UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172019
or
☐TRANSITION REPORT UNDERPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-55722
HELIX TCS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 81-4046024 | |
(State or other jurisdiction of
| (IRS Employer
|
5300 DTC Parkway,10200 E. Girard Avenue, Suite 300B420
Greenwood Village,Denver, CO 8011180231
(Address of Principal Executive Offices) (Zip Code)
Telephone: (720) 328-5372
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | HLIX | OTCQB |
Indicate by check mark whether the registrant (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 report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | Smaller reporting company | ☒ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 13, 2017,12, 2019, the registrant had 28,644,52293,274,159 shares of its common stock, par value $0.001 per share, outstanding.
Table of Contents
i
PART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 655,280 | $ | 285,761 | ||||
Accounts receivable, net | 1,496,137 | 1,184,923 | ||||||
Prepaid expenses and other current assets | 644,763 | 409,800 | ||||||
Costs & earnings in excess of billings | 30,468 | 42,869 | ||||||
Total current assets | 2,826,648 | 1,923,353 | ||||||
Property and equipment, net | 573,792 | 349,518 | ||||||
Intangible assets, net | 15,594,869 | 18,604,078 | ||||||
Goodwill | 53,716,207 | 39,913,559 | ||||||
Deposits and other assets | 1,296,504 | 146,990 | ||||||
Promissory note receivable | 75,000 | - | ||||||
Total assets | $ | 74,083,020 | $ | 60,937,498 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | 2,916,998 | 1,702,713 | ||||||
Advances from related parties | - | 45,250 | ||||||
Billings in excess of costs | 126,505 | 155,192 | ||||||
Deferred rent | - | 2,937 | ||||||
Notes payable, current portion | 24,805 | 24,805 | ||||||
Obligation pursuant to acquisition | 50,000 | 201,667 | ||||||
Convertible notes payable, net of discount | 862,426 | 187,177 | ||||||
Convertible notes payable, net of discount - related party | 1,209,458 | - | ||||||
Due to related party | - | 32,489 | ||||||
Contingent consideration | - | 908,604 | ||||||
Warrant liability | 1,010,890 | 896,171 | ||||||
Promissory note | 300,000 | |||||||
Total current liabilities | 6,501,082 | 4,157,005 | ||||||
Long-term liabilities: | ||||||||
Notes payable, net of current portion | 436,153 | 51,554 | ||||||
Other long-term liabilities | 878,929 | - | ||||||
Total long-term liabilities | 1,315,082 | 51,554 | ||||||
Total liabilities | 7,816,164 | 4,208,559 | ||||||
Shareholders’ equity: | ||||||||
Preferred stock (Class A), $0.001 par value, 3,000,000 shares authorized; 1,000,000 issued and outstanding as of September 30, 2019 and December 31, 2018 | 1,000 | 1,000 | ||||||
Preferred stock (Class B), $0.001 par value, 17,000,000 shares authorized; 13,784,201 issued and outstanding as of September 30, 2019 and December 31, 2018 | 13,784 | 13,784 | ||||||
Common stock; par value $0.001; 200,000,000 shares authorized; 92,530,013 shares issued and outstanding as of September 30, 2019; 72,660,825 shares issued and outstanding as of December 31, 2018 | 92,531 | 72,660 | ||||||
Additional paid-in capital | 99,748,368 | 82,831,014 | ||||||
Accumulated other comprehensive (loss) income | (96,355 | ) | 17,991 | |||||
Accumulated deficit | (33,492,472 | ) | (26,207,510 | ) | ||||
Total shareholders’ equity | 66,266,856 | 56,728,939 | ||||||
Total liabilities and shareholders’ equity | 74,083,020 | 60,937,498 |
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 130,125 | $ | 57,841 | ||||
Accounts receivable, net | 558,141 | 257,974 | ||||||
Costs & earnings in excess of billings | 151,445 | - | ||||||
Total current assets | 839,711 | 315,815 | ||||||
Property and equipment, net | 122,472 | 55,600 | ||||||
Intangible assets, net | 3,215,604 | 279,744 | ||||||
Goodwill | 664,329 | - | ||||||
Deposits and other assets | 38,810 | 20,290 | ||||||
Total assets | $ | 4,880,926 | $ | 671,449 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | 315,779 | 106,600 | ||||||
Advances from related parties | 102,000 | 76,500 | ||||||
Billings in excess of costs | 53,237 | - | ||||||
Deferred rent | 7,245 | 4,243 | ||||||
Notes payable, current portion | 10,268 | - | ||||||
Obligation pursuant to acquisitions | 548,279 | 178,090 | ||||||
Convertible notes payable, net of discount | 508,642 | 470,000 | ||||||
Convertible note payable - related party | 265,593 | 274,574 | ||||||
Obligation to issue warrants | 1,432,529 | - | ||||||
Total current liabilities | 3,243,572 | 1,110,007 | ||||||
Long-term liabilities: | ||||||||
Notes payable, net of current portion | 50,933 | - | ||||||
Total long-term liabilities | 50,933 | - | ||||||
Total liabilities | $ | 3,294,505 | $ | 1,110,007 | ||||
Shareholders’ equity (deficit): | ||||||||
Preferred stock (Class A), $0.001 par value, 1,000,000 shares authorized; 1,000,000 issued and outstanding as of September 30, 2017 and December 31, 2016 | 1,000 | 1,000 | ||||||
Preferred stock (Class B), $0.001 par value, 13,000,000 shares authorized; 9,830,035 shares issued and outstanding as of September 30, 2017; 0 shares issued and outstanding as of December 31, 2016 | 9,830 | - | ||||||
Common stock; par value $0.001; 200,000,000 shares authorized; 28,644,522 shares issued and outstanding as of September 30, 2017; 28,533,411 shares issued and outstanding as of December 31, 2016 | 28,644 | 28,533 | ||||||
Additional paid-in capital | 17,242,695 | 7,107,630 | ||||||
Accumulated deficit | (15,695,748 | ) | (7,575,721 | ) | ||||
Total shareholders’ equity (deficit) | 1,586,421 | (438,558 | ) | |||||
Total liabilities and shareholders’ equity (deficit) | $ | 4,880,926 | $ | 671,449 |
See accompanying notes to the unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue: | ||||||||||||||||
Security and guarding | $ | 1,138,934 | $ | 1,141,676 | $ | 3,691,174 | $ | 3,432,651 | ||||||||
Systems installation | 245,272 | 318,850 | 447,880 | 454,113 | ||||||||||||
Software | 2,357,078 | 1,653,195 | 6,872,210 | 2,229,337 | ||||||||||||
Total revenues | $ | 3,741,284 | $ | 3,113,721 | $ | 11,011,264 | $ | 6,116,101 | ||||||||
Cost of revenue | 2,224,795 | 1,880,061 | 6,146,713 | 3,892,716 | ||||||||||||
Gross margin | 1,516,489 | 1,233,660 | 4,864,551 | 2,223,385 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 1,114,419 | 802,724 | 3,221,788 | 1,678,603 | ||||||||||||
Salaries and wages | 1,392,522 | 1,888,155 | 3,859,068 | 4,308,994 | ||||||||||||
Professional and legal fees | 674,172 | 473,651 | 2,154,728 | 1,362,205 | ||||||||||||
Depreciation and amortization | 1,198,752 | 806,611 | 3,554,729 | 1,869,889 | ||||||||||||
Loss on impairment of Goodwill | - | - | - | 664,329 | ||||||||||||
Total operating expenses | 4,379,865 | 3,971,141 | 12,790,313 | 9,884,020 | ||||||||||||
Loss from operations | (2,863,376 | ) | (2,737,481 | ) | (7,925,762 | ) | (7,660,635 | ) | ||||||||
Other income (expenses): | ||||||||||||||||
Change in fair value of convertible note | 430,766 | (17,880 | ) | 288,425 | 679,766 | |||||||||||
Change in fair value of convertible note - related party | 491,442 | - | (213,828 | ) | 118,506 | |||||||||||
Change in fair value of warrant liability | 1,224,601 | 136,920 | 3,462,746 | 1,434,760 | ||||||||||||
Change in fair value of contingent consideration | - | (131,994 | ) | (880,050 | ) | (131,994 | ) | |||||||||
Loss on issuance of warrants | - | - | (787,209 | ) | - | |||||||||||
Gain on reduction of obligation pursuant to acquisition | - | 50,361 | - | 607,415 | ||||||||||||
Interest (expense) income | (539,002 | ) | 21,622 | (1,229,284 | ) | 6,705 | ||||||||||
Other income | 1,607,807 | 59,029 | 640,800 | 2,715,158 | ||||||||||||
Net loss | $ | (1,255,569 | ) | $ | (2,678,452 | ) | $ | (7,284,962 | ) | $ | (4,945,477 | ) | ||||
Other comprehensive income: | ||||||||||||||||
Changes in foreign currency translation adjustment | (118,003 | ) | 17,538 | (114,346 | ) | 17,538 | ||||||||||
Total other comprehensive (loss) income | (118,003 | ) | 17,538 | (114,346 | ) | 17,538 | ||||||||||
Total comprehensive loss | (1,373,572 | ) | (2,660,914 | ) | (7,399,308 | ) | (4,927,939 | ) | ||||||||
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend | - | - | - | (22,202,194 | ) | |||||||||||
Net loss attributable to common shareholders | $ | (1,373,572 | ) | $ | (2,660,914 | ) | $ | (7,399,308 | ) | $ | (27,130,133 | ) | ||||
Net loss per share attributable to common shareholders: | ||||||||||||||||
Basic | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.10 | ) | $ | (0.57 | ) | ||||
Diluted | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.10 | ) | $ | (0.57 | ) | ||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 79,295,278 | 70,420,857 | 76,038,782 | 47,598,820 | ||||||||||||
Diluted | 79,295,278 | 70,420,857 | 76,038,782 | 47,598,820 |
See accompanying notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSSHAREHOLDERS’ EQUITY
(UNAUDITED)
Common Stock | Preferred Stock (Class A) | Preferred Stock (Class B) | Additional Paid-In | Accumulated Other Comprehensive Income | Accumulated | Total Shareholders’ | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) | Deficit | Equity | |||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 75,747,718 | $ | 75,748 | 1,000,000 | $ | 1,000 | 13,784,201 | $ | 13,784 | $ | 86,489,136 | $ | 21,648 | $ | (32,236,903 | ) | $ | 54,364,413 | ||||||||||||||||||||||
Share-based compensation expense | 352,341 | 352,341 | ||||||||||||||||||||||||||||||||||||||
Restricted common stock issued as part of the Green Tree acquisition | 16,765,727 | 16,766 | 12,892,845 | 12,909,611 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock resulting from convertible note PIK interest (paid) | 16,568 | 17 | 14,046 | 14,063 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation | (118,003 | ) | (118,003 | ) | ||||||||||||||||||||||||||||||||||||
Net loss | (1,255,569 | ) | (1,255,569 | ) | ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 92,530,013 | $ | 92,531 | 1,000,000 | $ | 1,000 | 13,784,201 | �� | $ | 13,784 | $ | 99,748,368 | $ | (96,355 | ) | $ | (33,492,472 | ) | $ | 66,266,856 |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | $ | 1,129,746 | $ | 612,017 | $ | 2,837,145 | $ | 1,477,345 | ||||||||
Cost of revenue | 814,031 | 447,690 | 2,192,366 | 1,149,278 | ||||||||||||
Gross margin | 315,715 | 164,327 | 644,779 | 328,067 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 269,143 | 78,784 | 649,973 | 285,545 | ||||||||||||
Salaries and wages | 315,316 | 179,176 | 602,254 | 448,372 | ||||||||||||
Professional and legal fees | 261,098 | 219,364 | 641,958 | 375,375 | ||||||||||||
Depreciation and amortization | 194,347 | 17,955 | 292,757 | 41,817 | ||||||||||||
Total operating expenses | 1,039,904 | 495,279 | 2,186,942 | 1,151,109 | ||||||||||||
Loss from operations | (724,189 | ) | (330,952 | ) | (1,542,163 | ) | (823,042 | ) | ||||||||
Other income (expenses): | ||||||||||||||||
Change in fair value of liability of shares to be issued | - | (29,250 | ) | - | (19,250 | ) | ||||||||||
Change in fair value of obligation to issue warrants | 531,395 | - | 406,604 | - | ||||||||||||
Change in fair value of convertible notes | 115,000 | (1,393 | ) | (210,000 | ) | (233,342 | ) | |||||||||
Change in fair value of convertible note - related party | (34,725 | ) | (697 | ) | 8,971 | (107,107 | ) | |||||||||
Change in fair value of contingent consideration | (25,078 | ) | - | 10,186 | - | |||||||||||
Loss on extinguishment of debt | - | - | (4,611,395 | ) | - | |||||||||||
Loss on induced conversion of convertible note | - | - | (1,503,876 | ) | - | |||||||||||
Loss on impairment of intangible assets | - | - | - | (1,278,323 | ) | |||||||||||
Interest expense | (117,760 | ) | (9,493 | ) | (678,354 | ) | (23,560 | ) | ||||||||
Other expenses | 468,832 | (40,833 | ) | (6,577,864 | ) | (1,661,582 | ) | |||||||||
Net loss | $ | (255,357 | ) | $ | (371,785 | ) | $ | (8,120,027 | ) | $ | (2,484,624 | ) | ||||
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend | (8,044,958 | ) | - | (11,200,845 | ) | - | ||||||||||
Net loss attributable to common shareholders | $ | (8,300,315 | ) | $ | (371,785 | ) | $ | (19,320,872 | ) | $ | (2,484,624 | ) | ||||
Net loss per share attributable to common shareholders - basic and diluted | $ | (0.29 | ) | $ | (0.01 | ) | $ | (0.68 | ) | $ | (0.09 | ) | ||||
Weighted average common shares outstanding - basic and diluted | 28,644,522 | 27,290,360 | 28,592,643 | 27,290,360 |
Common Stock | Preferred Stock (Class A) | Preferred Stock (Class B) | Additional Paid-In | Accumulated Other Comprehensive | Accumulated | Total Shareholders’ | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||||||||||||||
Balance at June 30, 2018 | 69,133,410 | $ | 69,134 | 1,000,000 | $ | 1,000 | 13,784,201 | $ | 13,784 | $ | 79,066,909 | $ | - | $ | (20,508,733 | ) | $ | 58,642,094 | ||||||||||||||||||||||
Beneficial conversion feature of Series B convertible preferred stock | - | |||||||||||||||||||||||||||||||||||||||
Deemed dividend on conversion of Series B convertible preferred stock to common stock | - | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock per stock subscription agreements | 1,416,665 | 1,416 | 1,273,582 | 1,274,998 | ||||||||||||||||||||||||||||||||||||
Restricted common stock issued as part of Engeni acquisition | 366,700 | 367 | 388,335 | 388,702 | ||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 443,195 | 443 | 523,352 | 523,795 | ||||||||||||||||||||||||||||||||||||
Reduction in Additional Paid-In Capital due to Security Grade acquisition settlement agreement | (39,199 | ) | (39,199 | ) | ||||||||||||||||||||||||||||||||||||
Issuance of common stock resulting from exercise of stock options | 3,983 | 4 | 4 | |||||||||||||||||||||||||||||||||||||
Foreign currency translation | 17,538 | 17,538 | ||||||||||||||||||||||||||||||||||||||
Net loss | (2,678,452 | ) | (2,678,452 | ) | ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | 71,363,953 | $ | 71,364 | 1,000,000 | $ | 1,000 | 13,784,201 | $ | 13,784 | $ | 81,212,979 | $ | 17,538 | $ | (23,187,185 | ) | $ | 58,129,480 |
Common Stock | Preferred Stock (Class A) | Preferred Stock (Class B) | Additional Paid-In | Accumulated Other Comprehensive Income | Accumulated | Total Shareholders’ | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) | Deficit | Equity | |||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 72,660,825 | $ | 72,660 | 1,000,000 | $ | 1,000 | 13,784,201 | $ | 13,784 | $ | 82,831,014 | $ | 17,991 | $ | (26,207,510 | ) | $ | 56,728,939 | ||||||||||||||||||||||
Issuance of common stock per investment unit agreements | 1,421,889 | 1,422 | 66,247 | 67,669 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock resulting from convertible note conversion | 155,421 | 156 | 117,781 | 117,937 | ||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 270,000 | 270 | 1,241,471 | 1,241,741 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock resulting from exercise of stock options | 78,644 | 79 | 26,534 | 26,613 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock resulting from cashless exercise of stock options | 109,931 | 110 | (110 | ) | - | |||||||||||||||||||||||||||||||||||
Restricted common stock issued as part of the Tan Security acquisition | 250,000 | 250 | 709,750 | 710,000 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock in satisfaction of contingent consideration | 733,300 | 733 | 1,787,921 | 1,788,654 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock resulting from convertible note PIK interest (paid) | 84,276 | 85 | 74,915 | 75,000 | ||||||||||||||||||||||||||||||||||||
Restricted common stock issued as part of the Green Tree acquisition | 16,765,727 | 16,766 | 12,892,845 | 12,909,611 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation | (114,346 | ) | (114,346 | ) | ||||||||||||||||||||||||||||||||||||
Net loss | (7,284,962 | ) | (7,284,962 | ) | ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 92,530,013 | $ | 92,531 | 1,000,000 | $ | 1,000 | 13,784,201 | $ | 13,784 | $ | 99,748,368 | $ | (96,355 | ) | $ | (33,492,472 | ) | $ | 66,266,856 |
Common Stock | Preferred Stock (Class A) | Preferred Stock (Class B) | Additional Paid-In | Accumulated Other Comprehensive | Accumulated | Total Shareholders’ | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||||||||||||||
Balance at December 31, 2017 | 28,771,402 | $ | 28,771 | 1,000,000 | $ | 1,000 | 13,784,201 | $ | 13,784 | $ | 18,741,114 | $ | - | $ | (18,241,708 | ) | $ | 542,961 | ||||||||||||||||||||||
Beneficial conversion feature of Series B convertible preferred stock | 22,202,194 | 22,202194 | ||||||||||||||||||||||||||||||||||||||
Deemed dividend on conversion of Series B convertible preferred stock to common stock | (22,202,194 | ) | (22,202,194 | ) | ||||||||||||||||||||||||||||||||||||
Issuance of common stock per stock subscription agreements | 2,883,331 | 2,883 | 2,592,114 | 2,594,997 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock resulting from convertible note conversion | 205,974 | 206 | 174,794 | 175,000 | ||||||||||||||||||||||||||||||||||||
Issuance of restricted common stock | 157,850 | 158 | 452,821 | 452,979 | ||||||||||||||||||||||||||||||||||||
Reduction in Additional Paid-In Capital due to Security Grade acquisition settlement agreement | (340,039 | ) | (340,039 | ) | ||||||||||||||||||||||||||||||||||||
Restricted common stock issued as part of BioTrack acquisition | 38,184,985 | 38,185 | 57,513,848 | 57,552,033 | ||||||||||||||||||||||||||||||||||||
Restricted common stock issued as part of Engeni acquisition | 366,700 | 367 | 388,335 | 388,702 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock to employees under Stock Incentive Plan | 227,095 | 227 | 308,842 | 309,069 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock resulting from inducement of consulting agreement | 250,000 | 250 | 336,250 | 336,500 | ||||||||||||||||||||||||||||||||||||
Issuance of restricted common stock resulting from an investor relation consulting agreement | 100,000 | 100 | 101,900 | 102,000 | ||||||||||||||||||||||||||||||||||||
Issuance of warrants pursuant to consulting agreement | 943,000 | 943,000 | ||||||||||||||||||||||||||||||||||||||
Issuance of common stock resulting from exercise of stock options | 216,616 | 217 | 217 | |||||||||||||||||||||||||||||||||||||
Foreign currency translation | 17,538 | 17,538 | ||||||||||||||||||||||||||||||||||||||
Net loss | (4,945,477 | ) | (4,945,477 | ) | ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | 71,363,953 | $ | 71,364 | 1,000,000 | $ | 1,000 | 13,784,201 | $ | 13,784 | $ | 81,212,979 | $ | 17,538 | $ | (23,187,185 | ) | $ | 58,129,480 |
See accompanying notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (7,284,962 | ) | $ | (4,945,477 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 3,554,729 | 1,869,889 | ||||||
Accretion of debt discounts | 922,965 | - | ||||||
Loss on issuance of warrants | 787,209 | - | ||||||
Provision for doubtful accounts | 199,215 | - | ||||||
Share-based compensation expense | 1,241,741 | 2,143,548 | ||||||
Change in fair value of convertible notes, net of discount | (288,425 | ) | (504,768 | ) | ||||
Change in fair value of warrant liability | (3,462,746 | ) | (1,434,760 | ) | ||||
Change in fair value of convertible notes, net of discount - related party | 213,828 | (93,506 | ) | |||||
Change in fair value of contingent consideration | 880,050 | 131,994 | ||||||
Loss on impairment of goodwill | - | 664,329 | ||||||
Gain on reduction of obligation pursuant to acquisition | - | (607,415 | ) | |||||
Gain on reduction of contingent consideration | (100,000 | ) | - | |||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (458,461 | ) | (373,314 | ) | ||||
Prepaid expenses and other current assets | (239,374 | ) | - | |||||
Deposits and other assets | 40,259 | (87,161 | ) | |||||
Due to related party | (32,489 | ) | - | |||||
Costs in excess of billings | 12,401 | 16,055 | ||||||
Accounts payable and accrued expenses | 1,108,266 | 26,044 | ||||||
Deferred rent | (2,937 | ) | (6,403 | ) | ||||
Billings in excess of costs | (28,687 | ) | (16,405 | ) | ||||
Right of use assets and liabilities | 72,940 | - | ||||||
Other long-term liabilities | 2,000 | - | ||||||
Net cash used in operating activities | (2,862,478 | ) | (3,217,350 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (620,594 | ) | (85,665 | ) | ||||
Purchase of domain names | (21,856 | ) | - | |||||
Payments for business combination, net of cash acquired | (148,727 | ) | (79,664 | ) | ||||
Cash acquired as part of business combination | - | 454,306 | ||||||
Payments for asset acquisition | - | (58,729 | ) | |||||
Net cash (used in) provided by investing activities | (791,177 | ) | 230,248 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Payments pursuant to convertible notes payable - related party | - | (150,000 | ) | |||||
Promissory note receivable | (75,000 | ) | - | |||||
Payments pursuant to advances from related parties | (45,250 | ) | (69,500) | |||||
Payments pursuant to notes payable | (15,401 | ) | - | |||||
Payments pursuant to a promissory note | (280,000) | - | ||||||
Proceeds from notes payable | - | 16,271 | ||||||
Proceeds from the issuance of a promissory note | 580,000 | 250,000 | ||||||
Proceeds from the issuance of convertible notes payable | 2,732,500 | - | ||||||
Proceeds from the issuance of common stock | 1,306,313 | 2,595,214 | ||||||
Net cash provided by financing activities | 4,203,162 | 2,641,985 | ||||||
Effect of foreign exchange rate changes on cash | (179,988 | ) | (58,445 | ) | ||||
Net change in cash | 369,519 | (403,562 | ) | |||||
Cash, beginning of period | 285,761 | 868,554 | ||||||
Cash, end of period | 655,280 | 464,992 | ||||||
Supplemental disclosure of cash and non-cash transactions: | ||||||||
Cash paid for interest | $ | 40,625 | $ | - | ||||
Common stock issued pursuant to convertible notes payable | $ | 117,937 | $ | - | ||||
Debt discount for warrant liability | $ | (1,578,225 | ) | $ | - | |||
Equity issued pursuant to acquisition | $ | 13,619,611 | $ | 58,718,033 | ||||
Security Grade acquisition consideration settlement | $ | - | $ | - | ||||
Cash payable pursuant to acquisition | $ | 50,000 | $ | - | ||||
PIK interest payment of common stock | $ | 75,000 | $ | - | ||||
Common stock issued pursuant to contingent consideration as part of acquisition | $ | 1,788,654 | $ | - | ||||
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets | $ | 1,485,511 | $ | - | ||||
Partial conversion of convertible note into common stock | $ | - | $ | 175,000 |
HELIX TCS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
Common Stock | Preferred Stock (Class A) | Preferred Stock (Class B) | Additional Paid-In | Accumulated | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||
Balance at December 31, 2016 | 28,533,411 | $ | 28,533 | 1,000,000 | $ | 1,000 | - | - | $ | 7,107,630 | $ | (7,575,721 | ) | $ | (438,558 | ) | ||||||||||||||||||||
Beneficial conversion feature of Series B convertible preferred stock | - | - | - | - | - | - | 11,200,845 | - | 11,200,845 | |||||||||||||||||||||||||||
Deemed dividend on conversion of Series B convertible preferred stock to common stock | - | - | - | - | - | - | (11,200,845 | ) | - | (11,200,845 | ) | |||||||||||||||||||||||||
Issuance of Series B preferred shares | - | - | - | - | 9,830,035 | 8,289 | 2,976,711 | - | 2,985,000 | |||||||||||||||||||||||||||
Cost of issuance of Series B preferred shares | (1,941,633 | ) | (1,941,633 | ) | ||||||||||||||||||||||||||||||||
Stock options issued pursuant to acquisition consideration | - | - | - | - | - | - | 916,643 | - | 916,643 | |||||||||||||||||||||||||||
Stock options issued in satisfaction of contingent consideration | - | - | - | - | - | - | 871,193 | - | 871,193 | |||||||||||||||||||||||||||
Induced conversion of convertible debt | - | - | - | - | - | 1,541 | 2,002,335 | - | 2,003,876 | |||||||||||||||||||||||||||
Issuance of common stock per share purchase agreements | 111,111 | 111 | - | - | - | - | 99,889 | - | 100,000 | |||||||||||||||||||||||||||
Warrant issuances to investors | - | - | - | - | - | - | 93,200 | - | 93,200 | |||||||||||||||||||||||||||
Beneficial conversion feature on convertible debt | - | - | - | - | - | - | 535,332 | - | 535,332 | |||||||||||||||||||||||||||
Reacquisition price of convertible debt | - | - | - | - | - | - | 4,581,395 | - | 4,581,395 | |||||||||||||||||||||||||||
. | ||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (8,120,027 | ) | (8,120,027 | ) | |||||||||||||||||||||||||
Balance at September 30, 2017 | 28,644,522 | $ | 28,644 | 1,000,000 | $ | 1,000 | 9,830,035 | $ | 9,830 | $ | 17,242,695 | $ | (15,695,748 | ) | $ | 1,586,421 |
See accompanying notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (8,120,027 | ) | $ | (2,484,624 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 292,757 | 41,817 | ||||||
Amortization of debt discounts | 244,843 | - | ||||||
Change in fair value of liability of shares to be issued | - | 19,250 | ||||||
Change in fair value of obligation to issue warrants | (406,604 | ) | - | |||||
Change in fair value of convertible notes | 210,000 | 233,342 | ||||||
Change in fair value of convertible note - related party | (8,971 | ) | 107,107 | |||||
Change in fair value of contingent consideration | (10,186 | ) | - | |||||
Loss on extinguishment of debt | 4,611,395 | - | ||||||
Loss on induced conversion of convertible note | 1,503,876 | - | ||||||
Loss on impairment of intangible assets | - | 1,278,323 | ||||||
Loss on beneficial conversion feature of convertible note | 390,666 | - | ||||||
Non-employee stock compensation expense | - | 150,710 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (246,375 | ) | (53,507 | ) | ||||
Prepaid expenses | - | 16,595 | ||||||
Deposits | (14,640 | ) | - | |||||
Costs in excess of billings | (54,547 | ) | - | |||||
Accounts payable and accrued expenses | 122,875 | 88,501 | ||||||
Deferred rent | 3,002 | - | ||||||
Billings in excess of costs | 29,270 | - | ||||||
Net cash used in operating activities | (1,452,666 | ) | (602,486 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (31,054 | ) | (2,231 | ) | ||||
Payments for business combination, net of cash acquired | (1,631,313 | ) | - | |||||
Payments for asset acquisition | (46,872 | ) | (419,830 | ) | ||||
Net cash used in investing activities | (1,709,239 | ) | (422,061 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Advances from related parties | 60,500 | - | ||||||
Payments pursuant to advances from related parties | (32,000 | ) | - | |||||
Payments pursuant to notes payable | (3,466 | ) | - | |||||
Proceeds from the issuance of convertible notes payable | 229,167 | 200,000 | ||||||
Proceeds from the issuance of convertible note payable - related party | - | 300,000 | ||||||
Proceeds from the issuance of a promissory note | 255,000 | - | ||||||
Proceeds from the issuance of common stock | 100,000 | 385,143 | ||||||
Proceeds from the issuance of Series B convertible preferred stock | 2,624,988 | - | ||||||
Net cash provided by financing activities | 3,234,189 | 885,143 | ||||||
Net change in cash | 72,284 | (139,404 | ) | |||||
Cash, beginning of period | 57,841 | 154,282 | ||||||
Cash, end of period | $ | 130,125 | $ | 14,878 | ||||
Supplemental disclosure of cash and non-cash transactions: | ||||||||
Financing of property and equipment purchases | $ | 52,082 | $ | - | ||||
Common stock issued pursuant to asset acquisition | $ | - | $ | 944,875 | ||||
Cost of issuance of Series B preferred shares | $ | (1,941,633 | ) | $ | - | |||
Stock options issued pursuant to acquisition consideration | $ | 916,643 | $ | - | ||||
Stock options issued pursuant to contingent consideration as part of acquisition | $ | 871,193 | $ | - | ||||
Warrant issuances to investors | $ | 93,200 | $ | - | ||||
Reacquisition price of convertible debt | $ | 4,581,395 | $ | - |
See accompanying notes to the unaudited condensed consolidated financial statements.
HELIX TCS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. | Description of Business |
Helix TCS, Inc. (the “Company” or “Helix”) was incorporated in Delaware on March 13, 2014. Pursuant to the acquisition of the assets of Helix TCS, LLC, as discussed below, the Companywe changed itsour name from Jubilee4 Gold, Inc. to Helix TCS, Inc. effective October 25, 2015.
Effective October 25, 2015, the Companywe entered into an acquisition and exchange agreement with Helix TCS, LLC. TheWe closed the transaction contemplated under the Agreement closedacquisition and exchange agreement on December 23, 2015 and Helix TCS, LLC was merged into and with Helix.
Effective October 1, 2015, for accounting purposes, as part of an acquisition amounting to a reorganization dated December 21, 2015, Helix Opportunities LLC exchanged 100% of Helix TCS, LLC and its wholly-owned subsidiaries, Security Consultants Group, LLC and Boss Security Solutions, Inc. to the Company in exchange for 20 million common shares and 1 million convertible preferred shares of the Company.
The Acquisition Agreementacquisition of Helix TCS, LLC was treated as a recapitalization for financial accounting purposes. Jubilee4 Gold, Inc. is considered the acquiree for accounting purposes and their historical financial statements before the Acquisition Agreement were replaced with the historical financial statements of the Company. The common stock account of the Company continues post-merger, while the retained earnings of the acquiree is eliminated. The historical information of Helix TCS, Inc. is presented for comparative purposes.
OnFurthermore, on April 11, 2016, the Company acquired the assets of Revolutionary Software, LLC (“Revolutionary”) (see Note 6).
On August 3, 2018 (the “Engeni Closing Date”), the Company and its wholly owned subsidiary, Engeni Merger Sub, LLC (“Engeni Merger Sub”), entered into an Agreement and Plan of Merger (the “Engeni Merger Agreement”) with Engeni LLC (“Engeni US”), Engeni S.A (“Engeni SA”), Scott Zienkewicz, Nicolas Heller and Alberto Pardo Saleme (the Engeni US members), and Scott Zienkewicz, as the representative of the Engeni US members. Pursuant to the Engeni Merger Agreement, Engeni Merger Sub merged with and into Engeni US, with Engeni US surviving the merger as a wholly-owned subsidiary of the Company (the “Engeni Merger”).
On the Engeni Closing Date, in connection with closing the Engeni Merger Agreement, the Company issued 366,700 shares of Company common stock to Engeni US members. Furthermore, the Company subsequently issued Engeni US members 733,300 shares of Company common stock on JuneApril 2, 2017,2019.
On April 1, 2019 (“Tan Security Closing Date”), the Company entered into a Membership Interest and Stock Purchase Agreement in which(the “Tan Security Acquisition Agreement”) with Tan’s International Security and Tan’s International LLC (collectively, “Tan Security”). Pursuant to the Tan Security Acquisition Agreement, the Company purchased all issuedmembership interests and outstanding Unitscapital stock of Tan Security Grade Protective Services, Ltd. (“and collectively holds 100% of the interests of Tan Security Grade”(the “Tan Security Acquisition”), which comprised of 800,000 Class A Units and 200,000 Class B Units. The merger was accounted for as a business combination in accordance with ASC 805 (see Note 5).
The Company corrected certain immaterial errors in its financial statements contained herein. In accordance with ASC 650-10-S99 and S55 (formerly Staff Accounting Bulletins (“SAB”) No. 99 and No. 108), Accounting Changes and Error Corrections,On February 5, 2019, the Company concluded that these errors were, individually, and inits wholly owned subsidiary, Merger Sub, entered into an Agreement and Plan of Merger (the “Amercanex Merger Agreement”) with Green Tree International, Inc. (“GTI”) and Steve Janjic, as the aggregate, not material, quantitatively or qualitatively,representative of the GTI shareholders, pursuant to the financial statements in these periods.which Merger Sub merged with and into GTI (the “Merger”).
In October 2015,
On September 10, 2019, the Company’s shareholders’Company closed the Merger and its Board of Directors approved aentered into an Addendum No. 1 for 4 reverse split of the Company’s common stock. The reverse split was effective on October 27, 2015. Prior to the reverse splitAmercanex Merger Agreement acknowledging and approving certain events that occurred since signing as well as implementing various related amendments to the Company had 3,908,617 shares issued and outstanding. Upon further review and reconciliation ofAmercanex Merger Agreement. In connection with closing the Company’s transfer agent reports it was determined that due to rounding, the share count as of December 31, 2014 was understated by 26 shares of common stock. The balance at December 31, 2014 of common stock was originally reported at 977,154 and revised as 977,180.
During the year ended December 31, 2015,Merger, the Company issued common stock on the open market. Upon further review and reconciliation of the Company’s transfer agent reports it was determined that the share count was overstated by 5616,765,727 unregistered shares of common stock. The total issuance of common stock on the open market for the year ended December 31, 2015 was originally reported as 1,087 shares of common stock and is being revised as 1,031.
Furthermore, during the year ended December 31, 2016, specifically the three months ended March 31, 2016, the Company issued 150,000 shares of restricted common stock to a third party for professional consulting services rendered that was not accounted for. The Company performed an evaluationGTI shareholders, of which 4,140,274 shares were held back to satisfy indemnification obligations in the 150,000 shares of restricted common stock and determined they should be accounted for in accordance with ASC 718, Compensation – Stock Based Compensation, and ASC 505, Equity Based Payments to Non-Employees. The common stock issued to third parties for non-cash consideration were valued based on the fair market value of the services provided or the fair market value of the common stock on the measurement date, whichever was readily determinable. The 150,000 shares of restricted common stock resulted in additional professional and legal expense of $55,710 and increases in common stock and additional paid-in capital of $150 and $55,560, respectively.Merger Agreement, if necessary.
Additionally, it was determined that the Weighted Average Common Shares Outstanding – basic and diluted for the three months ending March 31, 2017 was incorrectly stated on the Consolidated Statements of Operations in the original Form 10-Q filing. This error resulted in the Weighted Average Common Shares Outstanding – basic and diluted being understated by 1,923,185 shares and the Net Loss per Common Share – basic and diluted being overstated by $.02.
During the year ended December 31, 2016 the Company issued three Unsecured Convertible Promissory Notes to three individual investors referred to as Note One, Note Two and Note Three (collectively “the Notes”) The Notes were initially measured at fair value pursuant to ASC 480, Distinguishing Liabilities from Equity and subsequently measured at fair value with changes in fair value recognized in earnings. All Notes were converted into common stock of the Company on December 31, 2016, though in the Form 10-Q/A for the quarterly period ended March 31, 2017, filed with the SEC on July 7, 2017, the Notes were not fair valued in which the changes in fair value were not reported in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2016. This was the first time the unaudited condensed consolidated statement of operations for the three months ended March 31, 2016 was filed with the Securities and Exchange Commission (“SEC”). For the three months ended March 31, 2016 the change in fair value of the Notes resulted in a non-cash loss of $384,303. The omission of the change in the fair value of convertible notes resulted in the Net Loss per Common Share – basic and diluted – being understated by $0.02 for the three months ended March 31, 2016.
Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s amended audited consolidated financial statements for the year ended December 31, 2016 included in the Company’s Amended Fiscal 2016 Annual Report on Form 10-K/A, filed with the SEC on July 7, 2017. In addition, the Company’s future Quarterly Reports on Form 10-Q for subsequent quarterly periods during the current fiscal year will reflect the impact of the revision in the comparative prior quarter and year-to-date periods.
The following table summarizes the effects of the revisions on the financial statements for the periods reported.
Previously Reported | Adjustments | Restated | ||||||||||
Condensed Consolidated Balance Sheet as of March 31, 2017 | ||||||||||||
Common stock | $ | 28,383 | $ | 150 | $ | 28,533 | ||||||
Additional paid-in capital | $ | 12,190,797 | $ | 55,560 | $ | 12,246,357 | ||||||
Accumulated deficit | $ | (12,987,681 | ) | $ | (55,710 | ) | $ | (13,043,391 | ) | |||
Condensed Consolidated Balance Sheet as of December 31, 2016 | ||||||||||||
Common stock | $ | 28,383 | $ | 150 | $ | 28,533 | ||||||
Additional paid-in capital | $ | 7,052,070 | $ | 55,560 | $ | 7,107,630 | ||||||
Accumulated deficit | $ | (7,520,011 | ) | $ | (55,710 | ) | $ | (7,575,721 | ) | |||
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 | ||||||||||||
Net loss per common share - basic and diluted | $ | (0.21 | ) | $ | 0.02 | $ | (0.19 | ) | ||||
Weighted average common shares outstanding - basic and diluted | 26,610,226 | 1,923,185 | 28,533,411 | |||||||||
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 | ||||||||||||
Professional and legal fees | $ | 54,472 | $ | 55,710 | $ | 110,182 | ||||||
Change in fair value of convertible notes | $ | 20,014 | $ | (384,303 | ) | $ | (364,289 | ) | ||||
Net loss | $ | (203,620 | ) | $ | (440,013 | ) | $ | (643,633 | ) | |||
Net loss per common share - basic and diluted | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | |||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 | ||||||||||||
Non-employee stock compensation expense | $ | 95,000 | $ | 55,710 | $ | 150,710 |
Going Concern Uncertainty, Financial Condition and Management’s Plans |
The Company believes that there is substantial doubt about the Company’s ability to continue as a going concern. The Company believes that its available cash balance as of the date of this filing will not be sufficient to fund its anticipated level of operations for at least the next 12 months. The Company believes that its ability to continue operations depends on its ability to sustain and grow revenue and results of operations as well as its ability to access capital markets when necessary to accomplish the Company’s strategic objectives. The Company believes that the Companyit will continue to incur losses for the immediate future. The Company expects to finance future cash needs from theits results of operations and, depending on the results of operations, the Company may need additional equity or debt financing until the Companyit can achieve profitability and positive cash flows from operating activities, if ever.
At September 30, 2017,2019, the Company had a working capital deficit of approximately $2,403,861$3,674,434, as compared to a working capital deficit of approximately $794,192$2,233,652 at December 31, 2016.2018. The decreaseincrease of $1,609,669$1,440,782 in the Company’s working capital deficit from December 31, 20162018 to September 30, 20172019 was primarily the result of a non-cash increase in the fair market value of the Company’s convertible notes payable, net of discount – related party and an obligation pursuant to the acquisition of Security Grade. increase in accounts payable and accrued liabilities, partially offset by a decrease in contingent consideration.
The Company’s future capital requirements for its operations will depend on many factors, including the profitability of its businesses, the number and cash requirements of other acquisition candidates that the Company pursues, and the costs of operations. The Company has been investing in expanding its operation in new states, its couriersecurity service in Colorado though acquisitions, and transformingCalifornia, and upgrading the assets acquired from Revolutionary.capabilities of BioTrackTHC. The Company’s management has taken several actions to ensure that it will have sufficient liquidity to meet its obligations through December 31, 2017,for the next twelve months, including growing and diversifying its revenue streams, selectively reducing expenses, and discussingconsidering additional funding with potential investors.funding. Additionally, if the Company’s actual revenues are less than forecasted, the Company anticipates that variable expenses will also decline, and the Company’s management can implement expense reduction as necessary. The Company is evaluating other measures to further improve its liquidity, including the sale of equity or debt securities. Lastly, the Company may elect to reduce certain related-party and third-party debt by converting such debt into common shares. The Company’s management believes that these actions will enable the Company to meet its liquidity requirements through December 31, 2017.for the next twelve months. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during 20172019 and beyond.
The Company plans to generate positive cash flow from its recently-completed asset acquisitionColorado and business combinationCalifornia security operations, BioTrackTHC and Engeni software operations to address some of the liquidity concerns. However, to execute the Company’s business plan, service existing indebtedness and implement its business strategy, the Company anticipates that it will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. The Company cannot be sure that any additional funding, if needed, will be available on terms favorable to the Company or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute the Company’s current stockholders’ ownership and could also result in a decrease in the market price of the Company’s common stock. The terms of those securities issued by the Company in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. The Company also may be required to recognize non-cash expenses in connection with certain securities it issues, such as convertible notes and warrants, which may adversely impact the Company’s operating results and financial condition. Furthermore, any debt financing, if available, may subject the Company to restrictive covenants and significant interest costs. There can be no assurance that the Company will be able to raise additional capital, when needed, to continue operations in their current form.
Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Helix TCS, LLC (“Helix TCS”), Security Consultants Group, LLC (“Security Consultants”), Boss Security Solutions, Inc. (“Boss Security”), Security Consultants Group Oregon, LLC (“Security Oregon”) and, Security Grade, Protective Services, Ltd., (“Security Grade”)BioTrackTHC (since June 2, 2017)1, 2018), Engeni US (since August 3, 2018), Tan Security (since April 1, 2019) and Green Tree International, Inc. (since September 10, 2019).
Use of Estimates
The preparation of These interim statements should be read in conjunction with the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affectfor the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Use of estimates includes the following: 1) allowance for doubtful accounts, 2) estimated useful lives of property, equipment and intangible assets, 3) impairment of goodwill and intangible assets, 4) valuation of convertible notes payable 5) valuation of stock options 6) fair value of assets and liabilities acquired pursuant to business combination and 7) revenue recognition. Actual results could differ from estimates.
Cash and Cash equivalentsyear ended December 31, 2018.
Cash consists of checking accounts. The Company considers all highly-liquid investments purchased with a maturity of three months or less at the time of purchase to be cash.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.
Management charges balances off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company determines when receivables are past due, or delinquent based on how recently payments have been received.
Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Allowance for doubtful accounts was $31,767$241,896 and $76,156 at September 30, 20172019 and December 31, 2016,2018, respectively.
Long-Lived Assets, Including Definite Lived Intangible Assets
Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Definite-lived intangible assets primarily consist of non-compete agreements and customer relationships. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.
Accounting for Acquisitions
In accordance with the guidance for business combinations, the Company determines whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase. The Company capitalizes acquisition-related costs and fees associated with asset acquisitions and immediately expense acquisition-related costs and fees associated with business combinations.
Revenue Recognition
The Company recognizes revenue when: (1) persuasive evidence of an arrangement exists, (2) the services have been rendered to the customer, (3) the sales price is fixed or determinable and, (4) collectability is reasonably assured. The Company’s revenues are principally derived from providing security services to its clientele.
The security services revenue is generated from performing armed and unarmed guarding which is contracted for on an hourly basis. Revenues associated with these contracted services are recognized under time-based arrangements as services are provided.
Additionally, the Company provides transportation security services, which are generally contracted for on a per run basis and sometimes additional fees and surcharges are also billed to the client depending on the length of the run. Revenues associated with these services are recognized as the transportation service is provided.
The Company generates advertising revenues from consumer advertising on its Cannabase platform. Revenue is recognized over the contract period associated with each specific advertising campaign.
Expenses
Cost of Revenue
The cost of revenue is the total cost incurred to obtain a sale and the cost of the goods or services sold. Cost of revenue primarily consisted of hourly compensation for security personal.
Operating Expenses
Operating expenses encompass selling general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company.
Other Expenses
Other expenses, net consisted of the change in the fair value of obligation to issue warrants, the change in the fair value of convertible notes, the change in fair value of convertible note related party, loss on extinguishment of debt, loss on induced conversion of convertible note and interest expense.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives are 3 years for vehicles and 5 years for furniture and equipment. Maintenance and repairs are expensed as incurred and major improvements are capitalized. When assets are sold, or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in other income.
Contingencies
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
Leases
Lease agreements are evaluated to determine if they are capital leases meeting any of the following criteria at inception: (a) transfer of ownership; (b) bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the leased property; or (d) the present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.
If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a capital lease; and if none of the four criteria are met, the lease is classified by the Company as an operating lease.
Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in liabilities.
Advertising
Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $7,298$104,785 and $11,131$12,671 for the three months ended September 30, 20172019 and 2016,2018, respectively, and $12,477$352,275 and $30,100$74,408 for the nine months ended September 30, 20172019 and 2016,2018, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the nine months ended September 30, 2017 and 2016.
Distinguishing Liabilities from Equity
The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.
Initial Measurement
The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.
Subsequent Measurement – Financial instruments classified as liabilities
The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other income (expenses).expense/income.
Beneficial Conversion Feature
If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a Beneficial Conversion Feature (“BCF”). A beneficial conversion feature is recorded by the Company as a debt discount pursuant to ASC 470-20,Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the beneficial conversion feature and the Company amortizes the discount to interest expense over the life of the debt.
The Company accounts for the beneficial conversion feature on its convertible preferred stock in accordance with ASC 470-20,Debt with Conversion and Other Options. The BCF of convertible preferred stock is normally characterized as the convertible portion or feature that provides a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of convertible preferred stock when issued. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.
To determine the effective conversion price, the Company first allocates the proceeds received to the convertible preferred stock and then uses those allocated proceeds to determine the effective conversion price. If the convertible instrument is issued in a basket transaction (i.e., issued along with other freestanding financial instruments), the proceeds should first be allocated to the various instruments in the basket. Any amounts paid to the investor when the transaction is consummated (e.g., origination fees, due diligence costs) represent a reduction in the proceeds received by the issuer. The intrinsic value of the conversion option should be measured using the effective conversion price for the convertible preferred stock on the proceeds allocated to that instrument. The effective conversion price represents proceeds allocable to the convertible preferred stock divided by the number of shares into which it is convertible. The effective conversion price is then compared to the per share fair value of the underlying shares on the commitment date.
The accounting for a BCF requires that the BCF be recognized by allocating the intrinsic value of the conversion option to additional paid-in capital, resulting in a discount on the convertible preferred stock. This discount should be accreted from the date on which the BCF is first recognized through the earliest conversion date for instruments that do not have a stated redemption date. The intrinsic value of the BCF is recognized as a deemed dividend on convertible preferred stock over a period specified in the guidance.guidance.
Share-based Compensation
The Company accounts for stock-based compensation to employees in conformity with the provisions of ASC Topic 718,Stock Based Compensation. Stock-based compensation to employees consist of stock options grants and restricted shares that are recognized in the statement of operations based on their fair values at the date of grant.
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50,Equity-Based Payments to Non-Employees based upon the fair-value of the underlying instrument. The equity instruments, are valued using the Black-Scholes valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which services are received.
The Company calculates the fair value of option grants utilizing the Black-Scholes pricing model, and estimates the fair value of the stock based upon the estimated fair value of the common stock. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.
The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight- line basis over the requisite service period of the award.
Fair Value of Financial Instruments
ASC Topic 820,Fair Value Measurements and Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:
Certain assets and liabilities of the Company are required to be recorded at fair value either on a recurring or non-recurring basis. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction based on market participants. The following section describes the valuation methodologies that the Company used to measure, for disclosure purposes, its financial instruments at fair value.
Convertible notes payable
The fair value of the Company’s convertible notes payable, approximated the carrying value as of September 30, 2017 and December 31, 2016. Factors that the Company considered when estimating the fair value of its debt included market conditions and the term of the debt. The level of the debt would be considered as Level 2.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of cash, accounts receivable, prepaid expenses, deposits, accounts payable and accrued liabilities, advances from shareholders and obligation pursuant to acquisition approximate their fair value due to the short-term maturity of those item.
Contingent Consideration
The Company’s contingent consideration measured at fair value on a recurring basis are comprised of performance-based awards issued to certain former owners of the acquired businesses in exchange for future services. Contingent liabilities are valued using significant inputs that are not observable in the market, which are defined as Level 3 inputs according to fair value measurement accounting. The Company estimates the fair value of contingent liabilities based on certain milestones of the acquired businesses and estimated probabilities of achievement, then discounts the liabilities to present value. The Company believes its estimates and assumptions are reasonable, however, there is significant judgment involved. During the three months ended September 30, 2017, the Company satisfied its contingent consideration liability related to the Security Grade Acquisition. The change in the fair value associated with the contingent consideration was $(25,078) and $10,186 for the three and nine months ended September 30, 2017, respectively.
Earnings (Loss) per Share
The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basicstructures. Basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net income (loss)loss available to common shareholders (numerator) by the weighted average number of shares of common stock outstanding (denominator) during the period. Diluted EPS excludedgives effect to all dilutive potential common shares if their effect was anti-dilutive.outstanding during the period including stock options and warrants, using the treasury stock method, and convertible debt and convertible securities, using the if-converted method.
Basic net loss per share is based on
For the weighted average number of commonthree and common-equivalent shares outstanding. Potentialnine months ended September 30, 2019 and 2018, potential common shares includable in the computation of fully-diluted per share results are not presented in the condensed consolidated financial statements for the three and nine months ended September 30, 2017 and September 30, 2016 as their effect would be anti-dilutive.
Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of warrants, options, convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.
The anti-dilutive shares of common stock outstanding for the three months ended and nine months ended September 30, 20172019 and September 30, 20162018 were as follows:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Potentially dilutive securities: | ||||||||||||||||
Convertible notes payable | 3,649,021 | 106,957 | 3,649,021 | 106,957 | ||||||||||||
Convertible Preferred A Stock | 1,000,000 | 1,000,000 | 1,000,000 | 1,000,000 | ||||||||||||
Convertible Preferred B Stock | 13,784,201 | 13,784,201 | 13,784,201 | 13,784,201 | ||||||||||||
Warrants | 4,975,558 | 3,307,073 | 4,975,558 | 3,307,073 | ||||||||||||
Stock options | 9,787,381 | 8,739,669 | 9,787,381 | 8,739,669 |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Potentially dilutive securities: | ||||||||||||||||
Convertible notes payable | 226,320 | 1,558,226 | 226,320 | 1,558,226 | ||||||||||||
Convertible Preferred A Stock | 1,000,000 | 16,746,127 | 1,000,000 | 16,746,127 | ||||||||||||
Convertible Preferred B Stock | 9,830,035 | - | 9,830,035 | - | ||||||||||||
Warrants | 2,557,195 | 1,920,000 | 2,557,195 | 1,920,000 |
Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform to the current period financial statement presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.
Recent Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle (issued as Accounting Standards Update “ASU”2014-09by the FASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In August 2015,February 2016, the FASB issued ASU No. 2015-14,2016-.02,Leases (Topic 842) (“Topic 842”) which defersrequires the recognition of right-of-use assets and lease liabilities on the balance sheet. The most prominent of the changes in the standard is the recognition of right-of-use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases.
The Company adopted the new standard on January 1, 2019 and used the modified retrospective approach with the effective date as the date of ASU 2014-09 by one year,initial application. Consequently, prior period balances and would allow entities the optiondisclosures have not been restated. The Company elected certain practical expedients, which among other things, allowed us to early adopt the new revenue standard ascarry forward prior conclusions about lease identification and classification.
Adoption of the original effective date. This ASU is effectivestandard resulted in the balance sheet recognition of additional lease assets and lease liabilities of approximately $1,500,000. The new standard also provides practical expedients for public reporting companies for interim and annual periods beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method.an entity’s ongoing accounting. The Company iscurrently has elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in separate lease and non-lease components for all our leases. For additional information regarding the Company’s leases, see Note 18 in the process of performing an initial review of custom contractsnotes to determine the impact that ASU 2014-09 and its subsequent updates will have on the Company’scondensed consolidated financial statements or financial statement disclosures upon adoption. Based on this preliminary review, the Company believes that the timing and measurement of revenue for these customers will be similar to the current revenue recognition. However, this view is preliminary and could change based on the detailed analysis associated with the conversion and implementation phases of ASU 2014-09. The Company will complete the assessment during 2017, and will include other customers as part of the reviewstatements.
In July 2017, the FASB issued ASU 2017-11,Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity,, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company adopted this ASU as of January 1, 2019. The amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,Income Statement – Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is currently assessingpermitted in any interim period after issuance of the potentialASU. The Company adopted this ASU as of January 1, 2019. The amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07,Compensation-Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of adoptingASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASC 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. This update is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted this ASU 2017-11as of January 1, 2019. The amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effect that this update will have on its financial statements and related disclosures.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on the Company’s consolidated financial statements and related disclosures.
4. | Revenue Recognition |
Disaggregation of revenue
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Types of Revenues: | ||||||||||||||||
Security and Guarding | $ | 1,138,934 | $ | 1,141,676 | $ | 3,691,174 | $ | 3,432,651 | ||||||||
Systems Installation | 245,272 | 318,850 | 447,880 | 454,113 | ||||||||||||
Software | 2,357,078 | 1,653,195 | 6,872,210 | 2,229,337 | ||||||||||||
Total revenues | $ | 3,741,284 | $ | 3,113,721 | $ | 11,011,264 | $ | 6,116,101 |
The following is a description of the principal activities from which we generate our revenue.
Security and Guarding Revenue
Helix provides armed and unarmed guards, monitoring of security alarms and cameras, as well as armed transportation services. The guards are charged out at an hourly rate, as are the monitoring services, with invoices typically sent to clients shortly after each month-end for the previous month, with revenue being recognized over time. The customer simultaneously receives and consumes benefits provided by the Helix performance. Transportation services are typically invoiced on a per-run basis, with revenue being recognized at a point in time once the service has been completed.
Systems Installation Revenue
Security systems, including Internet Protocol camera, intrusion alarm systems, perimeter alarm systems, and access controls are installed for clients. Installation jobs are estimated based on the cost of the equipment, the number of man hours expected to complete the work, supplies, travel, and any other ancillary costs. The installation is typically invoiced with 60% of the total price immediately after signing and the balance upon completion of the installation service. The timing of these contracts is short-term in nature and less than 12 months in duration, and revenue is recognized over the term of the contracts, utilizing the cost-to-cost method.
Software
The Company generates revenue from developing and licensing seed to sale cannabis compliance software to both private-sector and public-sector (government agencies) clients that are involved in cannabis related operations. The Company also generates revenue from on-going training, support and software customization services.
The private-sector software entails cultivation tracking, inventory management, point of sale and analytic reporting to assist businesses in meeting their compliance requirements and effectively managing their businesses. Customers within the private sector business are charged an initial one-time installation fee and the revenues associated with these services are recognized upon completion of installation and configuration at a point in time. After the installation and configuration of the software is completed, the customer is invoiced monthly and revenues associated with these services are recognized monthly over a period of time in which the customer continues to use the software and related services.
The public-sector software assists government agencies in efficient oversight of cannabis related business under their jurisdiction. Revenues associated with governmental contracts are longer-term in nature and recognized upon completion of certain milestones over a period of time or on a completed-contract basis at a point in time. The Company considers the contract to be complete when all significant costs have been incurred and the customer accepts the project. Costs incurred prior to the customer accepting the project are deferred and reflected on the condensed consolidated balance sheets as prepaid expenses and other current assets.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in accordance with ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Generally, the Company’s contracts include a single performance obligation that is separately identifiable, and therefore, distinct. Under ASC 606, the allocation of transaction price is not necessary if only one performance obligation is identified.
Significant Judgments
Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue, costs and satisfaction of performance obligation. The Company satisfies its performance obligations and subsequently recognizes revenue, over time, as security and installation services are performed. There were no changes to the significant judgments used by the Company to determine the timing of satisfaction of the performance obligations under ASC 606.
Costs to Obtain or Fulfill Contract
The Company’s costs to fulfill or obtain contracts with customers primarily consist of commissions and legal costs. The Company provides sales team members with commissions at 0-6%. Although sales commissions are incremental in nature and are only incurred when a contract is obtained, there is no up-front commission paid on the satisfactory obtainment of a contract, resulting in no sales commissions being capitalized at September 30, 2019 and December 31, 2018. The Company also incurs legal costs relating to the drafting and negotiating of contracts with select customers. Because legal costs are not incremental in nature and are incurred regardless of whether a contract is ultimately obtained, there were no legal costs capitalized as of September 30, 2019 and December 31, 2018. The Company did not record amortization of costs incurred to obtain the contract or any impairment losses for the period ending September 30, 2019 and 2018.
5. | Business |
Engeni SA Acquisition
On June 2, 2017 (the “Closing”), the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) in which the Company purchased all issued and outstanding Units of Security Grade Protective Services, Ltd. (“Security Grade”), which comprised of 800,000 Class A Units and 200,000 Class B Units. At closing, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”). Furthermore, provided that, within the first 60 days following the closing, no material customer identified in the Agreement terminates its contractual relationship withEngeni Closing Date, the Company and that all contractsits wholly owned subsidiary, Engeni Merger Sub, entered into the Engeni Merger Agreement with such material customers are in full forceEngeni US, Engeni SA, the members of Engeni US, and effect without default or cancellationScott Zienkewicz as the representative of the 60th day followingEngeni US members. Pursuant to the closing, onEngeni Merger Agreement, Engeni Merger Sub merged with and into Engeni US, with Engeni US surviving the 61st day followingmerger as a wholly-owned subsidiary of the Company. On the Engeni Closing Date, in connection with closing the Engeni Merger Agreement, the Company shallissued 366,700 shares of Company common stock to Engeni US members. Furthermore, the Company may also issue 207,427 additionalEngeni US members 366,700 and 366,600 shares of Parent common stock options (the “Additional Stock Options”). Inupon the eventachievement of termination, cancellationspecific objectives. If applicable, the Company will pay Engeni US members the aggregate amount of $100,000, on a pro rata basis, if Engeni SA reaches financial breakeven on or default of any contract with one or more material customer identified in the Agreement within the first 60 days following the closing, the stock options receivedbefore December 31, 2018, as determined by the acquiree shall be reduced and/or forfeited to the extent necessary (pro rata based upon their ownership interest in the Company immediately preceding the closing) by a percentage equal to the revenue received by the Company from the terminating customer(s) in the 180 days immediately preceding such termination divided by the revenue received by the Company from all material customers identified in the Agreement in the 180 days immediately preceding such termination. As of September 30, 2017, the Company has a liability pursuant to the Agreement of $500,373 payable nine months following the Closing. Company’s Chief Financial Officer and Scott Zienkewicz.
The mergerEngeni Merger is being accounted for as a business combination in accordance with ASC 805. The Company has determined fair values of the assets acquired and liabilities assumed in the Engeni Merger. These values are subject to change as we perform additional reviews of our assumptions utilized.
During the first quarter of 2019, it was determined Engeni SA did not reach financial breakeven and therefore the contingent consideration of $100,000 was deemed by the Company not to be payable and was reduced to zero. In accordance with ASC 805-30-35-1, the Company recognized the change in the fair value of contingent consideration subsequent to the acquisition date in general and administrative expenses. The Company’s allocation of the purchase price was calculated as follows:
Base Price - Cash | $ | 2,100,373 | ||
Base Price - Stock Options | 916,643 | |||
Contingent Consideration - Stock Options | 916,643 | |||
Total Purchase Price | $ | 3,933,659 |
As Adjusted | ||||
Base Price - Common Stock | $ | 388,702 | ||
Contingent Consideration - Common Stock | 777,298 | |||
Contingent Consideration - Cash | - | |||
Total Purchase Price | $ | 1,166,000 |
Weighted Average Useful Life | Weighted Average Useful Life | |||||||||||
Description | Fair Value | (in years) | Fair Value | (in years) | ||||||||
Assets acquired: | ||||||||||||
Cash | $ | 14,137 | $ | 5,609 | ||||||||
Accounts receivable | 53,792 | |||||||||||
Costs & earnings in excess of billings | 96,898 | |||||||||||
Accounts receivable and other assets | 30,479 | |||||||||||
Property, plant and equipment, net | 27,775 | 57,830 | ||||||||||
Trademarks | 25,000 | 10 | ||||||||||
Customer lists | 3,154,578 | 5 | ||||||||||
Web address | 5,000 | 5 | ||||||||||
Software | 449,568 | 3.3 | ||||||||||
Goodwill | 664,329 | 778,552 | ||||||||||
Other assets | 3,880 | |||||||||||
Total assets acquired | $ | 4,045,389 | $ | 1,322,038 | ||||||||
Liabilities assumed: | ||||||||||||
Billings in excess of costs | $ | 23,967 | ||||||||||
Loans payable | 18,414 | |||||||||||
Credit card payable and other liabilities | 69,349 | |||||||||||
Accounts payable | $ | 56,038 | ||||||||||
Total liabilities assumed | 111,730 | 56,038 | ||||||||||
Estimated fair value of net assets acquired | $ | 3,933,659 | $ | 1,266,000 |
The Company determined the fair value of the contingent consideration to be $777,298 at August 3, 2018 and recorded it as a liability in its unaudited condensed consolidated balance sheets. On April 2, 2019, the Company satisfied their contingent consideration liability and issued 733,300 shares of the Company’s common stock to Engeni US members.
Tan’s International Security
On the Tan Security Closing Date, the Company entered into the Tan Security Acquisition Agreement. Pursuant to the Tan Security Acquisition Agreement, Helix purchased all membership interests and capital stock of Tan Security and collectively holds 100% of the interests of Tan Security. The purchase price of $100,000 in cash plus 250,000 shares of the Company’s restricted common stock will be paid to Rocky Tan as follows:
● | 250,000 shares of Helix Stock at closing. | |
● | $25,000 at closing | |
● | $25,000 on the 4-month anniversary of the Tan Security Closing Date | |
● | $25,000 on the 8-month anniversary of the Tan Security Closing Date | |
● | $25,000 on the 12-month anniversary of the Tan Security Closing Date |
The Tan Security Acquisition is being accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary fair values of the assets acquired and liabilities assumed in the Tan Security Acquisition. These values are subject to change as we perform additional reviews of our assumptions utilized.
The Company has made a provisional allocation of the purchase price of the Tan Security transaction to the assets acquired and the liabilities assumed as of the purchase date. The following table summarizes the provisional purchase price allocations relating to the Tan Security Acquisition:
Base Price – Cash at closing | $ | 25,000 | ||
Base Price – Deferred cash payment (including $25,000 to be made on the 4,8 and 12-month anniversaries of closing) | 75,000 | |||
Base Price – Common Stock | 710,000 | |||
Total Purchase Price | $ | 810,000 |
Description | Fair Value | |||
Assets acquired: | ||||
Cash | $ | 2,940 | ||
Accounts receivable | 7,635 | |||
Goodwill | 821,807 | |||
Total assets acquired | $ | 832,382 | ||
Liabilities assumed: | ||||
Accounts payable | $ | 12,526 | ||
Other liabilities | 9,856 | |||
Total liabilities assumed | 22,382 | |||
Estimated fair value of net assets acquired | $ | 810,000 |
Green Tree International, Inc.
On February 5, 2019, the Company and its wholly owned subsidiary, Merger Sub, entered into the Amercanex Merger Agreement with GTI and Steve Janjic, as the representative of the GTI shareholders, pursuant to which Merger Sub merged with and into GTI (the “Merger”).
Pursuant to the Amercanex Merger Agreement, at the effective time of the Merger (the “Effective Time”), the Company will issue to the GTI stockholders an amount of unregistered shares of the Company’s common stock equal to $15 million, based on the average closing price of the Company’s common stock over the forty-five (45) trading day period ending three (3) trading days prior to the Closing Date. If the Closing occurs and revenues of GTI in the second 12 month period following the Closing Date exceed $5 million and are less than or equal to $10 million, Parent shall issue to the Company Shareholders a number of unregistered Parent Shares (whether issued or reserved for issuance) equal to the quotient of (a) $5 million divided by (b) the Parent Share Price multiplied by the quotient of (c) the revenues of the Company in the second 12 month period following the Closing Date less $5 million divided by (d) $5 million.
To secure the indemnification obligations of the GTI shareholders to the Company under the Merger Agreement, 4,140,274 of the Company shares to be issued to the GTI shareholders will be held back and the Company will be entitled to retain such number of the holdback shares as necessary to satisfy those indemnification obligations. 50% of the holdback shares that remain after satisfaction of any indemnification obligations will be released 12 months after the closing date of the merger, and the remainder 24 months after the closing date of the merger. Additionally, if in the first 12 months following the closing GTI generates less than $1.5 million of revenues, 100% of the holdback shares shall be returned to the Company.
In connection with closing the Merger on September 10, 2019, the Company will issue 16,765,727 unregistered shares of its common stock to GTI stockholders. In connection with the Merger, Steve Janjic joined the board of directors of the Company.
The Merger is being accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary fair values of the assets acquired and liabilities assumed in the GTI merger. These values are subject to change as we perform additional reviews of our assumptions utilized.
The Company has made a provisional allocation of the purchase price of the GTI transaction to the assets acquired and the liabilities assumed as of the purchase date. The following table summarizes the provisional purchase price allocations relating to the GTI transaction:
Base Price - Common Stock | $ | 12,909,611 | ||
Total Purchase Price | $ | 12,909,611 |
Description | Fair Value | Weighted Average Useful Life (Years) | ||||
Assets acquired: | ||||||
Note Receivable, net | $ | 135,000 | ||||
Property, Plant and Equipment, Net | 12,142 | |||||
Software | 452,002 | 4.5 | ||||
Goodwill | 12,980,840 | |||||
Total assets acquired | $ | 13,579,984 | ||||
Liabilities assumed: | ||||||
Accounts Payable | 43,717 | |||||
Notes Payable | 400,000 | |||||
Other Liabilities | 226,656 | |||||
Total liabilities assumed: | 670,373 | |||||
Estimated fair value of net assets acquired: | $ | 12,909,611 |
The Company has not completed the valuation studies necessary to finalize the acquisition fair values of the assets acquired and liabilities assumed and related allocation of purchase price for GTI. Accordingly, the type and value of the intangible assets amounts set forth above are preliminary. Once the valuation process is finalized for GTI, there could be changes to the reported values of the assets acquired and liabilities assumed, including goodwill and intangible assets and those changes could differ materially from what is presented above.
Total acquisition costs for the Security Grade acquisitionGTI merger incurred during the three and nine months ended September 30, 20172019 was $0 and $17,659, respectively$83,324, and is included in selling, general and administrative expense in the Company’s Statements of Operations.
The initial stock options are included as part of the purchase price – please see Note 16 for the Company’s valuation methods and assumptions. The Company determined the fair value of the contingent consideration to be $916,643 at June 2, 2017 and recorded it as a liability in its unaudited condensed consolidated balance sheets. For the three and nine months ended September 30, 2017, the Company recorded a change in fair value of contingent consideration of $(25,078) and $10,186, respectively. The Company satisfied their contingent consideration liability during the three months ended September 30, 2017.
Unaudited Pro Forma Results
The operating resultsGTI contributed revenues of $0 and a net loss of $22,144 for the acquired business has beenperiod September 10, 2019 through September 30, 2019, included in the Company’s income statement since closing. The revenues and net income (loss)consolidated condensed statements of the acquired business was as follows:operations.
For the Three Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2017 | |||||||||||||||
Acquisition | Total Revenue | Net Income | Total Revenue | Net Income | ||||||||||||
Security Grade Protective Services, Ltd | $ | 579,951 | $ | 180,292 | $ | 1,239,369 | $ | 139,470 | ||||||||
Total | $ | 579,951 | $ | 180,292 | $ | 1,239,369 | $ | 139,470 |
The following table below represents the revenue, net loss and loss per share effect of the acquired company, as reported in our consolidated financial statements and on a pro forma basis as if the acquisition occurred on January 1, 2016. These pro forma results are not necessarily indicative of the results that actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
Description | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues | $ | 1,709,697 | $ | 1,026,401 | $ | 3,607,865 | $ | 2,503,599 | ||||||||
Net loss | (75,065 | ) | (291,282 | ) | (7,970,731 | ) | (2,387,097 | ) | ||||||||
Net loss attributable to common shareholders | (8,120,023 | ) | (291,282 | ) | (19,171,576 | ) | (2,387,097 | ) | ||||||||
Loss per share attributable to common shareholders: | ||||||||||||||||
Basic and diluted-as pro forma (unaudited) | (0.28 | ) | (0.01 | ) | (0.67 | ) | (0.09 | ) |
6. |
The acquisition of the assets of Revolutionary Software, LLC occurred via two transactions:
The total purchase price for the Revolutionary assets acquired was $1,596,750. The acquisition cost has been allocated over the intangible assets acquired in accordance with the guidance set forth in ASC 805,Business Combinations, please see Note 8. As of September 30, 2017, the Company has a liability pursuant to the Revolutionary asset acquisition of $47,906.
Property and Equipment, Net |
PropertyAt September 30, 2019 and December 31, 2018, property and equipment consisted of the following:
September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||
Furniture and equipment | $ | 16,332 | $ | 14,731 | $ | 149,738 | $ | 264,659 | ||||||||
Software | 743 | - | ||||||||||||||
Software equipment | 402,297 | - | ||||||||||||||
Vehicles | 175,412 | 68,295 | 201,400 | 202,700 | ||||||||||||
Total | 192,487 | 83,026 | 753,435 | 467,359 | ||||||||||||
Less: Accumulated depreciation | (70,015 | ) | (27,426 | ) | (179,643 | ) | (117,841 | ) | ||||||||
Property and equipment, net | $ | 122,472 | $ | 55,600 | $ | 573,792 | $ | 349,518 |
Depreciation expense was $19,553 and $4,424 for the three months ended September 30, 20172019 and 2016,2018 was $24,440 and $27,528, respectively, and $42,589$71,662 and $16,519$63,421 for the nine months ended September 30, 20172019 and 2016,2018, respectively.
Intangible Assets, Net and Goodwill |
The following table summarizes the Company’s intangible assets:assets as of September 30, 2019 and December 31, 2018:
September 30, 2017 | ||||||||||||||||||
Estimated Useful Life (Years) | Gross Carrying Amount at December 31, 2016 | Assets Acquired Pursuant to Business Combination (1) | Accumulated Amortization | Net Book Value | ||||||||||||||
Database | 5 | $ | 93,427 | $ | - | $ | (27,476 | ) | $ | 65,951 | ||||||||
Tradenames and trademarks | 10 | 100,000 | 25,000 | (15,526 | ) | 109,474 | ||||||||||||
Web addresses | 5 | 125,000 | 5,000 | (37,089 | ) | 92,911 | ||||||||||||
Customer list | 5 | - | 3,154,578 | (207,310 | ) | 2,947,268 | ||||||||||||
$ | 318,427 | $ | 3,184,578 | $ | (287,401 | ) | $ | 3,215,604 |
September 30, 2019 | ||||||||||||||||||||||
Estimated Useful Life (Years) | Gross Carrying Amount | Assets Acquired Pursuant to Business Combination (2) | Assets Acquired | Accumulated Amortization | Net Book Value | |||||||||||||||||
Database | 5 | $ | 93,427 | $ | - | - | $ | (64,826 | ) | $ | 28,601 | |||||||||||
Trade names and trademarks | 5 - 10 | 591,081 | - | - | (178,294 | ) | 412,787 | |||||||||||||||
Web addresses | 5 | 130,000 | - | - | (89,061 | ) | 40,939 | |||||||||||||||
Customer list | 5 | 11,459,027 | - | - | (3,678,726 | ) | 7,780,301 | |||||||||||||||
Software | 4.5 | 9,771,195 | 452,002 | 1,625 | (2,911,794 | ) | 7,313,028 | |||||||||||||||
Domain Name | 5 | - | - | 20,231 | (1,018 | ) | 19,213 | |||||||||||||||
$ | 22,044,730 | $ | 452,002 | $ | 21,856 | $ | (6,923,719 | ) | $ | 15,594,869 |
December 31, 2016 | ||||||||||||||||||||||
Estimated Useful Life (Years) | Gross Carrying Amount at December 31, 2015 | Assets Acquired (1) | Impairment (2) | Accumulated Amortization | Net Book Value | |||||||||||||||||
In-process software | 5 | $ | - | $ | 800,500 | $ | (800,500 | ) | $ | - | $ | - | ||||||||||
Database | 5 | - | 571,250 | (477,823 | ) | (13,464 | ) | 79,963 | ||||||||||||||
Trade names | 10 | - | 100,000 | - | (7,205 | ) | 92,795 | |||||||||||||||
Web addresses | 5 | - | 125,000 | - | (18,014 | ) | 106,986 | |||||||||||||||
$ | - | $ | 1,596,750 | $ | (1,278,323 | ) | $ | (38,683 | ) | $ | 279,744 |
December 31, 2018 | ||||||||||||||||||
Estimated Useful Life (Years) | Gross Carrying Amount at December 31, 2017 | Assets Acquired Pursuant to Business Combination (1) | Accumulated Amortization | Net Book Value | ||||||||||||||
Database | 5 | $ | 93,427 | $ | - | $ | (50,858 | ) | $ | 42,569 | ||||||||
Trade names and trademarks | 5 - 10 | 125,000 | 466,081 | (91,554 | ) | 499,527 | ||||||||||||
Web addresses | 5 | 130,000 | - | (69,625 | ) | 60,375 | ||||||||||||
Customer list | 5 | 3,154,578 | 8,304,449 | (1,965,520 | ) | 9,493,507 | ||||||||||||
Software | 4.5 | - | 9,771,195 | (1,263,095 | ) | 8,508,100 | ||||||||||||
$ | 3,503,005 | $ | 18,541,725 | $ | (3,440,652 | ) | $ | 18,604,078 |
(1) | On |
(2) | ||
On |
The Company uses the straight-line method to determine the amortization expense for its definite lived intangible assets. Amortization expense related to the purchased intangible assets was $173,344$1,174,312 and $13,531$1,160,889 for the three months ended September 30, 20172019 and 2016,2018, respectively, and $248,718$3,483,067 and $25,298$1,806,468 for the nine months ended SeptSeptember 30, 20172019 and 2016,2018, respectively.
The following table summarizes the Company’s Goodwill as of September 30, 2019 and December 31, 2018:
Total Goodwill | ||||
Balance at December 31, 2017 | $ | 664,329 | ||
Impairment of goodwill | (664,329 | ) | ||
Goodwill attributable to Biotrack acquisition | 39,135,008 | |||
Goodwill attributable to Engeni acquisition | 778,552 | |||
Balance at December 31, 2018 | $ | 39,913,560 | ||
Goodwill attributable to Tan Security acquisition | 821,807 | |||
Goodwill attributable to Green Tree acquisition | 12,980,840 | |||
Balance at September 30, 2019 | $ | 53,716,207 |
During the period ended March 31, 2018, the Company came to a settlement agreement with multiple Security Grade employees resulting from a misrepresentation of revenue and customer list information provided as part of the acquisition. Therefore, the Company considers the settlement to be an indicator for goodwill impairment testing. Accordingly, at March 31, 2018, goodwill was tested for potential impairment. As a result of the goodwill impairment test performed, it was determined that the carrying value for each reporting unit was higher than its fair value and therefore goodwill was fully impaired, which resulted in a write-off of $664,329 for the three months ended March 31, 2018.
Costs, Estimated Earnings and Billings |
Costs, estimated earnings and billings on uncompleted contracts are summarized as follows as of September 30, 20172019 and December 31, 2016:2018:
September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||
Costs incurred on uncompleted contracts | $ | 281,634 | $ | - | $ | 171,486 | $ | 89,700 | ||||||||
Estimated earnings | 120,700 | - | 71,321 | 50,512 | ||||||||||||
Cost and estimated earnings earned on uncompleted contracts | 402,334 | - | 242,807 | 140,212 | ||||||||||||
Billings to date | 304,126 | - | 338,844 | 252,535 | ||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 98,208 | - | ||||||||||||||
Billings in excess of costs on uncompleted contracts | (96,037 | ) | (112,323 | ) | ||||||||||||
Costs in excess of billings | $ | 151,445 | $ | - | $ | 30,468 | $ | 42,869 | ||||||||
Billings in excess of cost | (53,237 | ) | - | (126,505 | ) | (155,192 | ) | |||||||||
$ | 98,208 | $ | - | $ | (96,037 | ) | $ | (112,323 | ) |
Accounts Payable and Accrued |
AccountsAs of September 30, 2019 and December 31, 2018, accounts payable and accrued expensesliabilities consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
Accounts payable | $ | 156,447 | $ | 83,308 | ||||
Accrued expenses | 112,099 | 14,805 | ||||||
Accrued interest | 47,233 | 8,487 | ||||||
Total | $ | 315,779 | $ | 106,600 |
September 30, 2019 | December 31, 2018 | |||||||
Accounts payable | $ | 734,090 | $ | 842,389 | ||||
Accrued compensation and related expenses | 341,832 | 33,869 | ||||||
Accrued expenses | 1,455,292 | 826,455 | ||||||
Lease obligation - current | 385,784 | - | ||||||
Total | $ | 2,916,998 | $ | 1,702,713 |
Convertible Notes Payable, net of discount |
September 30, 2019 | December 31, 2018 | |||||||
Note Five, 5% convertible promissory note, fixed secured, maturing November 16, 2019 | $ | - | $ | 187,177 | ||||
Note Ten, 25% convertible promissory note, fixed secured, maturing March 1, 2020, net of debt discount for warrants | 365,960 | - | ||||||
Note Eleven, 10% convertible promissory note, fixed secured, maturing May 15, 2020, net of debt discount for warrants and legal fees | 234,595 | - | ||||||
Note Twelve, 10% convertible promissory note, fixed secured, maturing June 16, 2020, net of debt discount for warrants and legal fees | 261,871 | - | ||||||
862,426 | 187,177 | |||||||
Less: Current portion | (862,426 | ) | (187,177 | ) | ||||
Long-term portion | $ | - | $ | - |
September 30, 2017 | December 31, 2016 | |||||||
Note Four, 0% convertible promissory note, unsecured, maturing June 1, 2017, net of debt discount for debt issuance costs and BCF | $ | - | $ | 470,000 | ||||
Note Five, 10% convertible promissory note, fixed secured, originally maturing September 12, 2017, net of debt discount for debt issuance costs, warrants and BCF | 183,334 | - | ||||||
Note Six, 10% convertible promissory note, fixed secured, originally maturing September 13, 2017 | 25,000 | - | ||||||
Note Seven, 10% convertible promissory note, fixed secured, originally maturing October 26, 2017, net of debt discount for debt issuance costs and warrants | 300,308 | |||||||
508,642 | 470,000 | |||||||
Less: Current portion | (508,642 | ) | (470,000 | ) | ||||
Long-term portion | $ | - | $ | - |
On December 16, 2015, the Company entered into an Unsecured Convertible Promissory Note (“Note One”) with an investor (the “Investor”). The Investor provided the Company with $100,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note One due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note One was convertible at the election of the Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. The Company evaluated Note One in accordance with ASC 480,Distinguishing Liabilities from Equity and determined that Note One will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of December 31, 2015, the fair value of the liability was $90,436 and accordingly the Company recorded a gain in regard to the change in fair value of $9,546 for the year ended December 31, 2015. On December 31, 2016, the Company and the Investor of Note One entered into an Amendment and Extension Agreement (“Amended Note One”). Per Amendment Note One, the conversion rate under Note One was amended to a new conversion rate of $1.00 per share, for the outstanding principal balance and any accrued and unpaid interest to date. If the Investor elects to convert the entire outstanding principal balance of the note on or before ten (10) days from the date of the Amended Note One, the Investor of Note One receives the right to purchase 50,000 restricted shares of common stock of the Company at $1.00 per common share, for cash. On December 31, 2016, the Amended Note One was converted into 107,000 shares of restricted common stock. In addition, the Investor elected to purchase 50,000 restricted shares of common stock of the Company, which the Company received proceeds of $50,000 (“Amended Note One Subscription”). In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the Amended Note One and Amended Note One Subscription of $1,003,751. The Company did not record a change in the fair value of Note One for the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, the Company recorded a loss and gain, respectively, pertaining to the change in fair value of Note One of $465 and $80,969. The interest expense associated with Note One was $0 and $1,765 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note One was $0 and $5,236 for the nine months ended September 30, 2017 and 2016, respectively.
On December 18, 2015, the Company entered into an Unsecured Convertible Promissory Note (“Note Two”) with a second investor (the “Second Investor”). The Second Investor provided the Company with $100,000 in cash, which was received by the Company during the year ended December 31, 2016. The Company promised to pay the principal amount, together with interest at the annual rate of 7%, with principal and accrued interest on Note Two due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Two was convertible at the election of the Second Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. On December 31, 2016, the Company and the Second Investor of Note Two entered into an Amendment and Extension Agreement (“Amended Note Two”). Per Amendment Note Two, the conversion rate under Note Two was amended to a new conversion rate of $1.00 per common share, for the outstanding principal balance and any accrued and unpaid interest to date. If the Second Investor elects to convert the entire outstanding principal balance of the note on or before ten (10) days from the date of the Amended Note Two, the Second Investor of Note Two receives the right to purchase 50,000 restricted shares of common stock of the Company at $1.00 per share, for cash. On December 31, 2016, the Amended Note Two was converted into 107,000 shares of restricted common stock. In addition, the Investor elected to purchase 50,000 restricted shares of common stock of the Company, which the Company received proceeds of $50,000 (“Amended Note Two Subscription”). In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the Amended Note Two and Amended Note Two Subscription of $1,003,751. The Company did not record a change in the fair value of Note Two for the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, the Company recorded a loss and gain, respectively, pertaining to the change in fair value of Note Two of $465 and $80,969. The interest expense associated with Note Two was $0 and $1,765 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note Two was $0 and $5,236 for the nine months ended September 30, 2017 and 2016, respectively.
On February 12, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Three”) with a third investor (the “Third Investor”). The Third Investor provided the Company with $100,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note Three due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Three was convertible at the election of the Third Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. On December 31, 2016, the Company and the Investor of Note Three entered into an Amendment and Extension Agreement (“Amended Note Three”). Per Amended Note Three, the conversion rate under Note Three was amended to a new conversion rate of $1.00 per share, for the outstanding principal balance and any accrued and unpaid interest to date. If the Investor elects to convert the entire outstanding principal balance of the note on or before ten (10) days from the date of the Amended Note Three, the Investor of Note Three receives the right to purchase 25,000 restricted shares of common stock of the Company at $1.00 per common share, for cash. On December 31, 2016, the Amended Note Three was converted into 106,000 shares of restricted common stock. In addition, the Investor elected to purchase 25,000 restricted shares of common stock of the Company, which the Company received proceeds of $25,000 (“Amended Note Three Subscription”). In accordance with ASC 470,Debt, the Company recorded a loss on induced conversion associated with the Amended Note Three and Amended Note Three Subscription of $882,641. For the three and nine months ended September 30, 2016, the Company recorded a loss and gain, respectively, pertaining to the change in fair value of Note Three of $465 and $71,405. The interest expense associated with Note Three was $0 and $1,765 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note Three was $0 and $4,430 for the nine months ended September 30, 2017 and 2016, respectively.
On September 30, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Four”) with a fourth investor (the “Fourth Investor”) in which the Fourth Investor provided the Company $500,000 in cash. As of December 31, 2016, the Class B Preferred Shares were not established as a result of Holder Default, in which, the Fourth Investor did not act in good faith towards the prompt negotiation, execution and delivery of the Class B Preferred Shares.
On March 31, 2017, the First Amendment to Note Four (the “Amended Note”) was entered by the Company and the Fourth Investor. In the absence of a Company Event of Default or Fourth Investor Event of Default, Amended Note is payable by issuance upon conversion into Class B Preferred Shares of the Company, which was to occur no later than June 1, 2017. The Amended Note was converted on May 17, 2017 (see below). The Amended Note had the following conversion features:
Due to the terms of the Amendment, the Company evaluated Note Four under ASC 470-50 to determine if modification or extinguishment treatment was necessary. After performing the analysis under ASC 470-50, it was determined extinguishment treatment was appropriate and the Company should extinguish Note Four and recognize the Amended Note as new debt. The Company recognized a loss on extinguishment of $4,611,395 on Note Four.
The Company evaluated the Amended Note and the embedded conversion feature under ASC 815 and determined the conversion feature did not meet the definition of a derivative and therefore should not be bifurcated. The Company then evaluated the Amended Note in accordance with ASC 480 and determined that Note Four will be accounted for as a liability measured at fair value. As of March 31, 2017, the fair value of the liability was $500,000.
On May 17, 2017, pursuant to the Series B Preferred Stock Purchase Agreement (see Note 13), Note Four was converted into 1,540,649 Series B Preferred Shares in which the conversion feature into common stock was altered from $0.43 per share of common stock to $0.3245385 per share of the Series B Preferred Stock. In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the conversion of Note Four of $1,503,876.
On February 13, 2017,2019, the Company entered into a $183,333 10% Fixed$450,000 Secured Convertible Promissory Note (“Note Five”Ten”) with a fourthan independent investor (the “Fourth Investor”“investor”). The Fourth Investorinvestor provided the Company with $166,666 in cash, which was received by the Company during the period ended March 31, 2017. The additional $16,666 was retained by the Fourth Investor for due diligence and legal bills for the transaction. The Company promised to pay the principal amount, together with guaranteed interest at the annual rate of 10%, with principal and accrued interest on Note Five due and payable on September 12, 2017 (unless converted under terms and provisions as set forth within Note Five). The principal balance of Note Five was convertible at the election of the Fourth Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $1.50 per share. In conjunction with Note Five, the Company issued a warrant to the third investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share.
The Company evaluated the embedded conversion feature within the above convertible note under ASC 815 and determined the conversion feature did not meet the definition of a derivative and therefore should not be bifurcated. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to the convertible note payable and a total debt discount of $183,333 was recorded.
The company recorded a debt discount relating to the warrants issued in the amount of $22,000 based on the relative fair values of Note Five without the warrants and the warrants themselves at the effective date of Note Five. The additional $16,666 retained by the Fourth Investor for due diligence and legal bills for the transaction will be recorded as a debt discount. The calculated value of the beneficial conversion feature and the combined value of the debt discount resulted in a value greater than the value of the debt and as such, the total discount was limited to the value of the debt balance of $183,333. Therefore, the debt discount related to the beneficial conversion feature was in the amount of $144,666. The excess value of the beneficial conversion feature discount was recognized as a loss in earnings and recorded as a component of interest expense in the amount of $390,666.
The debt discounts will be amortized to interest expense over the life of Note Five. Amounts amortized to interest expense were approximately $64,603 and $0 for the three months ended September 30, 2017 and 2016, respectively. Amounts amortized to interest expense were approximately $183,333 and $0 for the nine months ended September 30, 2017 and 2016, respectively. Note Five was fully amortized at September 30, 2017. The interest expense associated with Note Five was $6,460 and $0 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note Five was $18,333 and $0 for the nine months ended September 30, 2017 and 2016, respectively.
On February 13, 2017, the Company entered into a $25,000 10% Fixed Secured Convertible Promissory Note (“Note Six”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $25,000 in cash, which was received by the Company during the period ended March 31, 2017. The Company promised to pay the principal amount, together with guaranteed interest at the annual rate of 10%, with principal and accrued interest on Note Six due and payable on September 13, 2017. The principal balance of Note Six was convertible at the election of the Fourth Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $6.10 per share. Note Six became effective on February 14, 2017 upon the execution by the Company and the Holder of numerous exhibit documents.
The Company evaluated Note Six in accordance with ASC 815,Derivatives and Hedgingto determine if the conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the conversion feature did not meet the requirements for bifurcation pursuant to ASC 815. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception and determined that Note Six did not have a beneficial conversion feature. As a result, the Company recorded the conventional convertible note as a debt instrument in its entirety. The interest expense associated with Note Six was $2,713 and $0 for the nine months ended September 30, 2017 and 2016, respectively. The interest expense associated with Note Six was $1,090 and $0 for the three months ended September 30, 2017 and 2016, respectively.
On April 26, 2017, the Company entered into a $100,000 10% Secured Convertible Promissory Note (“Note Seven”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $72,000$450,000 in cash proceeds, which was received by the Company during the three monthsperiod ended June 30, 2017.2019. Note Seven is dueTen will mature on October 26, 2017March 1, 2020 and bear interest at a rate of 25% per annum, payable by the Company must pay guaranteed interesthalf in cash and half in kind on the principal balance at an amount equivalent to 10% of the note amount.a quarterly basis. The principal balance of Note SevenTen is convertible at the election of the Fourth Investor,investor, in whole or in part, at any time or from time to time, into the Company’s common stock at the lower of $1.00$0.90 per share or a 50%30% discount to the lowest closing bidCompany’s 30-day weighted average listed price ofper share immediately before the Company’s common stock for the 30 Trading Days prior todate of conversion. In conjunction with Note Seven,Ten, the Company issued a warrant to the fourth investor to purchase 150,000160,715 shares of the Company’s common stock at $1.00$1.40 per share.
The Company evaluated Note SevenTen in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that Note Seven will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. At inception, April 26, 2017, the fair value of Note Seven was $618,000 while as of September 30, 2017, the fair value of the liability was $310,000. Accordingly, the Company recorded a change in fair value loss of $210,000 related to Note Seven. In addition, the company recorded a debt discount relating to the warrants issued in the amount of $43,200 based on the relative fair values of Note Seven without the warrants and the warrants themselves at inception of Note Seven. The additional $25,000 retained by the Third Investor for due diligence and legal bills for the transaction and $3,000 paid to legal counsel was recorded as a debt discount.
The debt discounts will be amortized to interest expense over the life of Note Seven. Amounts amortized to interest expense were approximately $36,220 and $0 for the three months ended September 30, 2017 and 2016, respectively. Amounts amortized to interest expense were approximately $61,510 and $0 for the nine months ended September 30, 2017 and 2016, respectively. The unamortized discount balance at September 30, 2017 was approximately $9,690. The interest expense associated with Note Seven was $5,027 and $0 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note Seven was $8,579 and $0 for the nine months ended September 30, 2017 and 2016, respectively.
On November 16, 2017, the Company amended the terms of Notes Five, Six and Seven, whose original maturity dates were September 12, 2017, September 12, 2017 and October 26, respectively. These notes now mature on May 16, 2018. See Note 20 for details relating to the amended terms of Note Five, Six and Seven.
Advances from Related Parties
The Company has a loan outstanding from Helix Opportunities. The advance does not accrue interest and has no definite repayment terms. The loan balance was $0 as of September 30, 2017. The Company has an additional loan outstanding from a Company executive. The advance does not accrue interest and has no definite repayment terms. The loan balance was $102,000 as of September 30, 2017.
Convertible Note Payable
On March 11, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Eight”) with Paul Hodges, a Director of the Company (the “Related Party Holder”). The Related Party Holder provided the Company with $150,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note Eight due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Eight was convertible at the election of the Related Party Holder, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. The Company evaluated Note Eight in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that Note EightTen will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2017,2019, the fair value of the liabilityNote Ten was $265,593 and accordingly$514,148. Accordingly, the Company recorded a credit regarding the change in fair value of $8,971($147,433) and loss of $34,725, respectively$64,148 related to Note Ten for the nine and three months ended September 30, 2017. For the three and nine months ended September 30, 2016,2019, respectively.
In addition, the company recorded a debt discount relating to the warrants issued in the amount of $355,847 based on the relative fair value of the warrants at inception of Note Ten. Debt discounts amortized to interest expense were $89,693 and $207,659 for the three and nine months ended September 30, 2019, respectively. The unamortized discount balance at September 30, 2019 was $148,188. On May 31, 2019 and September 3, 2019, the Company issued 15,625 and 16,568 restricted shares of common stock as paid-in-kind (“PIK”) interest payments in the amount of $14,062 and $14,063, respectively. Accrued interest expense associated with Note Ten was $9,247 as of September 30, 2019, which includes PIK interest payable.
On August 15, 2019, the Company entered into a $400,000 Fixed Convertible Promissory Note (“Note Eleven”) with the investor. The investor provided the Company with $380,000 in cash proceeds, which was received by the Company during the period ended September 30, 2019. The additional $20,000 was retained by the investor for due diligence and legal bills for the transaction and recorded as a debt discount. Note Eleven will mature on May 15, 2020 and bear interest at a rate of 10% per annum, payable by the Company in cash. The principal balance of Note Eleven is convertible at the election of the investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $0.90 per share for the first 6 months and thereafter at the lower of $0.90 per share or at 70% of the average of the five lowest daily VWAPs of the Company’s common stock during the 15 consecutive trading days prior to the date on which the investor elects to convert all or part of Note Eleven. In conjunction with Note Eleven, the Company issued a warrant to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share.
The Company evaluated Note Eleven in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Eleven will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2019, the fair value of Note Eleven was $266,667. Accordingly, the Company recorded a charge in the change in fair value of $697($133,333) related to Note Eleven for the three and $107,107,nine months ended September 30, 2019, respectively.
In addition, the company recorded a debt discount of $38,543 relating to the warrants issued in the amount of $18,543 based on the relative fair value of the warrants themselves at inception of Note Eleven and $20,000 relating to legal fees. Debt discounts amortized to interest expense were $6,471 for the three and nine months ended September 30, 2019, respectively. The unamortized discount balance at September 30, 2019 was $32,072. Accrued interest expense associated with Note EightEleven was $2,675$6,715 as of September 30, 2019.
On September 16, 2019, the Company entered into a $450,000 Fixed Convertible Promissory Note (“Note Twelve”) with the investor. The investor provided the Company with $427,500 in cash proceeds, which was received by the Company during the period ended September 30, 2019. The additional $22,500 was retained by the investor for due diligence and $2,646legal bills for the transaction and was recorded as a debt discount. Note Twelve will mature on June 16, 2020 and bear interest at a rate of 10% per annum, payable by the Company in cash. The principal balance of Note Twelve is convertible at the election of the investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $0.90 per share for the first 6 months and thereafter at the lower of $0.90 per share or at 70% of the average of the five lowest daily VWAPs of the Company’s common stock during the 15 consecutive trading days prior to the date on which the investor elects to convert all or part of Note Twelve. In conjunction with Note Twelve, the Company issued a warrant to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share.
The Company evaluated Note Twelve in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Twelve will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2019, the fair value of Note Twelve was $300,000. Accordingly, the Company recorded a change in fair value of ($150,000) related to Note Twelve for the three and nine months ended September 30, 20172019, respectively.
In addition, the company recorded a debt discount of $40,183 relating to the warrants issued in the amount of $17,683 based on the residual fair value of the warrants themselves at inception of Note Twelve and 2016.$22,500 relating to legal fees. Debt discounts amortized to interest expense were $2,054 for the three and nine months ended September 30, 2019, respectively. The unamortized discount balance at September 30, 2019 was $38,129. Accrued interest expense associated with Note EightTwelve was $7,853 and $7,853 for the nine months ended$2,299 as of September 30, 2017 and 2016.2019.
11. | Related Party Transactions |
Warrants
InOn March 2016,1, 2019, the Company issued 960,000 sharesentered into a $1,500,000 Secured Convertible Promissory Note (“Note Nine”) with Rose Capital Fund I, LP (the Related Party Holder”). A Managing Member of restricted common stock to the Related Party Holder is also a Director of the Company. The Related Party Holder provided the Company with $1,475,000 in cash proceeds, which was received by the Company during the period ended September 30, 2019. The additional $25,000 was retained by the Related Party Holder for legal bills for the transaction. Note Nine will mature on March 1, 2020 and bear interest at a rate of 25% per annum, payable by the Company half in cash and half in kind on a subscription agreement for total proceedsquarterly basis. The principal balance of $150,000.Note Nine is convertible at the election of the Related Party Holder, in whole or in part, at any time or from time to time, into the Company’s common stock at the lower of $0.90 per share or a 30% discount to the Company’s 30-day weighted average listed price per share immediately before the date of conversion. In conjunction with the subscription agreement,Note Nine, the Company issued a warrant to the Related Party Holder to purchase 1,920,000 restricted535,715 shares of the Company’s common stock at $0.16$1.40 per share.
The Warrant Exercise Date is the later of the following to occur (i) March 9, 2017, (ii) ten (10) days after the Company’s notice to the holder of the warrant that the Company shall have an effective S-1 registrationevaluated Note Nine in accordance with the SEC; or (iii) ten (10) days after Company’s notice to the holder of the warrants that the Company has entered into an agreementASC 480, Distinguishing Liabilities from Equity and determined Note Nine will be accounted for the sale of substantially all the assets or Common Stock of the Company.as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2017,2019, the fair value of Note Nine was $1,713,828. Accordingly, the Company recorded a change in fair value of ($491,442) and $213,828 related to Note Nine for the three and nine months ended September 30, 2019, respectively.
In addition, the company recorded a debt discount relating to the warrants granted are not exercisable.issued in the amount of $1,186,153 based on the relative fair value of the warrants at inception of Note Nine. The additional $25,000 retained by the fourth investor for legal bills for the transaction will be recorded as a debt discount. Debt discounts amortized to interest expense were $305,276 and $706,782 for the three and nine months ended September 30, 2019, respectively. The unamortized discount balance at September 30, 2019 was $504,371. On May 31, 2019, the Company issued 52,083 restricted shares of common stock as PIK interest payments in the amount of $46,875. Accrued interest expense associated with Note Nine was $29,795 as of September 30, 2019, which includes PIK interest payable. As of September 30, 2019, the balance of Note Nine, net of debt discount for warrants and legal bills was $1,209,458.
Warrants
On March 1, 2019, in connection with the issuance of Note Nine, the Company issued warrants, of which the value was derived and based off the fair value of Note Nine, to the investor to purchase 535,715 shares of the Company’s common stock at $1.40 per share. Exercise of the purchase rights represented by the warrant may be made, in whole or in part, at any time or times on or after March 1, 2019 and on or before March 1, 2024, by delivery to the Company of the Notice of Exercise.
The Company determined that the warrants associated with Note Nine are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, March 1, 2019, the fair value of the warrant liability was $1,186,153 while as of September 30, 2019, the fair value of the warrant liability was $259,215. Accordingly, the Company recorded a change in fair value of $212,131 and $926,938 during the three and nine months ended September 30, 2019, respectively, which is reflected in the unaudited condensed consolidated statements of operations.
Promissory Note
On January 30, 2017,3, 2019, the Company entered into an unsecured promissory note with the Related Party Holder in the amount of $75,000.$280,000. The unsecured promissory note has a fixed interest rate of 8%10% and is due and payable on June 30, 2017. In conjunction with the Series B Preferred Stock Purchase Agreement, as discussed in Note 13, the Company satisfied its liability in exchange for Series B Preferred Stock. As of September 30, 2017, the Company had $0 outstanding on the unsecured promissory note. The interest expense associated withMarch 31, 2019. On March 2, 2019, the unsecured promissory note was $0 for the three months ended September 30, 2017. The interest expense associated with the unsecured promissory note was $2,570 for the nine months ended September 30, 2017.paid off in full.
On February 13, 2017,July 29, 2019, the Company entered into an unsecured promissory note with the Related Party Holder in the amount of $180,000.$300,000. The unsecured promissory note has a fixed interest rate of 8%12% and is due and payable on June 30, 2017. In conjunction with the Series B Preferred Stock Purchase Agreement, as discussed in Note 13, the Company satisfied its liability in exchange for Series B Preferred Stock. As of September 30, 2017, the Company had $0 outstanding on the unsecured promissory note. The interest expense associated with the unsecured promissory note was $0 for the three months ended September 30, 2017. The interest expense associated with the unsecured promissory note was $2,570 for the nine months ended September 30, 2017.January 29, 2020.
Notes Payable |
As of September 30, 2019 and December 31, 2018 Notes payable consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
Vehicle financing loans payable, between 4.7% and 7.0% interest and maturing between June 2022 and July 2022 | $ | 44,344 | $ | - | ||||
Loans Payable - Credit Union | 16,857 | |||||||
Less: Current portion of loans payable | (10,268 | ) | - | |||||
Long-term portion of loans payable | $ | 50,933 | $ | - |
September 30, 2019 | December 31, 2018 | |||||||
Vehicle financing loans payable, between 4.7% and 7.0% interest and maturing between June 2022 and July 2022 | $ | 55,127 | $ | 71,284 | ||||
Loans Payable - Credit Union | 5,831 | 5,075 | ||||||
Convertible Note Payable | 400,000 | - | ||||||
Less: Current portion of loans payable | (24,805 | ) | (24,805 | ) | ||||
Long-term portion of loans payable | $ | 436,153 | $ | 51,554 |
The interest expense associated with the notes payable was $230$7,065 and $300$2,901 for the three months ended September 30, 20172019 and 2016, respectively. The interest expense associated with the notes payable was $4602018, respectively, and $600$9,746 and $4,321 for the nine months ended September 30, 20172019 and 2016,2018, respectively.
In connection with the Merger, the Company assumed a $400,000 Senior Secured Convertible Debenture (the “Convertible Debenture”) (See Note 5). The Convertible Debenture will mature on July 31, 2021 and bears interest at a rate of 10% per annum, payable by the Company to the Lender. In the event that Lender elects to convert the Convertible Debenture into Helix Common Stock or in the event Helix required the Lender to convert the Convertible Debenture into its Common Stock, the number of shares that shall be issuable upon full Conversion of the Convertible Debenture at any time shall be equal to the outstanding principal of the Convertible Debenture divided by $1.00. Pursuant to the terms of the Convertible Debenture, Helix Common Stock can be transferred to the Lender from Steve Janjic, as a shareholder of the Company who receives shares of Helix Common Stock at the Closing, instead of via a new issuance of shares of Helix Common Stock by Helix to Lender, and Lender agrees to accept such transfer of shares from Mr. Janjic as the issuance of Helix Common Stock.
In addition, the Company shall have the right to require the Lender to convert the Convertible Debenture into Helix Common Stock at any time provided its Common Stock is listed on a stock exchange other than the U.S. OTCQB, the Common Stock would be fully traded up on conversion and the trading price of its Common Stock closes above $1.15 for 20 consecutive trading days on such exchange. The Convertible Debenture will be secured by a general security interest over all of the assets of the GTI, however does not apply to those assets owned by Helix or Merger Sub prior to the closing of the Merger.
Shareholders’ Equity |
Common Stock
Other Common Stock Issuances
In May 2017,January 2019, the Company issued 111,11120,000 shares of restricted common stock to an investora consultant per a subscriptionconsulting agreement and recorded shared based compensation expense of $27,400.
In March and June 2019, the Company issued 1,255,222 and 166,667 shares of common stock as part of investment unit purchase agreements (see Note 15).
In March and June 2019, certain option holders exercised their rights under the BioTrackTHC Stock Plan and were issued 62,847 and 47,084 shares of common stock, respectively, for no cash proceeds.
In March and April 2019, certain option holders exercised their rights under the BioTrackTHC Stock Plan and were issued 6,082 and 57,461 shares of common stock for total proceeds of $100,000.$4,805 and $21,808, respectively.
In April 2019, the Company issued 250,000 shares of common stock as part of the Tan Security acquisition.
In April 2019, a selling shareholder of Security Grade exercised their right to purchase 15,101 shares of the Company’s common stock.
In April 2019, the Company issued 733,300 shares of common stock in satisfaction of the Engeni contingent consideration (see Note 5).
In May 2019, the Company issued 15,625 and 52,083 restricted shares of common stock as PIK interest payments in the amount of $14,062 and $46,875, respectively (see Notes 10 and 11).
In August 2019, the Company issued 16,765,727 shares of common stock as part of the GTI acquisition.
In September 2019, the Company issued 16,568 restricted shares of common stock as PIK interest payments in the amount of $14,063 (see Note 10).
Conversion of Convertible Note to Common Stock
On March 7, 2019 and March 28, 2019, the holder of a 10% fixed secured convertible promissory note issued by the Company elected its option to fully convert $75,882 and $42,055 in principal of the convertible note into 100,000 and 55,421 shares of the Company’s common stock.
2017 Omnibus Incentive Plan
The table below reflects shares issued under the 2017 Omnibus Incentive Plan during the nine months period ended September 30, 2019:
Date of Issuance | Number of Shares Issued | Total Share Based Compensation | ||||||
March 2019 | 250,000 | $ | 320,000 | |||||
250,000 | $ | 320,000 |
Series A convertible preferred stock
In October 2015, the Company issued a total of 1,000,000 shares of its Class A Preferred Stock as part of a reorganization in which Helix Opportunities LLC contributed 100% of itself and its wholly-owned subsidiaries, Security Consultants Group, LLC and Boss Security Solutions, Inc. to the Company in exchange for 1,000,000 convertible preferred shares of the Company.Stock. The Class A Preferred Stock included super majority voting rights and were convertible into 60% of the Company’s common stock. During the three months ended September 30,third quarter of 2017, the Company modified the conversion rate on the Class A Preferred Stock to a 1:1 ratio. This modification reduced the amount of potentially dilutive Convertible Series A Stock by 15,746,127 shares to a total of 1,000,000 at September 30, 2017.
Series B convertible preferred stock
Series B Preferred Stock Purchase Agreement
On May 17, 2017, the Company sold to accredited investors an aggregate of 5,781,426 Series B Preferred Shares for gross proceeds of $1,875,000 and converted a $500,000 Unsecured Convertible Promissory Note into 1,536,658 Series B Preferred Shares. This tranche of Series B Preferred Shares are convertible into 7,318,084 shares of common stock based on the current conversion price, at a purchase price of $0.325 per share. Net proceeds were approximately $1,772,500 after legal and placement agent fees listed below and the satisfaction of the promissory notes discussed in Note 12.
In connection with the Series B Preferred Stock Purchase Agreement, the Company is obligated to issue warrants to a third-party for services to purchase 462,195 shares of common stock at $0.325 per share (see Note 15).share. These warrants have been accounted for as an obligation to issue because as of the balance sheet date the Company did not deliver the warrants though incurred the obligation; accordingly, they were recognized as a liability on the unaudited condensed consolidated balance sheet and cost of issuance of Series B preferred shares on the unaudited condensed consolidated statement of shareholders’ equity (deficit).equity.
On July 28, 2017, as contemplated by the Initial Series B Preferred Purchase Agreement, the Parties entered into a second Series B Preferred Stock Purchase Agreement (the “Second Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 1,680,000 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $840,000.
On August 29, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a third Series B Preferred Stock Purchase Agreement (the “Third Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 369,756 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $120,000.
On September 15, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a third Series B Preferred Stock Purchase Agreement (the “Third Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 462,195 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $150,000.
Series B Preferred Stock
In accordance with the Certificate of Incorporation, there were 9,000,000 authorized Series B Preferred Stock at a par value of $ 0.001.In connection with the Series B Preferred Stock Purchase Agreement, on May 12, 2017, the Company filed a Certificate of Designation (the “Certificate of Designations”) with the Secretary of State of the State of Delaware to designate the preferences, rights and limitations of the Series B Preferred Shares.0.001. On August 23, 2017 the Certificate of Designations was amended and restated to increase the number of shares of Series B Preferred Stock authorized to be 13,000,000. 17,000,000.
Conversion:
Each Series B Preferred Share is convertible at the option of the holder at any time on or after May 12, 2018 into such number of shares of the Company’s common stock equal to the number of Series B Preferred Shares to be converted, multiplied by the Preferred Conversation Rate. The Preferred Conversion Rate shall be the quotient obtained by dividing the Preferred Stock Original Issue Price ($0.3253815) by the Preferred Stock Conversation Price in effect at the time of the conversion (the initial conversion price will be equal to the Preferred Stock Original Issue Price, subject to adjustment in the event of stock splits, stock dividends, and fundamental transactions). Based on the current conversion price, the Series B Preferred Shares are convertible into 9,830,03513,784,201 shares of common stock. A fundamental transaction means: (i) our merger or consolidation with or into another entity, (ii) any sale of all or substantially all of our assets in one transaction or a series of related transactions, (iii) any reclassification of our Common Stock or any compulsory share exchange by which Common Stock is effectively converted into or exchanged for other securities, cash or property; or (iv) sale of shares below the preferred stock conversion price. Each Series B Preferred Share will automatically convert into common stock upon the earlier of (i) notice by the Company to the holders that the Company has elected to convert all outstanding Series B Preferred Shares at any time on or after May 12, 2018; or (ii) immediately prior to the closing of a firmly underwritten initial public offering (involving the listing of the Company’s Common Stock on an Approved Stock Exchange) pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Common Stock for the account of the Company in which the net cash proceeds to the Company (before underwriting discounts, commissions and fees) are at least fifty million dollars ($50,000,000).
Beneficial Conversion Feature – Series B Preferred Stock (deemed dividend):
Each share of Series B Preferred Stock is convertible into shares of common stock, at any time at the option of the holder at any time on or after May 12, 2018. On May 17, 2017, the date of issuances of the Series B, the publicly traded common stock price was $3.98.
Based on the guidance in ASC 470-20-20, the Company determined that a beneficial conversion feature exists, as the effective conversion price for the Series B preferred shares at issuance was less than the fair value of the common stock into which the preferred shares are convertible. A beneficial conversion feature based on the intrinsic value at the date of issuances for the Series B preferred shares is scheduled below. For the three and nine months ended September 30, 2017, the beneficial conversion amount of $8,044,958 and $11,200,845 was accreted back to the preferred stock as a deemed dividend and charged to additional paid in capital in the absence of earning as the beneficial conversion feature is amortized over time through the earliest conversion date, May 12, 2018. Provided below is a schedule of the issuances of Series B preferred shares and the amount accredited to deemed dividend at September 30, 2017.
For the Three Months Ended September 30, 2017 | ||||||||||||||||||
Issuance Date | Beneficial Conversion Feature Term (months) | Number of shares | Fair Value of Beneficial Conversion Feature | Amount accreted as a deemed dividend | Unamortized Beneficial Conversion Feature | |||||||||||||
May 17, 2017 | 12 | 7,318,084 | $ | 25,247,098 | $ | (6,311,775 | ) | $ | 15,779,436 | |||||||||
July 29, 2017 | 9.5 | 1,680,000 | 6,804,000 | (1,493,561 | ) | 5,310,439 | ||||||||||||
August 29, 2017 | 8.5 | 369,756 | 1,148,263 | (143,533 | ) | 1,004,730 | ||||||||||||
September 15, 2017 | 8 | 462,195 | 1,435,329 | (96,089 | ) | 1,339,240 | ||||||||||||
Total | 9,830,035 | $ | 34,634,690 | $ | (8,044,958 | ) | $ | 23,433,845 |
For the Nine Months Ended September 30, 2017 | ||||||||||||||||||
Issuance Date | Beneficial Conversion Feature Term (months) | Number of shares | Fair Value of Beneficial Conversion Feature | Amount accreted as a deemed dividend | Unamortized Beneficial Conversion Feature | |||||||||||||
May 17, 2017 | 12 | 7,318,084 | $ | 25,247,098 | $ | (9,467,662 | ) | $ | 15,779,436 | |||||||||
July 29, 2017 | 9.5 | 1,680,000 | 6,804,000 | (1,493,561 | ) | 5,310,439 | ||||||||||||
August 29, 2017 | 8.5 | 369,756 | 1,148,263 | (143,533 | ) | 1,004,730 | ||||||||||||
September 15, 2017 | 8 | 462,195 | 1,435,329 | (96,089 | ) | 1,339,240 | ||||||||||||
Total | 9,830,035 | $ | 34,634,690 | $ | (11,200,845 | ) | $ | 23,433,845 |
Dividends, Voting Rights and Liquidity Value:
Pursuant to the Certificate of Designations, the Series B Preferred Shares shall bear no dividends, except that if the Board shall declare a dividend payable upon the then-outstanding shares of the Company’s common stock. The Series B Preferred Shares vote together with the common stock and all other classes and series of stock of the Company as a single class on all actions to be taken by the stockholders of the Company including, but not limited to, actions amending the certificationcertificate of incorporation of the Company to increase the number of authorized shares of the common stock. Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series B Preferred Shares are entitled to (i) first receive distributions out of our assets in an amount per share equal to the Stated Value plus all accrued and unpaid dividends, whether capital or surplus before any distributions shall be made on any shares of common stock and (ii) second, on an as-converted basis alongside the common stock.
Classification:
These Series B Preferred Shares are classified within permanent equity on the Company’s consolidated balance sheet as they do not meet the criteria that would require presentation outside of permanent equity under ASC 480,Distinguishing Liabilities from Equity.
Stock Options |
As part of the Membership Interest Purchase Agreement entered into betweenOn February 6, 2019 the Company and Security Grade, on June 2, 2017 (see Note 5), the Company granted to the selling Members theawarded an executive an option to purchase up to 414,854a total of 100,000 shares of the Company’s common stock at aan exercise price of $0.001$1.51 per share. Of the 414,854These options granted, 207,427 were vested at closingon May 6, 2019 and equity classified. The vesting of the remaining 207,427 shares were subject to certain milestones being achieved and was initially recognized as contingent consideration, both a component of purchase price. As a result of the milestones being met during the three months ended September 30, 2017, the remaining 207,427 shares have also vested. The options have an expiration date of 36 monthsFebruary 6, 2024.
On March 19, 2019 the Company awarded the Chief Financial Officer, two options to purchase a total of 300,000 shares of the Company’s common stock at prices ranging from $2.35 to $2.59 per share. These options shall vest over a three-year period from March 2020 to March 2022 and have expiration dates ranging from March 2024 to March 2029.
On March 19, 2019 the closing date. TheCompany awarded the Chief Executive Officer, two options to purchase a total of 500,000 shares of the Company’s common stock at prices ranging from $2.35 to $2.59 per share. These options shall vest over a three-year period from March 2020 to March 2022 and have expiration dates ranging from March 2024 to March 2029.
On May 2, 2019, the Company awarded an investor an option to purchase a total of 125,000 shares of the Company’s common stock at an exercise price will be based on the fair market valueof $2.03 per share. 62,500 of the shareoptions shall vest immediately and 62,500 of the options shall vest on August 2, 2019 provided the date of grant.marketing agreement between the Company and grantee has not been terminated. These options shall expire on May 1, 2024.
The fair valueIn May and June 2019, the Company awarded five employees, an option to purchase a total of 50,000, 40,000, 50,000, 50,000, and 30,000 shares of the Company’s common stock at prices ranging from $1.05 to $2.03 per share. These options was estimated using the Black-Scholes option pricing model,shall vest over a period ranging from September 2019 to June 2020 and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgement. The assumptions at the inception date are as follows:have expiration dates ranging from May 2024 to June 2024.
As of August 2, 2017 | As of June 2, 2017 | |||||||
Exercise Price | $ | 0.001 | $ | 0.001 | ||||
Fair value of company’s common stock | $ | 4.20 | $ | 4.42 | ||||
Dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 179.9 | % | 181.2 | % | ||||
Risk Free interest rate | 1.52 | % | 1.42 | % | ||||
Expected life (years) | 2.67 | 2.67 |
Stock option activity for the nine-monthsperiod ended September 30, 20172019 is as follows:
Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | ||||||||||
Outstanding at January 1, 2017 | - | - | - | |||||||||
Granted | 414,854 | $ | 0.001 | 3.00 | ||||||||
Forfeited and expired | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Outstanding at September 30, 2017 | 414,854 | $ | 0.001 | 2.67 | ||||||||
Vested options at September 30, 2017 | 414,854 | $ | 0.001 | 2.67 |
Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | ||||||||||
Outstanding at January 1, 2019 | 8,730,956 | $ | 0.671 | 2.44 | ||||||||
Granted | 1,245,000 | $ | 2.106 | 6.81 | ||||||||
Exercised | (188,575 | ) | $ | 0.261 | 0.83 | |||||||
Forfeited and expired | - | - | - | |||||||||
Outstanding at September 30, 2019 | 9,787,381 | $ | 0.862 | 2.94 | ||||||||
Vested options at September 30, 2019 | 8,900,021 | $ | 0.749 | 1.88 |
On February 13, 2017,March 1, 2019, in connection with the Company entered into a $183,333 Fixed secured Convertible Promissoryissuance of Note (“Note Five”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $166,666 in cash, which was received by the Company during the period ended March 31, 2017. The additional $16,666 was retained by the Fourth Investor for due diligence and legal bills for the transaction. In conjunction with Note Five,Ten, the Company issued a warrant,warrants, of which the value was derived and based off the fair value of Note Five,Ten, to the fourthinvestor to purchase 160,715 shares of the Company’s common stock at $1.40 per share. Exercise of the purchase rights represented by the warrant may be made, in whole or in part, at any time or times on or after March 1, 2019 and on or before March 1, 2024, by delivery to the Company of the Notice of Exercise.
The Company determined that the warrants associated with Note Ten are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with ASC 480, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, March 1, 2019, the fair value of the warrant liability was $355,847 while as of September 30, 2019, the fair value of the warrant liability was $77,765. Accordingly, the Company recorded a change in fair value of the warrant liability of $63,639 and $278,082 related to Note Ten for the three and nine months ended September 30, 2019, respectively.
On January 10, 2019, the Company entered into an Investment Unit Purchase Agreement (the “First Investment Agreement”) to issue and sell investment units to an investor, in which the investment units consist of one share of the common stock of the Company, and a warrant exercisable for one half share of common stock of the Company at an Exercise Price of $1.25 per share for cash at a price per investment unit of $0.90.
On March 5, 2019, the Company sold an aggregate of 1,255,222 units of the Company’s securities to an investor at a purchase price of $0.90 per unit for total proceeds of $1,129,700. In connection with the First Investment Agreement, the investor is entitled to purchase from the Company, at the Exercise Price, at any time on or after 90 days from the issuance date, 627,611 shares of the Company’s common stock (the “March Warrant Shares”).
The Company determined that the warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations.
The fair value of the March Warrant Shares at issuance on January 10, 2019 is in excess of the proceeds received, the warrant liability is required to be recorded at fair value with the excess of the fair value over the proceeds received recognized as a loss in earnings. The gross proceeds from the 1,255,222 investment units at $0.90 was $1,129,700. The fair value of the March Warrant Shares at issuance was $1,717,506. The amount to be recognized as a loss in earnings is calculated as follows:
Proceeds from January investment units | $ | 1,129,700 | ||
Par value of common stock issues | $ | (1,255 | ) | |
Fair value of warrants | $ | (1,717,506 | ) | |
Loss on issuance of warrants (January 10, 2019 issuance) | $ | (589,061 | ) | |
Loss on issuance of warrants (March 11, 2019 issuance) | $ | (198,148 | ) | |
Total loss on issuance of warrants | $ | (787,209 | ) |
As of September 30, 2019, the fair value of the warrant liability was $283,696 and the Company recorded a change in fair value of the warrant liability of $255,151 and $1,433,810 for the three and nine months ended September 30, 2019, respectively.
On March 11, 2019, the Company issued warrants to an investment bank to purchase a total of 100,000 restricted shares of the Company’s common stock at a per share purchase price of $0.90. The warrants are exercisable at any time nine months after the issuance date within three years of issuance.
The Company determined that the warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the condensed consolidated balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the condensed consolidated statement of operations. At inception, March 11, 2019, the fair value of the warrant liability was $198,148 while as of September 30, 2019, the fair value of the warrant liability was $37,125. Accordingly, the Company recorded a change in fair value of the warrant liability of $45,037 and $161,023 related to the warrants for the three and nine months ended September 30, 2019, respectively.
On June 14, 2019, the Company entered into another Investment Unit Purchase Agreement (the “Second Investment Agreement”) to issue and sell investment units to an investor (the “investor”), in which the investment units consist of one share of the common stock of the Company, and a warrant exercisable for one half share of common stock of the Company at an exercise price of $1.25 per share for cash at a price per investment unit of $0.90.
On June 24, 2019, the Company sold an aggregate of 166,667 units of the Company’s securities to an investor at a purchase price of $0.90 per unit for total proceeds of $150,000. In connection with the Second Investment Agreement, the investor is entitled to purchase from the Company, at the exercise price, at any time on or after 90 days from the issuance date, 83,333 shares of the Company’s common stock (the “June Warrant Shares”).
The gross proceeds from the 166,667 investment units at $0.90 was $150,000. The fair value of the June Warrant Shares at issuance was $83,586 while as of September 30, 2019, the fair value of the warrant liability was $38,832. Accordingly, the Company recorded a change in fair value of the warrant liability of $34,241 and $44,754 related to the warrants for the three and nine months ended September 30, 2019.
On August 15, 2019, in connection with the issuance of Note Eleven, the Company issued warrants, of which the value was derived and based off the fair value of Note Eleven, to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share. Exercise of the purchase rights represented by this Warrantthe warrant may be made, in whole or in part, at any time or times on or after February 14, 2017August 15, 2019 and on or before February 12, 2022,August 15, 2024, by delivery to the Company of the Notice of Exercise. As
The Company determined that the warrants associated with Note Eleven are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with ASC 480, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, August 15, 2019, the fair value of the warrant liability was $18,542 while as of September 30, 2017,2019, the warrants granted were not exercised.fair value of the warrant liability was $12,739. Accordingly, the Company recorded a change in fair value of the warrant liability of $5,803 related to Note Eleven for the three and nine months ended September 30, 2019, respectively.
InOn September 16, 2019, in connection with the issuance of the Note SevenTwelve, the Company issued a warrant (the “Warrant”)warrants, of which the value was derived and based off the fair value of Note Twelve, to the Purchaserinvestor to purchase 150,000 shares of Common Stock pursuant to the terms and provisions thereunder. The Warrant is exercisable at any time within five (5) years of issuance and entitles the Purchaser to purchase 150,00025,000 shares of the Common StockCompany’s common stock at an exercise price of the lesser of either i) $1.00 or ii) a 50% discount to the lowest closing bid price thirty (30) trading days immediately preceding conversion, subject to certain adjustments.
per share. Exercise of the purchase rights represented by this Warrantthe warrant may be made, in whole or in part, at any time or times on or after April 26, 2017September 16, 2019 and on or before April 26, 2022,September 16, 2024, by delivery to the Company of the Notice of Exercise. As
The Company determined that the warrants associated with Note Twelve are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with ASC 480, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, September 16, 2019, the fair value of the warrant liability was $17,683 while as of September 30, 2017,2019, the warrants granted were not exercised.fair value of the warrant liability was $12,803. Accordingly, the Company recorded a change in fair value of the warrant liability of $4,880 related to Note Twelve for the three and nine months ended September 30, 2019, respectively.
A summary of warrant activity is as follows:
September 30, 2017 | ||||||||
Warrant Shares | Weighed Average Exercise Price | |||||||
Balance at beginning of period | 1,920,000 | $ | 0.16 | |||||
Warrants granted | 637,195 | $ | 0.51 | |||||
Balance at end of period | 2,557,195 | $ | 0.25 |
Liability to issue warrants
In connection with the Series B Preferred Stock Purchase Agreement, the Company is obligated to issue warrants to a third-party for services to purchase 462,195 shares of common stock at $0.325 per share. These warrants have been accounted for as an obligation to issue because as of the balance sheet date the Company did not deliver the warrants though incurred the obligation; accordingly, they were recognized as a liability on the unaudited condensed consolidated balance sheet and cost of issuance of Series B preferred shares on the unaudited condensed consolidated statement of shareholders’ equity (deficit).
For the Nine Months Ended September 30, 2019 | ||||||||
Warrant Shares | Weighted Average Exercise Price | |||||||
Balance at January 1, 2019 | 3,418,184 | $ | 0.23 | |||||
Warrants granted | 1,557,374 | $ | 1.22 | |||||
Balance at June 30, 2019 | 4,975,558 | $ | 0.55 |
The fair value of the Company’s obligation to issue warrantswarrant liability was calculated using the Black-Scholes model and the following assumptions:
As of September 30, 2017 | As of May 17, 2017 | As of September 30, 2019 | As of December 31, 2018 | |||||||||||||
Fair value of company’s common stock | $ | 3.10 | $ | 3.98 | $ | 0.60 | $ | 0.90 | ||||||||
Dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Expected volatility | 243.5 | % | 181.2 | % | 45% - 140% | 175.0 | % | |||||||||
Risk Free interest rate | 1.62 | % | 1.42 | % | 1.55% - 1.79% | 2.49 | % | |||||||||
Expected life (years) | 2.63 | 3.00 | 2.92 | 1.65 | ||||||||||||
Fair value of financial instruments - warrants | $ | 1,432,529 | $ | 1,839,133 | $ | 1,010,890 | $ | 896,171 |
The change in fair value of the financial instrumentinstruments – warrants is as follows:
Amount | ||||
Balance as of January 1, 2017 | $ | - | ||
Fair value of warrants at date of inception | 1,839,133 | |||
Change in fair value of liability to issue warrants | (406,604 | ) | ||
Balance as of September 30, 2017 | $ | 1,432,529 |
Amount | ||||
Balance as of January 1, 2019 | $ | 896,171 | ||
Fair value of warrants issued | $ | 3,577,465 | ||
Change in fair value of liability to issue warrants | $ | (3,462,746 | ) | |
Balance as of September 30, 2019 | $ | 1,010,890 |
Amount | ||||
Balance as of June 30, 2017 | $ | 1,963,924 | ||
Change in fair value of liability to issue warrants | (531,395 | ) | ||
Balance as of September 30, 2017 | $ | 1,432,529 |
Amount | ||||
Balance as of July 1, 2019 | $ | 2,199,266 | ||
Fair value of warrants issued | $ | 36,225 | ||
Change in fair value of liability to issue warrants | $ | (1,224,601 | ) | |
Balance as of September 30, 2019 | $ | 1,010,890 |
16. | Stock-Based Compensation |
2017 Omnibus Incentive Plan
The Company recordedCompany’s 2017 Omnibus Incentive Plan (the “2017 Plan”) was adopted by our Board of Directors and a chargemajority of $531,395our voting securities on October 17, 2017. The 2017 Plan permits the granting of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and $406,604 fordividend equivalent rights to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the three and nine months ended September 30, 2017 as a result of the change inPlan at no less than the fair value of the obligationunderlying common stock as of the date of grant. Options granted under the Plan have a maximum term of ten years. Under the Plan, a total of 5,000,000 shares of common stock are reserved for issuance, of which was recorded in other income (expense) on the consolidated statementsoptions to purchase 2,499,945 and 1,004,945 shares of operations.common stock were granted as of September 30, 2019 and December 31, 2018, respectively.
Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan
On October 22, 2014, BioTrackTHC approved and adopted the BioTrackTHC Stock Plan. The BioTrackTHC Stock Plan set aside and reserved 600,000 shares of BioTrackTHC’s common stock for grant and issuance in accordance with its terms and conditions. Persons eligible to receive awards from the BioTrackTHC Stock Plan include employees (including officers and directors) of BioTrackTHC or its affiliates and consultants who provide significant services to BioTrackTHC or its affiliates (the “Grantees”). The BioTrackTHC Stock Plan permits BioTrackTHC to issue to Grantees qualified and/or non-qualified options to purchase BioTrackTHC’s common stock, restricted common stock, performance units, and performance shares. The term of each award under the BioTrackTHC Stock Plan shall be no more than ten years from the date of grant thereof. BioTrackTHC’s Board of Directors or a committee designated by the Board of Directors is responsible for administration of the BioTrackTHC Stock Plan and has the sole discretion to determine which Grantees will be granted awards and the terms and conditions of the awards granted.
BioTrackTHC Management Awards
On September 1, 2015 and November 1, 2015, BioTrackTHC’s Board approved individual employee option grants (the “Executive Grants”) for three executives (the “Executives”). Pursuant to the Executive Grants, the Executives were each granted stock options to purchase 146,507 shares (totaling 439,521 shares) of BioTrackTHC’s common stock (the “Option”) at an exercise price equal to approximately $7.67. The options vest as to 25% of the shares subject to the Options, one year after the date of grant and then in equal quarterly installments for the three years thereafter, subject to the Executive’s continued employment with BioTrackTHC (see Notes 1 and 5).
Income Taxes |
No provision for U.S. federal or state income taxes has been recorded as the Company has incurred net operating losses since inception. Significant components of the Company’s net deferred income tax assets for the nine months ended September 30, 20172019 and 20162018 consist of income tax loss carryforwards. These amounts are available for carryforward for use in offsetting taxable income of future years through 2035. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carry-forward period. Utilization of the net operating loss carry-forwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Due to the Company’s history of operating losses, these deferred tax assets arising from the future tax benefits are currently not likely to be realized and are thus reduced to zero by an offsetting valuation allowance. As a result, there is no provision for income taxes.
For the nine months ended September 30, 20172019 and 2016,2018, the companyCompany has a net operating loss carry forward of approximately $5,800,000$16,952,000 and $1,385,000,$9,825,000, respectively. Utilization of these net loss carry forwards is subject to the limitations of Internal Revenue Code Section 382. The Company applied a 100% valuation reserve against the deferred tax benefit as the realization of the benefit is not certain.
Commitments and Contingencies |
Under Topic 842, operating lease expense is generally recognized evenly on a straight-line basis. The Company has operating leases primarily consisting of facilities with remaining lease terms of one year to five years. The lease term represents the period up to the early termination date unless it is obligated under an operating lease agreement for an office facilityreasonably certain that the Company will not exercise the early termination option. Certain leases include rental payments that are adjusted periodically based on changes in Colorado, which expires on February 28, 2021.consumer price and other indices.
Rent expense incurred underLeases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company combines the lease and non-lease components in determining the lease liabilities and ROU assets.
Activity related to the Company’s leases was as follows:
Nine Months Ended September 30, 2019 | ||||
Operating lease expense | $ | 417,287 | ||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 273,398 | ||
ROU assets obtained in exchange for operating lease obligations | $ | 1,499,752 |
The Company’s lease agreements generally do not provide an implicit borrowing rate, therefore an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. The Company used the incremental borrowing rate on December 31, 2018 for all leases that commenced prior to that date.
ROU lease assets and lease liabilities for the Company’s operating leases amount to $14,438were recorded in the condensed consolidated balance sheet as follows:
As of September 30, 2019 | ||||
Other assets | $ | 1,189,773 | ||
Accounts payable and accrued liabilities | $ | 385,784 | ||
Other long-term liabilities | 876,929 | |||
Total lease liabilities | $ | 1,262,713 | ||
Weighted average remaining lease term (in years) | 2.91 | |||
Weighted average discount rate | 6.00 | % |
Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of September 30, 2019, for the following five fiscal years and $18,033thereafter were as follows:
As of September 30, 2019 | ||||
2019 - Remaining | 115,982 | |||
2020 | 393,413 | |||
2021 | 248,223 | |||
2022 | 195,144 | |||
2023 | 200,944 | |||
Thereafter | 205,438 | |||
Total future minimum lease payments | $ | 1,359,144 | ||
Less imputed interest | (96,431 | ) | ||
Total | $ | 1,262,713 |
As of September 30, 2019, the Company had additional operating lease obligations for a lease with a future effective date of approximately $600,000. This operating lease will commence during the first quarter of fiscal 2022 with a lease term of three months ended September 30, 2017years.
19. | Segment Results |
FASB ASC 280-10-50 requires use of the “management approach” model for segment reporting. The management approach is based on the way a company’s management organized segments within the company for making operating decisions and 2016, respectively. Rent expenseassessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision–making group is composed of the Chief Executive Officer. The Company operates in three segments, Security and guarding, Systems installation and Software.
Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements.
The following represents selected information for the nine months ended September 30, 2017 and 2016 was $55,159 and $62,697, respectively.Company’s reportable segments:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Security and guarding | ||||||||||||||||
Revenue | $ | 1,138,934 | $ | 1,141,676 | $ | 3,691,174 | $ | 3,432,651 | ||||||||
Cost of revenue | 1,236,572 | 917,620 | 2,975,102 | 2,458,548 | ||||||||||||
Gross profit | (97,638 | ) | 224,056 | 716,072 | 974,103 | |||||||||||
Total operating expenses | 1,789,627 | 2,536,916 | 5,426,705 | 7,943,815 | ||||||||||||
Loss from operations | (1,887,265 | ) | (2,312,860 | ) | (4,710,633 | ) | (6,969,712 | ) | ||||||||
Total other (expense) income | 1,619,474 | 58,716 | 640,064 | 2,714,438 | ||||||||||||
Total net loss | $ | (267,791 | ) | $ | (2,254,144 | ) | $ | (4,070,569 | ) | $ | (4,255,274 | ) | ||||
Systems installation | ||||||||||||||||
Revenue | $ | 245,272 | $ | 318,850 | $ | 447,880 | $ | 454,113 | ||||||||
Cost of revenue | 149,431 | 194,013 | 649,041 | 379,046 | ||||||||||||
Gross profit | 95,841 | 124,837 | (201,161 | ) | 75,067 | |||||||||||
Total operating expenses | 179,641 | 49,683 | 367,094 | 134,097 | ||||||||||||
Loss from operations | (83,800 | ) | 75,154 | (568,255 | ) | (59,030 | ) | |||||||||
Total other expense | 280 | 406 | 713 | 804 | ||||||||||||
Total net (loss) income | $ | (83,520 | ) | $ | 75,560 | $ | (567,542 | ) | $ | (58,226 | ) | |||||
Software | ||||||||||||||||
Revenue | $ | 2,357,078 | $ | 1,653,195 | $ | 6,872,210 | $ | 2,229,337 | ||||||||
Cost of revenue | 838,792 | 768,428 | 2,522,570 | 1,055,122 | ||||||||||||
Gross profit | 1,518,286 | 884,767 | 4,349,640 | 1,174,215 | ||||||||||||
Total operating expenses | 2,410,597 | 1,384,542 | 6,996,514 | 1,806,108 | ||||||||||||
Loss from operations | (892,311 | ) | (499,775 | ) | (2,646,874 | ) | (631,893 | ) | ||||||||
Total other expense | (11,947 | ) | (93 | ) | 23 | (84 | ) | |||||||||
Total net loss | $ | (904,258 | ) | $ | (499,868 | ) | $ | (2,646,851 | ) | $ | (631,977 | ) |
20. | Subsequent Events |
On October 11, 2017, as contemplated by2019, the Initial Series B Preferred Purchase Agreement, the PartiesCompany entered into a Series B Preferred Stock Purchase Agreement (the “Fifth Series B Purchase Agreement”) wherebysecurities purchase agreement pursuant to which the Company conductedagreed to sell a fifth closingsecured convertible promissory note (the “Convertible Note”) and common stock purchase warrant (the “Warrant”). The Convertible Note, which expires on July 11, 2020, has an initial aggregate principal balance of the sale$450,000 and bears interest at a rate of its Series B Preferred Stock and issued and sold10% per annum. The Warrant is exercisable for five years to the Purchaser 231,097.5purchase up to 25,000 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $75,000.common stock at a price of $1.00 per share.
On October 31, 2017, as contemplated18, 2019, November 5, 2019, November 7, 2019 and November 11, 2019, the holder of a 25% fixed secured convertible promissory note issued by the Initial Series B Preferred Purchase Agreement, the Parties entered into a Series B Preferred Stock Purchase Agreement (the “Sixth Series B Purchase Agreement”) whereby the Company conducted a sixth closingelected its option to partially convert $20,000, $20,000, $40,000 and $100,000 in principal of the sale of its Series B Preferred Stockconvertible note into 56,738, 63,012, 126,024 and issued and sold to the Purchaser 246,504315,060 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $80,000.common stock.
On October 31, 2017, as contemplated by the Initial Series B Preferred Purchase Agreement, the Parties entered into a Series B Preferred Stock Purchase Agreement (the “Seventh Series B Purchase Agreement”) whereby the Company conducted a seventh closing of the sale of its Series B Preferred Stock and issued and sold to the Purchaser 795,833 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $477,500.
On November 16, 2017,1, 2019, the Company amended Notes Five, Six, and Sevenentered into an Advisory Services Agreement (the “Agreement”) with Electrum Partners, LLC (“Electrum”). The Agreement provides for the Fourth Investor. All three notes shall have maturity dates that are six months from November 16, 2017, shall convert at a 40% discountissuance of 100,000 shares of restricted common stock to Electrum upon the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion, shall incur interest at an annual rate of 5%, and shall be prepayable at any time at 110%commencement of the unpaid principalAgreement, the issuance of 50,000 stock options each month the Agreement is effective, and accrued interest balances. Notes Six100,000 warrants each month the agreement is effective. The stock options are exercisable for three years from issuance and Seven may be repaid by November 21, 2017 at a principal amount that is reduced by 15% of the stated Principal Amount.vest immediately upon grant. The Note Five, Sixwarrants are exercisable for five years from issuance and Seven Principal Amounts are amended to $281,900, $38,441 and $131,107, respectively.
vest immediately upon grant.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion of our financial condition and results of operations for the three and nine months ended September 30, 20172019 and 20162018 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K/A10-K for the year ended December 31, 2016,2018, as filed on July 7, 2017April 1, 2019 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms “Helix”, the “Company”, “we”, “us”, and “our” refer to Helix TCS, Inc.
Overview
Helix’sHelix TCS, Inc. provides critical infrastructure solutions to the legal cannabis industry. Our mission is to provide clients with the most powerful and cutting-edgebest-in-class critical infrastructure services through a single integrated operating environments in the market, helpingplatform which enables them to better managerun their businesses more safely, efficiently, and mitigate risk while they focus on their core business. We accomplish these goals through a unique combination of business, logistics, risk-management,profitably. As we increase our platform’s scale and investment skills, delivered through a proprietary software suitescope, clients will be able to realize greater cost savings and partnership platform.operating advantages.
Our team is composed of former military, law enforcement, and technology professionals with deep experience in security and law enforcement, intelligence, technology design and development, partner relations, data aggregation, venture capital, private equity, risk-management, banking, and finance – a combination that is truly unmatched in the Legal Cannabis Industry.finance.
Technology is a cornerstone of Helix’s service offering. We offer clients the only trueOur technology platform in the industry, allowingallows clients to manage their business in a compliant manner with BioTrackTHC’s seed-to-sale software, as well as managing inventory and supply costs through Cannabase, as well asCannabase. We also provide bespoke monitoring and transport solutions. We focus on utilizing technology as an operations multiplier, bringing in and managing unique partnerships across the tech spectrum to tailor and guarantee desired outcomes for our clients.
Within the cannabis industry, we believe that no other activity carries as much potential for unforeseen negative impact as a lapse in compliance operations. Helix brings a broad range of compliance services to firms in the cannabis industry, safeguarding their ability to operate while increasing their access to services that offer them a competitive edge.
As our flagship service offering, we offer simply the highest standard in security operations: transport, armed and unarmed guarding, training, investigation, and special services in the industry. From the training of our guard staff, to the sophistication and effectiveness of our literally, battle-tested protocols, to our responsiveness to client needs and suggestions, Helix delivers integrated operating environments that are unmatched in the industry.
We have greatly enhanced our core operations with the recent acquisitionacquisitions of Security Grade.Grade, BioTrackTHC, Engeni, Tan Security and Amercanex. Security Grade is a market leader in the security profession and provides a broad range of services, from security consulting to installation of surveillance technology. Consistent with our team of professionals, Security Grade employs specialists with extensive experience and exposure to all areas of security related services. ThisBioTrackTHC specializes in providing cannabis software services, ranging from monitoring of plant inventory to point-of-sale solutions. BioTrackTHC’s software is used by 9 government entities and more than 2,000 commercial client locations across 34 U.S. states and 6 countries. Engeni provides a turnkey and comprehensive digital presence solution for small businesses. The Engeni Growth solution includes an optimized web page, a fully paid Google pay-per-click campaign, lead capture & lead delivery and ubiquitous directory/map listings. Engeni has also become the Company’s offshore software development platform, and is currently working on the second generation of the BioTrackTHC software. These strategic acquisitionacquisitions will help field the growing demand in the Legal Cannabis Industry.
Tan Security, a licensed security company, provided the Company a platform with which to expand security operations in the state of California. Amercanex is a business to business wholesale marketplace that leverages blockchain technology and is capable of facilitating wholesale cannabis and hemp transactions between licensed businesses on a global scale. The Company is currently working to integrate Amercanex’s technology with BioTrackTHC’s software platforms.
Results of Operations for the three months ended September 30, 20172019 and 20162018
The following table shows our results of operations for the three months ended September 30, 20172019 and 2016.2018. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
For the Three Months Ended September 30, | Change | |||||||||||||||
2017 | 2016 | Dollars | Percentage | |||||||||||||
Revenue | $ | 1,129,746 | $ | 612,017 | $ | 517,729 | 85 | % | ||||||||
Cost of revenue | 814,031 | 447,690 | 366,341 | 82 | % | |||||||||||
Gross margin | 315,715 | 164,327 | 151,388 | 92 | % | |||||||||||
Operating expenses | 1,039,904 | 495,279 | 544,625 | 110 | % | |||||||||||
Loss from operations | (724,189 | ) | (330,952 | ) | (393,237 | ) | 119 | % | ||||||||
Other (expense) income, net | 468,832 | (40,833 | ) | 509,665 | -1248 | % | ||||||||||
Net loss | (255,357 | ) | (371,785 | ) | 116,428 | -31 | % | |||||||||
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend | (8,044,958 | ) | - | (8,044,958 | ) | N/A | ||||||||||
Net loss attributable to common shareholders | $ | (8,300,315 | ) | $ | (371,785 | ) | $ | (7,928,530 | ) | 2133 | % |
For the Three Months Ended September 30, | Change | |||||||||||||||
2019 | 2018 | Dollars | Percentage | |||||||||||||
Revenue | $ | 3,741,284 | $ | 3,113,721 | $ | 627,563 | 20 | % | ||||||||
Cost of revenue | 2,224,795 | 1,880,061 | 344,734 | 18 | % | |||||||||||
Gross margin | 1,516,489 | 1,233,660 | 282,829 | 23 | % | |||||||||||
Operating expenses | 4,379,865 | 3,971,141 | 408,724 | 10 | % | |||||||||||
Loss from operations | (2,863,376 | ) | (2,737,481 | ) | (125,895 | ) | 5 | % | ||||||||
Other income, net | 1,607,807 | 59,029 | 1,548,778 | 2624 | % | |||||||||||
Net loss | $ | (1,255,569 | ) | $ | (2,678,452 | ) | $ | 1,422,883 | -53 | % | ||||||
Changes in foreign currency translation adjustment | $ | (118,003 | ) | $ | 17,538 | $ | (135,541 | ) | 100 | % | ||||||
Net loss attributable to common shareholders | $ | (1,373,572 | ) | $ | (2,660,914 | ) | $ | 1,287,342 | -48 | % |
Revenue
Total revenue for the three monthsthree-month period ended September 30, 20172019 was $1,129,746$3,741,284, which represented an increase of $517,729$627,563 compared to total revenue of $612,017$3,113,721 for the three months ended September 30, 2016.2018. The increase primarily resulted from a substantial increase in the number of clients serviced by Helix, the introduction of retail transportation services, and additional revenue resulting from growth in the Security Grade acquisition. client base of BioTrackTHC.
Cost of RevenueRevenues
Cost of revenuerevenues for the three months ended September 30, 20172019 and 20162018 primarily consisted of hourly compensation for security personal.personnel and employees involved in the creation and development of licensing software. Cost of revenuerevenues increased by $366,341$344,734 for the three months ended September 30, 2017,2019, to $814,031$2,224,795 as compared to $447,690$1,880,061 for the three months ended September 30, 2016.2018. The increase primarily resulted from a substantial increase in the numbercost of servicing additional clients serviced by Helix, which requiredof BioTrackTHC and the hiringtiming of additional employees.purchases for the installation of security equipment.
Operating Expenses
Operating Expenses
Our operating expenses encompass selling, general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during the three months ended September 30, 20172019 and 20162018 were $1,039,904$4,379,865 and $495,279$3,971,141, respectively. The overall $544,625$408,724 increase in operating expenses was primarily attributable to the following increasesincreases/(decreases) in operating expenses of:
● | Selling, general and administrative | |
● | Salaries and wages – | |
● | Professional and legal fees – | |
● | Depreciation and amortization – |
The $190,359$311,695 increase in selling, general and administrative expenses is a result of increases in rent expense, advertising and travel expenses resulting from an expansion in our operations requiring greater office space, as well as work done to expand the Company into new states.operations. The $136,140 increase$(495,663) decrease in salaries and wages resulted from a significant increasedecrease in administrative headcount.stock compensation expense. The $41,734$200,521 increase in professional and legal fees primarily resulted from an increase in legal fees and accounting costs associated with being a fully reporting public company.fundraising. The $176,932$392,141 increase in depreciation and amortization was due to the acquisition of vehicles for the retail transportation business, amortization of debt discounts and intangible assets acquired in the Security Grade acquisition.BioTrackTHC, Engeni and GTI acquisitions.
Other (Expense) Income, net
Other (expense) income, net consisted of lossa change in the fair value of convertible notes, change in the fair value of convertible notes – related party, change in fair value of warrant liability, change in fair value of contingent consideration, gain on reduction of obligation pursuant to acquisition and interest (expense) income. Other income, net during the three months ended September 30, 2019 and 2018 was $1,607,807 and $59,029, respectively. The $1,548,778 increase in other income, net was primarily attributable to a gain on the change in fair value of liability to issue warrants, loss on the change in the fair valueconvertible notes of convertible notes,$430,766, gain on the change in fair value of convertible notes – related party of $491,442, gain on the change in fair value of contingent consideration, andwarrant liability of $1,224,601, partially offset by interest expense. Other income (expense), netexpense of ($539,002) during the three months ended September 30, 2017 and 2016 was $468,832 and $(40,833) respectively. The $509,665 increase in other income (expense) was primarily attributable to a gain on fair value of convertible notes of $115,000, gain on fair value of obligation to issue warrants of $531,395 and interest expense of $117,760. The gain on fair value of convertible notes related to the change in the fair value of a secured convertible promissory note, gain on fair value of the obligation to issue warrants related to the change in the fair value of the Company’s obligation to issue warrants and interest expense was due to debt discounts associated with the issuance of convertible notes.2019.
Net loss
Net Loss
WeFor the foregoing reasons, we had a net loss of $255,357$(1,255,569) for the three months ended September 30, 2017,2019, or $0.02 per basic share, compared to a net loss of $371,785$(2,678,452) for the three months ended September 30, 2016. 2018, or $0.04 net loss per common share – basic and diluted.
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend
The convertible preferred stock beneficial conversion feature accreted as a deemed dividend resulted from the effective conversion price of the Series B preferred shares at issuance being less than the fair value of the common stock into which the preferred shares are convertible. The result was a non-cash charge in the amount of $8,044,958 for the three months ended September 30, 2017 compared to $0 for the three months ended September 30, 2016.
Net Loss Attributableloss attributable to common shareholders
For the foregoing reasons, we had a net loss attributable to common shareholders of $8,300,315$(1,373,572) for the three months ended September 30, 2017,2019, or $0.29 net loss$0.02 per basic share attributable to common shareholders, - basic and diluted, compared to net loss attributable to common shareholders of $371,785$(2,660,914) for the three months ended September 30, 2016,2018, or $0.01$0.04 net loss per share attributable to common shareholders – basic and diluted.
36
Results of Operations for the nine months ended September 30, 20172019 and 20162018
The following table shows our results of operations for the nine months ended September 30, 20172019 and 2016.2018. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
For the Nine Months Ended September 30, | Change | For the Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||
2017 | 2016 | Dollars | Percentage | 2019 | 2018 | Dollars | Percentage | |||||||||||||||||||||||||
Revenue | $ | 2,837,145 | $ | 1,477,345 | $ | 1,359,800 | 92 | % | $ | 11,011,264 | $ | 6,116,101 | $ | 4,895,163 | 80 | % | ||||||||||||||||
Cost of revenue | 2,192,366 | 1,149,278 | 1,043,088 | 91 | % | 6,146,713 | 3,892,716 | 2,253,997 | 58 | % | ||||||||||||||||||||||
Gross margin | 644,779 | 328,067 | 316,712 | 97 | % | 4,864,551 | 2,223,385 | 2,641,166 | 119 | % | ||||||||||||||||||||||
Operating expenses | 2,186,942 | 1,151,109 | 1,035,833 | 90 | % | 12,790,313 | 9,884,020 | 2,906,293 | 29 | % | ||||||||||||||||||||||
Loss from operations | (1,542,163 | ) | (823,042 | ) | (719,121 | ) | 87 | % | (7,925,762 | ) | (7,660,635 | ) | (265,127 | ) | 3 | % | ||||||||||||||||
Other (expense) income, net | (6,577,864 | ) | (1,661,582 | ) | (4,916,282 | ) | 296 | % | ||||||||||||||||||||||||
Other income, net | 640,800 | 2,715,158 | (2,074,358 | ) | -76 | % | ||||||||||||||||||||||||||
Net loss | (8,120,027 | ) | (2,484,624 | ) | (5,635,403 | ) | 227 | % | $ | (7,284,962 | ) | $ | (4,945,477 | ) | $ | (2,339,485 | ) | 47 | % | |||||||||||||
Changes in foreign currency translation adjustment | $ | (114,346 | ) | $ | 17,538 | $ | (131,884 | ) | 100 | % | ||||||||||||||||||||||
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend | (11,200,845 | ) | - | (11,200,845 | ) | N/A | - | (22,202,194 | ) | 22,202,194 | -100 | % | ||||||||||||||||||||
Net loss attributable to common shareholders | $ | (19,320,872 | ) | $ | (2,484,624 | ) | $ | (16,836,248 | ) | 678 | % | $ | (7,399,308 | ) | $ | (27,130,133 | ) | $ | 19,730,825 | -73 | % |
Revenue
Total revenue for the nine monthsnine-month period ended September 30, 20172019 was $2,837,145,$11,011,264, which represented an increase of $1,359,800$4,895,163 compared to total revenue of $1,477,345$6,116,101 for the nine months ended September 30, 2016.2018. The increase primarily resulted from a substantialadditional revenue resulting from the BioTrackTHC acquisition and an increase in the number of clients serviced by our security operations.
Cost of Revenues
Cost of revenues for the nine months ended September 30, 2019 and 2018 primarily consisted of hourly compensation for security personnel and employees involved in the creation and development of licensing software. Cost of revenues increased by $2,253,997 for the nine months ended September 30, 2019, to $6,146,713 as compared to $3,892,716 for the nine months ended September 30, 2018. The increase primarily resulted from the acquisition of BioTrackTHC and an increase in the number of clients serviced by Helix the introduction of retail transportation services, additional revenue resulting from the Security Grade acquisition and the development of the Cannabase Reach Platform, which did not previously exist.
Cost of Revenue
Cost of revenue for the nine months ended September 30, 2017 and 2016 primarily consisted of hourly compensation for security, personal. Cost of revenue increased by $1,043,088 for the nine months ended September 30, 2017, to $2,192,366 as compared to $1,149,278 for the nine months ended September 30, 2016. The increase primarily resulted from a substantial increase in the number of clients serviced by Helix, which required the hiring of additional employees.
Operating Expenses
Our operating expenses encompass selling, general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during the nine months ended September 30, 20172019 and 20162018 were $2,186,942$12,790,313 and $1,151,109$9,884,020, respectively. The overall $1,035,833$2,906,293 increase in operating expenses was primarily attributable to the following increasesincreases/(decreases) in operating expenses of:
● | Selling, general and administrative | |
● | Salaries and wages – | |
● | Professional and legal fees – | |
● | Depreciation and amortization – |
The $364,428$1,543,185 increase in selling, general and administrative expenses is a result of increases in rent expense, advertising and travel expenses resulting from an expansion in our operations requiring greater office space, as well as work done to expand the Company into new states.operations. The $153,882 increase$(449,926) decrease in salaries and wages resulted from a significant increasedecrease in administrative headcount.stock compensation expense. The $266,583$792,523 increase in professional and legal fees primarily resulted from an increase in legal fees and accounting costs associated with being a fully reporting public company.fundraising. The $250,940$1,684,840 increase in depreciation and amortization was due to the acquisition of vehicles for the retail transportation business, amortization of debt discounts and intangible assets acquired in the Security Grade acquisition.BioTrackTHC, Engeni and GTI acquisitions.
Other (Expense)Other Income, net
Other (expense) income, net consisted of loss on the change of fair value of liability of warrants to be issued, loss on extinguishment of debt, change in the fair value of convertible note – related party,a change in the fair value of convertible notes, change in the fair value of convertible notes – related party, change in fair value of warrant liability, change in fair value of contingent consideration, loss on induced conversionissuance of convertible notewarrants, gain on reduction of obligation pursuant to acquisition and interest expense.(expense) income. Other income, (expense), net during the nine months ended September 30, 20172019 and 20162018 was $(6,577,864)$640,800 and $(1,661,582)$2,715,158, respectively. The $4,916,282 increase$2,074,358 decrease in other income, (expense)net was primarily attributable to the change in fair value of liabilitya loss on issuance of warrants to be issued of $406,604, loss on extinguishment of debt of $(4,611,395), change of fair value of convertible note – related party of $8,971, change in the fair value of convertible notes of $(210,000), change in the fair value of contingent consideration of $10,186, loss on induced conversion of convertible note of $(1,503,876)$787,209, and interest expense of $678,354. The loss on extinguishment was a one-time non-cash charge based on an amended convertible note,$1,229,284 during the loss on induced conversion of convertible notes was a one-time non-cash charge based on convertible notes amended and converted at a share price lower than market, the change in fair value of convertible notes related to the change in the fair value of a secured convertible promissory note, and the interest expense was due to a beneficial conversion feature relating to a convertible note and debt discount amortized to interest expense..nine months ended September 30, 2019.
Net Lossloss
We
For the foregoing reasons, we had a net loss of $8,120,027$(7,284,962) for the nine months ended September 30, 2017,2019, or $0.10 net loss per common share – basic and diluted, compared to a net loss of $2,484,624$(4,945,477) for the nine months ended September 30, 2016. 2018, or $0.10 net loss per common share – basic and diluted.
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend
The convertible preferred stock beneficial conversion feature accreted as a deemed dividend resulted from the effective conversion price of the Series B preferred shares at issuance being less than the fair value of the common stock into which the preferred shares are convertible. The result was a non-cash charge in the amount of $11,200,845 for the nine months ended September 30, 2017 compared to $0 for the nine months ended September 30, 2016.2019 compared to $22,202,194 for the nine months ended September 30, 2018.
Net Loss Attributableloss attributable to common shareholders
For the foregoing reasons, we had a net loss attributable to common shareholders of $19,320,872$(7,399,308) for the nine months ended September 30, 2017,2019, or $0.68$0.10 net loss per share attributable to common shareholders –- basic and diluted, compared to net loss attributable to common shareholders of $2,484,624$(27,130,133) for the nine months ended September 30, 2016,2018, or $0.09$0.57 net loss per share attributable to common shareholders – basic and diluted.
38
Liquidity, Capital Resources and Cash Flows
Going Concern
Management believes that we will continue to incur losses for the immediate future. Therefore, we may either need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not include andany adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. For the three and nine months ended September 30, 2017,2019, we have generated revenue and are trying to achieve positive cash flows from operations.
As of September 30, 2017,2019, we had a cash balance of $130,125,$655,280, accounts receivable, net of $558,141$1,496,137 and $3,243,572$6,501,082 in current liabilities. At the current cash consumption rate, we willmay need to consider additional funding sources toward the end of fiscal 2017.2019. We are taking proactive measures to reduce operating expenses, drive growth in revenue and expeditiously resolve any remaining legal matters.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.
The condensed consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
Capital Resources
The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated:
September 30, 2017 | December 31, 2016 | Change | September 30, 2019 | December 31, 2018 | Change | |||||||||||||||||||
Current assets | $ | 839,711 | $ | 315,815 | $ | 523,896 | $ | 2,826,648 | $ | 1,923,353 | $ | 903,295 | ||||||||||||
Current liabilities | 3,243,572 | 1,110,007 | 2,133,565 | 6,501,082 | 4,157,005 | 2,344,077 | ||||||||||||||||||
Working capital (deficit) | $ | (2,403,861 | ) | $ | (794,192 | ) | $ | (1,609,669 | ) | |||||||||||||||
Working capital deficit | $ | (3,674,434 | ) | $ | (2,233,652 | ) | $ | (1,440,782 | ) |
As of September 30, 2017,2019, and December 31, 2016,2018, we had a cash balance of $130,125$655,280 and $57,841,$285,761, respectively.
Summary of Cash Flows. Flows
For the Nine Months Ended September 30, | ||||||||||||||||
For the Nine Months Ended September 30, | 2019 | 2018 | ||||||||||||||
2017 | 2016 | |||||||||||||||
Net cash used in operating activities | $ | (1,452,666 | ) | $ | (602,486 | ) | $ | (2,862,478 | ) | $ | (3,217,350 | ) | ||||
Net cash used in investing activities | (1,709,239 | ) | (422,061 | ) | ||||||||||||
Net cash (used in) provided by investing activities | (791,177 | ) | 230,248 | |||||||||||||
Net cash provided by financing activities | 3,234,189 | 885,143 | 4,203,162 | 2,641,985 |
Net cash used in operating activities.Net cash used in operating activities for the nine months ended September 30, 20172019 was 1,452,666.$(2,862,478). This included a net loss of $8,120,027,$(7,284,962), non-cash charge related to depreciation and amortization of $292,757,$3,554,729, non-cash charge related to amortization of debt discounts of $922,965, non-cash charge from loss on issuance of $210,000 regarding the changewarrants of $787,209, non-cash charge related to provision for doubtful accounts of $199,215, non-cash charge related to share-based compensation of $1,241,741, non-cash (gains) losses due to changes in fair value of convertible notes, non-cash gainfair value of $8,971 regarding thewarrant liability, fair value of convertible notes – related party, non-cash gain of $10,186 regarding the change in fair value of contingent consideration of $(288,425), $(3,462,746), $213,828 and $880,050, respectively, non-cash lossgains on beneficial conversion featurereduction of $390,666, non-cash loss on extinguishmentcontingent consideration of debt of $4,611,395, non-cash loss on induced conversion of convertible note of $1,503,876, non-cash gain on the change in fair value of warrants to be issued of $406,604$100,000, and changes in accounts receivable, deposits and other assets, costs in excess of billings, billings in excess of costs, deferred rent, accounts payable and accrued expenses, prepaid expenses and deferred rentother current assets, due to related party, other long-term liabilities, and right of $160,415.use assets and liabilities of $473,918. Net cash used in operating activities for the nine months ended September 30, 20162018 was $602,486.$(3,217,350). This included a net loss of $2,484,624, non-cash loss of $19,250 on the fair value of liability of shares to be issued, non-cash non-employee stock compensation expense of $150,710,$(4,945,477), non-cash charge related to depreciation and amortization of $41,817,$1,869,889, non-cash loss on the changecharge related to share-based compensation of $2,143,548, non-cash (gains) losses due to changes in the fair value of convertible notes, fair value of $233,342, non-cash loss on the change inwarrant liability, fair value of convertible notes – related party and fair value of $107,107,contingent consideration of $(504,768), $(1,434,760), $(93,506), and $131,994, respectively, non-cash charge from loss on the impairment of intangible assetsgoodwill of $1,278,323$664,329, non-cash gain on reduction of obligation pursuant to acquisition of $607,415, and changes in accounts receivable, prepaid expenses, deposits and other assets, costs in excess of billings, billings in excess of costs, deferred rent, and accounts payable and accrued expenses of $51,589.$(441,184).
Net cash used in(used in) provided by investing activities.Net cash used in investing activities for the nine months ended September 30, 20172019 was $1,709,239,$(791,177), which consisted of capital expenditures of $31,054, cash$(620,594), purchase of domain names of $(21,856) and payments pursuant to the Revolutionary assetTan Security business acquisition and Security Grade business acquisition of $1,631,313.$(148,727). Net cash used inprovided by investing activities for the nine months ended September 30, 20162018 was $422,061,$230,248, which consisted of $419,830 regardingcapital expenditures of $(85,665), cash payment pursuant to anthe Revolutionary asset acquisition of $(58,729), payments pursuant to the Security Grade business acquisition of $(79,664) and cash acquired as part of the BioTrackTHC business acquisition and capital expendituresEngeni business acquisition in the amount of $2,231. $454,306.
Net cash provided by financing activities.Net cash provided by financing activities for the nine months ended September 30, 20172019 was $3,234,189,$4,203,162, which resulted from issuance of a promissory note receivable of $(75,000), repayment of notes payable of $(15,401), payments pursuant to a promissory note of $(280,000), proceeds from the issuance of convertible notes payablea promissory note of $229,167, proceeds of $255,000 from the issuance of promissory notes and advances from shareholders of $60,500,$580,000, proceeds from the issuance of common stock of $100,000,$1,306,313, proceeds from the issuance of Series B convertible preferred stocknote payable of $2,624,988, payments pursuant to$2,732,500 and repayment of advances from related parties of $32,000 and payments pursuant to notes payable of $3,466.$(45,250). Net cash provided by financing activities for the nine months ended September 30, 20162018 was $885,143,$2,641,985, which resulted from the issuance ofpayments pursuant to convertible notes payable – related party of $200,000,$(150,000), proceeds from notes payable of $16,271, proceeds from the issuance of a convertiblepromissory note to related parties of $300,000 and the$250,000, proceeds of $385,143 from the issuance of common stock.stock of $2,595,214 and repayment of advances from related parties of $(69,500).
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K/A10-K for the year ended December 31, 2016 filed with the SEC on July 07, 2017 and should be read in conjunction with the Original filing on Form 10-K2018 filed with the SEC on April 17, 2017.1, 2019.
Related Party Transactions
On March 1, 2019, the Company entered into a $1,500,000 Secured Convertible Promissory Note (“Note Nine”) with Rose Capital Fund I, LP (the Related Party Holder”). A Managing Member of the Related Party Holder is also a Director of the Company. The Related Party Holder provided the Company with $1,475,000 in cash proceeds, which was received by the Company during the period ended September 30, 2019. The additional $25,000 was retained by the Related Party Holder for legal bills for the transaction. Note Nine will mature on March 1, 2020 and bear interest at a rate of 25% per annum, payable by the Company half in cash and half in kind on a quarterly basis. The principal balance of Note Nine is convertible at the election of the Related Party Holder, in whole or in part, at any time or from time to time, into the Company’s common stock at the lower of $0.90 per share or a 30% discount to the Company’s 30-day weighted average listed price per share immediately before the date of conversion. In conjunction with Note Nine, the Company issued a warrant to the Related Party Holder to purchase 535,715 shares of the Company’s common stock at $1.40 per share.
The Company hasevaluated Note Nine in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Nine will be accounted for as a loan outstanding from Helix Opportunities, LLC which is 50% owned by our Chief Executive Officerliability initially measured at fair value and 50% owned bysubsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2019, the fair value of Note Nine was $1,713,828. Accordingly, the Company recorded a directorchange in fair value of $(491,442) and $213,828 related to Note Nine for the three and nine months ended September 30, 2019, respectively.
In addition, the company recorded a debt discount relating to the warrants issued in the amount of $1,186,153 based on the residual fair value of the Company.warrants at inception of Note Nine. The advance does not accrueadditional $25,000 retained by the fourth investor for legal bills for the transaction will be recorded as a debt discount. Debt discounts amortized to interest expense were $305,276 and has no definite repayment terms.$706,782 for the three and nine months ended September 30, 2019, respectively. The loanunamortized discount balance at September 30, 2019 was $0$504,371. On May 31, 2019, the Company issued 52,083 restricted shares of common stock as PIK interest payments in the amount of $46,875. Accrued interest expense associated with Note Nine was $29,795 as of September 30, 2017.2019, which includes PIK interest payable. As of September 30, 2019, the balance of Note Nine, net of debt discount for warrants and legal bills was $1,209,458.
On March 1, 2019, in connection with the issuance of Note Nine, the Company issued warrants, of which the value was derived and based off the fair value of Note Nine, to the investor to purchase 535,715 shares of the Company’s common stock at $1.40 per share. Exercise of the purchase rights represented by the warrant may be made, in whole or in part, at any time or times on or after March 1, 2019 and on or before March 1, 2024, by delivery to the Company of the Notice of Exercise.
The Company determined that the warrants associated with Note Nine are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has an additional loan outstanding fromno plans to consummate a Company executive. The advancefundamental transaction and does not accrue interestbelieve a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and has no definite repayment terms. The loan balanceare measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, March 1, 2019, the fair value of the warrant liability was $102,000$1,186,153 while as of September 30, 2017.2019, the fair value of the warrant liability was $259,215. Accordingly, the Company recorded a change in fair value of $212,131 and $926,938 during the three and nine months ended September 30, 2019, respectively, which is reflected in the unaudited condensed consolidated statements of operations.
On January 3, 2019, the Company entered into an unsecured promissory note in the amount of $280,000. The unsecured promissory note has a fixed interest rate of 10% and is due and payable on March 31, 2019. On March 2, 2019, the unsecured promissory note was paid off in full.
On July 29, 2019, the Company entered into an unsecured promissory note in the amount of $300,000. The unsecured promissory note has a fixed interest rate of 12% and is due and payable on January 29, 2020.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for a smaller reporting company.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer who(who is our Principal Executive Officer) and our Chief Financial Officer (who is our Principal Financial Officer), to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control problems or acts of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
We carried out an Based on such evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer has concluded that as of the effectiveness of the design and operation ofSeptember 30, 2019, our disclosure controls and procedures as of September 30, 2017, the end of the period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Based on that evaluation, management has concluded that the Company did not maintain effective internal control over financial reporting as of the nine months ended September 30, 2017 due to the existence of material weaknesses in the internal control over financial reporting described below.effective.
A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management has determined that we did not maintain effective internal controls over financial reporting as of September 30, 2017 due to the existence of the following material weaknesses identified by management:
We expect to be materially dependent on a third party that can provide us with accounting consulting services for the foreseeable future. We believe that we are in the process of addressing the deficiencies that affected our internal control over financial reporting and we are developing specific action plans for each of the above material weaknesses. Because the remedial actions require hiring of additional personnel, upgrading certain of our information technology systems and relying extensively on manual review and approval, the successful operation of these controls for at least several quarters may be required before management may be able to conclude that the material weaknesses have been remediated. We intend to continue to evaluate and strengthen our internal control over financial reporting. These efforts require significant time and resources. If we are unable to establish adequate internal control over financial reporting, we may encounter difficulties in the audit or review of our financial statements by our independent registered public accounting firm, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with GAAP and to comply with our SEC reporting obligations.
This quarterly report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting because we are a “smaller reporting company.” Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this quarterly report.
Changes in internal control over financial reporting
During the nine months ended September 30, 2017,2019, there was no change in our internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Occasionally, we may be involved in claims and legal proceedings arising from the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on our consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
Other than as described below, thereThere is currently no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self- regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material effect on the Company.Company, with the exception of:
Baker, et al. v. Helix TCS, Inc.
On March 8, 2017, two former employees filed a lawsuit in the United States District Court for the District of Colorado alleging violations of the Fair Labor Standards Act and the Colorado Wage Act on behalf of themselves and other employees. The plaintiffs seek damages for our alleged failure to compensate them appropriately for the overtime hours they worked as purported “non-exempt” employees. On April 3, 2017, we moved to dismissAs of September 30, 2019, the complaint.claim is currently pending the outcome of certain matters in the Kenney, et al v. Helix TCS, Inc. case.
Kenney, et al. v. Helix TCS, Inc.
On July 20, 2017 one former employee filed a lawsuit in the United States District Court for the District of Colorado alleging violations of the Fair Labor Standards Act on behalf of themselves and other employees. The plaintiffs seek damages for our alleged failure to compensate them appropriately for the overtime hours they worked as purported “non-exempt” employees. As of September 30, 2019, the claim is currently in the process of discovery.
At this time, the Company is not able to predict the outcome of the lawsuits, any possible loss or possible range of loss associated with the lawsuits or any potential effect on the Company’s business, results of operations or financial condition. However, the Company believes the lawsuitlawsuits are wholly without merit and will defend itself from these claims vigorously.
As ofSmaller reporting companies such as us are not required to provide the date ofinformation required by this Report, there have been no material changes in the risk factors previously included in Item 1A- “Risk Factors,” in our Annual Report on form 10-K/A for the fiscal year end December 31, 2016 filed with the SEC on July 07, 2017.item.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the nine months ended September 30, 2017,2019, we issued 111,111shares19,869,188 shares of restricted common stock, to an investor per a subscription agreement,of which 17,015,727 shares were in connection with the Green Tree and Tan acquisitions, with offering proceeds received totaling $100,000. We also issued 9,830,035 shares of our Series B Preferred Stock to an investor pursuant to a Series B Purchase Agreement with net proceeds received totaling approximately $2,882,500 We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to issue the common stock. The securities were offered and sold without any form of general solicitation of general advertising and the offerees made representations that they were accredited investors.$1,306,313.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Mine Safety Disclosure
Not applicable.
None.
43
* Filed herewith
* | Filed herewith |
Management contract or compensatory plan. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November | By: | /s/Zachary L. Venegas |
Zachary L. Venegas | ||
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/Zachary L. Venegas | Chief Executive Officer | November | ||
Zachary L. | (Principal Executive Officer) | |||
/s/Scott Ogur | Chief Financial Officer | November 14, 2019 | ||
Scott Ogur | (Principal Financial Officer) | |||
/s/Paul Hodges | Director | November | ||
Paul | ||||
/s/ | Director | November | ||
/s/Terence Ferraro | Director | November 14, 2019 | ||
Terence Ferraro* | ||||
/s/Andrew Schweibold | Director | November 14, 2019 | ||
Andrew Schweibold* | ||||
/s/Satyavrat Joshi | Director | November 14, 2019 | ||
Satyavrat Joshi* |
* By: | Scott Ogur, as Attorney in Fact, pursuant to the Power of Attorney dated November 14, 2019 and filed herewith. |
38
45