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 JuneSeptember 30, 2019

 

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
incorporation or organization)

 

(IRS Employer
Identification No.)

 

10200 E. Girard Avenue, Suite B420

Denver, CO 80231

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 filerAccelerated filer
Non-accelerated filerSmaller 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 August 14,November 12, 2019, the registrant had 75,747,71893,274,159 shares of its common stock, par value $0.001 per share, outstanding. 

 

 

 

 

 

 

Table of Contents

 

  PAGE
PART IFINANCIAL INFORMATION1
   
ITEM 1.Financial Statements1
 Condensed Consolidated Balance Sheets (unaudited) as of JuneSeptember 30, 2019 and December 31, 20181
 Condensed Consolidated Statements of Operations for the Three and SixNine Months Ended JuneSeptember 30, 2019 and 2018 (unaudited)2
 Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and SixNine Months Ended JuneSeptember 30, 2019 and 2018 (unaudited)3
 Condensed Consolidated Statements of Cash Flows for the SixNine Months Ended JuneSeptember 30, 2019 and 2018 (unaudited)7
 Notes to the Condensed Consolidated Financial Statements8
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations4134
ITEM 3.Quantitative and Qualitative Disclosures about Market Risk4942
ITEM 4.Controls and Procedures4942
   
PART IIOTHER INFORMATION5143
   
ITEM 1.Legal Proceedings5143
ITEM 1A.Risk Factors5143
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds5143
ITEM 3Defaults upon Senior Securities5143
ITEM 4.Mine Safety Disclosures5143
ITEM 5.Other Information5143
ITEM 6.Exhibits5244
   
SIGNATURES5345

 

i

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 June 30, December 31,  September 30, December 31, 
 2019  2018  2019  2018 
ASSETS          
Current assets:          
Cash $800,015  $285,761  $655,280  $285,761 
Accounts receivable, net  1,640,996   1,184,923   1,496,137   1,184,923 
Prepaid expenses and other current assets  540,342   409,800   644,763   409,800 
Costs & earnings in excess of billings  12,017   42,869   30,468   42,869 
Total current assets  2,993,370   1,923,353   2,826,648   1,923,353 
                
Property and equipment, net  545,818   349,518   573,792   349,518 
Intangible assets, net  16,312,706   18,604,078   15,594,869   18,604,078 
Goodwill  40,735,366   39,913,559   53,716,207   39,913,559 
Deposits and other assets  1,413,493   146,990   1,296,504   146,990 
Promissory note receivable  75,000   -   75,000   - 
Total assets $62,075,753  $60,937,498  $74,083,020  $60,937,498 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                
Current liabilities:                
Accounts payable and accrued liabilities $2,463,136  $1,702,713   2,916,998   1,702,713 
Advances from related parties  -   45,250   -   45,250 
Billings in excess of costs  126,862   155,192   126,505   155,192 
Deferred rent  -   2,937   -   2,937 
Notes payable, current portion  24,805   24,805   24,805   24,805 
Obligation pursuant to acquisition  75,000   201,667   50,000   201,667 
Convertible notes payable, net of discount  423,700   187,177   862,426   187,177 
Convertible notes payable, net of discount - related party  1,395,623   -   1,209,458   - 
Due to related party  -   32,489   -   32,489 
Contingent consideration  -   908,604   -   908,604 
Warrant liability  2,199,266   896,171   1,010,890   896,171 
Promissory note  300,000     
Total current liabilities  6,708,392   4,157,005   6,501,082   4,157,005 
                
Long-term liabilities:                
Notes payable, net of current portion  40,232   51,554   436,153   51,554 
Other long-term liabilities  962,716   -   878,929   - 
Total long-term liabilities  1,002,948   51,554   1,315,082   51,554 
                
Total liabilities  7,711,340   4,208,559   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 June 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 June 30, 2019 and December 31, 2018  13,784   13,784 
Common stock; par value $0.001; 200,000,000 shares authorized; 75,747,718 shares issued and outstanding as of June 30, 2019; 72,660,825 shares issued and outstanding as of December 31, 2018  75,748   72,660 
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  86,489,136   82,831,014   99,748,368   82,831,014 
Accumulated other comprehensive income  21,648   17,991 
Accumulated other comprehensive (loss) income  (96,355)  17,991 
Accumulated deficit  (32,236,903)  (26,207,510)  (33,492,472)  (26,207,510)
Total shareholders’ equity  54,364,413   56,728,939   66,266,856   56,728,939 
Total liabilities and shareholders’ equity $62,075,753  $60,937,498   74,083,020   60,937,498 

See accompanying notes to the unaudited condensed consolidated financial statements


HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2019  2018  2019  2018 
                  
Revenue:         
Security and guarding $1,347,529  $1,197,201  $2,552,240  $2,290,975  $1,138,934  $1,141,676  $3,691,174  $3,432,651 
Systems installation  174,067   100,699   202,608   135,263   245,272   318,850   447,880   454,113 
Software  2,377,277   576,142   4,515,132   576,142   2,357,078   1,653,195   6,872,210   2,229,337 
Total revenues $3,898,873  $1,874,042  $7,269,980  $3,002,380  $3,741,284  $3,113,721  $11,011,264  $6,116,101 
Cost of revenue  1,996,699   1,560,387   3,921,918   2,351,092   2,224,795   1,880,061   6,146,713   3,892,716 
Gross margin  1,902,174   313,655   3,348,062   651,288   1,516,489   1,233,660   4,864,551   2,223,385 
                                
Operating expenses:                                
Selling, general and administrative  1,170,491   527,999   2,107,369   875,879   1,114,419   802,724   3,221,788   1,678,603 
Salaries and wages  1,214,969   1,216,082   2,466,546   2,082,402   1,392,522   1,888,155   3,859,068   4,308,994 
Professional and legal fees  792,101   268,795   1,480,556   888,554   674,172   473,651   2,154,728   1,362,205 
Depreciation and amortization  1,190,336   864,375   2,355,977   1,063,278   1,198,752   806,611   3,554,729   1,869,889 
Loss on impairment of Goodwill  -   -   -   664,329   -   -   -   664,329 
Total operating expenses  4,367,897   2,877,251   8,410,448   5,574,442   4,379,865   3,971,141   12,790,313   9,884,020 
                                
Loss from operations  (2,465,723)  (2,563,596)  (5,062,386)  (4,923,154)  (2,863,376)  (2,737,481)  (7,925,762)  (7,660,635)
                                
Other income (expenses):                                
Change in fair value of convertible note  845,622   120,630   (142,341)  697,646   430,766   (17,880)  288,425   679,766 
Change in fair value of convertible note - related party  2,818,739   -   (705,270)  118,506   491,442   -   (213,828)  118,506 
Change in fair value of warrant liability  3,871,101   321,161   2,238,145   1,297,840   1,224,601   136,920   3,462,746   1,434,760 
Change in fair value of contingent consideration  256,650   -   (880,050)  -   -   (131,994)  (880,050)  (131,994)
Loss on issuance of warrants  -   -   (787,209)  -   -   -   (787,209)  - 
Gain on reduction of obligation pursuant to acquisition  -   290,441   -   557,054   -   50,361   -   607,415 
Interest (expense) income  (514,081)  3,016   (690,282)  (14,917)  (539,002)  21,622   (1,229,284)  6,705 
Other income (expenses)  7,278,031   735,248   (967,007)  2,656,129 
Other income  1,607,807   59,029   640,800   2,715,158 
                                
Net income (loss) $4,812,308  $(1,828,348) $(6,029,393) $(2,267,025)
Net loss $(1,255,569) $(2,678,452) $(7,284,962) $(4,945,477)
                                
Other comprehensive (loss) income:                
Other comprehensive income:                
Changes in foreign currency translation adjustment  (590)  -   3,657   -   (118,003)  17,538   (114,346)  17,538 
Total other comprehensive (loss) income  (590)  -   3,657   -   (118,003)  17,538   (114,346)  17,538 
Total comprehensive income (loss)  4,811,718   (1,828,348)  (6,025,736)  (2,267,025)
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  -   (7,203,689)  -   (22,202,194)  -   -   -   (22,202,194)
                                
Net income (loss) attributable to common shareholders $4,811,718  $(9,032,037) $(6,025,736) $(24,469,219)
Net loss attributable to common shareholders $(1,373,572) $(2,660,914) $(7,399,308) $(27,130,133)
                                
Net income (loss) per share attributable to common shareholders:                
Net loss per share attributable to common shareholders:                
Basic $0.06  $(0.21) $(0.08) $(0.68) $(0.02) $(0.04) $(0.10) $(0.57)
Diluted $(0.03) $(0.21) $(0.08) $(0.68) $(0.02) $(0.04) $(0.10) $(0.57)
                                
Weighted average common shares outstanding:                                
Basic  75,470,238   42,673,528   74,324,689   35,907,118   79,295,278   70,420,857   76,038,782   47,598,820 
Diluted  

81,236,678

   42,673,528   74,324,689   35,907,118   79,295,278   70,420,857   76,038,782   47,598,820 

See accompanying notes to the unaudited condensed consolidated financial statements.


HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ 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 


  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.


HELIX TCS, INC.

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 

 

See accompanying notes to the unaudited condensed consolidated financial statements.


HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

  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 March 31, 2019  74,410,397  $74,410   1,000,000  $1,000   13,784,201  $13,784  $83,357,328  $22,238  $(37,049,211) $46,419,549 
                                         
Issuance of common stock per stock investment unit agreements  166,667   167                   66,247           66,414 
                                         
Share-based compensation expense                          485,333           485,333 
                                         
Issuance of common stock resulting from exercise of stock options  72,562   73                   21,735           21,808 
                                         
Issuance of common stock resulting from cashless exercise of stock options  47,084   47                   (47)          - 
                                         
Restricted common stock issued as part of 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)  67,708   68                   60,869           60,937 
                                         
Foreign currency translation                              (590)      (590)
                                         
Net income                                  4,812,308   4,812,308 
                                         
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 

3

 Common Stock  Preferred Stock (Class A)  Preferred Stock (Class B)  Additional
Paid-In
  Accumulated  Total Shareholders’ 
 Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Equity 
Balance at March 31, 2018 29,857,448  $29,857   1,000,000  $1,000   13,784,201  $13,784  $19,927,689  $(18,680,385) $1,291,945 
                                    
Beneficial conversion feature of Series B convertible preferred stock                         7,203,689       7,203,689 
                                    
 Deemed dividend on conversion of Series B convertible preferred stock to common stock                         (7,203,689)      (7,203,689)
                                    
Issuance of common stock per stock subscription agreements 744,444   745                   669,254       669,999 
                                    
Reduction in Additional Paid-In Capital due to Security Grade acquisition settlement agreement                         (210,522)      (210,522)
                                    
Restricted common stock issued as part of BioTrackTHC acquisition 38,184,985   38,185                   57,513,848       57,552,033 
                                    
Share-based compensation expense 133,900   134                   223,640       223,774 
                                    
Issuance of warrants pursuant to consulting agreement                         943,000       943,000 
                                    
Issuance of common stock resulting from exercise of stock options 212,633   213                           213 
                                    
Net loss                             (1,828,348)  (1,828,348)
                                    
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 

4

  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, 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                   889,130           889,400 
                                         
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 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)  67,708   68                   60,869           60,937 
                                         
Foreign currency translation                              3,657       3,657 
                                         
Net loss                                  (6,029,393)  (6,029,393)
                                         
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 

  Common Stock  Preferred Stock (Class A)  Preferred Stock (Class B)  Additional
Paid-In
  Accumulated  Total Shareholders’ 
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  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       22,202,194 
                                     
 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  1,466,666   1,467                   1,318,532       1,319,999 
                                     
Issuance of common stock resulting from convertible note conversion  205,974   206                   174,794       175,000 
                                     
Share-based compensation expense  291,750   292                   676,461       676,753 
                                     
Reduction in Additional Paid-In Capital due to Security Grade acquisition settlement agreement                          (300,840)      (300,840)
                                     
Restricted common stock issued as part of BioTrackTHC acquisition  38,184,985   38,185                   57,513,848       57,552,033 
                                     
Issuance of warrants pursuant to consulting agreement                          943,000       943,000 
                                     
Issuance of common stock resulting from exercise of stock options  212,633   213                           213 
                                     
Net loss                              (2,267,025)  (2,267,025)
                                     
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 

See accompanying notes to the unaudited condensed consolidated financial statements.


HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

  For the Six Months Ended
June 30,
 
  2019  2018 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss $(6,029,393) $(2,267,025)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  2,355,977   1,063,278 
Accretion of debt discounts  519,472   - 
Loss on issuance of warrants  787,209   - 
Provision for doubtful accounts  104,288   - 
Share-based compensation expense  889,400   1,619,753 
Change in fair value of convertible notes, net of discount  142,341   (522,646)
Change in fair value of obligation to issue warrants  (2,238,145)  (1,297,840)
Change in fair value of convertible notes, net of discount - related party  705,270   (118,506)
Change in fair value of contingent consideration  880,050   - 
Loss on impairment of goodwill  -   664,329 
Gain on reduction of obligation pursuant to acquisition  -   (557,054)
Gain on reduction of contingent consideration  (100,000)  - 
Change in operating assets and liabilities:        
Accounts receivable  (563,744)  (353,355)
Prepaid expenses  (134,876)  - 
Deposits  26,743   (50,069)
Due from related party  (32,489)  - 
Costs in excess of billings  30,852   31,570 
Accounts payable and accrued expenses  718,162   128,645 
Deferred rent  (2,937)  (6,077)
Billings in excess of costs  (28,330)  41,384 
Right of use assets and liabilities  80,296   - 
Net cash used in operating activities  (1,889,854)  (1,623,613)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of property and equipment  (505,904)  (484,838)
Purchase of domain names  (17,383)  - 
Payments for business combination, net of cash acquired  (123,727)  448,697 
Payments for asset acquisition  -   (58,730)
Net cash used in investing activities  (647,014)  (94,871)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Advances for related parties  -   (59,500)
Advance for note receivable  (75,000)  - 
Payments pursuant to advances from related parties  (45,250)  - 
Payments pursuant to notes payable  (11,322)  - 
Payments pursuant to a promissory note  (280,000)  - 
Proceeds from notes payable  -   33,745 
Proceeds from the issuance of a promissory note  280,000   - 
Proceeds from the issuance of convertible notes payable  1,925,000   - 
Proceeds from the issuance of common stock  1,306,313   1,320,212 
Net cash provided by financing activities  3,099,741   1,294,457 
         
Effect of foreign exchange rate changes on cash  (48,619)  - 
         
Net change in cash  514,254   (424,027)
         
Cash, beginning of period  285,761   868,554 
         
Cash, end of period $800,015  $444,527 
         
Supplemental disclosure of cash and non-cash transactions:        
Cash paid for interest $40,625  $- 
Conversion of convertible note into common stock $117,937  $175,000 
Debt discount for warrant liability $(1,542,000) $- 
Equity issued pursuant to asset acquisition $710,000  $57,552,033 
Security Grade acquisition consideration settlement $-  $(300,840)
Cash payable pursuant to acquisition $75,000  $- 
PIK interest payment of common stock $60,937  $- 
Common stock issued pursuant to 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  $- 

See accompanying notes to the unaudited condensed consolidated financial statements.

7

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, we changed our name from Jubilee4 Gold, Inc. to Helix TCS, Inc. effective October 25, 2015.

 

Effective October 25, 2015, we entered into an acquisition and exchange agreement with Helix TCS, LLC. We closed the transaction contemplated under the acquisition 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 of Helix 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. Furthermore, on April 11, 2016, the Company acquired the assets of Revolutionary Software, LLC (“Revolutionary”).

 

On March 3, 2018, Helix, Inc. and its wholly owned subsidiary, Helix Acquisition Sub, Inc. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bio-Tech Medical Software, Inc. (“BioTrackTHC”) and Terence J. Ferraro, as the representative of the BioTrackTHC shareholders, pursuant to which Merger Sub merged with and into BioTrackTHC (the “Merger”).

On June 1, 2018 (the “BioTrackTHC Closing Date”), in connection with closing the Merger, the Company issued 38,184,985 unregistered shares of its common stock to BioTrackTHC stockholders, of which 1,852,677 shares were held back to satisfy indemnification obligations in the Merger Agreement, if necessary. The Company also assumed the Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan (“BioTrackTHC Stock Plan”), pursuant to which options exercisable in the amount of 8,132,410 shares of common stock are outstanding. As a result, BioTrackTHC stockholders will own 48% of the Company on a fully diluted basis on the BioTrackTHC Closing Date.

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 April 2, 2019.

 

On February 5, 2019, the Company and its wholly owned subsidiary, Merger Sub, entered into an Agreement and Plan of Merger (the “Amercanex Merger Agreement”) with Green Tree International, Inc., a corporation incorporated under the laws of the state of Colorado operating under the tradename “Amercanex International Exchange” (“Amercanex”). Pursuant to the Amercanex Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into Amercanex, with Amercanex surviving the merger as a wholly-owned subsidiary of the Company. The Merger is expected to close during the third quarter of 2019.

On April 1, 2019 (“Tan Security Closing Date”), the Company entered into a Membership Interest and Stock Purchase Agreement (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 membership interests and capital stock of Tan Security and collectively holds 100% of the interests of Tan Security (the “Tan Security Acquisition”).

On February 5, 2019, the Company and its 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 representative of the GTI shareholders, pursuant to which Merger Sub merged with and into GTI (the “Merger”).

On September 10, 2019, the Company closed the Merger and entered into an Addendum No. 1 to the Amercanex Merger Agreement acknowledging and approving certain events that occurred since signing as well as implementing various related amendments to the Amercanex Merger Agreement. In connection with closing the Merger, the Company issued 16,765,727 unregistered shares of Company common stock to GTI shareholders, of which 4,140,274 shares were held back to satisfy indemnification obligations in the Merger Agreement, if necessary.


2.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 it will continue to incur losses for the immediate future. The Company expects to finance future cash needs from its results of operations and, depending on the results of operations, the Company may need additional equity or debt financing until it can achieve profitability and positive cash flows from operating activities, if ever. 

 

At JuneSeptember 30, 2019, the Company had a working capital deficit of $3,715,022,$3,674,434, as compared to a working capital deficit of $2,233,652 at December 31, 2018. The increase of $1,481,370$1,440,782 in the Company’s working capital deficit from December 31, 2018 to JuneSeptember 30, 2019 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 increase in the warrant liability,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 security service in Colorado and California, and upgrading the capabilities of BioTrackTHC. The Company’s management has taken several actions to ensure that it will have sufficient liquidity to meet its obligations for the next twelve months, including growing and diversifying its revenue streams, selectively reducing expenses, and considering additional 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 August 16, 2020.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 2019 and beyond.  

On May 31, 2019 the Company filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the securities being offered. The Company is working with an investment bank to identify investors in anticipation of raising up to $5 million in new equity capital.

  

The Company plans to generate positive cash flow from its Colorado and California 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, 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.


3.Summary of Significant Accounting Policies

 

Principles of Consolidation 

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The 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”), Security Grade, BioTrackTHC (since June 1, 2018,2018), Engeni US (since August 3, 2018), and 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. Significant estimates made by management include, but are not limited to allowance for doubtful accounts, purchase accounting allocations, recoverability and useful lives of property, equipment and intangible assets, valuation of convertible notes payable, contingencies, warrant liabilities, equity compensation and revenue recognition. Actual results could differ from estimates.

Cash

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 equivalents. The Company has no cash equivalents as of June 30, 2019 oryear ended December 31, 2018.

  

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 $77,046$241,896 and $76,156 at JuneSeptember 30, 2019 and December 31, 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.

Goodwill

Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. Helix reviews goodwill for possible impairment annually during the fourth quarter, or whenever events or circumstances indicate that the carrying amount may not be recoverable.

The impairment model prescribes a two-step method for determining goodwill impairment. However, an entity is permitted to first assess qualitative factors to determine whether the two-step goodwill impairment test is necessary. The qualitative factors considered by Helix may include, but are not limited to, general economic conditions, Helix’s outlook, market performance of Helix’s industry and recent and forecasted financial performance. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. In the first step, Helix determines the fair value of its reporting unit using a discounted cash flow analysis. If the net book value of the reporting unit exceeds its fair value, Helix then performs the second step of the impairment test, which requires allocation of the reporting unit’s fair value to all of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business combinations with any residual fair value being allocated to goodwill. An impairment charge is recognized when the implied fair value of Helix’s goodwill is less than its carrying amount.

Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash flows and the current fair value of the asset

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 expenses acquisition-related costs and fees associated with business combinations. 

The Company accounts for its business combinations under the provisions of Accounting Standards Codification (“ASC”) Topic 805-10,Business Combinations(“ASC 805-10”), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred. If the business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date and any changes in fair value after the acquisition date are accounted for as measurement-period adjustments. Changes in fair value of contingent consideration resulting from events after the acquisition date, such as earn-outs, are recognized as follows: 1) if the contingent consideration is classified as equity, the contingent consideration is not re-measured and its subsequent settlement is accounted for within equity, or 2) if the contingent consideration is classified as a liability, the changes in fair value are recognized in earnings.

11

Revenue Recognition

Under Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenues when (or as) the Company satisfies a performance obligation.

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 also generates revenue from developing and licensing seed to sale cannabis compliance software to both private-sector and public-sector (government agencies) businesses that are involved in cannabis related operations. The Company also generates revenue from on-going training, support and software customization services.

Occasionally, the Company will enter into systems installation arrangements. Installation jobs are estimated based on the cost of equipment to be installed, the number of hours expected to be incurred to complete the job and other ancillary costs. Revenue associated with these services are recognized over the arrangement period.

Lastly, 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. 

Segment Information

FASB ASC Topic 280, Segment Reporting, establishes standards for reporting information about operating segments. 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 maker is the Chief Executive Officer, who reviews the financial performance and the results of operations of the segments prepared in accordance with GAAP when making decisions about allocating resources and assessing performance of the Company.

Asset information by operating segment is not presented 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 condensed unaudited consolidated financial statements.

Expenses

Cost of Revenues

The cost of revenues is the total cost incurred to obtain a sale and the cost of the goods or services sold. Cost of revenues primarily consisted of hourly compensation for security personnel and employees involved in the creation and development of licensing software.

Operating Expenses

Operating expenses encompass selling general and administrative expenses, salaries and wages, professional and legal fees, depreciation and amortization, and loss on impairment of Goodwill. 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 Income (Expense), net

Other income (expense), net consisted of change in fair value of convertible note, change in fair value of convertible note – related party, change in fair value of contingent consideration, change in fair value of warrant liability, loss on issuance of warrants, gain on reduction of obligation pursuant to acquisition and interest (expense) income.


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.

   

Advertising

 

Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $178,219$104,785 and $34,963$12,671 for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $247,490$352,275 and $61,737$74,408 for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.

  

Foreign Currency

The local currency is the functional currency for one entity’s operations outside the United States. Assets and liabilities of these operations are translated to U.S. dollars at the exchange rate in effect at the end of each period. Income statement accounts are translated at the average exchange rate prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of other comprehensive income within shareholders’ equity. Gains and losses from foreign currency transactions are included in net loss for the period.

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.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of consolidated net income (loss) and foreign currency translation adjustments. Foreign currency translation adjustments included in comprehensive income (loss) were not tax-effected as investments in international affiliates are deemed to be permanent.


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 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 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.

14

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:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Inputs that are unobservable for the asset or liability.

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 June 30, 2019 and December 31, 2018. 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.

Warrant liabilities

The fair value of the Company’s warrant liabilities approximated the carrying value as of June 30, 2019 and December 31, 2018. Factors that the Company considered when estimating the fair value of its warrants included market conditions and the term of the warrants. The level of the warrant liabilities would be considered as Level 3.

Additional Disclosures Regarding Fair Value Measurements

The carrying value of cash, accounts receivable, prepaid expenses and other current assets, deposits and other assets, accounts payable and accrued liabilities, advances from related parties and obligation pursuant to acquisition approximate their fair value due to the short-term maturity of those items. 

 

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. Basic EPS is computed by dividing net income (loss)loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares 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.

 


For the three and nine months ended June 30, 2018 and the six months ended JuneSeptember 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 as their effect would be anti-dilutive. For the three months ended June 30, 2019, dilutive earnings per share are calculated by dividing net income attributable to common shareholders less the change in fair value of warrant liability, the change in fair value of convertible notes, interest expense on convertible notes, and the debt discount amortized on convertible notes. The calculation of diluted EPS excludes 24,571,582 shares for securities which have been deemed to be anti-dilutive.

Earnings per share for the three and six months ended June 30, 2019 and 2018 were calculated as follows:

  For the Three Months
Ended June 30,
  For the Six Months
Ended June 30,
 
  2019  2018  2019  2018 
Numerator            
Net income attributable to common shareholders $4,811,718  $(9,032,037) $(6,025,736) $(24,469,219)
Effect of dilutive instruments on net loss  (7,024,580)  -   -   - 
Net income (loss) attributable to common shareholders - diluted $(2,212,862) $(9,032,037) $(6,025,736) $(24,469,219)
                 
Denominator                
Weighted average shares of common stock outstanding - basic  75,470,238   42,673,528   74,324,689   35,907,118 
                 
Dilutive effect of warrants and convertible securities  

5,766,440

   -   -   - 
                 
Weighted average shares of common stock outstanding - diluted  

81,236,678

   42,673,528   74,324,689   35,907,118 
                 
Net income (loss) per share                
Basic $0.06  $(0.21) $(0.08) $(0.68)
Diluted $(0.03) $(0.21) $(0.08) $(0.68)

 

The anti-dilutive shares of common stock outstanding for the three and sixnine months ended JuneSeptember 30, 2019 and 2018 were as follows:

 

 For the Three Months
Ended June 30,
 For the Six Months Ended
June 30,
  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
 2019 2018 2019 2018  2019  2018  2019  2018 
Potentially dilutive securities:                  
Convertible notes payable - 135,634 2,704,577 135,634   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   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   13,784,201   13,784,201   13,784,201   13,784,201 
Warrants - 3,307,073 4,925,558 3,307,073   4,975,558   3,307,073   4,975,558   3,307,073 
Stock options 9,787,381 8,704,345 9,787,381 8,704,345   9,787,381   8,739,669   9,787,381   8,739,669 

 

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 February 2016, the FASB issued ASU 2016-.02,Leases (Topic 842) (“Topic 842”) which requires 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 initial application. Consequently, prior period balances and disclosures have not been restated. The Company elected certain practical expedients, which among other things, allowed us to carry forward prior conclusions about lease identification and classification.

 

Adoption of the standard 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 an entity’s ongoing accounting. The Company currently 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 notes to condensed consolidated financial statements.


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 permitted in any interim period after issuance of the ASU. 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 ASC 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 as 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 June 30,  For the Six Months Ended June 30,  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2019  2018  2019  2018 
Types of Revenues:                  
Security and Guarding $1,347,529  $1,197,201  $2,552,240  $2,290,975  $1,138,934  $1,141,676  $3,691,174  $3,432,651 
Systems Installation  174,067   100,699   202,608   135,263   245,272   318,850   447,880   454,113 
Software  2,377,277   576,142   4,515,132   576,142   2,357,078   1,653,195   6,872,210   2,229,337 
Total revenues $3,898,873  $1,874,042  $7,269,980  $3,002,380  $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 areis short-term in nature and are 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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2019 and 2018.

 

5.Business Combinations

 

Security Grade Acquisition

On June 2, 2017 (the “Security Grade Closing Date”), the Company entered into a Membership Interest Purchase Agreement (the “Security Grade Acquisition Agreement”) in which the Company purchased all issued and outstanding units of Security Grade Protective Services, Ltd. (“Security Grade”), which consisted of 800,000 Class A Units and 200,000 Class B Units. On the Security Grade Closing Date, 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 Security Grade Closing Date, no material customer identified in the Security Grade Acquisition Agreement terminates its contractual relationship with the Company and that all contracts with such material customers are in full force and effect without default or cancellation as of the 60th day following the Security Grade Closing Date, on the 61st day following the Security Grade Closing Date, the Company shall issue an additional $800,000 in cash and issue 207,427 additional stock options (the “Additional Stock Options”). In the event of termination, cancellation or default of any contract with one or more material customer identified in the Security Grade Acquisition Agreement within the first 60 days following the Security Grade Closing Date, the stock options received 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 Security Grade Acquisition Agreement in the 180 days immediately preceding such termination. The Company subsequently issued the 207,427 Additional Stock Options on August 1, 2017 as well as a second cash payment of $800,000 pursuant to the original terms of the Security Grade Acquisition Agreement.

In the first quarter of 2018, the Company notified the selling members of Security Grade of their intent to exercise their right of setoff noted in the Security Grade Acquisition Agreement after discovering misrepresentations made by one of the selling members of Security Grade. The Company has settled with all of the six selling members. As of June 30, 2019 and December 31, 2018, the Company has a liability pursuant to the Security Grade Acquisition Agreement of $0 and $101,667, respectively, payable following the closing.


The merger is being accounted for as a business combination in accordance with ASC 805. 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 

     Weighted
Average
Useful Life
Description Fair Value  (in years)
Assets acquired:     
Cash $14,137   
Accounts receivable  53,792   
Costs & earnings in excess of billings  96,898   
Property, plant and equipment, net  27,775   
Trademarks  25,000  10
Customer lists  3,154,578  5
Web address  5,000  5
Goodwill  664,329   
Other assets  3,880   
Total assets acquired $4,045,389   
Liabilities assumed:      
Billings in excess of costs $23,967   
Loans payable  18,414   
Credit card payable and other liabilities  69,349   
Total liabilities assumed  111,730   
Estimated fair value of net assets acquired $3,933,659   

The Initial Stock Options are included as part of the purchase price. 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 sheet. The Company satisfied their contingent consideration liability during the third quarter of 2017. During the year ended December 31, 2018, the Company reached settlement agreements with all six selling members. As a result of these settlements, 79,486 options previously issued as part of the acquisition were cancelled (see Note 14).

BioTrackTHC Acquisition

On March 3, 2018, the Company and its wholly owned subsidiary, Merger Sub, entered into the Merger Agreement with BioTrackTHC and Terence J. Ferraro, as the representative of the BioTrackTHC shareholders, pursuant to which Merger Sub merged with and into BioTrackTHC. On the BioTrackTHC Closing Date, the Company closed the Merger. In connection with closing the Merger, the Company issued 38,184,985 unregistered shares of Company common stock to BioTrackTHC stockholders, of which 1,852,677 shares were held back to satisfy indemnification obligations in the Merger Agreement, if necessary. The Company also assumed the BioTrackTHC Stock Plan, pursuant to which options exercisable for 8,132,410 shares of Company common stock are outstanding so that the BioTrackTHC stockholders will own 48% of the Company on a fully diluted basis at closing.


The Merger is being accounted for as a business combination in accordance with ASC 805. The Company’s allocation of the purchase price was calculated as follows:

Base Price - Common Stock $44,905,542 
Base Price - Stock Options  12,646,491 
Total Purchase Price $57,552,033 

     Weighted
Average
Useful Life
Description Fair Value  (in years)
Assets acquired:     
Cash $448,697   
Accounts receivable  128,427   
Prepaid expenses  351,615   
Property, plant and equipment, net  72,252   
Goodwill  39,135,007   
Customer list  8,304,449  5
Software  9,321,627  4.5
Tradename  466,081  4.5
Total assets acquired $58,228,155   
Liabilities assumed:      
Accounts payable $223,581   
Other liabilities  452,541   
Total liabilities assumed  676,122   
Estimated fair value of net assets acquired $57,552,033   

Engeni SA Acquisition

 

On the Engeni Closing Date, the Company and its wholly owned subsidiary, Engeni Merger Sub, entered into the Engeni Merger Agreement with Engeni US, Engeni SA, the members of Engeni US, 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. 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 may also issue Engeni US members 366,700 and 366,600 shares of Parent common stock upon the achievement of specific 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 before December 31, 2018, as determined by the Company’s Chief Financial Officer and Scott Zienkewicz.

 


The Engeni 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:

 

  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
Description Fair Value  (in years)
Assets acquired:     
Cash $5,609   
Accounts receivable and other assets  30,479   
Property, plant and equipment, net  57,830   
Software  449,568  3.3
Goodwill  778,552   
Total assets acquired $1,322,038   
Liabilities assumed:      
Accounts payable $56,038   
Total liabilities assumed  56,038   
Estimated fair value of net assets acquired $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 assessmentvaluation studies necessary to finalize the acquisition fair values of the assets acquired and liabilities assumed and related allocation of purchase price for Tan Security.GTI. Accordingly, the type and value of the intangible assets amounts set forth above are preliminary. Once the valuation process is finalized for Tan Security,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 GTI merger incurred during the nine months ended September 30, 2019 was $83,324, and is included in selling, general and administrative expense in the Company’s Statements of Operations.

Unaudited Pro Forma Results

GTI contributed revenues of $0 and a net loss of $22,144 for the period September 10, 2019 through September 30, 2019, included in the Company’s consolidated condensed statements of operations.

6.Property and Equipment, Net

 

At JuneSeptember 30, 2019 and December 31, 2018, property and equipment consisted of the following:

 

 June 30,
2019
  December 31,
2018
  September 30,
2019
  December 31,
2018
 
Furniture and equipment $139,782  $264,659  $149,738  $264,659 
Software equipment  352,505   -   402,297   - 
Vehicles  201,066   202,700   201,400   202,700 
Total  693,353   467,359   753,435   467,359 
Less: Accumulated depreciation  (147,535)  (117,841)  (179,643)  (117,841)
Property and equipment, net $545,818  $349,518  $573,792  $349,518 

 

Depreciation expense for the three months ended JuneSeptember 30, 2019 and 2018 was $29,509$24,440 and $32,893,$27,528, respectively, and $47,222$71,662 and $35,893$63,421 for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.


7.Intangible Assets, Net and Goodwill

 

The following table summarizes the Company’s intangible assets as of JuneSeptember 30, 2019 and December 31, 2018:

 

       June 30,
2019
 
  Estimated
Useful Life
(Years)
 Gross 
Carrying
Amount
  Assets
Acquired
  Accumulated
Amortization
  Net Book
Value
 
Database 5 $93,427  $              -  $(60,119) $33,308 
Trade names and trademarks 5 - 10  591,081   -   (149,063)  442,018 
Web addresses 5  130,000   -   (82,511)  47,489 
Customer list 5  11,459,027   -   (3,101,382)  8,357,645 
Software 4.5  9,771,195   -   (2,356,189)  7,415,006 
Domain Name 5  -   17,383   (143)  17,240 
    $22,044,730  $17,383  $(5,749,407) $16,312,706 

    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,
2018
 
  Estimated
Useful Life
(Years)
 Gross
Carrying
Amount at
December 31,
2017
  Assets
Acquired
Pursuant to
Business
Combination
(1) (2)
  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 

       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 June 1, 2018, the Company acquired various assets of BioTrackTHC (See Note 5)
(2)(1)On August 3, 2018, the Company acquired various assets of Engeni (See Note 5)

(2)On September 10, 2019 the Company acquired various assets of GTI (see Note 5)

 

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 $1,160,827$1,174,312 and $476,003$1,160,889 for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $2,308,755$3,483,067 and $645,579$1,806,468 for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.


The following table summarizes the Company’s Goodwill as of JuneSeptember 30, 2019 and December 31, 2018:

 

 Total Goodwill  Total Goodwill 
Balance at December 31, 2017 $664,329  $664,329 
Impairment of goodwill  (664,329) (664,329)
Goodwill attributable to BiotrackTHC acquisition  39,135,007 
Goodwill attributable to Biotrack acquisition 39,135,008 
Goodwill attributable to Engeni acquisition  778,552  778,552 
Balance at December 31, 2018 $39,913,559  $39,913,560 
    
Goodwill attributable to Tan Security acquisition  821,807   821,807 
Balance at June 30, 2019 $40,735,366 
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.

 

8.Costs, Estimated Earnings and Billings

 

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows as of JuneSeptember 30, 2019 and December 31, 2018:

 

 June 30,
2019
  December 31,
2018
  September 30,
2019
  December 31,
2018
 
Costs incurred on uncompleted contracts $140,289  $89,700  $171,486  $89,700 
Estimated earnings  49,366   50,512   71,321   50,512 
Cost and estimated earnings earned on uncompleted contracts  189,655   140,212   242,807   140,212 
Billings to date  304,500   252,535   338,844   252,535 
Billings in excess of costs on uncompleted contracts  (114,845)  (112,323)  (96,037)  (112,323)
                
Costs in excess of billings $12,017  $42,869  $30,468  $42,869 
Billings in excess of cost  (126,862)  (155,192)  (126,505)  (155,192)
 $(114,845) $(112,323) $(96,037) $(112,323)

9.Accounts Payable and Accrued Liabilities

 

As of JuneSeptember 30, 2019 and December 31, 2018, accounts payable and accrued liabilities consisted of the following:

 

  June 30,
2019
  December 31,
2018
 
Accounts payable $857,610  $842,389 
Accrued compensation and related expenses  56,332   33,869 
Accrued expenses  1,138,368   826,455 
Lease obligation - current  410,826   - 
Total $2,463,136  $1,702,713 

  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 

10.Convertible NoteNotes Payable, net of discount

 

 June 30,
2019
  December 31,
2018
  September 30,
2019
  December 31,
2018
 
Note Five, 5% interest, convertible promissory note, fixed secured, maturing November 16, 2019 $-  $187,177 
Note Ten, 25% interest, convertible promissory note, fixed secured, maturing March 1, 2020, net of debt discount for warrants  423,700   - 
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   - 
  423,700   187,177   862,426   187,177 
Less: Current portion  (423,700)  (187,177)  (862,426)  (187,177)
Long-term portion $-  $-  $-  $- 

On February 13, 2017, the Company entered into a $183,333 10% Fixed Secured Convertible Promissory Note (“Note Five”) with an investor (the “First Investor”). The First 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 First Investor for due diligence and legal bills for the transaction.

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 First 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.

On November 16, 2017, the Company amended Note Five (the “First Amendment”) with the First Investor. The First Amendment has a maturity date that is six months from November 16, 2017, converts at a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion, incurs interest at an annual rate of 5%, and is prepayable at any time at 110% of the unpaid principal and accrued interest balance. At November 16, 2017, the principal amount of Note Five was $281,900.

On May 16, 2018, the Company amended Note Five (“Second Amendment”) with the First Investor. The Second Amendment states that Note Five shall have a maturity of November 16, 2018 and shall be pre-payable at any time at 120% of the unpaid principal and accrued interest balance. The principal amount as of the date of the Second Amendment was $112,305.


In November 2018, the Company amended Note Five (“Third Amendment”) with a second investor. The Third Amendment states that Note Five shall have a maturity of November 16, 2019. The principal amount as of the date of the Third Amendment was $115,136. During March 2019, the remaining principal of $112,305 was converted into 155,421 shares of common stock. The interest expense associated with Note Five was $0 and $5,839 for the three months ended June 30, 2019 and 2018, respectively, and $0 and $7,878 for the six months ended June 30, 2019 and 2018, respectively.

On March 1, 2019, the Company entered into a $450,000 Secured Convertible Promissory Note (“Note Ten”) with a third investor.an independent investor (the “investor”). The third investor provided the Company with $450,000 in cash proceeds, which was received by the Company during the period ended June 30, 2019. Note Ten 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 Ten is 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 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 Ten, the Company issued a warrant to the third investor to purchase 160,715 shares of the Company’s common stock at $1.40 per share.

 

The Company evaluated Note Ten in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Ten 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 JuneSeptember 30, 2019, the fair value of Note Ten was $661,581.$514,148. Accordingly, the Company recorded a change in fair value of ($845,622)147,433) and $211,581$64,148 related to Note Ten for the three and sixnine months ended JuneSeptember 30, 2019, respectively.

 

In addition, the company recorded a debt discount relating to the warrants issued in the amount of $355,847 based on the residualrelative fair value of the warrants themselves at inception of Note Ten. Debt discounts amortized to interest expense were $88,718$89,693 and $117,966$207,659 for the three and sixnine months ended JuneSeptember 30, 2019, respectively. The unamortized discount balance at JuneSeptember 30, 2019 was $237,881.$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.$14,062 and $14,063, respectively. Accrued interest expense associated with Note Ten was $9,247 as of JuneSeptember 30, 2019, which includes PIK interest payable.

11.Related Party Transactions

Advances from Related Parties

 

The Company had a loan outstanding from a former Company executive. The loan balance was $0 and $45,250 as of June 30, 2019 and December 31, 2018, respectively.

Convertible Note Payable

On March 11, 2016,August 15, 2019, the Company entered into an Unsecureda $400,000 Fixed Convertible Promissory Note (“Note Eight”Eleven”) with Paul Hodges, a Director of the Company (the “Related Party Holder”).investor. The Related Party Holderinvestor provided the Company with $150,000$380,000 in cash andproceeds, which was received by the Company promised to payduring the principal amount, together withperiod 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 an annuala rate of 7%, with principal and accrued interest on Note Eight due and10% per annum, payable on December 31, 2017 (unless converted under terms and provisions as set forth below).by the Company in cash. The principal balance of Note Eight wasEleven is convertible at the election of the Related Party Holder,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$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 average market closing price fordate on which the previous five (5) trading days, precedinginvestor elects to convert all or part of Note Eleven. In conjunction with Note Eleven, the dateCompany issued a warrant to the investor to purchase 25,000 shares of conversion election. the Company’s common stock at $1.00 per share.


The Company evaluated Note EightEleven in accordance with ASC 480,Distinguishing Liabilities from Equity and determined that Note EightEleven 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.


On February 20, 2018, the Company entered into an agreement to amend Note Eight (the “Amendment”) with the Related Party Holder. The Company and Holder desired to extend the maturity date of Note Eight to August 20, 2018 (the “Maturity Date”). Note Eight was amended as follows. The Company promises to pay (i) all accrued interest on the unpaid principal amount through December 31, 2017 and (ii) $25,000 in principal within 5 business days of the date of the Amendment. The Company agrees to issue 15,000 shares of restricted Company common stock as an inducement for the Amendment within 10 business days of the date of the Amendment. The principal amount of Note Eight will be reduced to $125,000. Unless extended by the Company, converted or prepaid earlier, all unpaid principal and unpaid accrued interest on Note Eight shall be due and payable on the Maturity Date. All provisions related to conversion of Note Eight into equity securities of the Company were terminated as part of the Amendment.

As of February 20, 2018,September 30, 2019, the fair value of the liabilityNote Eleven was $239,343, however due to termination of the conversion of the note into equity securities, Note Eight will be valued in its principal amount of $125,000 and accordingly$266,667. Accordingly, the Company recorded a credit regarding the change in fair value of $0($133,333) related to Note Eleven for the three and nine months ended JuneSeptember 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 2018, respectively, and $0 and $118,506$20,000 relating to legal fees. Debt discounts amortized to interest expense were $6,471 for the sixthree and nine months ended JuneSeptember 30, 2019, and 2018, respectively. The unamortized discount balance at September 30, 2019 was $32,072. Accrued interest expense associated with Note EightEleven was $0$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 legal 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 JuneSeptember 30, 2019, 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 2018, respectively, and $0 and $2,402$22,500 relating to legal fees. Debt discounts amortized to interest expense were $2,054 for the sixthree and nine months ended JuneSeptember 30, 2019, and 2018, respectively. The unamortized discount balance at September 30, 2019 was $38,129. Accrued interest expense associated with Note EightTwelve was paid in full on the Maturity Date.$2,299 as of September 30, 2019.

 

11.Related Party Transactions

On March 1, 2019, the Company entered into a $1,500,000 Secured Convertible Promissory Note (“Note Nine”) with a related party entityRose Capital Fund I, LP (the Second Related Party Holder”). A Managing Member of the Second Related Party Holder is also a Director of the Company. The Second Related Party Holder provided the Company with $1,475,000 in cash proceeds, which was received by the Company during the period ended JuneSeptember 30, 2019. The additional $25,000 was retained by the fourth investorRelated 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 fourth investor,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 fourth investorRelated Party Holder to purchase 535,715 shares of the Company’s common stock at $1.40 per share.


The Company evaluated Note Nine in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Nine 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 JuneSeptember 30, 2019, the fair value of Note Nine was $2,205,270.$1,713,828. Accordingly, the Company recorded a change in fair value of ($2,818,739)491,442) and $705,270$213,828 related to Note Nine for the three and sixnine months ended JuneSeptember 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 residualrelative 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 $301,959$305,276 and $401,506$706,782 for the three and sixnine months ended JuneSeptember 30, 2019, respectively. The unamortized discount balance at JuneSeptember 30, 2019 was $809,647.$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 $30,822$29,795 as of JuneSeptember 30, 2019, which includes PIK interest payable. As of JuneSeptember 30, 2019, the balance of Note Nine, net of debt discount for warrants and legal bills was $1,395,623.$1,209,458.


Warrants

In March 2016, the Company issued 960,000 shares of restricted common stock to the Related Party Holder per a subscription agreement for total proceeds of $150,000. In conjunction with the subscription agreement, the Company issued a warrant to the Related Party Holder to purchase 1,920,000 restricted shares of the Company’s common stock at $0.16 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 registration 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 agreement for the sale of substantially all the assets or Common Stock of the Company. As of June 30, 2019, the warrants granted are not exercisable. 

 

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 JuneSeptember 30, 2019, the fair value of the warrant liability was $471,346.$259,215. Accordingly, the Company recorded a change in fair value of $(857,730)$212,131 and $(714,807)$926,938 during the three and sixnine months ended JuneSeptember 30, 2019, respectively, which is reflected in the unaudited condensed consolidated statements of operations. 

 

Promissory Note

 

On January 3, 2019, the Company entered into an unsecured promissory note with the Related Party Holder 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 with the Related Party Holder 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.

12.Notes Payable

 

As of September 30, 2019 and December 31, 2018 Notes payable consisted of the following:

 

  June 30,
2019
  December 31,
2018
 
Vehicle financing loans payable, between 4.7% and 7.0% interest and maturing between June 2022 and July 2022 $58,910  $71,284 
Loans Payable - Credit Union  6,127   5,075 
Less: Current portion of loans payable  (24,805)  (24,805)
Long-term portion of loans payable $40,232  $51,554 

  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 $890$7,065 and $720$2,901 for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $2,681$9,746 and $1,420$4,321 for the sixnine months ended JuneSeptember 30, 2019 and 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.


13.Shareholders’ Equity

 

Common Stock

 

Subscription Agreements

The table below reflects shares of restricted common stock issued in relation to subscription agreements during the period ended June 30, 2018:

Date of Sale Number
of Shares
Sold
  Total
Proceeds
 
February 2018  222,222  $200,000 
March 2018  500,000   450,000 
April 2018  500,000   450,000 
May 2018  244,444   219,999 
   1,466,666  $1,319,999 

Other Common Stock Issuances

In June 2018, the Company issued 38,184,985 shares of common stock as part of the BioTrackTHC acquisition.

On June 7, 2018, two selling shareholders of Security Grade exercised their right to purchase 212,633 shares of the Company’s common stock.

  

In January 2019, the Company issued 20,000 shares of restricted common stock to a consultant per a consulting 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 $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 February 15, 2018, March 12, 2018 and March 21, 2018, the holder of a 10% fixed secured convertible promissory note issued by the Company elected its option to partially convert $50,000, $50,000 and $75,000 in principal of the convertible note into 46,066, 63,963, and 95,945 shares of the Company’s 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 JuneSeptember 30, 2019:

 

Date of Issuance Number
of Shares
Issued
  Total Share
Based
Compensation
 
March 2019  250,000  $320,000 
   250,000  $320,000 

 

The table below reflects shares issued under the 2017 Omnibus Incentive Plan during the period ended June 30, 2018:

Date of Issuance Number
of Shares
Issued
  Total Share
Based
Compensation
 
January 2018  42,850  $173,014 
March 2018  100,000   250,000 
May 2018  133,900   223,774 
   276,750  $646,788 


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 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 11.

 

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 18).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.

The table below reflects the shares issued under the Series B Preferred Purchase Agreement of the initial tranche, Second Series B Purchase Agreement and the various issuances under the Third Series B Purchase Agreement during the year-ended December 31, 2017:

 

Date of Sale Number of
Shares
Sold
  Total
Proceeds
 
Initial      
May 2017  7,318,084  $1,875,000 
Second        
July 2017  1,680,000   840,000 
Third        
August 2017  369,756   120,000 
September 2017  462,195   150,000 
October 2017  462,195   150,000 
October 2017  1,042,337   557,500 
December 2017  2,449,634   795,000 
Ending Balance  13,784,201  $4,487,500 

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. 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 17,000,000.

 

Conversion:

 

Each Series B Preferred Share is convertible at the option of the holder 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 13,784,201 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 six months ended June 30, 2018, the beneficial conversion amount of $14,998,505 and $22,202,194, respectively 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 June 30, 2018. As of June 30, 2019 and 2018, the beneficial conversion feature was fully amortized.

For the Six Months Ended June 30, 2018
Issuance Date Beneficial
Conversion
Feature
Term
(months)
 Number of
shares
  Fair
Value of
Beneficial
Conversion
Feature
  Amount
accreted as a
deemed
dividend at
December 31,
2017
  Amount
accreted as
a deemed
dividend for
the Six
Months
Ended June 30,
2018
  Unamortized
Beneficial
Conversion
Feature
 
May 17, 2017 12  7,318,084  $25,247,098  $(15,779,436) $(9,467,661) $             - 
July 29, 2017 9.5  1,680,000   6,804,000   (3,674,634)  (3,129,366)  - 
August 29, 2017 8.5  369,756   1,148,263   (556,190)  (592,073)  - 
September 15, 2017 8  462,195   1,435,329   (648,601)  (786,728)  - 
October 11, 2017 7  462,195   1,121,036   (426,309)  (694,727)  - 
October 31, 2017 6.5  1,042,337   1,735,641   (548,570)  (1,187,071)  - 
December 19, 2017 5  2,449,634   6,921,348   (576,780)  (6,344,568)  - 
Total    13,784,201  $44,412,715  $(22,210,520) $(22,202,194) $- 

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 certificate 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.

 

14.Stock Options

On March 15, 2018 the Company awarded Zachary Venegas two options to purchase a total of 490,000 shares of the Company’s common stock at prices ranging from $1.90 to $2.09 per share. These options vested on June 28, 2018 and have expiration dates ranging from March 2023 to March 2028.

As part of the Membership Interest Purchase Agreement entered into between the Company and Security Grade, on June 2, 2017 (see Note 5), the Company granted to the selling Members the option to purchase up to 414,854 shares of the Company’s common stock at a price of $0.001 per share. Of the 414,854 options granted, 207,427 were vested at closing 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 third quarter of 2017, the remaining 207,427 shares have also vested. The options have an expiration date of 36 months from the closing date. The exercise price will be based on the fair market value of the share on the date of grant.

On March 6, 2018, the Company filed a lawsuit in the United States Court for the District of Colorado alleging violations in previously disclosed representations and warranties by the plaintiff as part of the Acquisition. Following the appointment of a registered Public Company Accounting Oversight Board (“PCAOB”) auditor, certain misrepresentations, primarily surrounding the misclassification of certain revenues as being recurring, were discovered, artificially inflating the price of the membership interest in Security Grade. As a result of certain settlements with the selling shareholder, as of June 30, 2018, 70,151 options previously issued as part of the acquisition were cancelled. Subsequently, as of December 31, 2018, the remaining settlements with the selling shareholders were settled and a total of 79,486 options previously issued as part of the acquisition were cancelled.

 

On February 6, 2019 the Company awarded an executive an option to purchase a total of 100,000 shares of the Company’s common stock at an exercise price $1.51 per share. These options vested on May 6, 2019 and have an expiration date of February 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 Company 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 of $2.03 per share. 62,500 of the options shall vest immediately and 62,500 of the options shall vest on August 2, 2019 provided the marketing agreement between the Company and grantee has not been terminated. These options shall expire on May 1, 2024.

 

In 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 shall vest over a period ranging from September 2019 to June 2020 and have expiration dates ranging from May 2024 to June 2024.

33

 

Stock option activity for the period ended JuneSeptember 30, 2019 is as follows:

 

  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   7.06 
Exercised  (188,575) $0.261   1.08 
Forfeited and expired            
Outstanding at June 30, 2019  9,787,381  $0.862   2.98 
Vested options at June 30, 2019  8,900,021  $0.749   2.13 

  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 

 


15.Warrant Liability

 

On March 1, 2019, in connection with the issuance of Note Ten, the Company issued warrants, of which the value was derived and based off the fair value of Note Ten, to the investor 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 JuneSeptember 30, 2019, the fair value of the warrant liability was $141,404.$77,765. Accordingly, the Company recorded a change in fair value of the warrant liability of $(257,320)$63,639 and $(214,443)$278,082 related to Note Ten for the three and sixnine months ended JuneSeptember 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 JuneSeptember 30, 2019, the fair value of the warrant liability was $538,847$283,696 and the Company recorded a change in fair value of the warrant liability of $(1,046,606)$255,151 and $(1,178,659)$1,433,810 for the three and sixnine months ended JuneSeptember 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 sixnine 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 JuneSeptember 30, 2019, the fair value of the warrant liability was $82,162.$37,125. Accordingly, the Company recorded a change in fair value of the warrant liability of $(168,380)$45,037 and $(115,986)$161,023 related to the warrants for the three and sixnine months ended JuneSeptember 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 JuneSeptember 30, 2019, the fair value of the warrant liability was $73,073.$38,832. Accordingly, the Company recorded a change in fair value of the warrant liability of ($10,513)$34,241 and $44,754 related to the warrants for the three and sixnine months ended JuneSeptember 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 the warrant may be made, in whole or in part, at any time or times on or after August 15, 2019 and on or before August 15, 2024, by delivery to the Company of the Notice of Exercise.

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, 2019, the 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.

On September 16, 2019, in connection with the issuance of Note Twelve, the Company issued warrants, of which the value was derived and based off the fair value of Note Twelve, 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 the warrant may be made, in whole or in part, at any time or times on or after September 16, 2019 and on or before September 16, 2024, by delivery to the Company of the Notice of Exercise.


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, 2019, the 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:

 

For the Six Months Ended June 30, 2019
For the Nine Months Ended September 30, 2019For the Nine Months Ended September 30, 2019
 Warrant 
Shares
  Weighted Average Exercise Price  Warrant Shares  Weighted Average Exercise Price 
Balance at January 1, 2019  3,418,184  $0.23   3,418,184  $0.23 
                
Warrants granted  1,507,374  $1.23   1,557,374  $1.22 
                
Balance at June 30, 2019  4,925,558  $0.55   4,975,558  $0.55 

The fair value of the Company’s warrant liability was calculated using the Black-Scholes model and the following assumptions:

 

 As of
June 30,
2019
  As of
December 31,
2018
  As of
September 30,
2019
  As of
December 31,
2018
 
Fair value of company’s common stock $1.06  $0.90  $0.60  $0.90 
Dividend yield  0%  0%  0%  0%
Expected volatility  135% - 140%   175.0%  45% - 140%   175.0%
Risk Free interest rate  1.72% - 2.56%   2.49%  1.55% - 1.79%   2.49%
Expected life (years)  3.19   1.65   2.92   1.65 
Fair value of financial instruments - warrants $2,199,266  $896,171  $1,010,890  $896,171 

 

The change in fair value of the financial instruments – warrants is as follows:

 

 Amount  Amount 
Balance as of January 1, 2019 $896,171  $896,171 
        
Fair value of warrants issued  3,541,240  $3,577,465 
        
Change in fair value of liability to issue warrants  (2,238,145) $(3,462,746)
        
Balance as of June 30, 2019 $2,199,266 
Balance as of September 30, 2019 $1,010,890 

 

  Amount 
Balance as of April 1, 2019 $5,986,781 
     
Fair value of warrants issued  83,586 
     
Change in fair value of liability to issue warrants  (3,871,101)
     
Balance as of June 30, 2019 $2,199,266 

  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’s 2017 Omnibus Incentive Plan (the “2017 Plan”) was adopted by our Board of Directors and a majority of our 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 dividend equivalent rights to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the 2017 Plan at no less than the fair value of the underlying 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 options to purchase 1,735,0002,499,945 and 490,000 shares of common stock and 764,945 and 514,9451,004,945 shares of common stock were granted as of JuneSeptember 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).

 

17.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 sixnine months ended JuneSeptember 30, 2019 and 2018 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 sixnine months ended JuneSeptember 30, 2019 and 2018, the Company has a net operating loss carry forward of approximately $15,098,000$16,952,000 and $8,365,000,$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.

  

18.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 reasonably certain that the Company will not exercise the early termination option. Certain leases include rental payments that are adjusted periodically based on changes in consumer price and other indices.

 

Leases 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:

 

 Six Months Ended
June 30,
2019
  Nine Months Ended
September 30,
2019
 
Operating lease expense $297,566  $417,287 
Cash paid for amounts included in the measurement of operating lease liabilities $150,696  $273,398 
ROU assets obtained in exchange for operating lease obligations $1,499,752  $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 were recorded in the condensed consolidated balance sheet as follows:

 

  As of
June 30,
2019
 
Other assets $1,293,245 
     
Accounts payable and accrued liabilities $410,826 
Other long-term liabilities  962,716 
Total lease liabilities $1,373,542 
     
Weighted average remaining lease term (in years)  3.05 
Weighted average discount rate  6.00%

  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 JuneSeptember 30, 2019, for the following five fiscal years and thereafter were as follows:

 

  As of
June 30,
2019
 
2019 - Remaining  238,684 
2020  393,413 
2021  248,223 
2022  195,144 
2023  200,944 
Thereafter  205,434 
Total future minimum lease payments $1,481,842 
Less imputed interest  (108,300)
Total $1,373,542 

  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 JuneSeptember 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 years.

 

As of December 31, 2018, future minimum lease payments, as defined under the previous lease accounting guidance of ASC Topic 840, under noncancelable operating leases for the following five fiscal years and thereafter were as follows:

  Operating
leases
 
2019 $473,495 
2020  420,291 
2021  275,223 
2022  198,144 
2023  199,144 
Thereafter  205,135 
Total lease payments $1,771,432 


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 assessing 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 Company’s reportable segments:

 

  For the Three Months Ended June 30,  For the Six Months Ended June 30, 
  2019  2018  2019  2018 
Security and guarding            
Revenue $1,347,529  $1,197,201  $2,552,240  $2,290,975 
Cost of revenue  797,944   1,273,693   1,738,530   2,064,398 
Gross margin  549,585   (76,492)  813,710   226,577 
Total operating expenses  1,903,371   2,455,685   3,637,078   5,152,876 
Loss from operations  (1,353,786)  (2,532,177)  (2,823,368)  (4,926,299)
Total other income (expense)  7,265,540   735,239   (979,410)  2,656,120 
Total net income (loss) $5,911,754  $(1,796,938) $(3,802,778) $(2,270,179)
                 
Systems installation                
Revenue $174,067  $100,699  $202,608  $135,263 
Cost of revenue  337,852   -   499,610   - 
Gross margin  (163,785)  100,699   (297,002)  135,263 
Total operating expenses  154,822   -   187,453   - 
Loss from operations  (318,607)  100,699   (484,455)  135,263 
Total other income  513   -   433   - 
Total net (loss) income $(318,094) $100,699  $(484,022) $135,263 
                 
Software                
Revenue $2,377,277  $576,142  $4,515,132  $576,142 
Cost of revenue  860,903   286,694   1,683,778   286,694 
Gross margin  1,516,374   289,448   2,831,354   289,448 
Total operating expenses  2,309,704   421,566   4,585,917   421,566 
Loss from operations  (793,330)  (132,118)  (1,754,563)  (132,118)
Total other income  11,978   9   11,970   9 
Total net loss $(781,352) $(132,109) $(1,742,593) $(132,109)

  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, 2019, the Company entered into a securities purchase agreement pursuant to which the Company agreed to sell a secured convertible promissory note (the “Convertible Note”) and common stock purchase warrant (the “Warrant”). The Convertible Note, which expires on July 29,11, 2020, has an initial aggregate principal balance of $450,000 and bears interest at a rate of 10% per annum. The Warrant is exercisable for five years to purchase up to 25,000 shares of the Company’s common stock at a price of $1.00 per share.

On October 18, 2019, November 5, 2019, November 7, 2019 and November 11, 2019, the holder of a 25% fixed secured convertible promissory note issued by the Company elected its option to partially convert $20,000, $20,000, $40,000 and $100,000 in principal of the convertible note into 56,738, 63,012, 126,024 and 315,060 shares of the Company’s common stock.

On November 1, 2019, the Company entered into an unsecured promissory note inAdvisory Services Agreement (the “Agreement”) with Electrum Partners, LLC (“Electrum”). The Agreement provides for the amountissuance of $300,000. The unsecured promissory note has a fixed interest rate100,000 shares of 12% per annum and is due and payablerestricted common stock to Electrum upon the maturity date of January 29, 2020. 

In August 2019, the Company paid $25,000 in cash as partcommencement of the original purchase priceAgreement, the issuance of Tan Security pursuant to50,000 stock options each month the original terms ofAgreement is effective, and 100,000 warrants each month the Tan Security Acquisition Agreement.

agreement is effective. The stock options are exercisable for three years from issuance and vest immediately upon grant. The warrants are exercisable for five years from issuance and 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 sixnine months ended JuneSeptember 30, 2019 and 2018 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 for the year ended December 31, 2018, as filed on April 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 TCS, Inc. provides critical infrastructure solutions to the legal cannabis industry. Our mission is to provide clients with the best-in-class critical infrastructure services through a single integrated platform which enables them to run their businesses more safely, efficiently, and profitably. As we increase our platform’s scale and scope, clients will be able to realize greater cost savings and 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.

 

Technology is a cornerstone of Helix’s service offering. Our technology platform allows 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. 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, 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.

 

We have greatly enhanced our core operations with the acquisitions of Security Grade, BioTrackTHC, Engeni, Tan Security and Tan Security.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. BioTrackTHC 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-paidfully 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 acquisitions 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 JuneSeptember 30, 2019 and 2018

 

The following table shows our results of operations for the three months ended JuneSeptember 30, 2019 and 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 June 30,  Change 
  2019  2018  Dollars  Percentage 
Revenue $3,898,873  $1,874,042  $2,024,831   108%
Cost of revenue  1,996,699   1,560,387   436,312   28%
Gross margin  1,902,174   313,655   1,588,519   506%
                 
Operating expenses  4,367,897   2,877,251   1,490,646   52%
                 
Loss from operations  (2,465,723)  (2,563,596)  97,873   -4%
                 
Other income (expense), net  7,278,031   735,248   6,542,783   890%
                 
Net income (loss) $4,812,308  $(1,828,348) $6,640,646   -363%
                 
Changes in foreign currency translation adjustment $(590) $-  $(590)  100%
                 
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend  -   (7,203,689)  7,203,689   -100%
                 
Net income (loss) attributable to common shareholders $4,811,718  $(9,032,037) $13,843,755   -153%

  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-month period ended JuneSeptember 30, 2019 was $3,898,873,$3,741,284, which represented an increase of $2,024,831$627,563 compared to total revenue of $1,874,042$3,113,721 for the three months ended JuneSeptember 30, 2018. The increase primarily resulted from additional revenue resulting from the BioTrackTHC acquisition and an increasegrowth in the numberclient base of clients serviced by our security operations.BioTrackTHC.

 

Cost of Revenues

 

Cost of revenues for the three months ended JuneSeptember 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 $436,312$344,734 for the three months ended JuneSeptember 30, 2019, to $1,996,699$2,224,795 as compared to $1,560,387$1,880,061 for the three months ended JuneSeptember 30, 2018. The increase primarily resulted from the acquisitioncost of servicing additional clients of BioTrackTHC and a substantial increase in the numbertiming of clients serviced by Helixpurchases for the installation of security which required the hiring of additional employees.equipment.


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 JuneSeptember 30, 2019 and 2018 were $4,367,897$4,379,865 and $2,877,251,$3,971,141, respectively. The overall $1,490,646$408,724 increase in operating expenses was attributable to the following increases/(decreases) in operating expenses of:

 

 Selling, general and administrative – $642,492$311,695
   
 Salaries and wages – $(1,113)($495,633)
   
 Professional and legal fees – $523,306$200,521
   
 Depreciation and amortization – $325,961$392,141

 

The $642,492$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. The $1,113$(495,663) decrease in salaries and wages resulted from a decrease in stock compensation expense. The $523,306$200,521 increase in professional and legal fees primarily resulted from an increase in legal fees and costs associated with fundraising. The $325,961$392,141 increase in depreciation and amortization was due to amortization of intangible assets acquired in the BioTrackTHC, Engeni and EngeniGTI acquisitions.

 

Other Income, (Expense), net

 

Other income, (expense), net consisted of 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, gain on reduction of obligation pursuant to acquisition and interest (expense) income. Other income, (expense), net during the three months ended JuneSeptember 30, 2019 and 2018 was $7,278,031$1,607,807 and $735,248,$59,029, respectively. The $6,542,783$1,548,778 increase in other income, (expense), net was primarily attributable to a gain on the change in fair value of convertible notes of $845,622,$430,766, gain on the change in fair value of convertible notes – related party of $2,818,739,$491,442, gain on the change in fair value of warrant liability of $3,871,101,$1,224,601, partially offset by interest expense of $514,081($539,002) during the three months ended JuneSeptember 30, 2019.

 

Net income (loss)loss

 

For the foregoing reasons, we had net incomeloss of $4,812,308$(1,255,569) for the three months ended JuneSeptember 30, 2019, or $0.06$0.02 per basic share, compared to a net loss of $1,828,348$(2,678,452) for the three months ended JuneSeptember 30, 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 $0 for the three months ended June 30, 2019 compared to $7,203,689 for the three months ended June 30, 2018.

  

Net income (loss) Attributableloss attributable to common shareholders

 

For the foregoing reasons, we had a net gainloss attributable to common shareholders of $4,811,718$(1,373,572) for the three months ended JuneSeptember 30, 2019, or $.06$0.02 per basic share attributable to common shareholders, compared to net loss attributable to common shareholders of $9,032,037$(2,660,914) for the three months ended JuneSeptember 30, 2018, or $0.21$0.04 net loss per share attributable to common shareholders – basic and diluted.

 

4336

 

 

Results of Operations for the sixnine months ended JuneSeptember 30, 2019 and 2018

 

The following table shows our results of operations for the sixnine months ended JuneSeptember 30, 2019 and 2018. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

 For the Six Months Ended June 30,  Change  For the Nine Months Ended
September 30,
  Change 
 2019  2018  Dollars  Percentage  2019  2018  Dollars  Percentage 
Revenue $7,269,980  $3,002,380  $4,267,600   142% $11,011,264  $6,116,101  $4,895,163   80%
Cost of revenue  3,921,918   2,351,092   1,570,826   67%  6,146,713   3,892,716   2,253,997   58%
Gross margin  3,348,062   651,288   2,696,774   414%  4,864,551   2,223,385   2,641,166   119%
                                
Operating expenses  8,410,448   5,574,442   2,836,006   51%  12,790,313   9,884,020   2,906,293   29%
                                
Loss from operations  (5,062,386)  (4,923,154)  (139,232)  3%  (7,925,762)  (7,660,635)  (265,127)  3%
                                
Other income (expense), net  (967,007)  2,656,129   (3,623,136)  -136%
Other income, net  640,800   2,715,158   (2,074,358)  -76%
                                
Net loss $(6,029,393) $(2,267,025) $(3,762,368)  166% $(7,284,962) $(4,945,477) $(2,339,485)  47%
                                
Changes in foreign currency translation adjustment $3,657  $-  $3,657   100% $(114,346) $17,538  $(131,884)  100%
                                
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend  -   (22,202,194)  22,202,194   -100%  -   (22,202,194)  22,202,194   -100%
                                
Net loss attributable to common shareholders $(6,025,736) $(24,469,219) $18,443,483   -75% $(7,399,308) $(27,130,133) $19,730,825   -73%

 

Revenue

 

Total revenue for the six-monthnine-month period ended JuneSeptember 30, 2019 was $7,269,980,$11,011,264, which represented an increase of $4,267,600$4,895,163 compared to total revenue of $3,002,380$6,116,101 for the sixnine months ended JuneSeptember 30, 2018. The increase primarily resulted from additional 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 sixnine months ended JuneSeptember 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 $1,570,826$2,253,997 for the sixnine months ended JuneSeptember 30, 2019, to $3,921,918$6,146,713 as compared to $2,351,092$3,892,716 for the sixnine months ended JuneSeptember 30, 2018. The increase primarily resulted from the acquisition of BioTrackTHC and a substantialan increase in the number of clients serviced by Helix security, 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 sixnine months ended JuneSeptember 30, 2019 and 2018 were $8,410,448$12,790,313 and $5,574,442,$9,884,020, respectively. The overall $2,836,006$2,906,293 increase in operating expenses was primarily attributable to the following increasesincreases/(decreases) in operating expenses of:

 

 Selling, general and administrative – $1,231,490$1,543,185
   
 Salaries and wages – $384,144$(449,926)
   
 Professional and legal fees – $592,002$792,523
   
 Depreciation and amortization – $1,292,699$1,684,840

  

The $1,231,490$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. The $384,144 increase$(449,926) decrease in salaries and wages resulted from a significant increasedecrease in headcount, including BioTrackTHC and Engeni personnel.stock compensation expense. The $592,002$792,523 increase in professional and legal fees primarily resulted from an increase in legal fees and costs associated with fundraising. The $1,292,699$1,684,840 increase in depreciation and amortization was due to amortization of intangible assets acquired in the BioTrackTHC, Engeni and EngeniGTI acquisitions.

 

Other Income, (Expense), net

 

Other income, (expense), net consisted of 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 issuance of warrants, gain on reduction of obligation pursuant to acquisition and interest (expense) income. Other income, (expense), net during the sixnine months ended JuneSeptember 30, 2019 and 2018 was ($967,007)$640,800 and $2,656,129,$2,715,158, respectively. The $3,623,136$2,074,358 decrease in other income, (expense), net was primarily attributable to a loss on the change in fair value of convertible notes of $142,341, loss on the change in fair value of convertible notes – related party of $705,270, loss on the change in fair value of contingent consideration of $880,050, loss on issuance of warrants of $787,209, and interest expense of $690,282, partially offset by a gain on the change in fair value of warrant liability of $2,238,145,$1,229,284 during the sixnine months ended JuneSeptember 30, 2019.

 

Net income (loss)loss

 

For the foregoing reasons, we had a net loss of $6,029,393$(7,284,962) for the sixnine months ended JuneSeptember 30, 2019, or $0.08$0.10 net loss per common share – basic and diluted, compared to a net loss of $2,267,025$(4,945,477) for the sixnine months ended JuneSeptember 30, 2018, or $0.06$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 $0 for the sixnine months ended JuneSeptember 30, 2019 compared to $22,202,194 for the sixnine months ended JuneSeptember 30, 2018.

 

Net income (loss) Attributableloss attributable to common shareholders

 

For the foregoing reasons, we had a net loss attributable to common shareholders of $6,025,736$(7,399,308) for the sixnine months ended JuneSeptember 30, 2019, or $.08$0.10 net loss per share attributable to common shareholders - basic and diluted, compared to net loss attributable to common shareholders of $24,469,219$(27,130,133) for the sixnine months ended JuneSeptember 30, 2018, or $0.68$0.57 net loss per share attributable to common shareholders – basic and diluted.

 

4538

 

 

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 condensed consolidated financial statements do not include any 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 sixnine months ended JuneSeptember 30, 2019, we have generated revenue and are trying to achieve positive cash flows from operations.

 

As of JuneSeptember 30, 2019, we had a cash balance of $800,015,$655,280, accounts receivable, net of $1,640,996$1,496,137 and $6,708,392$6,501,082 in current liabilities. At the current cash consumption rate, we may need to consider additional funding sources toward the end of fiscal 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 for the periods indicated: 

 

 June 30,
2019
  December 31,
2018
  Change  September 30,
2019
  December 31,
2018
  Change 
Current assets $2,993,370  $1,923,353  $1,070,017  $2,826,648  $1,923,353  $903,295 
Current liabilities  6,708,392   4,157,005   2,551,387   6,501,082   4,157,005   2,344,077 
Working capital $(3,715,022) $(2,233,652) $(1,481,370)
Working capital deficit $(3,674,434) $(2,233,652) $(1,440,782)

 

As of JuneSeptember 30, 2019, and December 31, 2018, we had a cash balance of $800,015$655,280 and $285,761, respectively.


Summary of Cash Flows

 

 For the Six Months Ended
June 30,
  For the Nine Months Ended
September 30,
 
 2019  2018  2019  2018 
          
Net cash used in operating activities $(1,889,854) $(1,623,613) $(2,862,478) $(3,217,350)
Net cash used in investing activities  (647,014)  (94,871)
Net cash (used in) provided by investing activities  (791,177)  230,248 
Net cash provided by financing activities  3,099,741   1,294,457   4,203,162   2,641,985 

Net cash used in operating activities.Net cash used in operating activities for the sixnine months ended JuneSeptember 30, 2019 was $(1,889,854)$(2,862,478). This included a net loss of $6,029,393,$(7,284,962), non-cash charge related to depreciation and amortization of $2,355,977,$3,554,729, non-cash charge related to amortization of debt discounts of $519,472,$922,965, non-cash charge from loss on issuance of warrants of $787,209, non-cash charge related to provision for doubtful account $104,288,accounts of $199,215, non-cash charge related to share-based compensation of $889,400,$1,241,741, non-cash (gains) losses (gains) due to changes in fair value of convertible notes, fair value of warrant liability, fair value of convertible notes – related party, fair value of warrant liability, fair value of contingent consideration of $142,341, $705,270, $(2,238,145)$(288,425), $(3,462,746), $213,828 and $880,050, respectively, non-cash gains on reduction of contingent consideration of $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 other current assets, due fromto related party, other long-term liabilities, and right of use assets and liabilities of $93,677.$473,918. Net cash used in operating activities for the sixnine months ended JuneSeptember 30, 2018 was $(1,623,613)$(3,217,350). This included a net loss of $(2,267,025)$(4,945,477), non-cash charge related to depreciation and amortization of $1,063,278,$1,869,889, non-cash charge related to share-based compensation of $1,619,753,$2,143,548, non-cash gains(gains) losses due to changes in fair value of convertible notes, fair value of warrant obligations,liability, fair value of convertible notes – related party and fair value of a related party notecontingent consideration of $(522,646)$(504,768), $(1,297,840)$(1,434,760), $(93,506), and $(118,506),$131,994, respectively, non-cash charge from loss on impairment of goodwill of $664,329, non-cash gain on reduction of obligation pursuant to acquisition of $(557,054),$607,415, and changes in accounts receivable, deposits and other assets, costs in excess of billings, billings in excess of costs, deferred rent, and accounts payable and accrued expenses of $(207,902)$(441,184).

 

Net cash used in(used in) provided by investing activities.Net cash used in investing activities for the sixnine months ended JuneSeptember 30, 2019 was $(647,014)$(791,177), which consisted of capital expenditures of $(505,904)$(620,594), purchase of domain names of $(17,383)$(21,856) and payments pursuant to the Tan Security business acquisition and Security Grade business acquisition of $(123,727)$(148,727). Net cash used inprovided by investing activities for the sixnine months ended JuneSeptember 30, 2018 was $(94,871),$230,248, which consisted of capital expenditures of $(484,838)$(85,665), cash payment pursuant to the Revolutionary asset acquisition of $(58,730)$(58,729), payments pursuant to the Security Grade business acquisition of $(79,664) and paymentscash acquired as part of the BioTrackTHC business combination, net of cash acquiredacquisition and Engeni business acquisition in the amount of $448,697.$454,306.

 

Net cash provided by financing activities.Net cash provided by financing activities for the sixnine months ended JuneSeptember 30, 2019 was $3,099,741,$4,203,162, which resulted from issuance of a promissory note receivable of $(75,000), repayment of notes payable of $(11,322)$(15,401), payments pursuant to a promissory note of $(280,000), proceeds and repaymentfrom the issuance of a promissory note of $(280,000),$580,000, proceeds from the issuance of common stock of $1,306,313, proceeds from the issuance of convertible note payable of $1,925,000$2,732,500 and repayment of advances from related parties of $(45,250). Net cash provided by financing activities for the sixnine months ended JuneSeptember 30, 2018 was $1,294,457,$2,641,985, which resulted from payments pursuant to convertible notes payable – related party of $(150,000), proceeds from notes payable of $16,271, proceeds from the issuance of a promissory note of $250,000, proceeds from the issuance of common stock of $1,320,212, proceeds from notes payable of $33,745,$2,595,214 and repayment of advances from related parties of $(59,500)$(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 for the year ended December 31, 2018 filed with the SEC on April 1, 2019.


Related Party Transactions

 

The Company had a loan outstanding from a former Company executive. The loan balance was $0 and $45,250 as of June 30, 2019 and December 31, 2018, respectively.

In March 2016, the Company issued 960,000 shares of restricted common stock to the Related Party Holder per a subscription agreement for total proceeds of $150,000. In conjunction with the subscription agreement, the Company issued a warrant to the Related Party Holder to purchase 1,920,000 restricted shares of the Company’s common stock at $0.16 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 registration 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 agreement for the sale of substantially all the assets or Common Stock of the Company. As of June 30, 2019, the warrants granted are not exercisable. 

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 Eight 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.

On February 20, 2018, the Company entered into an agreement to amend Note Eight (the “Amendment”) with the Related Party Holder. The Company and Holder desired to extend the maturity date of Note Eight to August 20, 2018 (the “Maturity Date”). Note Eight was amended as follows. The Company promises to pay (i) all accrued interest on the unpaid principal amount through December 31, 2017 and (ii) $25,000 in principal within 5 business days of the date of the Amendment. The Company agrees to issue 15,000 shares of restricted Company common stock as an inducement for the Amendment within 10 business days of the date of the Amendment. The principal amount of the Note Eight will be reduced to $125,000. Unless extended by the Company, converted or prepaid earlier, all unpaid principal and unpaid accrued interest on Note shall be due and payable on the Maturity Date. All provisions related to conversion of Note Eight into equity securities of the Company were terminated as part of the Amendment.

As of February 20, 2018, the fair value of the liability was $239,343, however due to termination of the conversion of the note into equity securities, Note Eight will be valued in its principal amount of $125,000 and accordingly the Company recorded a credit regarding the change in fair value of $0 for the three months ended June 30, 2019 and 2018, respectively, and $0 and $118,506 for the six months ended June 30, 2019 and 2018, respectively. The interest expense associated with Note Eight was $0 for the three months ended June 30, 2019 and 2018, respectively, and $0 and $2,402 for the six months ended June 30, 2019 and 2018, respectively. Note Eight was paid in full on the Maturity Date.

On March 1, 2019, the Company entered into a $1,500,000 Secured Convertible Promissory Note (“Note Nine”) with a related party entityRose Capital Fund I, LP (the Second Related Party Holder”). A Managing Member of the Second Related Party Holder is also a Director of the Company. The Second Related Party Holder provided the Company with $1,475,000 in cash proceeds, which was received by the Company during the period ended JuneSeptember 30, 2019. The additional $25,000 was retained by the fourth investorRelated 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 fourth investor,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 fourth investorRelated Party Holder to purchase 535,715 shares of the Company’s common stock at $1.40 per share.

 

The Company evaluated Note Nine in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Nine 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 JuneSeptember 30, 2019, the fair value of Note Nine was $2,205,270.$1,713,828. Accordingly, the Company recorded a change in fair value of ($2,818,739)$(491,442) and $705,270$213,828 related to Note Nine for the three and sixnine months ended JuneSeptember 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 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 $301,959$305,276 and $401,506$706,782 for the three and sixnine months ended JuneSeptember 30, 2019, respectively. The unamortized discount balance at JuneSeptember 30, 2019 was $809,647.$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 $30,822$29,795 as of JuneSeptember 30, 2019, which includes PIK interest payable. As of JuneSeptember 30, 2019, the balance of Note Nine, net of debt discount for warrants and legal bills was $1,395,623.$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 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 JuneSeptember 30, 2019, the fair value of the warrant liability was $471,346.$259,215. Accordingly, the Company recorded a change in fair value of $(857,730)$212,131 and $(714,807)$926,938 during the three and sixnine months ended JuneSeptember 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 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. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that as of JuneSeptember 30, 2019, our disclosure controls and procedures were effective.


Management’s Report on Internal Controls Over Financial Reporting

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our internal controls over financial reporting as of June 30, 2019, the end of the interim period covered by this report established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The evaluation of our internal controls over financial reporting included a review of the internal control 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, including our Chief Executive Officer and Chief Financial Officer, concluded that the Company did not maintain effective internal control over financial reporting as of the six months ended June 30, 2019 due to the existence of material weaknesses in the internal control over financial reporting described below.

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 June 30, 2019 due to the existence of the following material weaknesses identified by management:

The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked personnel with accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting requirements.

Inadequate segregation of duties.

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 sixnine months ended JuneSeptember 30, 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.


PART II – OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

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.

 

There 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, 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. As of JuneSeptember 30, 2019, the 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 JuneSeptember 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 lawsuits are wholly without merit and will defend itself from these claims vigorously.

  

ITEM 1A. Risk Factors

 

Smaller reporting companies such as us are not required to provide the information required by this item.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the sixnine months ended JuneSeptember 30, 2019, we issued 3,086,89319,869,188 shares of common stock, of which 17,015,727 shares were in connection with the Green Tree and Tan acquisitions, with offering proceeds received totaling $1,306,313.

ITEM 3. Defaults upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosure

 

Not applicable.

 

ITEM 5. Other Information

 

None. 

 

5143

 

 

ITEM 6. Exhibits

 

Exhibit No. Description
10.432.3  FormAgreement and Plan of Management Consulting Services AgreementMerger, dated February 5, 2019, by and betweenamong Helix TCS, Inc., Helix Acquisition Sub, Inc., Green Tree International, Inc. and the Company and Rose Management Group LLCSecurityholder Representative (incorporated by reference to Exhibit 10.432.3 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on April 18,September 16, 2019).
2.4Addendum No. 1, dated as of September 10, 2019, to the Agreement and Plan of Merger, dated February 5, 2019, by and among Helix TCS, Inc., Helix Acquisition Sub, Inc., Green Tree International, Inc. and the Securityholder Representative (incorporated by reference to Exhibit 2.4 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on September 16, 2019).
10.44Form of Securities Purchase Agreement, dated August 15, 2019, by and between Helix TCS, Inc. and RedDiamond Partners, LLC.*   
10.45Form of 10% Fixed Convertible Promissory Note, dated August 15, 2019, for $400,000 payable to RedDiamond Partners, LLC.*
10.46Form of Common Stock Purchase Warrant of Helix TCS, Inc., dated August 15, 2019.*
10.47Form of Securities Purchase Agreement, dated September 16, 2019, by and between Helix TCS, Inc. and RedDiamond Partners, LLC.*   
10.48Form of 10% Fixed Convertible Promissory Note, dated September 16, 2019, for $450,000 payable to RedDiamond Partners, LLC.*
10.49Form of Common Stock Purchase Warrant of Helix TCS, Inc., dated September 16, 2019.*
10.50Form of Securities Purchase Agreement, dated October 11, 2019, by and between Helix TCS, Inc. and RedDiamond Partners, LLC.* 
10.51Form of 10% Fixed Convertible Promissory Note, dated October 11, 2019, for $450,000 payable to RedDiamond Partners, LLC.*
10.52Form of Common Stock Purchase Warrant of Helix TCS, Inc., dated October 11, 2019.*
   
31.1 Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). *
   
31.2 Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). *
   
32.1 Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
   
32.2 Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
   
101.INS XBRL Instance Document *
   
101.SCH XBRL Taxonomy Extension Schema *
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase *
   
101.DEF XBRL Taxonomy Extension Definition Linkbase *
   
101.LAB XBRL Taxonomy Extension Label Linkbase *
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase *

 

*Filed herewith

 

#Management contract or compensatory plan.

SIGNATURES

 

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 14,2019By:/s/Zachary L. Venegas
  Zachary L. Venegas
  

Chief Executive Officer


(Principal 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 AugustNovember  14, 2019
Zachary L. Venegas* (Principal Executive Officer)  
     
/s/Scott Ogur Chief Financial Officer AugustNovember  14, 2019
Scott Ogur (Principal Financial Officer)  
     
/s/Paul Hodges Director AugustNovember  14, 2019
Paul Hodges*    
     
/s/Patrick VoSteve Janjic Director AugustNovember  14, 2019
Patrick Vo*Steve Janjic*    
     
/s/Terence Ferraro Director AugustNovember  14, 2019
Terence Ferraro*    
     
/s/Andrew Schweibold Director AugustNovember  14, 2019
Andrew Schweibold*    
     
/s/Satyavrat Joshi Director AugustNovember  14, 2019
Satyavrat Joshi*    

 

* By:Scott Ogur, as Attorney in Fact, pursuant to the
Power of Attorney dated AugustNovember 14, 2019 and filed herewith.

 

 

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