAM) in advance of revenue recognized are originally recorded as deferred revenue and recognized into revenue over the period services are provided.

HAM and HPA receivables are typically paid the month following services performed.  As of December 31, 2012, the Company’s accounts receivable are made up of the following percentages; HAM at 81%, HPA at 17%, all other at 2%.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: past transaction history with the customer, current economic and industry trends, and changes in customer payment terms.  The Company provides for estimated uncollectible amounts through an increase to the allowance for doubtful accounts and a charge to earnings based on actual historical trends and individual account analysis.  Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts.

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, valuation of equity based compensation and derivative liabilities.

Equity-Based Compensation

The Company accounts for equity instruments issued to employees in accordance with ASC 718 “Compensation-Stock Compensation”.  Under ASC 718, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options beginning when the specified events become probable of occurrence.  For the year ended December 31, 2012, there were 20,000 shares of stock options awarded as discussed in Note 16.  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.

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Liquidity and Capital Resources

As of December 31, 2012, the Company had cash and cash equivalents of $184,121.  The decrease of $473,014 in cash and cash equivalents from December 31, 2011 was due to cash used in operating activities of $1,104,520, offset by cash provided by investing activities of $156,618 and cash provided by financing activities of $474,888.
 
Net cash used in operating activities was $1,104,520 for the year ended December 31, 2012, compared to $287,508 net cash provided by operating activities for the year ended December 31, 2011.  The net cash used in operating activities for the year ended December 31, 2012 was due to a net loss of $999,286, adjusted primarily by the following: (1) a decrease in deferred revenue of $682,815; (2) a decrease in deferred rent of $114,311; (3) a gain on the sale of HDS, HFS and HCS subsidiaries of $134,731 and gain on the sale of HGR software platform of $50,000; (4) and an increase in deposits and other assets of $35,000; (4) offsetting the above adjustments to cash include a decrease in trade accounts receivable of $410,908, an increase of $253,506 and $86,971 in accrued and other liabilities and accounts payable, respectively, and non cash expense depreciation and amortization of $71,435.  The remaining immaterial variance is related to changes in operating assets and liabilities, a change in the noncontrolling interest balance, a non cash loss on the change in fair value of derivative, a loss on sale of Halo Group Realty, bad debt expense, amortization of debt discount, and two non cash expenses for stock compensation and stock based payment for consulting services rendered.
 
Deferred revenue decreased $682,815 primarily related to the revenue recognition of asset management fees in its HAM subsidiary.  Deferred revenue is discussed further in significant accounting policies above. The decrease in deferred rent of $114,311 is due to the Company paying more in monthly contractual rental cash payments than straight line rent expense.  Both the $134,731 gain on sale of the HDS, HFS and HCS subsidiaries and the gain on the sale of HGR software platform of $50,000 are discussed in Note 1 to the consolidated financial statements.  The increase in deposits and other assets of $35,000 is discussed in Note 2 to the consolidated financial statements.

The increase in accrued and other liabilities is primarily related to both the increase in deferred compensation to a portion of the management team and an increase in accrued interest at December 31, 2012, compared to December 31, 2011, specifically related to the secured asset promissory note discussed in Note 12 of the consolidated financials.  The increase in accrued and other liabilities is offset by a decrease in salaries and wages payable due to both the reduction of Company personnel as discussed in operating expenses above as well as the timing of the payroll pay date for the period ending December 31, 2012 compared to December 31, 2011.  The accounts payable increase is primarily the result of the timing of payments in monthly vendor commitments and payables.  As the Company has seen declines in its top line revenues, expenses have also declined accordingly.  However, the timing of the revenue decreases, in line with the Company’s attempt to raise capital for future successful business operations discussed in Plan of Operations above, has required the Company to strategically monitor its payables and cash flow outlays.  The Company pro-actively manages the timing and aging of vendor payables throughout the year.

The decrease in trade accounts receivable of $410,908 is primarily related to two factors; (1) the decrease in HDS accounts receivable throughout the year as the Company wound down its HDS operations and (2) the decrease of accounts receivable in the sale of its HDS, HFS and HCS subsidiaries in November 2012.
 
Net cash provided by investing activities was $156,618 for the year ended December 31, 2012, compared to net cash provided by investing activities of $169,555 for the year ended December 31, 2011.  Investing activities for the year ended December 31, 2012 consisted primarily of receiving; (1) $85,000 and $30,000 in proceeds from the sale of both the HDS, HFS and HCS subsidiaries in November 2012 and HGR in January 2012, (2) $50,000 in proceeds received in the sale of HGR software and final proceeds of $9,823 received from the mortgage joint venture, (3) offset by $18,205 in purchases of software and computer equipment.

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Net cash provided by financing activities was $474,888 for the year ended December 31, 2012, compared to net cash used in financing activities of $4,089 for the year ended December 31, 2011.  Financing activities for the year ended December 31, 2012 consisted primarily of the $700,000 received from issuance of preferred stock, $190,000 in proceeds received from notes payable to related parties, and $25,000 in proceeds from subordinated debt, offset by $85,000 discretionary redemption of preferred stock, $164,365 payment of principal on notes payable, $113,847 payment of principal on notes payable to related parties, and $77,000 in principal payments on subordinated debt.

As shown below, at December 31, 2012, our contractual cash obligations totaled approximately $3,510,715, all of which consisted of operating lease obligations and debt principal and accrued interest repayment.
 
   
Payments due by Period
 
Contractual Obligations
 
Less than 1 Year
   
1-3 years
   
4-5 years
   
More than 5
years
   
Total
 
Debt Obligations
  $ 2,100,222     $ 227,634     $ 69,983     $ 0     $ 2,397,839  
                                         
Operating Lease Obligations
  $ 679,966     $ 432,910     $ 0     $ 0     $ 1,112,876  
                                         
Total Contractual Cash Obligations
  $ 2,780,188     $ 660,544     $ 69,983     $ 0     $ 3,510,715  

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need additional financing to fund additional material capital expenditures and to fully implement its business plan including asset management and 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 our 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 our operations.  Management, in the normal course of business, is trying to raise additional capital through sales of common stock as well as seeking financing from third parties, via both debt and equity, to balance the Company’s cash requirements and to finance specific capital projects.

Off Balance Sheet Transactions and Related Matters
 
Other than operating leases discussed in Note 15 to the consolidated financial statements, there are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Interest Rate Risk.  Our business is leveraged and, accordingly, is 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.
 
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Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required by this item are included in this report in Part IV, Item 15 beginning on page F-1.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None
 
Item 9A. CONTROLS AND PROCEDURES.
 
Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company’s principal executive officer and principal financial officer evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the officers concluded that, as of the date of the evaluation, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the officers, to allow timely decisions regarding required disclosure. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Report of Management on Internal Control over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive officer and principal financial officer, to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that the Company’s transactions are recorded as necessary to permit preparation of the Company’s financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
 
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control – Integrated Framework.  Based on this assessment, the Company’s management concluded that, as of December 31, 2012, the Company’s internal control over financial reporting is effective based on those criteria.
 
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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Item 9B.  OTHER INFORMATION.

None.
 
Item 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

Directors and Executive Officers

On August 31, 2012, Paul Williams resigned from his role as Chief Financial Officer of Halo Companies, Inc.  Mr. Williams has continued to serve as Vice Chairman on the Board of Directors of the Company.  On August 31, 2012, Robbie Hicks was appointed to serve as Chief Accounting Officer of the Company.  He was previously serving as Vice President and Controller of the Company.  Set forth below is certain information regarding the persons who were directors and executive officers at any time during the fiscal year 2012.

UName
 
UAge
UPositions with the Company
Brandon C. Thompson
 
33
Chairman of the Board, Chief Executive Officer and Director
 
Paul Williams
 
56
Vice Chairman of the Board, Treasurer, Assistant Secretary and Director
 
Tony J. Chron
58
Director
 
T. Craig Friesland
 
41
Secretary and Director
 
Richard G. Morris
 
58
Director
Reif Chron
 
34
President and Chief Legal Counsel
Robert A. Boyce
 
50
Chief Operating Officer
Robbie Hicks
 
33
Chief Accounting Officer and Controller
 
Brandon C. Thompson

Brandon C. Thompson, 33, currently serves as Chairman of the Board and Chief Executive Officer of the Company.  Mr. Thompson was a co-founder of HGI and has served as the Chairman of the Board of Directors and Chief Executive Officer of HGI since its founding in January 2007.  Commencing in March 2003, Mr. Thompson served as a Loan Officer with Morningstar Mortgage, LLC, a mortgage company, and eventually acquired the assets of that company through Halo Funding Group, LLC in February 2005, which was ultimately consolidated into HGI in January 2007. Following this acquisition, Mr. Thompson founded and has served as Chairman, President, and Chief Executive Officer of Halo Credit Solutions, LLC, Halo Debt Solutions, Inc., and Halo Group Consulting, Inc.  In January 2007, upon the founding of HGI, Mr. Thompson contributed his interest in these companies, as well as his interest in Halo Funding Group, LLC (currently named Halo Group Mortgage, LLC), to HGI.  The breadth of Mr. Thompson’s entrepreneurial and consumer services experience led the Board of Directors to believe this individual is qualified to serve as a director of the Company.  Mr. Thompson was nominated for the Ernst & Young Entrepreneur of the Year Award, has served on the advisory board of Independent Bank of Texas. Mr. Thompson graduated from Abilene Christian University with a degree in Finance.

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Paul Williams

            Paul Williams, 56, currently serves as Vice Chairman of the Board, Treasurer and Assistant Secretary of the Company.  Mr. Williams was a co-founder of HGI, has served as Vice Chairman of the Board, Chief Financial Officer (thru August 2012) and Treasurer of HGI since its founding in January 2007 and as Assistant Secretary since late September 2009.  Mr. Williams has over 30 years of business experience primarily in the capital markets and mergers and acquisitions.  Since October 2007, Mr. Williams has also served as an executive officer for Bison Financial Group, Inc., a business development company, and as an executive officer for Blue Star Equities, Inc., a capital markets company, since September 2007. From November 1999 to the present, Mr. Williams has also served as the managing member of Lincoln America Investments, LLC, a real estate and equity investment company.  From January 15, 2006 to March 12, 2008, Mr. Williams served as an officer and director of NeXplore Corporation.  In June 2007, NeXplore and its executive team received an administrative order from the Arkansas Securities Department, suspending their ability to offer or sell securities in the state.    Mr. Williams has previously served three terms on the Board of the Texas Economic Development Council in Austin.  In 2007 he served as Chairman of the Board of the Frisco Chamber of Commerce and in 2009 was recognized by the Dallas Business Journal as the CFO of the Year for companies under $50MM in revenues. Mr. Williams graduated from Austin College in Sherman, Texas with a double-major in Economics and Business Administration.  He also graduated from the Institute of Organization Management, affiliated with the U.S. Chamber of Commerce.  The breadth of Mr. Williams’ entrepreneurial and financial services experience led the Board of Directors to believe this individual is qualified to serve as a director of the Company.

Tony J. Chron

Tony J. Chron, 58, currently serves as a Director of the Company and joined Halo in late September 2009 as its President.  Mr. Chron brings to the Company over 33 years of business experience in both public and private companies.  From 1997 to September 2009, Mr. Chron was a Senior Partner with Trademark Property Company, a major mixed-use and retail developer, and served in various executive capacities including, most recently, as Chief Operating Officer and Executive Vice President.  Mr. Chron also served on Trademark Property’s Executive Committee.  From 1986-1992 Mr. Chron served as Associate Corporate Counsel and Director of Real Estate and Property Management for Pier 1 Imports, Inc., a specialty retailer.  In 1992, following Pier 1 Imports’ purchase of Sunbelt Nursery Group, Inc., Mr. Chron served as General Counsel and Vice-President of Real Estate for Sunbelt, a specialty nursery retailer, and following the purchase by Frank’s Nursery & Crafts, Inc. of a 49% interest in Sunbelt, as Vice President of Store Development for Frank’s, a specialty retailer, where he remained until 1994.  From 1994 until 1997 Mr. Chron served as Vice President of Real Estate and Real Estate Legal for Michael Stores, Inc., a specialty retailer.  Mr. Chron is Mr. Thompson’s uncle and Reif Chron’s father.  Mr. Chron earned a Doctor of Jurisprudence degree from South Texas College of Law in 1983.  He also has a BS degree from Abilene Christian University.  Mr. Chron has been a licensed attorney in the State of Texas for more than twenty-six years.  The breadth of Mr. Chron’s professional and legal experience led the Board of Directors to believe this individual is qualified to serve as a director of the Company.

T. Craig Friesland

T. Craig Friesland, 41, currently serves as Secretary of the Company and served as Chief Legal Officer until October of 2010.  Mr. Friesland was a co-founder of HGI and had served as a Director and Chief Legal Officer since its inception in January 2007.  He also practices law in his own firm, Law Offices of T. Craig Friesland, founded in January 2005.  Prior to establishing his own firm, Mr. Friesland practiced law with Haynes and Boone, LLP, one of the largest law firms in Texas, from September 1998 through December 2004.  Mr. Friesland earned his law degree at Baylor University School of Law in 1998.  He also has a Master of Business Administration degree from Baylor University and a Bachelor of Business Administration degree in Finance from The University of Texas at Austin.  Mr. Friesland was admitted to the State Bar of Texas in 1998.  The breadth of Mr. Friesland’s professional legal experience led the Board of Directors to believe this individual is qualified to serve as a director of the Company.

-20-

 
Richard G. Morris

Richard G. Morris, 58, currently serves as a Director of the Company.  Mr. Morris was a co-founder of HGI, and has served as a Director since its inception in January 2007.  Prior to joining the Company, he served in various positions with United Parcel Service from 1976 until March 2002, most recently, from January 2001 to March 2002 as one of its three District Operations Managers.  In that role, Mr. Morris was responsible for 5,400 employees, a staff of 18 senior managers, a monthly operating budget of approximately $28 million, and revenues in excess of $35 million.  After departing UPS, in July 2002, Mr. Morris became the principal owner of Rammco Distributors, Incorporated, an equipment rental company which he still owns.  In July 2004, Mr. Morris co-founded Blue River Development, Inc., a real estate investment and development company, and is currently the sole owner and operator of this company.  In August 2008, Mr. Morris acquired Port City, Inc., a plastics manufacturing company which Mr. Morris also currently owns and operates.  The breadth of Mr. Morris’ entrepreneurial, managerial and operational experience led the Board of Directors to believe this individual is qualified to serve as a director of the Company.
 
Reif O. Chron

Reif O. Chron, 34, currently serves as President and General Counsel of the Company.  Mr. Chron joined Halo in March of 2009 to serve as General Counsel.  Mr. Chron studied Accounting at Texas A&M University and subsequently graduated with his Juris Doctorate from Washington University School of Law.  Prior to attending Washington University, Mr. Chron spent time at Pricewaterhouse Coopers LLP where he specialized in tax planning for high net worth clients.  Mr. Chron also worked at Trademark Property Company, where he participated in several projects, including a $160 million real estate portfolio sale to Heritage Property Investment Trust, a new 400,000 square foot shopping center in Flowood, MS and a $100 million lifestyle center located in the Woodlands, TX. Mr. Chron also compiled market research that has led to three new development projects.  After earning his law degree, he practiced as a real estate attorney at Kelly Hart & Hallman where his experience includes the negotiation, due diligence review, documentation, and closing of sophisticated real estate transactions, including the acquisition and disposition of office buildings, hotels, commercial tracts and ranch land as well as representing developers in the acquisition, leasing and management of shopping centers and mixed-use projects.

Robert A. Boyce, Jr.

Robert A. Boyce, Jr., 50, currently serves as Chief Operating Officer of the Company.  Mr. Boyce joined Halo in June of 2011 bringing over 27 years of business operating experience in public companies and the private sector.  For the five years prior to joining Halo, Mr. Boyce managed and operated commercial real estate holdings in Texas and commercial agricultural properties in Mississippi.  From 1990 to 2005, Mr. Boyce held various executive positions for United Agri Products (and its related entities), which prior to being taken public by the Apollo Group, was a wholly-owned subsidiary of ConAgra Foods.  While with UAP, Mr. Boyce held the positions of President of Verdicon, the non-crop distribution business with revenues of $300 million; Executive Vice President of United Agri Products responsible for $1.2 billion in revenue; and President and General Manager for two independent operating companies with revenue of $200 million.  Prior to joining UAP, Mr. Boyce worked for Helena Chemical Company and ICI Americas.  Throughout his career, Mr. Boyce has served on national and regional industry-related boards.  He is a graduate from the University of Mississippi, B.B.A., 1984.

Robbie Hicks

Robbie Hicks, 33, currently serves as Chief Accounting Officer and Controller of the Company.  Mr. Hicks joined Halo in April of 2009 as the Company’s Controller.  In this capacity, Mr. Hicks has been responsible for the preparation and timely filing of the Company’s annual and quarterly financials with the Securities Exchange Commission, all accounting functions including accounting policy and procedure and implementation, treasury management, and internal management reporting to the Company’s Executive Committee and Board of Directors.  Prior to joining the Company, Mr. Hicks was an audit manager with KPMG LLP, servicing its financial services clients in the Dallas metro area.  Several clients included a public national bank, a large mortgage servicing company, and several private investment companies.  Mr. Hicks is a certified public accountant in the State of Texas.  He is a 2003 graduate of Texas Tech University where he received both his B.B.A and Master of Science in Accounting.

-21-

 
Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires officers, directors and persons who beneficially own more than 10% of a class of our equity securities registered under the Exchange Act to file reports of ownership and changes in ownership with the Securities and Exchange Commission.  Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us during fiscal year 2011 and Forms 5 and amendments thereto furnished to us with respect to fiscal year 2011, or written representations that Form 5 was not required for fiscal year 2011, we believe that except as noted below, all Section 16(a) filing requirements applicable to each of our officers, directors and greater-than-ten percent stockholders were fulfilled in a timely manner.  James G. Temme, beneficial owner of greater than 10% of our common stock, failed to comply with his Section 16(a) filing requirements.  We have notified all known beneficial owners of more than 10% of our common stock of their requirement to file ownership reports with the Securities and Exchange Commission.

Code of Ethics
 
We do not currently have a Code of Ethics applicable to our principal executive, financial, and accounting officers.

No Committees of the Board of Directors; No Financial Expert

We do not presently have a separately constituted audit committee, compensation committee, nominating committee, executive committee or any other committees of our Board of Directors. Nor do we have an audit committee “financial expert”.  At present, our entire Board of Directors acts as our audit committee.  None of the members of our Board of Directors meets the definition of “audit committee financial expert” as defined in Item 407(d) of Regulation S-K promulgated by the Securities and Exchange Commission.  We have not retained an audit committee financial expert because we do not believe that we can do so without undue cost and expense.  Moreover, we believe that the present members of our Board of Directors, taken as a whole, have sufficient knowledge and experience in financial affairs to effectively perform their duties.

Item 11.  EXECUTIVE COMPENSATION.

Summary Compensation Table
 
The particulars of compensation paid to the following persons during the fiscal period ended December 31, 2012 and 2011 are set out in the summary compensation table below:

 
·
our Chief Executive Officer (Principal Executive Officer);
 
·
our Chief Financial Officer (Principal Financial Officer);
 
·
each of our three most highly compensated executive officers, other than the Principal Executive Officer and the Principal Financial Officer, who were serving as executive officers at the end of the fiscal year ended December 31, 2012 and 2011; and
 
·
up to two additional individuals for whom disclosure would have been provided under the item above but for the fact that the individual was not serving as our executive officer at the end of the fiscal year ended December 31, 2012 and 2011;
(collectively, the “ Named Executive Officers ”):
 
-22-

 
SUMMARY COMPENSATION TABLE
 
Name and Principal Position
 
 
Year
 
 
Salary
 
($)**
Bonus
 
($)
Stock Awards
 
($)
Option Awards
 
($)
All Other Compensation
 
 ($)***
Total
 
($)
Brandon C. Thompson, CEO
2012
2011
$225,000
$155,809
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
$225,000
$155,809
Paul Williams, CFO
(Principal Financial Officer thru August 31, 2012)
2012
2011
75,000
$109,629
-0-
-0-
-0-
-0-
-0-
-0-
$3,000
-0-
78,000
$109,629
Robbie Hicks, CAO
(Principal Financial Officer from August 31, 2012)
2012
2011
$138,865
$121,986
-0-
$15,000
-0-
-0-
-0-
-0-
-0-
-0-
$138,865
$136,986
Reif Chron, President & General Counsel
2012
2011
$225,000
$154,426
 -0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
$225,000
$154,426
 
** 2012 Salary includes both gross cash payments made and deferred compensation accrued during the year ended December 31, 2012
*** Other compensation includes non-employee compensation for the sale of HDS, HFS and HCS subsidiaries.  This compensation is paid as a percentage of cash proceeds received against the note receivable as discussed in Note 2 of the consolidated financial statements.

Summary Compensation

The Company has no employment agreements with any of its Directors or executive officers.

For the fiscal year ended December 31, 2012, no outstanding stock options or other equity-based awards were re-priced or otherwise materially modified.  No stock appreciation rights have been granted to any of our Directors or executive officers and none of our Directors or executive officers exercised any stock options or stock appreciation rights.  There are no non-equity incentive plan agreements with any of our Directors or executive officers.

-23-

 
Outstanding Equity Awards

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS
STOCK AWARDS
Name
 
 
Number of Securities Underlying Unexercised options
 
(#)
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
 
(#)
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
 
(#)
Option
Exercise
Price
 
($)
Option
Expiration
Date
 
 
Number of
Shares or
Units of
Stock that
have not Vested
 
(#)
Market
Value of
Shares or
Units of
Stock that
have not Vested
 
($)
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or
Other
Rights that
have not
Vested
 
(#)
Equity Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or other
Rights that
have not
Vested
 
($)
Brandon C. Thompson,
CEO
0
0
0
0
0
0
0
0
0
Robbie Hicks,
CAO
23,000
77,000
0
 
0
 
$0.94
$1.59
3/04/2014
6/29/2014
0
 
0
 
0
 
0
 
Reif Chron,
President & General Counsel
23,000
77,000
0
0
0
0
$0.94
$1.59
3/11/2014
6/29/2014
0
0
0
0
0
0
0
0
 
Compensation of Directors
 
DIRECTOR COMPENSATION
Name
 
 
Fees earned or
Paid in Cash
 
($)
Stock Awards
 
($)
Option Awards
 
($)
All Other
Compensation
 
 ($)
Total
 
($)
T. Craig Friesland
$13,200
-0-
-0-
-0-
$13,200
Richard G. Morris
$13,200
-0-
-0-
-0-
$13,200
Tony Chron
$13,200
-0- -0-
-0-
$13,200
 
Employment Contracts, Termination of Employment, Change-in-Control Arrangements
 
There are no employment or other contracts or arrangements with officers or Directors. There are no compensation plans or arrangements, including payments to be made by us, with respect to our officers, Directors or consultants that would result from the resignation, retirement or any other termination of service in respect of such Directors, officers or consultants. There are no arrangements for Directors, officers, employees or consultants that would result from a change-in-control.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Security Ownership of Certain Beneficial Owners and Management
 
The following table sets forth certain information with respect to the beneficial ownership, as of April 1, 2013 of the Company’s common stock, which is the Company’s only outstanding class of voting securities, and the voting power resulting from such beneficial ownership, by
 
-24-

 
    ·
each stockholder known by the Company to be the beneficial owner of more than 5% of the Company’s outstanding common stock;
    ·
each director of the Company;
    ·
each executive officer of the Company; and
    ·
all directors and executive officers of the Company as a group.
 
UBeneficial Owner (1)
Amount and Nature
of Beneficial
UOwnership
Percent
Uof Class (3)
     
Brandon C. Thompson (2)
20,051,110
27.8%
     
James Temme (2)
17,808,000 (7)
24.7%
     
Jimmy Mauldin (2)
8,500,000
11.8%
     
Paul Williams (2)
4,395,243
6.1%
     
T. Craig Friesland (2)
2,250,122
3.1%
     
Richard G. Morris (2)
4,210,006 (4)
5.8%
     
Tony J. Chron (2)
1,290,071 (5)
1.8%
     
Reif Chron (2)
1,160,005 (6)
1.6%
     
Directors and executive officers as a group (six persons)
33,356,557 (8)
46.2%

 
(1) We understand that, except as noted below, each beneficial owner has sole voting and investment power with respect to all shares attributable to that owner.
 
(2)  The address for each such beneficial owner is 700 Central Expressway South, Suite 500, Allen, Texas 75013.
 
(3) Asterisk indicates that the percentage is less than one percent.
 
(4) Includes 3,822 shares of the Company’s Series Z preferred stock (172,009 shares of the Company’s common stock into which such Series Z preferred stock will be convertible) issuable upon exercise of HGI stock options.  Further, includes 40,000 shares of Series E convertible preferred stock (conversion rate of 50 common shares per share of Series E) for a total of 2,000,000 shares issuable upon conversion of the preferred stock.
 
(5) Includes 978 shares of the Company’s Series Z preferred stock (44,004 shares of the Company’s common stock into which such Series Z preferred stock is convertible) issuable upon conversion of HGI preferred stock.
 
(6) Includes 2,222 shares of the Company’s Series Z preferred stock (100,005 shares of the Company’s common stock into which such Series Z preferred stock is convertible) issuable upon exercise of HGI stock options.
 
(7) Shares issued pursuant to the transaction between Halo and Equitas Asset Management, described in Note 17 to the consolidated financial statements.
 
(8) Includes (a) 3,822 shares of the Company’s Series Z preferred stock (172,009 shares of the Company’s common stock into which such Series Z preferred stock will be convertible) issuable upon exercise of HGI stock options and (b) 978 shares of the Company’s Series Z preferred stock (44,004 shares of the Company’s common stock into which such Series Z preferred stock will be convertible) issuable upon conversion of HGI preferred stock and (c) 2,222 shares of the Company’s Series Z preferred stock (100,005 shares of the Company’s common stock into which such Series Z preferred stock will be convertible) issuable upon exercise of the HGI stock options.  This also includes 40,000 shares of Series E convertible preferred stock (conversion rate of 50 common shares per share of Series E) for a total of 2,000,000 shares issuable upon conversion of the preferred stock into common stock.

-25-

 
All of the shares of the Company owned by Messrs. Cade Thompson and Reif Chron have been pledged as security in a loan agreement.  A default under the loan agreement which is not timely remedied may result in a change of control in the Company.  The default provisions of the loan agreement include the following: (i) non-payment of loan obligations; (ii) breach of a representation or warranty; (iii) non-performance of certain covenants and obligations; (iv) default on other indebtedness; and (v) judgments exceeding $100,000.

Changes in Control

All of the shares of the Company owned by Messrs. Cade Thompson and Reif Chron have been pledged as security in a loan agreement.  A default under the loan agreement which is not timely remedied may result in a change of control in the Company.  The default provisions of the loan agreement include the following: (i) non-payment of loan obligations; (ii) breach of a representation or warranty; (iii) non-performance of certain covenants and obligations; (iv) default on other indebtedness; and (v) judgments exceeding $100,000.

Securities authorized for issuance under equity compensation plans

The following table provides information as of the end of the most recently completed fiscal year, with respect to Company compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
 
 
Equity Compensation Plan Information
 
A(1)
B
C
Plan category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column A)
Equity compensation plans approved by security holders
1,215,150(1)
$0.97
-0-
Equity compensation plans not approved by security holders
20,000
$0.34
-6,980,000-
Total
1,235,150
$0.96
-6,980,000-
 
(1)  
 Includes 1,215,150 shares subject to stock options under the HGI 2007 Stock Plan.

-26-

 
Following is a brief description of the material features of each compensation plan under which equity securities of the Company are authorized for issuance, which was adopted without the approval of the Company security holders:

Prior to the merger in 2009, HGI granted stock options to certain employees and contractors under the HGI 2007 Stock Plan.  Pursuant to the terms of the Merger and the terms of the HGI 2007 Stock Plan, the Company’s common stock will be issued upon the exercise of the HGI stock options.  At December 31, 2009, pursuant to the terms of the merger agreement, all options available for issuance under the HGI 2007 Stock Plan have been forfeited and consequently the Company has no additional shares subject to options or stock purchase rights available for issuance under the HGI 2007 Stock Plan.  Currently outstanding options under the HGI 2007 Stock Plan vest over a period no greater than two years, are contingently exercisable upon the occurrence of specified events as defined by the option agreements, and expire upon termination of employment or five years from the date of grant.  This plan is discussed in further detail in Note 16 to the consolidated financials.

On July 19, 2010, the board of directors approved the Company’s 2010 Incentive Stock Plan (2010 Stock Plan).  The 2010 Stock Plan allows for the reservation of 7,000,000 shares of the Company’s common stock for issuance under the plan.  The 2010 Stock Plan became effective July 19, 2010 and terminates July 18, 2020.  As of December 31, 2012, 20,000 shares were granted under the 2010 Stock Plan.
 
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Transactions with Related Persons, Promoters and Certain Control Persons

Since the beginning of the fiscal year January 1, 2012 and except as disclosed below, none of the following persons has had any direct or indirect material interest in any transaction to which the Company  was or is a party, or in any proposed transaction to which the Company proposes to be a party:
 
 
·
any director or officer of the Company;

 
·
any proposed director of officer of the Company;

 
·
any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to the Company’s common stock; or

 
·
any member of the immediate family of any of the foregoing persons (including a spouse, parents, children, siblings, and in-laws).

In 2012, the Company was indebted to Reif Chron, President and Chief Legal Officer, for $28,000 in working capital advances he made to the Company.  The advances do not accrue interest.

In 2012, the Company was indebted to Cade Thompson, CEO, for $12,000 in working capital advances he made to the Company.  Subsequent to December 31, 2012, Mr. Thompson advanced an additional $20,000 for total outstanding advances of $32,000.  The advances do not accrue interest.

In 2012, the Company was indebted to Richard Morris, Director of the Company, for working capital advances he made to the Company.  During 2012, total advances to the Company and paydowns to Mr. Morris totaled $150,000 and $50,000, respectively.  As of December 31, 2012, the advance balance was $100,000.  Subsequent to December 31, 2012, Mr. Morris advanced an additional $100,000 for total outstanding advances of $200,000.  The advances do not accrue interest.

-27-

 
In 2012, Richard Morris, Director of the Company, purchased 40,000 shares of Series E convertible preferred stock for $400,000 in cash consideration.   The Series E stock has a conversion rate of 50 common shares per share of Series E convertible preferred stock for a total of 2,000,000 common shares issuable upon conversion of the preferred stock.
 
During 2011, the Company entered into one unsecured promissory note with Tony Chron, Director of the Company, in the amount of $250,000.  The note accrued interest of $52,426.  During 2011, the note and accrued interest were consolidated into one note balance of $302,426, with future payments to be made per the note amortization schedule.  As of December 31, 2012 the remaining total principal on this consolidated note balance was $206,292.  The balance accrues interest at an annual rate of 6%.  Total interest paid to Mr. Chron during 2012 totaled $22,135.

During 2010, Martin Williamson invested $1,200,000 in the $20,000,000 Equitas Housing Fund 25% Secured Promissory Note Offering.  $1,200,000 of principal balance is still outstanding.  The offering provided for a 25% rate of interest and a 24 month term, due December 2012.  Mr. Williamson is Reif Chron’s stepfather.  All accrued interest has been paid thru March 31, 2012.  From March 31, 2012 thru December 31, 2012, accrued interest of $252,000 is owed.  This balance is calculated at a 28% default interest rate.

During the year ended December 31, 2012, the Company selectively redeemed on a discretionary basis, 8,500 Series X Preferred shares from Jimmy Mauldin, beneficial owner.  The shares had a par value of $0.01, liquidation value of $10.00 per share, for total cash consideration of $85,000.

Prior to and during 2012, the Company had a related party note with an entity owned by the father of Jimmy Mauldin, a beneficial owner, totaling $370,639.  The note currently bears interest of 6% and has a maturity date of September 15, 2016.  As of December 31, 2012, the note balance was $291,969.  Total interest paid in 2012 on this note totaled $36,296.

Director Independence; Board Leadership Structure

The Company’s common stock is quoted through the OTC System.  For purposes of determining whether members of the Company’s Board of Directors are “independent,” the Company’s Board utilizes the standards set forth in the NASDAQ Stock Market Marketplace Rules.  At present, the Company’s entire Board serves as its Audit, Compensation and Nominating Committees.  The Company’s Board of Directors has determined that, of the Company’s present directors, Richard G. Morris, constituting one of the five members of the Board, is an “independent director,” as defined under NASDAQ’s Marketplace Rules, for purposes of qualifying as independent members of the Board and an Audit, Compensation and Nominating Committee of the Board, but that Brandon C. Thompson, Paul Williams, Tony J. Chron, and T. Craig Friesland are not “independent directors” since they serve as executive officers of the Company.  In reaching its conclusion, the Board determined that Mr. Morris does not have a relationship with the Company that, in the Board’s opinion, would interfere with his exercise of independent judgment in carrying out the responsibilities of a director, nor does Mr. Morris have any of the specific relationships set forth in NASDAQ’s Marketplace Rules that would disqualify him from being considered an independent director.

Since the effective date of the merger in 2009, the Company has not changed the structure of its Board of Directors and currently, Mr. Brandon C. Thompson serves as both Chairman of the Board and Chief Executive Officer.  As noted above, Mr. Richard G. Morris is the sole independent director and, as a recent addition to the Board of Directors, Mr. Morris has not taken on any supplemental role in his capacity as director.  It is anticipated that additional independent directors will be added to the Board, however, the Company’s Board of Directors has not set a timetable for such action.

The Company’s Board of Directors is of the view that the current leadership structure is suitable for the Company at its present stage of development, and that the interests of the Company are best served by the combination of the roles of Chairman of the Board and Chief Executive Officer.

As a matter of regular practice, and as part of its oversight function, the Company’s Board of Directors undertakes a review of the significant risks in respect of the Company’s business.  Such review is conducted in concert with the Company’s in-house legal staff, and is supplemented as necessary by outside professionals with expertise in substantive areas germane to the Company’s business.  With the Company’s current governance structure, the Company’s Board of Directors and senior executives are, by and large, the same individuals, and consequently, there is not a significant division of oversight and operational responsibilities in managing the material risks facing the Company.

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Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
The following information summarizes the fees billed to us by Whitley Penn LLP and Montgomery Coscia Greilich L.L.P. for professional services rendered for the fiscal year ended December 31, 2012 and 2011, respectively.

UAudit FeesU.   Fees billed or remainder to be billed for audit services by Whitley Penn LLP were $74,000 for fiscal year 2012 and fees billed by Montgomery Coscia Greilich L.L.P. were $84,837 for fiscal year 2011. Audit fees include fees associated with the annual audit and the reviews of the Company’s quarterly reports on Form 10-Q, and other SEC filings.

UAudit-Related FeesU.   The Company did not pay any audit-related service fees to Whitley Penn LLP or Montgomery Coscia Greilich L.L.P., other than the fees described above, for services rendered during fiscal year 2012 or 2011.

UTax FeesU.   Fees billed for tax compliance by Whitley Penn LLP were $9,000 for fiscal year 2012 and $7,544 by Montgomery Coscia Greilich L.L.P. for fiscal year 2011.

UAll Other Fees.  Other Fees billed by Whitley Penn LLP or Montgomery Coscia Greilich L.L.P. were $0 in fiscal year 2012 and 2011.

Consistent with SEC policies regarding auditor independence, the audit committee has responsibility for appointing, setting compensation, approving and overseeing the work of the independent auditor.  In recognition of this responsibility, the audit committee pre-approves all audit and permissible non-audit services provided by the independent auditor.  The Board of Directors serves as the audit committee for the Company.

PART IV
 
Item 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
(a) Financial Statements and financial statement schedules
         
  (1)  
and  (2) The financial statements and financial statement schedules required to be filed as part of this report are set forth in Item 8 of Part II of this report.
         
  (3)  Exhibits. See Item 15(b) below.
         
(b)  Exhibits required by Item 601 of Regulation S-K
         
  Exhibit No.   Description
       
 
2.1
 
Assignment and Contribution Agreement by and among Halo Companies, Inc, Halo Asset Management, LLC, the Members of Equitas Asset Management, LLC and Equitas Asset Management, LLC. (filed as Exhibit 2.1 to Form 8-K filed with the Commission on December 17, 2010, and incorporated herein by reference).
       
 
3.1
 
Restated Certificate of Incorporation of GVC Venture Corp. changing the name of the Company to Halo Companies, Inc., filed with the Secretary of State of the State of Delaware on December 11, 2009 (filed as Exhibit 3.1 to Form 8-K filed with the Commission on December 15, 2009, and incorporated herein by reference).
 
-29-

 
 
3.2
 
Amendment to Restated Certificate of Incorporation of Halo Companies, Inc., filed with the Secretary of State of the State of Delaware on December 11, 2009 (filed as Exhibit 3.2 to Form 8-K filed with the Commission on December 15, 2009, and incorporated herein by reference).
       
 
3.3
 
Amended By-Laws of Halo Companies, Inc., as amended through December 11, 2009 (filed as Exhibit 3.3 to Form 8-K filed with the Commission on December 15, 2009, and incorporated herein by reference).
       
 
16.1
 
Changes in Registrant’s Certifying Accountant (filed as Exhibit 16 to Form 8-KA filed with the Commission on May 10, 2012, and incorporated herein by reference).
       
   
List of subsidiaries
       
  31.1   Sarbanes-Oxley Section 302(a) Certification of Brandon C. Thompson
       
  31.2   Sarbanes-Oxley Section 302(a) Certification of Robbie Hicks
       
  32.1   Sarbanes-Oxley Section 906 Certifications
 
 
-30-

 
SIGNATURES
 
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

Date: April 1, 2013
By:
/s/ Brandon Cade Thompson
 
Brandon Cade Thompson
 
Chief Executive Officer
 
(Principal Executive Officer)
   
Date: April 1, 2013
By:
/s/ Robbie Hicks
 
Robbie Hicks
 
Chief Accounting Officer
 
(Principal Financial Officer)
 

 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 
SignatureU   CCapacity   Date
         
/s/ Brandon Cade Thompson   Chairman, CEO, Director    
Brandon Cade Thompson   (principal executive officer)   April 1, 2013
         
/s/ Robbie Hicks   Chief Accounting Officer    
Robbie Hicks   (principal financial officer)   April 1, 2013
         
/s/ Paul Williams        
Paul Williams   Vice Chairman, Director   April 1, 2013
         
U/s/ Tony ChronU
       
Tony Chron   Director   April 1, 2013
         
U/s/ T. Craig Friesland
       
T. Craig Friesland   Director   April 1, 2013
         
U/s/ Richard Morris
       
Richard Morris   Director   April 1, 2013
 
 
-31-

 
HALO COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012


The following consolidated financial statements of the Company are contained in this Report on the pages indicated:
 
Reports of Independent Registered Public Accounting Firms
F-2
   
Consolidated Financial Statements:
 
   
Balance Sheets as of December 31, 2012 and 2011
F-4
   
Statements of Operations for the Years Ended December 31, 2012 and 2011
F-5
   
Statements of Changes in (Deficit) Equity for the Years Ended December 31, 2012 and 2011
F-6
   
Statements of Cash Flows for the Years Ended December 31, 2012 and 2011
F-7
   
Notes to Financial Statements
F-8


-F-1-

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Halo Companies, Inc.


We have audited the accompanying consolidated balance sheet of Halo Companies, Inc. (the “Company”), as of December 31, 2012, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year ended December 31, 2012.  The Company’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Halo Companies, Inc., as of December 31, 2012, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 5 to the consolidated financial statements, the Company has had recurring losses from operations, and has an accumulated deficit.  Management’s plans in regard to these matters are also described in Note 5.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/ WHITLEY PENN LLP

Dallas, Texas
April 1, 2013
 
-F-2-

 
Montgomery Coscia Greilich LLP
Certified Public Accountants
2500 Dallas Parkway, Suite 300
Plano, Texas 75093
972.748.0300 p
972.748.0700 f

Thomas A. Montgomery, CPA
Matthew R. Coscia, CPA
Paul E. Greilich, CPA
Jeanette A. Musacchio
James M. Lyngholm
Christopher C. Johnson, CPA
J. Brian Simpson, CPA
Rene E. Balli, CPA
Erica D. Rogers, CPA
Dustin W. Shaffer, CPA
Gary W. Boyd, CPA
Michal L. Gayler, CPA
Gregory S. Norkiewicz, CPA
Karen R. Soefje, CPA


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Halo Companies, Inc.

We have audited the accompanying consolidated balance sheet of Halo Companies, Inc. as of December 31, 2011, and the related consolidated statement of operations, changes in shareholders’ equity and cash flows for the year then ended. Halo Companies, Inc. management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Halo Companies, Inc. as of December 31, 2011, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming Halo Companies, Inc. will continue as a going concern.  As discussed in Note 5 to the financial statements, Halo Companies, Inc. has incurred losses since its inception and has not yet established profitable operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regards to these matters are also described in Note 5. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/ Montgomery Coscia Greilich LLP

Montgomery Coscia Greilich LLP
Plano, Texas
March 31, 2012
 
-F-3-

 
Halo Companies, Inc. and Subsidiaries
 
CONSOLIDATED BALANCE SHEETS
 
             
ASSETS
 
December 31, 2012
   
December 31, 2011
 
 
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 184,121     $ 657,135  
Trade accounts receivable, net of allowance for doubtful accounts of $375,665 and $446,722, respectively
    183,151       718,925  
Note receivable
    165,000       -  
Total current assets
    532,272       1,376,060  
                 
PROPERTY, EQUIPMENT AND SOFTWARE, net
    146,697       199,094  
INVESTMENTS IN UNCONSOLIDATED ENTITIES
    -       9,823  
DEPOSITS AND OTHER ASSETS
    45,000       48,333  
                 
TOTAL ASSETS
  $ 723,969     $ 1,633,310  
                 
LIABILITIES AND (DEFICIT) EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable
  $ 700,348     $ 588,377  
Accrued and other liabilities (including $55,927 and $55,030 to related parties, respectively)
    601,742       332,713  
Deferred revenue
    11,300       693,560  
Current portion of secured asset promissory note
    1,200,000       1,200,000  
Current portion of subordinated debt
    226,713       66,556  
Current portion of notes payable to related parties
    396,129       63,847  
Current portion of notes payable
    8,509       164,418  
Current portion of deferred rent
    186,227       319,874  
Total current liabilities
    3,330,968       3,429,345  
                 
NOTES PAYABLE, LESS CURRENT PORTION
    -       8,456  
NOTES PAYABLE TO RELATED PARTIES, LESS CURRENT PORTION
    242,132       498,261  
SUBORDINATED DEBT, LESS CURRENT PORTION
    20,833       215,546  
ACCRUED INTEREST ON RELATED PARTY NOTES, LESS CURRENT PORTION
    34,652       50,068  
DERIVATIVE LIABILITY
    29,351       24,970  
DEFERRED RENT, LESS CURRENT PORTION
    120,117       100,781  
Total liabilities
    3,778,053       4,327,427  
                 
(DEFICIT) EQUITY
               
Series Z Convertible Preferred Stock, par value $0.01 per share; 82,508 shares
               
authorized; 0 shares issued and outstanding at December 31, 2012 and December 31, 2011
    -       -  
Preferred Stock, par value $0.001 per share; 917,492 shares
               
authorized; 0 shares issued and outstanding at December 31, 2012 and December 31, 2011
    -       -  
Series X Convertible Preferred Stock, par value $0.01 per share; 143,677 shares authorized;
               
143,677 and 152,177 shares issued and outstanding at December 31, 2012 and December 31, 2011,
               
respectively, liquidation preference of $1,436,770
    1,437       1,522  
Series E Convertible Preferred Stock, par value $0.001 per share; 100,000 shares authorized;
               
70,000 and 0 shares issued and outstanding at December 31, 2012 and December 31, 2011,
               
respectively, liquidation preference of $700,000
    70       -  
Halo Group, Inc. Preferred Stock, par value $0.001 per share; 2,000,000 shares authorized
               
Series A Convertible Preferred Stock;
               
372,999 shares issued and outstanding at December 31, 2012 and December 31, 2011
               
liquidation preference of $605,451
    373       373  
Series B Convertible Preferred Stock;
               
229,956 shares issued and outstanding at December 31, 2012 and December 31, 2011
               
liquidation preference of $497,789
    230       230  
Series C Convertible Preferred Stock;
               
124,000 shares issued and outstanding at December 31, 2012 and December 31, 2011
               
liquidation preference of $335,492
    124       124  
Common Stock, par value $0.001 per share; 375,000,000 shares authorized;
               
66,364,083 and 65,494,506 shares issued and outstanding
               
at December 31, 2012 and December 31, 2011, respectively
    66,364       65,495  
Additional paid-in capital
    7,638,764       7,000,218  
Accumulated deficit
    (10,678,986 )     (9,679,700 )
Total (deficit) equity
    (2,971,624 )     (2,611,738 )
NONCONTROLLING INTEREST
    (82,460 )     (82,379 )
Total shareholders' (deficit) equity
    (3,054,084 )     (2,694,117 )
TOTAL LIABILITIES AND (DEFICIT) EQUITY
  $ 723,969     $ 1,633,310  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
-F-4-

 
Halo Companies, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
             
   
For the Year Ended
 
   
December 31,
 
   
2012
   
2011
 
             
REVENUE (including $20,783 and $986,162 from related parties, respectively)
  $ 4,810,594     $ 6,280,314  
                 
OPERATING EXPENSES
               
Sales and marketing expenses
    1,631,216       2,104,139  
General and administrative expenses (including $0 and $74,750 to related parties, respectively)
    1,386,616       2,927,348  
Salaries, wages, and benefits (including $6,800 and $113,400 of stock-based compensation)
    2,509,320       3,052,153  
Total operating expenses
    5,527,152       8,083,640  
                 
OPERATING INCOME (LOSS)
    (716,558 )     (1,803,326 )
                 
OTHER INCOME (EXPENSE)
               
Loss from unconsolidated entities
    -       (14,677 )
(Loss) gain on change in fair value of derivative
    (4,381 )     73,590  
Gain on sale of equipment
    -       19,270  
Gain on sale of software
    50,000       -  
Gain on sale of HDS, HFS and HCS subsidiaries
    134,731       -  
Loss on sale of HGR subsidiary
    (7,500 )     -  
Loss on investment in portfolio assets
    -       (279,241 )
Interest expense (including $36,633 and $86,892 to related parties, respectively)
    (431,487 )     (485,810 )
Net income (loss) from operations, before income tax provision
    (975,195 )     (2,490,194 )
                 
INCOME TAX PROVISION
    24,172       12,895  
                 
NET INCOME (LOSS)
    (999,367 )     (2,503,089 )
                 
Loss attributable to the noncontrolling interest
    81       61  
                 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
  $ (999,286 )   $ (2,503,028 )
                 
Earning per share:
               
Basic & Diluted
  $ (0.015 )   $ (0.038 )
                 
Weighted Average Shares Outstanding
               
Basic & Diluted
    65,929,295       65,462,106  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
-F-5-

 
Halo Companies, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CHANGES IN (DEFICIT) EQUITY
 
For the Years Ended December 31, 2012 and 2011
 
                                                                   
   
Halo Companies, Inc. Common Stock
 
Halo Companies, Inc. Series X Convertible Preferred Stock
 
Halo Companies, Inc. Series E 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, 2010
    65,429,706   $ 65,430     138,777   $ 1,388     -   $ -     372,999   $ 373     229,956   $ 230     124,000   $ 124     6,580,767   $ (7,005,070 ) $ (82,318 ) $ (439,076 )
                                                                                                   
Stock-based compensation expense
    -     -     -     -                 -     -     -     -     -     -     113,400     -     -     113,400  
                                                                                                   
Exercise of Stock Options
    64,800     65     -     -     -     -     -     -     -     -     -     -     583     -     -     648  
                                                                                                   
Issuance of Series X Convertible Preferred Stock for cash
    -     -     19,800     198     -     -     -     -     -     -     -     -     197,802     -     -     198,000  
                                                                                                   
Discretionary redemption of Series X Convertible Preferred Stock
    -     -     (6,400 )   (64 )   -     -     -     -     -     -     -     -     (63,936 )   -     -     (64,000 )
                                                                                                   
Common Shares Distributable
    -     -     -     -     -     -     -     -     -     -     -     -     171,602     (171,602 )         -  
                                                                                                   
Net loss attributable to common shareholders
    -     -     -     -     -     -     -     -     -     -     -     -     -     (2,503,028 )   -     (2,503,028 )
                                                                                                   
Allocation of loss to noncontrolling interest
    -     -     -     -     -     -     -     -     -     -     -     -     -     -     (61 )   (61 )
                                                                                                   
Balance at December 31, 2011
    65,494,506   $ 65,495     152,177   $ 1,522     -   $ -     372,999   $ 373     229,956   $ 230     124,000   $ 124   $ 7,000,218   $ (9,679,700 ) $ (82,379 ) $ (2,694,117 )
                                                                                                   
Stock-based compensation expense
    -     -     -     -                 -     -     -     -     -     -     6,800     -     -     6,800  
                                                                                                   
Exercise of Stock Options
    10,000     10     -     -     -     -     -     -     -     -     -     -     90     -     -     100  
                                                                                                   
Issuance of Common Stock
    79,546     79     -     -     -     -     -     -     -     -     -     -     17,421     -     -     17,500  
                                                                                                   
Discretionary redemption of Series X Convertible Preferred Stock (FN 17)
    -     -     (8,500 )   (85 )   -     -     -     -     -     -     -     -     (84,915 )   -     -     (85,000 )
                                                                                                   
Issuance of Common Stock Shares as payment of stock dividends (FN 17)
    780,031     780     -     -     -     -     -     -     -     -     -     -     (780 )   -     -     -  
                                                                                                   
Issuance of Series E Convertible Preferred Stock for cash
    -     -     -     -     70,000     70     -     -     -     -     -     -     699,930     -     -     700,000  
                                                                                                   
Net loss attributable to common shareholders
    -     -     -     -     -     -     -     -     -     -     -     -     -     (999,286 )   -     (999,286 )
                                                                                                   
Allocation of loss to noncontrolling interest
    -     -     -     -     -     -     -     -     -     -     -     -     -     -     (81 )   (81 )
                                                                                                   
Balance at December 31, 2012
    66,364,083   $ 66,364     143,677   $ 1,437     70,000   $ 70     372,999   $ 373     229,956   $ 230     124,000   $ 124   $ 7,638,764   $ (10,678,986 ) $ (82,460 ) $ (3,054,084 )
                                                                                                   
The accompanying notes are an integral part of these consolidated financial statements.
 
 
-F-6-

 
Halo Companies, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
For the Year Ended Ended
 
   
December 31, 2012
   
December 31, 2011
 
CASH FLOWS FROM OPERATIONS
           
             
Net income (loss)
  $ (999,286 )   $ (2,503,028 )
Adjustments to reconcile net income (loss) to net cash
               
(used in) provided by operating activities:
               
Depreciation and amortization
    71,435       105,331  
Amortization of debt discount
    17,444       17,444  
Bad debt expense
    35,259       931,719  
Loss on investment in portfolio assets
    -       279,241  
Loss (gain) on change in fair value of derivative
    4,381       (73,590 )
Gain on sale of software and equipment
    (50,000 )     (19,270 )
Loss from investments in unconsolidated entities
    -       14,677  
Distributions of earnings from unconsolidated entities
    -       14,147  
Stock based compensation
    6,800       113,400  
Stock based payment for services
    17,500       -  
Gain on sale of HDS, HFS and HCS subsidiaries
    (134,731 )     -  
Loss on sale of HGR subsidiary
    7,500       -  
Noncontrolling interest
    (81 )     (61 )
Changes in operating assets and liabilities:
               
Accounts receivable
    410,908       114,711  
Deposits and other assets
    (35,000 )     31,564  
Accounts payable
    86,971       442,521  
Accrued and other liabilities
    253,506       9,504  
Deferred rent
    (114,311 )     127,320  
Deferred revenue
    (682,815 )     681,878  
Net cash (used in) provided by operating activities
    (1,104,520 )     287,508  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds received from joint venture
    9,823       -  
Proceeds received on portfolio assets
    -       20,759  
Proceeds received from sale of HDS, HFS and HCS subsidiaries
    85,000       -  
Proceeds received from sale of HGR subsidiary
    30,000       -  
Purchases of property and equipment
    (18,205 )     (754 )
Proceeds received on sale of software and equipment
    50,000       59,550  
Deposits
    -       90,000  
Net cash provided by investing activities
    156,618       169,555  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds received from issuance of preferred stock
    700,000       198,000  
Discretionary redemption of preferred stock
    (85,000 )     (64,000 )
Issuance of common stock for the exercise of stock options
    100       648  
Net payments on lines of credit
    -       (1 )
Principal payments on notes payable
    (164,365 )     (150,734 )
Proceeds from notes payable to related parties
    190,000       513,000  
Principal payments on notes payable to related parties
    (113,847 )     (417,002 )
Proceeds from subordinated debt
    25,000       -  
Principal payments on subordinated debt
    (77,000 )     (84,000 )
Net cash provided by (used in) financing activities
    474,888       (4,089 )
                 
Net decrease in cash and cash equivalents
    (473,014 )     452,974  
                 
CASH AND CASH EQUIVALENTS, beginning of period
    657,135       204,161  
                 
CASH AND CASH EQUIVALENTS, ending of period
  $ 184,121     $ 657,135  
                 
SUPPLEMENTAL INFORMATION
               
Cash paid for taxes - Texas Margin Tax
  $ 24,172     $ 12,895  
Cash paid for interest
  $ 173,507     $ 423,195  
NONCASH SUPPLEMENTAL INFORMATION
               
Common Shares distributable as stock dividend
  $ -     $ 171,602  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
-F-7-

 
Halo Companies, Inc.
Notes To Consolidated Financial Statements
December 31, 2012
 
NOTE 1.  ORGANIZATION AND RECENT DEVELOPMENTS
 
U
Halo Companies, Inc. (“Halo”, “HCI” or the “Company”) was incorporated under the laws of the State of Delaware on December 9, 1986.  Its principal executive offices are located at One Allen Center, Suite 500, 700 Central Expy South, Allen, Texas 75013 and its telephone number is 214-644-0065.

Unless otherwise provided in footnotes, all references from this point forward in this Report to “we,” “us,” “our company,” “our,” or the “Company” refer to the combined Halo Companies, Inc. entity, together with its subsidiaries.

Halo has multiple wholly-owned subsidiaries including Halo Group Inc. (“HGI”), Halo Asset Management, LLC (“HAM”), Halo Portfolio Advisors, LLC (“HPA”), Halo Select Insurance Services, LLC (“HSIS”),  Halo Group Mortgage, LLC (“HGM”), Halo Benefits, Inc. (“HBI”), and Equitas Housing Fund, LLC (“EHF”).  HGI is the management and shared services operating company.  HAM provides asset management and mortgage servicing services to investor and asset owners including all aspects of buying and managing distressed REO and non-performing loans.  HPA exists to market all of the Company’s operations into turnkey solutions for strategic business to business opportunities with HAM’s investors and asset owners, major debt servicers, lenders, and mortgage backed securities holders.  The remaining subsidiaries provide insurance brokerage,  mortgage services, and association benefit services to customers throughout the United States.  EHF is the Company’s investment in non-performing loans as discussed below in Note 7.

In January 2012, based on management’s assessment of the Halo Group Realty, LLC (“HGR”) operating segment performance along with the Company’s continued focus and financial capitalization efforts on growing the asset management and portfolio advisor subsidiaries, the Company committed to a plan to sell the subsidiary entity.  On January 31, 2012, the Company sold HGR for $30,000.  Included in the sale was some of the HGR’s intellectual property, which excluded the primary technology platform.  The business sale includes the purchaser retaining the HGR name and legal entity.  The Company recorded a loss on the sale of HGR of $7,500.  On August 31, 2012, the Company sold the primary technology platform, including the source code, of HGR for $50,000.  This sale included a cash payment of $10,000 and a $40,000 promissory note to the Company, payable on August 31, 2013.  In December 2012, the Company received $40,000 payment in full on the promissory note.

In November 2012, the Company entered into a stock/unit purchase agreement for the sale of the Company’s subsidiaries Halo Debt Solutions, Inc. (“HDS”), Halo Financial Services, LLC (“HFS”), and Halo Credit Solutions (“HCS”).  The purchase agreement was for $350,000, which includes a $25,000 down payment at closing and promissory note financing for the remainder of the purchase price.  The note receivable does not accrue interest.  Any purchaser default on the promissory note not properly cured would immediately declare the note due and payable. The purchaser has a prepayment option that allows for the buyer to pay a cumulative total of $250,000 by April 20, 2013 as full satisfaction of the $350,000.  The Company recorded a gain on the sale of HDS, HFS and HCS of $134,731.  The gain calculation was based on the $250,000 prepayment option as the Company expects the purchaser to pay in full by April 20, 2013.  If the purchaser does not pay in full on April 20, 2013, the Company would recognize the additional consideration, less any broker fees, as additional net gain on the sale of the subsidiaries.  As of December 31, 2012, the buyer has paid (including the down payment) the Company $85,000.  The promissory note receivable is included in current assets on the consolidated balance sheet for the period ended December 31, 2012.

NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES
 
The accompanying Consolidated Financial Statements as of December 31, 2012 and 2011 include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information.  Certain balances have been reclassified in prior period to be consistent with current year presentation.

-F-8-

 
Revenue Recognition, Accounts Receivable and Deferred Revenue

The Company recognizes revenue in the period in which services are earned and realizable.  To further understand the Company’s business, HAM earns fees from its clients for its boarding and initial asset management fee, success fees, and its monthly servicing fee.  The boarding and initial asset management services are performed in the first 30-60 days of assets being boarded and include; IRR analysis of loans boarded, detailed asset level workout exit strategy analysis, boarding the assets onto HAM’s proprietary software platform and the integrated servicing platform, identification and oversight of custodial files, oversight of mortgage/deed assignment from previous servicer, oversight of title policy administration work, and delinquent property tax research and exposure review.  HAM’s monthly success fees are earned for completing its default and asset disposition services including loan modification, notes sales, obtaining a deed in lieu of foreclosure, originating owner finance agreements, and cash sales of REO properties owned by the client.  HAM’s servicing fees are earned monthly and are calculated on a monthly unit price for assets under management.

Prior to the subsidiary sale in November 2012, with respect to any enrolled debt account, HFS recognized its revenue once a client made at least one payment to a creditor pursuant to a settlement agreement, debt management plan, or other valid contractual agreement between the client and the creditor. The revenue recognized on any enrolled account bared the same proportional relationship to the total revenue that would be recognized for renegotiating, settling, reducing, or altering the terms of the debt balance on all of a particular client’s enrolled accounts as the individual debt amount bears to the entire debt amount.   Settlements were in the form of a lump sum creditor settlement payment or via contractual payment plans.  Effective October 27, 2010, there were no new sales in HDS (until the subsidiary sale in November 2012 the servicing of existing customers was active, including collecting of fees already earned and owed on all existing customers).  Any new debt settlement business to the Company after October 27, 2010 was transacted in the HFS entity.  Cash receipts from customers (including boarding and initial asset management fees from clients of HAM) in advance of revenue recognized are originally recorded as deferred revenue and recognized into revenue over the period services are provided.

HAM and HPA receivables are typically paid the month following services performed.  As of December 31, 2012, the Company’s accounts receivable are made up of the following percentages; HAM at 81%, HPA at 17%, all other at 2%.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: past transaction history with the customer, current economic and industry trends, and changes in customer payment terms.  The Company provides for estimated uncollectible amounts through an increase to the allowance for doubtful accounts and a charge to earnings based on actual historical trends and individual account analysis.  Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts.  The below table summarizes the Company’s allowance for doubtful accounts as of December 31, 2012 and December 31, 2011, respectively;

   
Balance at
Beginning of
Period
   
Increase in the
Provision
   
Account
Receivable
Write-offs
   
Balance at
End of Period
 
Year ended December 31, 2012
                       
Allowance for doubtful accounts
  $ 446,722     $ 35,259     $ 106,316     $ 375,665