UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
☐ TRANSITION REPORT UNDER 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 under Section 12(b) of the Exchange Act:None
Securities registered under Section 12(g) of the Exchange Act:Common Stock, par value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| | Large accelerated filer | ☐ | | Accelerated filer | ☐ |
| | Non-Accelerated filer | ☐ | | Smaller reporting company | ☒ |
| | | | | Emerging growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2018, the last business day of the registrant’s last completed second quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $19,492,028 based on the closing price of the registrant’s common stock, on June 30, 2018, as reported by OTC Markets, Inc. For the purposes of this disclosure, shares of common stock held by each executive officer, director and stockholder known by the registrant to be affiliated with such individuals based on public filings and other information known to the registrant have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 29, 2019, the registrant had 74,223,865 shares of its common stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future operations, future cash needs, business plans and future financial results, and any other statements that are not historical facts.
Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects of competition and the projected growth of the industries in which we operate, as well as the following statements:
We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. The forward-looking statements in this Annual Report on Form 10-K are based on assumptions management believes are reasonable. However, due to the uncertainties associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Further, forward- looking statements speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to publicly update any of them in light of new information, future events, or otherwise.
From time to time, forward-looking statements also are included in our other periodic reports on Forms 10-Q and 8-K, in our press releases, in our presentations, on our website and in other materials released to the public. Any or all of the forward-looking statements included in this Report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.
We assume no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such 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., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries.
PART I
Company History
Helix TCS, Inc. 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 (the “Acquisition Agreement”) with Helix TCS LLC (the “LLC”). We closed the transaction contemplated under the Acquisition Agreement (the “Acquisition”) on December 23, 2015 and Helix TCS, LLC was merged into and with Helix.
Pursuant to the terms and conditions of the Acquisition Agreement, the owner of 100% of the issued and outstanding units of the LLC immediately prior to the closing of the Acquisition, exchanged their units for an aggregate of 22,225,000 shares of our common stock (post-reverse split) and all of our issued Class A Preferred Stock.
Effective April 11, 2016, we acquired the assets of Revolutionary Software, LLC (“Revolutionary”). The acquisition occurred through two transactions, the first occurred on March 14, 2016 and the second occurred on April 11, 2016. The total consideration for the acquisition included payment in the form of $650,000 in cash and 2,395,000 shares of restricted common stock of the Company. A portion of the cash consideration was paid at each transaction closing and a portion was paid over time.
On June 2, 2017, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) in which the Company purchased all issued and outstanding Units of Security Grade Protective Services, Ltd. (“Security Grade”), which was comprised of 800,000 Class A Units and 200,000 Class B Units. At closing, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”). Furthermore, provided that, within the first 60 days following the closing, no material customer identified in the Agreement terminates its contractual relationship 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 closing, on the 61st day following the closing, the Company shall issue 207,427 additional stock options (the “Additional Stock Options”). 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 Agreement.
In the first quarter of 2018, the Company notified the selling members of Security Grade its intent on exercising its right of setoff noted in the Agreement after discovering misrepresentations made by the selling members of Security Grade. The Company settled with all of the six selling members during 2018. SeeNote 6 for further details surrounding the settlements.
On March 3, 2018, Helix TCS, 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 stockholders, 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 owned approximately 48% of the Company on a fully diluted basis as of 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 will also issue Engeni US members 366,700 and 366,600 shares of Company common stock upon 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. As of December 31, 2018, the Company has not paid this amount to the Engeni US members.
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.
Commercial Services
Technology Services
Cannabase
Cannabase is an online community for registered legal cannabis license holders to be able to buy and sell wholesale cannabis legally and transparently. As of December 31, 2018, a majority of the users are in the state of Colorado. We continue to develop the wholesale market by integrating it with other operations in order to provide a single, compliant, and transparent wholesale market that can operate as a real-time commodity exchange. We expect 2019 to be a year of significant activity for this business line.
BioTrackTHC
BioTrackTHC has been rated as the largest retail seed-to-sale compliance software provider by market share, and continued to grow in 2018. The business has tracked over $18bn of legal cannabis transactions, and has expanded into Europe and Latin America, in addition to its 2,000+ client locations, and 9 government contracts. BioTrackTHC’s transactional and technological capabilities form the backbone of an integrated services platform that we have built over the last 36 months, and will continue to build and deploy in 2019. In any version of full legalization in the United States, seed-to-sale tracking in commercial locations will be the key compliance tool used by governments to regulate the massive legal cannabis market.
Security Services
Security is a primary concern for licensed cannabis businesses and the state regulators who oversee such programs. Facilities with cannabis permits must adopt strong security systems to protect their businesses and comply with regulations. These businesses maintain valuable inventories onsite and typically also have significant cash holdings since transactions are often conducted in cash. Such facilities are exposed to theft both from outsiders and employees. In addition, business operators in most legal cannabis states must show regulatory agencies that security systems carefully protect and track inventories and transactions. Failure to do so could not only result in large losses, but would also threaten businesses’ operating permits and force closure. In Colorado, for example, adult cannabis use laws stress the need for on premise security to control and enforce the age restrictions and act as a general deterrent to unlawful activity.
We provide effective security solutions to cannabis businesses, including assessments and planning, security system design and implementation, asset protection, transport, and assurance of security for the state licensing process. All systems and services are guaranteed to meet individual state regulatory requirements and to achieve compliance.
Security Systems/Physical Security
We provide security system assessment services for our customers and licensed cannabis business operators. Our core existing products and services include the following:
| | ● | Intrusion alarm systems; |
| | ● | Perimeter alarm systems; |
In 2015, we commenced offering armed and unarmed guards, as well as armed transport services to the cannabis industry in Colorado. As of 2018, we provide site risk assessments and consulting services as well. We have made significant investments in state security licenses and high-level training programs, which have generated positive results in customer acquisition and retention. We have expanded our market further in 2018 by signing new clients in Colorado and forming strategic partnerships to facilitate the potential for national expansion.
Our physical security solutions include the following:
| | ● | Armed and unarmed guards; |
Industry and Regulatory Background
In the 1930’s, Congress made marijuana illegal on the federal level, and it was scheduled as a narcotic. In the 1960s and 1970s, as the popularity of marijuana use grew, states began to realize that they needed drug policies consistent with the community and consumer use of marijuana. Under the Federal Controlled Substances Act of 1970, marijuana is currently classified as a “Schedule I” controlled substance. The level of enforcement in states varies widely regarding marijuana.
In 1996, Oregon and California passed legislation that legalized the possession and consumption of marijuana use for medical purposes. As of December 31, 2018, thirty-three states and the District of Columbia have legalized marijuana in one form or another. The Colorado, Washington, Oregon, and Alaska state policies to legalize recreational marijuana were not challenged by federal authorities, which was largely due to the guidance put forth in the August 29, 2013 memorandum from James Cole, the U.S. Deputy Attorney General, titled “Guidance Regarding Marijuana Enforcement” (the “Cole Memo”). This memorandum states that federal enforcement agencies are unlikely to enforce the Controlled Substances Act in states where marijuana has been legalized, and where the regulation and control is functional. As of December 31, 2018, ten states and the District of Columbia have legalized recreational cannabis use.
On the federal level, marijuana has been considered an illegal substance since 1930. This has caused various impediments to the marijuana industry, the most prominent of which is in banking. Although the U.S. Treasury has provided guidance intended to give banks the confidence that they can work with marijuana businesses in legal cannabis states, many banks are still reluctant to do so.
Government Regulation
Marijuana is categorized as a “Schedule I” controlled substance by the Drug Enforcement Agency and the United States Department of Justice. It is currently illegal to grow, possess, sell, purchase, and/or consume cannabis under Federal law. A Schedule I controlled substance is defined as a substance that has no currently accepted medicinal use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The Department of Justice also characterizes Schedule I controlled substances as the most dangerous drugs of all the drug schedules with potentially severe psychological and/or physical dependence.
Despite this, thirty-three states and the District of Columbia have passed state laws that permit doctors to prescribe cannabis for medicinal use. Additionally, ten states, and the District of Columbia, have enacted laws that allow recreational adult use of cannabis. As a result of the foregoing, an unpredictable business environment has been created for cannabis companies that can legally operate under state laws but are nonetheless openly in violation of Federal laws. On August 29, 2013, United States Deputy Attorney General James Cole issued the Cole Memo to United States Attorneys guiding them to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under state law, so long as:
| | ● | cannabis is not being distributed to minors and dispensaries are not located around schools and public buildings; |
| | ● | the proceeds from sales are not going to gangs, cartels or criminal enterprises; |
| | ● | cannabis grown in states where it is legal is not being diverted to other states; |
| | ● | cannabis-related businesses are not being used as a cover for sales of other illegal drugs or illegal activity; |
| | ● | there is not any violence or use of fire-arms in the cultivation and sale of marijuana; |
| | ● | there is strict enforcement of drugged-driving laws and adequate prevention of adverse health consequences; and |
| | ● | cannabis is not grown, used, or possessed on Federal properties. |
In January 2018, the Trump administration rescinded the Obama-era directive of easing federal enforcement on legalized marijuana usage. The subsequent departure of Jeff Sessions as Attorney General has signaled to the industry a potential softening of the federal government’s stance, and the recent introduction of a banking bill that would allow the cannabis industry to obtain banking services if enacted into law would also be a positive step.
The Market
The market has two categories of participants: consumers (i.e. users, retail buyers, individuals) and businesses (i.e. operators, cultivators, retailers, processors, etc.). Consumers are those that are permitted to use marijuana for medicinal purposes and have received medical advice from physicians for conditions that qualify for treatment with cannabis under state-specific guidelines. In ten states and the District of Columbia, anyone who is 21 years or older can consume cannabis products for medical purposes as described above, or for recreational purposes.
Businesses include companies that handle marijuana directly, including cultivators, processors, dispensaries and retail distributors. Also, included in businesses are companies that do not directly handle the marijuana plant or products, but benefit from the industry as participating ancillary businesses (i.e. equipment manufacturers, insurance companies, lenders, etc.).
Legal cannabis businesses that produce and distribute cannabis products serve patient and adult consumer populations in states that have passed and enforce cannabis laws. As more states adopt marijuana regulations to legalize cannabis, the number of businesses in the industry may accelerate rapidly.
Sales and Marketing Strategy
In 2019, we will continue to focus on key U.S. states such as California and Nevada, and will accelerate our international expansion.
Growth within these geographies, in addition to new states coming online and the expansion of cannabis programs in mature state markets, will increase the addressable market. These expanded state regulatory approvals that permit larger patient bases for medicinal and recreational cannabis use further imply and emphasize the potential for substantial expansion beyond the near-term opportunities.
Many states are emulating Colorado’s regulatory model, which requires tight business security, compliance, and adherence to regulations enforced by state and industry oversight agencies. Helix’s experience with compliance in multiple states and municipalities provides a significant competitive advantage for serving businesses in new markets, especially those that are adopting rules similar to the Colorado cannabis laws.
The cannabis industry is expanding, not only in terms of the number of states with cannabis laws, but also in the scope of business transactions allowed under state regulations. Ten states and the District of Columbia, for example, have approved the legal sale of marijuana for both recreational and medicinal use. This has increased cannabis sales, revenue, and taxes in those states, when compared to the market size of medicinal cannabis alone. The successful results of these state cannabis programs provide viable incentives for other states to legalize cannabis for recreational use, a few of which legalized recreational cannabis use in the November 2016 election.
Helix expanded operations through its acquisition of BioTrackTHC in June 2018. BioTrack is the leader in the seed-to-sale tracking software provided to both governments and commercial enterprises. BioTrack has customers in every state where cannabis is legal and 6 countries, with over 2,000 customer locations. The subsequent acquisition of Engeni provided Helix a software development platform where the next generation of the BioTrack software is being developed. The enhanced capabilities of this second generation of the software will enable us to continue to experience strong customer acquisition. In addition, Helix will continue to achieve market penetration in key geographies by working with state regulatory agencies around compliance, adding key personnel, word of mouth, client expansion into new markets and targeted marketing campaigns in markets where management feel opportunities are greatest.
Business Acquisitions
During the second quarter of 2017, we greatly enhanced our core operations with the acquisition of Security Grade. 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. This strategic acquisition will help field the growing demand in the Legal Cannabis Industry.
On March 3, 2018, Helix TCS, Inc. and its wholly owned subsidiary, Merger Sub, entered into the Merger Agreement with BioTrackTHC and Terence J. Ferraro, as the representative of the BioTrackTHC stockholders, pursuant to which Merger Sub merged with and into BioTrackTHC.
On August 3, 2018, the Company and its wholly owned subsidiary, Engeni Merger Sub, entered into an Agreement and Plan of Merger with Engeni US, Engeni SA, 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.
Asset Acquisition
During March and April 2016, we acquired the assets of Revolutionary. Revolutionary was the founder and operator of Cannabase which aspired to be a wholesale marketplace for the legal cannabis industry. The assets acquired were development stage software, web addresses, and certain trademarks. We have transformed certain intangible assets into business lines that were not explored by Revolutionary prior to the transaction. Revolutionary’s revenue was generated primarily from wholesale brokerage commissions from transactions that were facilitated by the Cannabase platform.
Cannabase was a tradename used for an attempt to build an online community. There was virtually no revenue created prior to our acquisition of Revolutionary assets. The Company has and will continue to spend significant capital to attempt to develop this online community. The Company intends to do this by writing new software code, hiring salespeople, and opening into other states. Revolutionary was not scalable on a multi-regional basis due to it being limited to the legal cannabis industry which is operational in certain states. The revenues generated since the asset acquisition have been generated from an advertising business model that was not in effect at Revolutionary. Since only nominal revenues had been generated previous to the acquisition, and the Company has had to, and will continue to, invest substantial capital to transform the software assets acquired for use in a new business model.
We are currently in the process of developing advertising, consumer-focused, and data-related business lines using the intellectual property acquired. To achieve the new business plan, we expect it will continue to take significant management time, as well as substantial financial resources in software development, marketing, sales personnel, and technology expenditures.
Competition
We have positioned ourselves as an innovative security firm with a recognizable brand that offers effective and consistent services. Our competition in the security services sector of the cannabis industry includes: Blue Line Protection Group, Safe Systems, Inc., Iron Protection Group, and a variety of smaller, local security companies. Certain of these security providers, like Canna Security America, have gone out of business since our last 10-k. We believe that Helix TCS has the largest cannabis-focused security business in the state of Colorado. We believe that we can continue to compete successfully with these companies based on our favorable reputation for outstanding reliability, customer service, and value added. There is no assurance, however, that our ability to deliver services successfully will not be impacted by competition that currently exists or may arise in the future.
BioTrackTHC also has multiple competitors. Some are focused solely on government traceability systems. Some are focused solely on point-of-sale software. Some provide all aspects of commercial software. And one company competes with BioTrack in all verticals. As the industry continues to grow, and as more geographies legalize cannabis, we expect more competitors will emerge, while some of the smaller ones will likely cease doing business or be acquired.
Employees
As of December 31, 2018, we employed 154 full time employees and 24 part time employees. We believe that the employer-employee relationships in our Company are positive. We have no labor union contracts.
Available Information
Our website address is https://helixtcs.com/. We do not intend our website address to be an active link or to otherwise incorporate by reference the contents of the website into this Report. The U.S. Securities and Exchange Commission (the “SEC”) maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
You should carefully consider the risks described below as well as other information provided to you in this document, including information in the section of this document entitled “Forward Looking Statements.” The risks and uncertainties described below are not the only ones we are facing. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected and our shareholders may lose all or part of their investment in our company.
The business, financial condition, and operating results of Helix can be affected by several factors, whether currently known or unknown, including, but not limited to, those described below. Any one or more of these factors could directly or indirectly cause our actual results of operations and financial condition to vary materially from past or anticipated future results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, results of operations, and stock price.
Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to Our Business and Industry
Our business is heavily dependent on state laws pertaining to the cannabis industry.
Currently, thirty-three states, the District of Columbia and the United States territories of Guam and Puerto Rico allow individuals to use medicinal cannabis legally. Furthermore, ten states, and the District of Columbia have enacted laws that allow recreational adult use of cannabis. Continued growth and innovation in the cannabis industry is dependent upon continued legislative acceptance and approval of cannabis use at the state level. Any number of factors could slow or halt progress in this area. Further, progress in the cannabis industry, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt the use or sale of cannabis, which would negatively impact our business.
Cannabis remains illegal under Federal law.
Despite the emergence of a cannabis industry legal under state laws, state laws legalizing medicinal and adult cannabis use are in conflict with the Federal Controlled Substances Act, which classifies cannabis as a Schedule I controlled substance and makes cannabis use and possession illegal on the Federal level. The United States Supreme Court has ruled that it is the Federal government that has the right to regulate and criminalize cannabis, even for medicinal purposes, and thus, Federal law criminalizing the use of cannabis preempts state laws that legalize its use. The Obama administration effectively stated that it is not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. However, the Trump administration has made statements implying that it could change this policy and decide to enforce the federal laws strongly, though no specific measures have yet been implemented other than revocation of the Cole Memo and two others. Any negative material change in the Federal government’s policy on enforcement of these laws could potentially cause significant financial damage to us and our shareholders.
Laws and regulations affecting the cannabis industry are constantly changing, which could potentially have a detrimental effect on our business. We cannot predict the impact that future regulation may have on us.
Local, state, and federal cannabis laws and regulations are constantly changing and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our service offerings. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition.
We cannot predict the nature of any future laws, rules, regulations, interpretations, or applications, nor can we predict or determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. Changes in laws or interpretation of laws could potentially have a material adverse effect on our business, financial condition, and results of operations. It is possible that we could be forced to alter our service offerings for various reasons.
As possession and use of cannabis are illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services that we provide to users. As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business.
Under Federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our business provides services to customers that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a). As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment. Such an action would have a material negative effect on our business and operations.
Federal enforcement practices could change with respect to service providers to participants in the cannabis industry, which could adversely impact us. If the federal government were to change its practices, or were to expand its resources attacking providers in the cannabis industry, such action could have a materially adverse effect on our operations, our customers, or the sales of our products.
It is possible that additional Federal or state legislation could be enacted in the future that would prohibit our customers from selling cannabis. If such legislation were enacted, our customers may discontinue the use of our services and our potential source of customers would be reduced, causing revenues to decline. Further, additional government disruption in the cannabis industry could cause potential customers and users to be reluctant to use our services, which would be detrimental to the Company. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
Expansion by well-established security companies into the cannabis industry could prevent us from realizing anticipated growth in customers and revenues.
Traditional security companies may expand their businesses into cannabis security services. If they decide to expand into cannabis security services, this could hurt the growth of our business and cause our revenues to be lower than we expect.
Due to our involvement in the cannabis industry, we may have a difficult time obtaining the insurance coverage that is desired to operate our business, which may expose us to additional risk and financial liabilities.
Insurance that is otherwise readily available, such as worker’s compensation, general liability, and directors’ and officers’ insurance, is more difficult for us to find, and more expensive, because we are service providers to companies in the cannabis industry. There are no guarantees that we will be able to find such insurance in the future, or that the cost will be affordable to us. If we are forced to go without such insurance, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
Participants in the cannabis industry may have difficulty accessing the service of banks, which may make it difficult for us to operate.
Despite recent rules issued by the United States Department of the Treasury mitigating the risk to banks who do business with cannabis companies permitted under state law, as well as recent guidance from the United States Department of Justice, banks remain wary to accept funds from businesses in the cannabis industry. Since the use of cannabis remains illegal under Federal law, there remains a compelling argument that banks may be in violation of Federal law when accepting for deposit funds derived from the sale or distribution of cannabis. Consequently, businesses involved in the cannabis industry continue to have trouble establishing banking relationships. An inability to open bank accounts may make it difficult for us, or some of our customers, to do business.
We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations.
We have a limited operating history. Our operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We have not generated positive earnings and there can be no assurance that we will achieve profitable operations. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.
We will need additional capital to fund our operations.
We will require additional capital to fund our current operations and anticipated expansion of our business and to pursue targeted revenue opportunities. We cannot assure you that we will be able to raise additional capital. If we are able to raise additional capital, we do not know what the terms of any such capital raising would be, and whether they will be on terms acceptable to us. In addition, any future sale of our equity securities would dilute the ownership and control of our current shareholders and could be at prices substantially below prices at which our shares currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations.
Our failure to manage growth effectively could impair our business.
Our business strategy envisions a period of rapid growth that may put a strain on our administrative and operational resources, and funding requirements. Our ability to effectively manage growth will require us to continue to expand the capabilities of our operational and management systems and to attract, train, manage and retain qualified personnel. There can be no assurance that we will be able to do so, particularly if losses continue and we are unable to obtain sufficient financing. If we are unable to successfully manage growth, our business, prospects, financial condition, and results of operations could be adversely affected.
Our plans are dependent upon key individuals and the ability to attract qualified personnel.
In order to execute our business plan, we will be dependent on Zachary Venegas, our Chief Executive Officer and Director. The loss of Mr. Venegas could have a material adverse effect upon our business prospects. Moreover, our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that we will be successful in identifying, attracting, hiring, training, and retaining such personnel in the future. If we are unable to hire, assimilate and retain qualified personnel in the future, our business, operating results, and financial condition could be materially adversely effected. We may also depend on third party contractors and other partners, to assist with the execution of our business plan. There can be no assurance that we will be successful in either attracting and retaining qualified personnel, or creating arrangements with such third parties. The failure to succeed in these endeavors would have a material adverse effect on our ability to consummate our business plans.
We have taken various steps to address our ability to retain our key employees, including nondisclosure and non-compete agreements with all our employees.
Our lack of patent and/or copyright protection and any unauthorized use of our proprietary information and technology, may adversely affect our business. Information technology, network and data security risks could harm our business.
We currently rely on a combination of protections by contracts, including confidentiality and nondisclosure agreements, and common law rights, such as trade secrets, to protect our intellectual property which includes business processes. However, we cannot assure you that we will be able to adequately protect our intellectual property from misappropriation in the United States. This risk may be increased due to the lack of any patent and/or copyright protection. Despite our efforts to protect our intellectual property rights, others may independently develop similar marks or duplicate our service offerings. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property rights in the United States in a cost-effective manner. If any of our proprietary rights are misappropriated or we are forced to defend our intellectual property rights, we will incur substantial costs. Such litigation could result in substantial costs and diversion of our resources, including diverting the time and effort of our senior management, and could disrupt our business, as well as have a material adverse effect on our business, prospects, financial condition and results of operations. We can provide no assurance that we will have the financial resources to oppose any actual or threatened infringement by any third party.
Security breaches and other disruptions could compromise our information and expose us to liability, which could cause our business and reputation to suffer.
Our business faces security risks. Our failure to adequately address these risks could have an adverse effect on our business and reputation. Computer viruses, break-ins, or other security problems could lead to misappropriation of proprietary information and interruptions, delays, or cessation in service to our customers.
As a public company, we are required to incur substantial expenses.
We are subject to the periodic reporting requirements of the Exchange Act, which requires, among other things, review, audit, and public reporting of our financial results, business activities, and other matters. SEC regulations, including regulations enacted as a result of the Sarbanes-Oxley Act of 2002, have also substantially increased the accounting, legal, and other costs related to compliance with SEC reporting obligations. If we do not have current information about our Company available to market makers, they will not be able to trade our stock. The public company costs of preparing and filing annual and quarterly reports, and other information with the SEC causes our expenses to be higher than they would be if we were privately-held. These increased costs may be material and may include the hiring of additional employees and/or the retention of additional advisors and professionals. Our failure to comply with the federal securities laws could result in private or governmental legal action against us and/or our officers and directors, which could have a detrimental effect on our business and finances, the value of our stock, and the ability of stockholders to resell their stock.
Risks Related to Our Common Stock
Our officers and directors own a large amount of our common stock and are in a position to affect all matters requiring shareholder approval, which may limit minority shareholders’ ability to influence corporate affairs.
As of December 31, 2018, the Company’s officers and directors directly or indirectly owned or controlled approximately 48,584,025 shares of our common stock (66.86%). We have 72,660,825 outstanding shares of common stock as of December 31, 2018. These persons are in a position to significantly affect all matters requiring shareholder approval, including the election of directors. This level of control may also have an adverse impact on the market value of our shares, as the control entity can institute or undertake transactions, policies or programs that result in losses. In addition, they might not take steps to increase visibility and presence in the financial community and/or may sell sufficient numbers of shares to significantly decrease the appropriate price per share.
The interests of our officers, directors and their affiliates may differ from the interests of other shareholders with respect to the issuance of shares, business transactions with and/or sales to other companies, selection of officers and directors, and other business decisions. The non-controlling shareholders would be severely limited in their ability to override the decisions of controlling shareholders. This level of control may also have an adverse impact on the market value of our shares because they may institute or undertake transactions, policies or programs that result in losses, may not take steps to increase our visibility in the financial community and/or may sell sufficient numbers of shares to significantly decrease our price per share.
Trading in our common stock has been limited, and there is no significant trading market or price discovery available for our common stock. Purchasers of our common stock may be unable to sell their shares.
Our common stock is currently quoted on the OTCQB, however trading to date has been limited. If activity in the market for shares of our common stock does not increase, purchasers of our shares may find it difficult to sell their shares. We currently do not meet the initial listing criteria for any registered securities exchange, including the NASDAQ Stock Market. The OTCQB is a less recognized market than the foregoing exchanges and is often characterized by low trading volume and significant price fluctuations. These and other factors may further impair our stockholders’ ability to sell their shares when they want to and/or could depress our stock price. As a result, stockholders may find it difficult to dispose of, or obtain accurate quotations of the price of our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our Company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares of common stock.
Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price ourcommon stock.
Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act, and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock can be publicly traded. Penny stocks generally are equity securities with a per share price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on NASDAQ). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, of our common stock and reducing the liquidity of an investment in our common stock.
We have outstanding shares of preferred stock with rights and preferences superior to those of our common stock.
The issued and outstanding shares of Class A and Class B Preferred super majority voting stock grant the holders of such preferred stock anti-dilution, voting, dividend and liquidation rights that are superior to those held by the holders of our common stock. The issuance of shares of common stock in the future, issuances or deemed issuances of additional shares of common stock for a price below the applicable preferred stock conversion price, will have the effect of diluting current shareholders.
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. We have not performed an in-depth analysis to determine if historical un-discovered failures of internal controls exist, and may in the future discover areas of our internal control that need improvement.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and rules implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, these rules and regulations increase our compliance costs and make certain activities more time consuming and costly. As a public company, these rules and regulations also may make it more difficult and expensive for us to obtain director and officer liability insurance and we may at times be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. Thus, it may be more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
Our operating results may fluctuate causing volatility in our stock price.
Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. The following factors may affect our operating results, causing volatility in our stock price:
| | ● | Our ability to execute our business plan; |
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| | ● | Our ability to compete effectively; |
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| | ● | Our ability to continue to attract customers; |
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| | ● | The amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations, and infrastructure; |
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| | ● | General economic conditions and those economic conditions specific to the cannabis industry; and |
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| | ● | Our ability to attract, motivate and retain high quality employees. |
Our stock price may be volatile.
The market price of our common stock is highly volatile and subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:
| | ● | Changes in our industry; |
| | | |
| | ● | Competitive pricing pressure; |
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| | ● | Our ability to obtain working capital financing; |
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| | ● | Quarterly variations in our results of operations; |
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| | ● | Changes in estimates of our financial results; |
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| | ● | Investors’ general perception of the Company; |
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| | ● | Disruption to our operations; |
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| | ● | The emergence of new sales channels in which we are unable to compete effectively; |
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| | ● | Commencement of, or our involvement in, litigation; |
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| | ● | Any major change in our Board of Directors or management; and |
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| | ● | Changes in governmental regulations or in the status of our regulatory approvals. |
Our shares of common stock are thinly traded, and therefore the price may not accurately reflect our value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future.
Our shares of common stock are thinly traded. Only a small percentage of our common stock is available to be traded, and is held by a small number of holders and the price, if traded, may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent on the perception of our operating business, among other things. We will take certain steps including utilizing investor awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might take to bring us to the awareness of investors may require that we compensate consultants with cash and/or stock.
There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business and trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers of our shares. If a market should develop, the price may be highly volatile. Because there may be a low price for our shares of common stock, many brokerage firms or clearing firms may not be willing to effect transactions in the securities or accept our shares for deposit in an account. Even if an investor finds a broker willing to affect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of low priced shares of common stock as collateral for any loans.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public market, including shares issued in private placements upon the effectiveness of the registration statement required to be filed, or upon the expiration of any statutory holding period under Rule 144, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which, the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
We do not pay dividends on our common stock.
We have not paid any dividends on our common stock and do not anticipate paying dividends in the foreseeable future. We plan to retain earnings, if any, to finance the development and expansion of our business.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
The table below represents the facilities in which we lease office space:
| Location | | Monthly Rent | | Lease Term | | Expiration Date |
| 10200 E. Girard Avenue, Denver, CO 80231 | | $3,572 to $3,704 | | 25 months | | 6/30/2020 |
| 5300 DTC Parkway, Suite 300, Greenwood Village, CO 80111 | | $6,011 to $6,718 | | 5 years | | 2/28/2021 |
| 6750 North Andrews Avenue, Suite 325, Fort Lauderdale, FL 33309 | | $19,380 to $20,560 | | 34 months | | 11/30/2021 |
| 6750 North Andrews Avenue, Suite 325, Fort Lauderdale, FL 33309 | | $15,200 to $16,127 | | 3 years | | 12/31/2024 |
| 5600 South Quebec Street, Suite 100D, Greenwood Village, CO | | $5,575 to $5,714 | | 2 years | | 11/30/2019 |
| 921 Lakeridge Way, Suite 301, Olympia, WA 98502 | | $3,500 to $3,713 | | 3 years | | 2/28/2021 |
| 1136 Union Mall, Honolulu, HI 96813 | | $1,106 to $1,142 | | 37 months | | 5/31/2020 |
| Ave. Ponce de Leon 1225, Suite 601, Santurce, Puerto Rico 00907 | | $1,005 | | 1 year | | 8/15/2019 |
| ITEM 3. | 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 December 31, 2018, the claim is currently in the process of discovery.
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 December 31, 2018, 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.
Helix TCS, Inc. v. Beckett, et al.
On March 6, 2018 the Company filed a lawsuit in the District Court for the city and county of Denver alleging violations in previously disclosed representations and warranties by the plaintiff as part of the Security Grade acquisition. Following the appointment of a registered Pubic Company Accounting Oversight Board (“PCAOB”) auditor, certain financial misrepresentations, including undisclosed liabilities, the overstatement of revenues, and the misclassification of certain revenues as being recurring, were discovered, ultimately artificially inflating the price of the membership interests in Security Grade. All matters related to the acquisition of Security Grade have been settled as of December 31, 2018.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information
Our common stock is quoted on the OTCQB tier of the OTC Markets, Inc. under the symbol “HLIX”. Our stock has been thinly traded on the OTCQB and there can be no assurance that a liquid market for our common stock will ever develop. The table below includes activity from the fiscal years ended December 31, 2018 and 2017, based on the aforementioned acquisition and exchange agreement with Helix TCS, LLC.
| Fiscal Year Ended December 31, 2017 | | High | | | Low | |
| First Quarter | | $ | 8.75 | | | $ | 3.25 | |
| Second Quarter | | $ | 9.25 | | | $ | 3.80 | |
| Third Quarter | | $ | 4.95 | | | $ | 2.26 | |
| Fourth Quarter | | $ | 4.60 | | | $ | 0.75 | |
| Fiscal Year Ended December 31, 2018 | | High | | | Low | |
| First Quarter | | $ | 4.50 | | | $ | 1.35 | |
| Second Quarter | | $ | 2.05 | | | $ | 1.30 | |
| Third Quarter | | $ | 1.64 | | | $ | 0.98 | |
| Fourth Quarter | | $ | 1.45 | | | $ | 0.90 | |
Holders
As of March 29, 2019, there were approximately 179 record holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers or registered clearing agencies.
Transfer Agent and Registrar
We have appointed Corporate Stock Transfer, Inc., to act as the transfer agent of our common stock. Their address is 3200 Cherry Creek Dr. South, Denver, CO 80209.
Dividend Policy
We currently intend to retain future earnings, if any, for use in the operation of our business and to fund future growth. We have never declared or paid cash dividends on our common stock and we do not intend to pay any cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors in light of conditions then-existing, including factors such as our results of operations, financial conditions and requirements, business conditions and covenants under any applicable contractual arrangements.
Unregistered Sales of Equity Securities
During the year ended December 31, 2018, we issued 4,389,997 shares of restricted common stock, with proceeds received totaling $4,068,960. We also issued 38,551,685 shares of common stock as part of the BioTrackTHC & Engeni US acquisitions. We also issued 514,945 shares of common stock pursuant to the Company’s 2017 Omnibus Stock Incentive Plan. We also issued 226,822 shares of common stock resulting from stock options exercised. Additionally, we issued 205,974 shares of restricted common stock resulting from convertible note conversions. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to issue the common stock. The securities were offered and sold without any form of general solicitation of general advertising and the offerees made representations that they were accredited investors. There were no underwriters or placement agents employed in connection with any of these transactions. Use of the exemption provided in Section 4(a)(2) for transactions not involving a public offering is based on the following facts:
| | ● | Neither we nor any person acting on our behalf solicited any offer to buy or sell securities by any form of general solicitation or advertising. |
| | ● | The recipients were either accredited or otherwise sophisticated individuals who had such knowledge and experience in business matters that they were capable of evaluating the merits and risks of the prospective investment in our securities. |
| | ● | The recipients had access to business and financial information concerning our company. |
| | ● | All securities issued were issued with a restrictive legend and may only be disposed of pursuant to an effective registration or exemption from registration in compliance with federal and state securities laws. |
| ITEM 6. | SELECTED FINANCIAL DATA |
Not applicable.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
The following discussion and analysis of the results of operations and financial condition for the years ended December 31, 2018 and 2017 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. 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. See “Forward-Looking Statements” at the beginning of this report.
Overview
Helix’s mission is to provide clients with the most powerful and cutting-edge integrated operating environments in the market, helping them to better manage and mitigate risk while they focus on their core business. We accomplish these goals through a unique combination of business, logistics, risk-management, and investment skills, delivered through a proprietary software suite and partnership platform.
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 inventory and supply costs through Cannabase, as well as 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 and Engeni. 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 clients across 34 U.S. states and 6 countries. Engeni provides a turnkey and comprehensive digital presence solution for small businesses. The Engeni Growth solution includes an optimized web page, a fully-paid Google pay-per-click campaign, lead capture & lead delivery and ubiquitous directory/map listings. Engeni has also become the Company’s offshore software development platform, and is currently working on the second generation of the BioTrackTHC software. These strategic acquisitions will help field the growing demand in the Legal Cannabis Industry.
Results of Operations for the Years Ended December 31, 2018 and 2017
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 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 year ended December 31, 2018, we have generated revenue and are trying to achieve positive cash flows from operations.
The following table shows our results of operations for the years ended December 31, 2018 and 2017. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
| | | For the Year Ended
December 31, | | | Change | |
| | | 2018 | | | 2017 | | | Dollars | | | Percentage | |
| Revenue | | $ | 9,563,573 | | | $ | 4,029,800 | | | $ | 5,533,773 | | | | 137 | % |
| Cost of revenue | | | 5,969,039 | | | | 2,885,459 | | | | 3,083,580 | | | | 107 | % |
| Gross margin | | | 3,594,534 | | | | 1,144,341 | | | | 2,450,193 | | | | 214 | % |
| Operating expenses | | | 13,759,855 | | | | 4,927,623 | | | | 8,832,232 | | | | 179 | % |
| Loss from operations | | | (10,165,321 | ) | | | (3,783,282 | ) | | | (6,382,039 | ) | | | 169 | % |
| Other income (expense), net | | | 1,983,741 | | | | (6,882,705 | ) | | | 8,866,446 | | | | -129 | % |
| Net loss | | $ | (8,181,580 | ) | | $ | (10,665,987 | ) | | $ | 2,484,407 | | | | -23 | % |
| Convertible preferred stock beneficial conversion feature accreted as a deemed dividend | | | (22,202,194 | ) | | | (22,210,520 | ) | | | 8,326 | | | | -0.04 | % |
| Net loss attributable to common shareholders | | $ | (30,365,783 | ) | | $ | (32,876,507 | ) | | $ | 2,510,724 | | | | -8 | % |
Revenue
Total revenue for the year ended December 31, 2018 was $9,563,573, which represented an increase of $5,533,773, or 137%, compared to total revenue of $4,029,800 for the year ended December 31, 2017. The increase primarily resulted from a substantial increase in the number of clients serviced by Helix and additional revenue resulting from the Security Grade and BioTrackTHC acquisitions.
Cost of Revenue
Cost of revenue for the years ended December 31, 2018 and 2017 primarily consisted of hourly compensation for security personal and employees involved in the creation and development of licensing software. Cost of revenue increased by $3,083,580, or 107%, for the year ended December 31, 2018, to $5,969,039, as compared to $2,885,459 for the year ended December 31, 2017. The increase primarily resulted from the acquisition of BioTrackTHC and a substantial increase in the number of clients serviced by Helix, which required the hiring of additional employees.
Operating Expenses
Our operating expenses encompass selling, general and administrative expenses, salaries and wages, professional and legal fees and depreciation and amortization. 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 year ended December 31, 2018 and 2017 were $13,759,855 and $4,927,623, respectively. The overall $8,832,232 increase in operating expenses was primarily attributable to the following increases (decreases) in operating expenses of:
| | ● | General and administrative expenses – $1,472,427 |
| | | |
| | ● | Salaries and wages – $4,897,782 |
| | | |
| | ● | Professional and legal fees – ($147,144) |
| | | |
| | ● | Depreciation and amortization – $2,609,167 |
The $1,472,427 increase in general and administrative expenses is a result of increases in rent expense, advertising and travel expenses resulting from an expansion in our operations. The $4,897,782 increase in salaries and wages resulted from a significant increase in headcount, including BioTrackTHC and Engeni personnel. The $147,144 decrease in professional and legal fees primarily resulted from an increase in costs associated with obtaining capital resources during the year ended December 31, 2017. The $2,609,167 increase in depreciation and amortization was due to the amortization of intangible assets acquired in the BioTrackTHC and Engeni acquisitions.
Other Income (Expense), net
Other income (expense), net consisted of a gain on the change in fair value of obligation to issue warrants, gain on the change in the fair value of convertible notes, gain on the change in fair value of convertible notes – related party, loss on the change in fair value of contingent consideration, loss on impairment of goodwill, gain on reduction of obligation pursuant to acquisition, and interest income. Other income (expense), net during the year ended December 31, 2018 and 2017 was $1,983,741 and ($6,882,705), respectively. The $8,866,446 increase in other income (expense), net was primarily attributable to a gain on the change in fair value of convertible notes of $450,216, gain on change in fair value of obligation to issue warrants of $1,625,398, and no loss on induced conversion of convertible note or loss on extinguishment of debt for the year ended December 31, 2018.
Net Loss
For the foregoing reasons, we had a net loss of $8,181,580 for the year ended December 31, 2018, or $0.15 net loss per common share – basic and diluted, compared to net loss of $10,665,987 for the year ended December 31, 2017, or $0.37 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 $22,202,194 for the year ended December 31, 2018 compared to $22,210,520 for the year ended December 31, 2017.
Net Loss Attributable to common shareholders
For the foregoing reasons, we had a net loss attributable to common shareholders of $30,365,783 for the year ended December 31, 2018, or $0.56 net loss per share attributable to common shareholders - basic and diluted, compared to net loss attributable to common shareholders of $32,876,507 for the year ended December 31, 2017, or $1.15 net loss per share attributable to common shareholders – basic and diluted.
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 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 year ended December 31, 2018, we have generated revenue and are trying to achieve positive cash flows from operations.
As of December 31, 2018, we had a cash balance of $285,761, accounts receivable, net of $1,184,923 and $4,065,005 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 consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
Capital Resources
The following table summarizes total current assets, liabilities and working capital deficit for the periods indicated:
| | | For the Year Ended
December 31, | | | | |
| | | 2018 | | | 2017 | | | Change | |
| Current assets | | $ | 1,923,353 | | | $ | 1,519,714 | | | $ | 403,639 | |
| Current liabilities | | | 4,065,005 | | | | 4,808,995 | | | | (743,990 | ) |
| Working capital (deficit) | | $ | (2,141,652 | ) | | $ | (3,289,281 | ) | | $ | 1,147,629 | |
As of December 31, 2018 and 2017, we had a cash balance of $285,761 and $868,554, respectively.
Summary of Cash Flows
| | | For the Year Ended
December 31, | |
| | | 2018 | | | 2017 | |
| | | | | | | |
| Net cash used in operating activities | | $ | (4,006,063 | ) | | $ | (1,690,075 | ) |
| Net cash provided by (used in) investing activities | | | 240,018 | | | | (1,708,663 | ) |
| Net cash provided by financing activities | | | 3,206,279 | | | | 4,209,451 | |
Net cash used in operating activities.Net cash used in operating activities for the year ended December 31, 2018 was $4,006,063. This included a net loss of $8,181,580, non-cash charge related to depreciation and amortization of $3,086,531, non-cash charge related to share-based compensation expense of $3,110,648, non-cash gains due to changes in fair value of convertible notes, obligation to issue warrants and convertible notes – related party of $450,216, $1,625,398, and $93,506, respectively, non-cash loss of $131,306 regarding the change in fair value of contingent consideration, non-cash loss on the impairment of goodwill of $664,329, non-cash gain on the reduction of obligation pursuant to acquisition of $607,415 and changes in accounts receivable, prepaid expenses and other current assets, deposits and other assets, accounts payable and accrued expenses, costs & earning in excess of billings, billings in excess of costs, due from related party and deferred rent of $(40,762). Net cash used in operating activities for the year ended December 31, 2017 was $1,690,075. This included a net loss of $10,665,987, non-cash charge related to depreciation and amortization of $477,364, non-cash charge related to amortization of debt discounts of $254,533, non-cash loss of $712,393 regarding the change in fair value of convertible notes, non-cash gain of $31,068 regarding the fair value of convertible notes – related party, non-cash loss on beneficial conversion feature of $390,666, non-cash loss on extinguishment of debt of $4,611,395, non-cash loss on induced conversion of convertible note of $1,503,876, non-cash loss on the change in fair value of warrants to be issued of $590,436 and changes in accounts receivable, deposits and other assets, accounts payable and accrued expenses, costs & earnings in excess of billings, billings in excess of costs and deferred rent of $466,317.
Net cash provided by (used in) investing activities.Net cash provided by investing activities for the year ended December 31, 2018 was $240,018, which consisted of capital expenditures of $155,559, cash acquired pursuant to the BioTrackTHC and Engeni acquisitions of $454,306, and cash payments pursuant to the Revolutionary asset acquisition $58,729. Net cash used in investing activities for the year ended December 31, 2017 was $1,708,663, which consisted of capital expenditures of $30,478, cash payments pursuant to the Security Grade business combination of $1,631,313 and cash payments pursuant to the Revolutionary asset acquisition of $46,872.
Net cash provided by financing activities.Net cash provided by financing activities for the year ended December 31, 2018 was $3,206,279, which resulted from proceeds from the issuance of notes payable of $39,723, proceeds of $250,000 from the issuance of promissory notes, proceeds from the issuance of common stock of $3,555,223, payments pursuant to convertible notes payable – related party of $150,000, payments pursuant to notes payable of $27,836, payments pursuant to contingent consideration of $131,331, advances from related parties of $79,500, and payments pursuant to a promissory note of $250,000. Net cash provided by financing activities for the year ended December 31, 2017 was $4,209,451, which resulted from proceeds from the issuance of convertible notes payable of $229,167, proceeds of $255,000 from the issuance of promissory notes and advances from shareholders of $83,250, proceeds from the issuance of common stock of $100,000, proceeds from the issuance of Series B convertible preferred stock of $3,577,500, payments pursuant to advances from related parties of $32,000 and payments pursuant to notes payable of $3,466.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP, and our discussion and analysis of its financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 4, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
Management believes our critical accounting policies and estimates are those related to accounts receivable and allowance for doubtful accounts, intangibles, accounting for acquisitions, revenue recognition, income taxes, distinguishing liabilities from equity and share-based compensation.
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 $76,156 and $3,000 at December 31, 2018 and 2017, respectively.
Accounting for Acquisitions
In accordance with the guidance for business combinations, the Company determines whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase. The Company capitalizes acquisition-related costs and fees associated with asset acquisitions and immediately expense acquisition-related costs and fees associated with business combinations.
Revenue Recognition
Under 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.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the years ended December 31, 2018 and 2017.
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.
Share-based Compensation
The Company accounts for stock-based compensation to employees in conformity with the provisions of ASC Topic 718, Stock Based Compensation. Stock-based compensation to employees consist of stock options grants and restricted shares that are recognized in the statement of operations based on their fair values at the date of grant.
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50, Equity-Based Payments to Non-Employees based upon the fair-value of the underlying instrument. The equity instruments, are valued using the Black-Scholes valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which services are received.
The Company calculates the fair value of option grants utilizing the Black-Scholes pricing model and estimates the fair value of the stock based upon the estimated fair value of the common stock. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.
The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight- line basis over the requisite service period of the award.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,“Revenue from Contracts with Customers” (“ASU 2014-09”).The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC. In April and May 2016, the FASB issued ASU 2016-10,“Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing”, ASU 2016-11,“Revenue Recognition and Derivatives and Hedging – Recession of SEC Guidance”,ASU 2016-12, “Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients”,and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. These ASUs each affect the guidance of the new revenue recognition standard in ASU 2014-09 and related subsequent ASUs. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies.
On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers and all the related amendments” (“ASC 606”) to all contracts which were not completed or expired as of January 1, 2018 using the modified retrospective method. The Company had no cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while the comparative information will continue to be reported under the accounting standards in effect for those periods.
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard is effective for the Company on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides several optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we 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 transition. We do not currently expect to elect the practical expedient to not separate lease and non-lease components for any of our leases.
We expect that this standard will have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our office and equipment operating leases; and providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between now and adoption.
On adoption, we currently expect to recognize additional operating liabilities of approximately $393,000, with corresponding ROU assets of the same amount, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
In January 2017, the FASB issued ASU 2017-01,Business Combinations (Topic 805) Clarifying the Definition of a Business.The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this standard on January 1, 2018.
In January 2017, the FASB issued ASU No. 2017-04,Intangibles – Goodwill and Other (Topic 350); Simplifying the Test for Goodwill Impairment. The amendments in this update simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public companies for the reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has elected to early adopt the provisions of ASU 2017-04 and, 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. Please refer to Note 9 for further detail.
In May 2017, the FASB issued ASU No 2017-09“Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”(ASU 2017-09). ASU 2017-09 provides clarity and reduces both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all three of the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Note that the current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in ASU 2017-09. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The updated standard was adopted by the Company on January 1, 2018. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260),Distinguishing Liabilities from Equity(Topic 480) andDerivatives 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 is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.
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 is evaluating the effect that this update will have on its financial statements and related disclosures.
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. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC 606. The Company is evaluating the effect that this update will have on its financial statements and related disclosures.
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 our consolidated financial statements and related disclosures.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable for a smaller reporting company.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations and shareholders’ equity (deficit) and cash flows for each of the two years in the years ended December 31, 2018 and 2017, together with the related notes and the report of our independent registered public accounting firm, are set forth on pages F-1 to F-41 of this report.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-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 have concluded that as of December 31, 2018, our disclosure controls and procedures were effective.
Management’s Report on Internal Control 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 disclosure controls and procedures as of December 31, 2018, the end of the annual period covered by this report established inInternal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report.
In the course of our evaluation, we sought to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Based on that evaluation, management has concluded that the Company did not maintain effective internal control over financial reporting as of the fiscal year ended December 31, 2018 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 the fiscal year ended December 31, 2018 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. |
We expect to be materially dependent on a third party that can provide us with accounting consulting services for the foreseeable future. We believe that we are in the process of addressing the deficiencies that affected our internal control over financial reporting and we are developing specific action plans for each of the above material weaknesses. Because the remedial actions require hiring of additional personnel, upgrading certain of our information technology systems and relying extensively on manual review and approval, the successful operation of these controls for at least several quarters may be required before management may be able to conclude that the material weaknesses have been remediated. We intend to continue to evaluate and strengthen our internal control over financial reporting. These efforts require significant time and resources. If we are unable to establish adequate internal control over financial reporting, we may encounter difficulties in the audit or review of our financial statements by our independent registered public accounting firm, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with GAAP and to comply with our SEC reporting obligations.
Changes in internal control over financial reporting
During the year ended December 31, 2018, 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.
Attestation report of Registered Public Accounting Firm
This Annual Report on Form 10-K 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 Annual Report on Form 10-K.
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers
Our directors and executive officers and their respective ages, positions, and biographical information as of March 29, 2019 are set forth below.
| Name | | Position | | Age |
| Zachary Venegas | | Chief Executive Officer and Director | | 48 |
| Scott Ogur | | Chief Financial Officer and Director | | 47 |
| Paul Hodges | | Director | | 64 |
| Patrick Vo | | Chief Executive Officer, BioTrackTHC and Director | | 36 |
| Terence J. Ferraro | | Chief Software Architect, BioTrackTHC and Director | | 36 |
| Andrew Schweibold | | Director | | 36 |
| Satyavrat Joshi | | Director | | 35 |
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until they are removed from office in accordance with our bylaws. Our officers are appointed by our Board and hold office until removed by the Board. All officers and directors listed above will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. There are no written agreements with respect to the election of directors. Our Board appoints officers annually and each executive officer serves at the discretion of our Board.
Zachary Venegas, Chief Executive Officer and Director
Mr. Venegas has been the Chief Executive Officer and a director of the Company since its inception. Before joining Helix, he was a managing director at Spruce Investment Advisors, LLC for nearly two years, where he managed a private equity portfolio with a net asset value of $500 million. In 2014, Mr. Venegas co-founded and became managing partner of Scimitar Global Ventures, a Dubai-based private equity and venture firm focused on Europe, Africa and the Middle East. During his nine years at Scimitar, Mr. Venegas led the firm’s activities in deal origination, negotiations, capital raising and macroeconomic and geopolitical analysis, leading investments across four continents and multiple industries. He represented Scimitar in numerous media appearances, including Bloomberg Television, CNBC and Barron’s.
In addition, Mr. Venegas was the founder and chief executive officer of Omega Strategic Services Group LLC, a dynamic corporate/competitive intelligence and security advisory firm with operations in the Middle East and Africa that supported investors and corporations in creating successful operating environments and helping them to succeed by providing them with distinct, actionable intelligence and real-time data analytics. Earlier in his career, he worked at J.P. Morgan Private Bank in Geneva, Switzerland focused on the Middle East, and went on to lead the bank’s Bahrain office before leaving to found Scimitar.
Mr. Venegas received his M.B.A. in Finance and International Business from New York University’s Stern School of Business and a B.S. in Classical Arabic and Portuguese Languages from the United States Military Academy, West Point. Prior to his business career, he served with distinction in the U.S. Army as an Infantry officer. Born in Brooklyn, New York, he has lived in Switzerland, England, France, Brazil, Egypt, Jordan, Bahrain, the UAE, Saudi Arabia, Ghana, DR Congo, South Africa, Singapore, and Thailand and has operated in over 70 countries throughout the Middle East, Asia, Europe and Africa. Mr. Venegas speaks Arabic, French, Portuguese, Romanian and Spanish and has a conversational command of Afrikaans and Swahili.
We believe Mr. Venegas brings to our Board of Directors valuable perspective and experience as our Chief Executive Officer and as a large stockholder, as well as knowledge of the industry and experience managing and directing companies through various stages of development, all of which qualify him to serve as one of our directors.
Scott Ogur, Chief Financial Officer and Director
Mr. Ogur, CFA, has been a Director of the Company since May 2017 and our Chief Financial Officer since January 2018. Mr. Ogur has over 20 years of financial services experience. From 2014 to 2017, Mr. Ogur was chief financial officer and managing director of Spruce Investment Advisors, LLC. From 2012 to 2014, he was chief financial officer of Beacon Mortgage Corp. Prior to that, Mr. Ogur was chief financial officer of Algorithmic Trading Management, LLC, chief investment officer of Scimitar Global Ventures, and portfolio manager for J.P. Morgan. He currently serves on the board of directors of MetricStream, a governance, risk, and compliance software company, as well as Independent Diplomat, a not-for-profit diplomatic advisory group of which he is also treasurer. Mr. Ogur holds a B.S. in Business Administration, Accounting from Bucknell University and an M.B.A. from New York University’s Stern School of Business. Mr. Ogur is a CFA Charterholder.
We believe Mr. Ogur’s financial and accounting experience, perspective as a large stockholder and his knowledge of our operations, bring to our Board of Directors important skills and qualify him to serve as one of our directors.
Paul Hodges, Director
Mr. Hodges has been a Director and Senior Advisor of the Company since 2016. He currently serves as principal, president and chief executive officer of Yottabyte, LLC, a software-defined storage company. Mr. Hodges has a 20-year track record as a successful entrepreneur. Most recently, he served as a principal of Netarx, Inc., a network integration and services organization, which he helped grow substantially during his tenure. Earlier, Mr. Hodges co-founded and was chief executive officer of Codespear, LLC, a developer of broadcast alert and interoperable communications software, now part of Federal Signal Corporation. In 2007, he was a founder of First Michigan Bancorp, Inc. (renamed Talmer Bancorp, Inc. and acquired by Chemical Financial Corporation (NASDAQ: CHFC) in 2016) and a director until 2018. Other companies he has founded include Bloomfield Computer Systems, Inc., later purchased by Datatec Ltd., an international IT and managed services provider, and the marketing and advertising agencies ePrize, Inc. and Alteris Group, LLC. Mr. Hodges was appointed by the Governor of Michigan to serve as a director of the Michigan Strategic Fund from 2007 through 2012. Mr. Hodges studied computer engineering at Lawrence Technological University.
We believe Mr. Hodges’ experience as an entrepreneur and directing companies through various stages of development, bring to our Board of Directors important skills related to strategic planning and qualify him to serve as one of our directors.
Patrick Vo, Chief Executive Officer, BioTrackTHC and Director
Patrick Vo’s leadership was a driving force in growing BioTrackTHC from fewer than 20 customer locations in 2012 to its present market leading position with nine government contracts and over 2,000 customer locations across 34 U.S. states and 6 countries. A thought leader with experience deeply rooted in bringing new cannabis programs online, Mr. Vo personally oversaw the launch of three of the first four government cannabis tracking systems deployed in the United States. Mr. Vo took over as Chief Executive Officer of BioTrackTHC in 2015 and continues to lead its evolution as lawful cannabis progresses from frontier market to a global industry. Prior to joining BioTrackTHC, Mr. Vo held roles at Robert Half International, the Greater Phoenix Economic Council, and he began his career at PricewaterhouseCoopers. Mr. Vo holds a Masters in Business from Indiana University’s Kelley School of Business, and both a Masters and Bachelors degree in Accounting from the University of Arizona’s Eller College of Management.
We believe Mr. Vo’s experience in the cannabis industry and knowledge of our operations bring to our Board of Directors important skills and qualify him to serve as one of our directors.
Terence J. Ferraro, Chief Software Architect, BioTrackTHC and Director
Terence “TJ” Ferraro began his professional career assisting local authorities to combat opioid diversion by creating a biometric-based tracking software that eventually drew the interest of cannabis operators, resulting in the creation of BioTrackTHC in 2010. As a self-taught programmer and technology inventor, Mr. Ferraro is considered one of the most experienced and effective traceability and seed-to-sale developers in the world, maintaining BioTrackTHC’s flawless track record in IT security and launching the world’s only private-sector traceability system within a 24-hour timeframe. As BioTrackTHC’s Chief Software Architect, he demonstrates unparalleled experience in government cannabis programs as it relates to technology infrastructure and launch timelines, being the only cannabis traceability company to never miss a deployment deadline. Mr. Ferraro and his innovative technology solutions are responsible for creating the most effective and transparent cannabis tracking programs in the world. His goal remains focused on establishing safety, accountability, and effective cannabis traceability infrastructure, throughout the US and internationally.
We believe Mr. Ferraro’s experience in the cannabis industry and deep programming knowledge bring to our Board of Directors important skills and qualify him to serve as one of our directors.
Andrew Schweibold, Director
Andrew is the Co-Founder and Managing Partner of Rose Capital. Andrew has 12 years of institutional investment and financial advisory experience, having invested, monitored and/or managed more than $800 million of capital in investments. Prior to forming Rose Capital, Andrew was a Co-Founder, Partner, and one of two Investment Committee members of Delos Capital, a middle market private equity firm. In 2016, Andrew was awarded the M&A Advisor 40 Under 40 Emerging Leaders Award for his efforts as Co-Founder and Partner of Delos at the age of 33. Prior to co-founding Delos, Andrew was a Principal of the Americas business for Vision Capital, worked at Apollo Management, GTCR Golder Rauner as well as Lazard. Andrew has a BBA from the Stephen M. Ross School of Business at the University of Michigan with a concentration in finance and accounting.
We believe Mr. Schweibold’s extensive financial services experience and degree in finance and accounting bring to our Board of Directors important skills and qualify him to serve as one of our directors.
Satyavrat Joshi, Director
Satyavrat “Sat” Joshi is the Chief Investment Officer of Rose Capital. Over the last 13 years, Sat has deployed and/or managed in excess of $1 billion of capital into both public securities and private investments across the capital structure. Prior to joining Rose Capital in 2018, Sat held senior investment roles at Hillhouse Capital, Incline Global Management and Ziff Brothers Investments. At Hillhouse Capital, Sat was a member of the Global Financials team, where he spent the majority of his time on private equity opportunities in the financial technology sector. During Sat’s tenure, Incline Global Management saw its assets under management triple and was named as one of Barron’s “Best 100 Hedge Funds.” Earlier in his career, Sat was an Associate at Apollo Management, where he focused on lower middle market private investments as well as public debt and equity investments. Sat began his career at Lazard, where he was a member of its New York-based Restructuring Group. Sat has a B.S. in Commerce from the McIntire School of Commerce at the University of Virginia with concentrations in finance and management.
We believe Mr. Joshi’s extensive financial services experience and degree in finance and management bring to our Board of Directors important skills and qualify him to serve as one of our directors.
Committees of our Board of Directors
Our securities are not quoted on an exchange that has requirements that a majority of our directors be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an audit committee or other committee of our Board. Our Board does not expect this structure to adversely affect its ability to act independently and satisfy its other requirements.
Our Board of Directors has not established an audit committee and does not have an audit committee financial expert due to our limited size. Since we do not have an audit committee comprised of independent directors, the functions that would have been performed by the audit committee are performed by our directors.
Our Board of Directors also does not have standing compensation or nominating committees. Our Board does not believe a compensation or nominating committee is necessary based on the size of our Company and the current levels of compensation to corporate officers. Our Board will consider establishing compensation and nominating committees at the appropriate time.
Our entire Board of Directors participates in the consideration of compensation issues and of director nominees. Candidates for director nominees are reviewed in the context of the current composition of our Board and the Company’s operating requirements and the long-term interests of its stockholders. In conducting this assessment, our Board considers skills, diversity, age, and such other factors as it deems appropriate given the current needs of our Board and the Company, to maintain a balance of knowledge, experience and capability.
Our Board’s process for identifying and evaluating nominees for director, including nominees recommended by stockholders, will involve compiling names of potentially eligible candidates, conducting background and reference checks, conducting interviews with the candidate and others (as schedules permit), meeting to consider and approve the final candidates and, as appropriate, preparing an analysis with regard to particular recommended candidates.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).
Based solely on our review of certain reports filed with the Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, the reports required to be filed with respect to transactions in our Common Stock during the fiscal year ended December 31, 2018, were timely.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors. We will provide a copy of our Code of Business Conduct and Ethics, without charge, to any person desiring a copy, by written request to our company at 10200 E. Girard Avenue, Suite B420, CO 80231, Attention: Corporate Secretary.
Legal Proceedings
No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.
| ITEM 11. | EXECUTIVE COMPENSATION. |
EXECUTIVE COMPENSATION
The following table sets forth certain information about compensation paid, earned or accrued for services of our named executive officers for the past two fiscal years.
Summary Compensation Table
| | | | | | | | | All | | | | |
| | | | | | Base | | | Other | | | | |
| | | Fiscal | | | Salary | | | Compensation | | | Total | |
| Name and Principal Position | | Year | | | ($) | | | ($) | | | ($) | |
| Zachary Venegas | | 2018 | | | | 200,000 | | | | 629,200 | | | | 829,200 | |
| President /CEO, Director | | 2017 | | | | 200,000 | | | | - | | | | 200,000 | |
| Scott Ogur | | 2018 | | | | 135,000 | | | | - | | | | 135,000 | |
| CFO, Director | | 2017 | | | | N/A | | | | N/A | | | | N/A | |
| Patrick Vo (1) | | 2018 | | | | 102,000 | | | | - | | | | 102,000 | |
| CEO, BioTrackTHC | | | | | | N/A | | | | N/A | | | | N/A | |
| Terence J. Ferraro (1) | | 2018 | | | | 102,000 | | | | - | | | | 102,000 | |
| Chief Software Architect, BioTrackTHC | | | | | | N/A | | | | N/A | | | | N/A | |
| (1) | Reflects compensation for the period from June 1, 2018 to December 31, 2018. |
On March 15, 2018 we awarded Zachary Venegas two options to purchase a total of 490,000 shares of the Company’s common stock. We made no other individual grants of restricted stock or stock options to, and there were no stock options exercised by, our named executive officers for the period from October 25, 2015 (inception) through December 31, 2018. We have employment agreements in place with Patrick Vo and Terence Ferraro. On March 19, 2019, the Company entered into employment agreements with Zachary Venegas and Scott Ogur. The employment agreements provide for compensation in certain events of termination.
Outstanding Equity Awards at Fiscal Year-End Table
| Name | | Stock Underlying Option | | | Option Exercise Price | | | Option Expiration Date |
| Zachary Venegas | | 40,000 shares of common stock | | | $ | 2.090* | | | | 3/28/2023 |
| Zachary Venegas | | 450,000 shares of common stock | | | $ | 1.900 | | | | 3/28/2028 |
* Represents 110% of the fair market value of the Company’s common stock on the day of issuance.
DIRECTOR COMPENSATION
There was no compensation awarded to, earned by, or paid to the members of our Board of Directors by us during the years ended December 31, 2018 and 2017.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of March 29, 2019 by (a) each stockholder who is known to us to own beneficially 5% or more of our outstanding Common Stock; (b) all directors; (c) our executive officers, and (d) all executive officers and directors as a group. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their shares of Common Stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their shares of Common Stock.
For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of Common Stock that such person has the right to acquire within 60 days of March 29, 2019. For purposes of computing the percentage of outstanding shares of our Common Stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of March 29, 2019 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership. Unless otherwise identified, the address of our directors and officers is c/o Helix TCS, Inc., 10200 E. Girard Avenue, Suite B420, Denver, CO 80231
The following table assumes 74,223,865 shares are outstanding as of March 29, 2019.
| Name of Beneficial Owner | | Number of
Shares of
Common
Stock
Beneficially
Owned | | | Percentage of
Ownership of
Common
Stock
Beneficially
Owned | | | Number of
Shares of
Series A
Preferred
Stock
Beneficially
Owned | | | Percentage
Ownership
of Series A
Preferred
Stock | | | Number of
Shares of
Series B
Preferred
Stock
Beneficially
Owned | | | Percentage
Ownership
of Series B
Preferred
Stock | | | Total
Percentage
of Voting
Power | |
| 5% Beneficial Shareholders | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| RSF4, LLC (1) (4) (5) | | | 13,233,994 | | | | 17.8 | % | | | - | | | | 0.0 | % | | | 13,784,201 | | | | 100.0 | % | | | 30.4 | % |
| Helix Opportunities, LLC (2) | | | 22,411,000 | | | | 30.2 | % | | | 1,000,000 | | | | 100.0 | % | | | - | | | | 0.0 | % | | | 26.3 | % |
| RSF5, LLC (4) | | | 13,233,994 | | | | 17.8 | % | | | | | | | | | | | 13,784,201 | | | | 100.0 | % | | | 30.4 | % |
| Nightstone Unlimited, Inc. | | | 8,740,815 | | | | 11.8 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 9.8 | % |
| Minds Eye Trust | | | 7,525,903 | | | | 10.1 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 8.5 | % |
| Brian McClintock | | | 4,618,207 | | | | 6.2 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 5.2 | % |
| Officers and Directors | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Zachary Venegas (2) (6) | | | 22,901,000 | | | | 30.9 | % | | | 1,000,000 | | | | 100.0 | % | | | - | | | | 0.0 | % | | | 26.9 | % |
| Scott Ogur (2) | | | 22,411,000 | | | | 30.2 | % | | | 1,000,000 | | | | 100.0 | % | | | - | | | | 0.0 | % | | | 26.3 | % |
| Andrew Schweibold (7) | | | 13,233,994 | | | | 17.8 | % | | | - | | | | 0.0 | % | | | 13,784,201 | | | | 100.0 | % | | | 30.4 | % |
| Terence J. Ferraro | | | 8,740,815 | | | | 11.8 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 9.8 | % |
| Patrick Vo | | | 1,320,539 | | | | 1.8 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 1.5 | % |
| Paul Hodges (3) | | | 975,000 | | | | 1.3 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 1.1 | % |
| Officers and Directors as a Group (6 persons) | | | 47,171,348 | | | | 63.6 | % | | | 1,000,000 | | | | 100.0 | % | | | 13,784,201 | | | | 100.0 | % | | | 69.6 | % |
| (1) | RSF4, LLC, a Delaware limited liability company, is solely managed by Rose Capital Fund I GP, LLC, a Delaware limited liability company (“Rose GP”). Rose GP has the sole power to vote or sell the shares of our Series B Preferred Stock held by RSF4, LLC. Rose GP is owned 50% by Andrew Schweibold and 50% by Jonathan Rosenthal. As a result of the foregoing, Rose GP, Schweibold and Rosenthal may be deemed to be beneficial owners of the shares of our Series B Preferred Stock held by RSF4, LLC. |
| (2) | Messrs. Venegas and Ogur each own 50% of Helix Opportunities, LLC. |
| (3) | Consists of (i) 960,000 shares of Common Stock and (ii) 15,000 shares of Common Stock issued on February 26, 2018 in conjunction with the amendment of a note payable. |
| (4) | Consists of (i) 3,394,442 shares of Common Stock and (ii) 9,839,552 shares of Common Stock beneficially owned by RSF4, LLC and RSF5, LLC. |
| (5) | Consists of 13,784,201 shares of Series B Preferred Stock beneficially owned by RSF4, LLC and RSF5, LLC. |
| (6) | Consists of (i) his beneficial ownership in Helix Opportunities, LLC and (ii) options to purchase up to 490,000 shares of Helix Common Stock. |
| (5) | Messrs. Schweibold owns 50% of Rose GP. |
Equity Compensation Plan Information Table
The following table sets forth the indicated information as of December 31, 2018 with respect to our equity compensation plan:
| Plan Category | | Number of
securities
to
be issued
upon
exercise
of
outstanding
options,
warrants
and rights | | | Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights | | | Number of
securities
remaining available
for future issuance
under equity
compensation
plans | |
| Equity compensation plans approved by security holders | | | | | | | | | |
| Helix TCS, Inc. 2017 Omnibus Stock Plan | | | 490,000 | | | $ | 1.92 | | | | 3,995,055 | |
| Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan | | | 393,492 | (1) | | $ | 0.72 | | | | 206,508 | |
| (1) | Upon exercise of these options, the shares will convert into 3,841,492 shares of the Company’s common stock. |
Our only equity compensation plans are the Helix TCS, Inc. 2017 Omnibus Stock Plan and Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan, which were approved by our stockholders. We do not have any equity compensation plans or arrangements that have not been approved by our stockholders.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Zachary L. Venegas, our Chief Executive Officer, director and Scott Ogur, Chief Financial Officer, director each own 50% of Helix Opportunities LLC.
Advances from Related Parties
The Company has a loan outstanding from a former Company executive. The advance does not accrue interest and has no definite repayment terms. The loan balance was $45,250 and $124,750 as of December 31, 2018 and 2017, respectively.
Convertible Note Payable
On March 11, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Eight”) with Paul Hodges, a Director of the Company (the “Related Party Holder”). The Related Party Holder provided the Company with $150,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note Eight due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Eight was convertible at the election of the Related Party Holder, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. The Company evaluated Note Eight in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that Note 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 with Paul Hodges. As of December 31, 2018, Note Eight was paid in full. See Note 13,Related Party Transactions for further detail surrounding the transaction.
Warrants
In March 2016, the Company issued 960,000 shares of restricted common stock to the Related Party Holder (Mr. Hodges) 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.
Director Independence
Our securities are not quoted on an exchange that has requirements that a majority of our directors be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an audit committee or other committee of our Board. Our Board does not expect this structure to adversely affect its ability to act independently and satisfy its other requirements.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The following table sets forth all fees paid or accrued by the Company for the audit and other services provided by the Company’s public accounting firm for the years ended December 31, 2018 and 2017:
| Services | | 2018 | | | 2017 | |
| | | | | | | |
| Audit Fees | | $ | 142,843 | | | $ | 86,280 | |
| Audit-Related Services | | | - | | | | - | |
| Tax Fees | | | - | | | | - | |
| Total Fees | | $ | 142,843 | | | $ | 86,280 | |
Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees - This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.
Tax Fees - This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting.
PART IV
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
(a) 1. Financial Statements.
Our consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations and shareholders’ equity (deficit) and cash flows for each of the two years in the years ended December 31, 2018 and 2017, together with the related notes and the report of our independent registered public accounting firm, are set forth on pages F-1 to F-41 of this report.
(b) Exhibits.
| Exhibit Number | | Description | | Filing | | Filing Exhibit | | Filing Date | |
| | | | | | | | | | |
| 2.1 | | Reorganization Agreement dated as of December 21, 2015 by and between Helix Opportunities, LLC and its members and Helix TCS, Inc. | | 10-12G | | 2.1 | | 12/09/16 | |
| | | | | | | | | | |
| 2.2 | | Agreement and Plan of Merger by and among Helix TCS, Inc., Helix Acquisition Sub, Inc., Bio-Tech Medical Software, Inc. and Terence J. Ferraro, as the Securityholder Representative, dated March 3, 2018. | | 8-K | | 2.1 | | 06/05/18 | |
| | | | | | | | | | |
| 3.1 | | Certificate of Incorporation of Jubilee4 Gold, Inc. | | 10-12G | | 3.i.1 | | 12/09/16 | |
| | | | | | | | | | |
| 3.1.2 | | Certificate of Amendment of Certificate of Incorporation of Helix TCS, Inc. | | 10-12G | | 3.i.2 | | 12/09/16 | |
| | | | | | | | | | |
| 3.1.3 | | Certificate of Amendment of Certificate of Incorporation of Helix TCS, Inc. – Certificate of Designation of Rights and Privileges of Class A Preferred Convertible Super Majority Voting Stock. | | 10-12G | | 3.i.3 | | 12/09/16 | |
| | | | | | | | | | |
| 3.1.4 | | Certificate of Designations, Preferences and Rights of Series B Preferred Stock, $.001 Par Value Per Share. | | 8-K | | 3.1 | | 05/19/17 | |
| | | | | | | | | | |
| 3.1.5 | | Amendment No. 1 to Certificate of Designations, Preferences and Rights of Series B Preferred Stock, $0.001 Par Value Per Share. | | 8-K | | 3.1 | | 8/30/17 | |
| | | | | | | | | | |
| 3.1.6 | | Amended and Restated Certificate of Designations, Preferences and Rights of Class A Preferred Convertible Super Majority Voting Stock, $.001 Par Value Per Share | | 8-K | | 3.1 | | 9/21/17 | |
| | | | | | | | | | |
| 3.1.7 | | Amendment No. 2 to Certificate of Designations, Preferences and Rights of Series B Preferred Stock, $0.001 Par Value Per Share | | 8-K | | 3.1 | | 12/20/17 | |
| | | | | | | | | | |
| 3.2 | | Bylaws of Jubilee4 Gold, Inc. | | 10-12G | | 3(ii).1 | | 12/09/16 | |
| | | | | | | | | | |
| 4.1 | | Form of Registration Rights Agreement dated as of February 13, 2017 by and between Helix TCS, Inc. and RedDiamond Partners, LLC. | | 8-K/A | | 10.4 | | 02/24/17 | |
| | | | | | | | | | |
| 4.2 | | Form of Warrant for the purchase of 25,000 shares of common stock of Helix TCS, Inc. issued February 13, 2017. | | 8-K/A | | 10.8 | | 02/24/17 | |
| | | | | | | | | | |
| 4.3 | | Form of Warrant for the purchase of 150,000 shares of common stock of Helix TCS, Inc. issued April 26, 2017. | | 8-K | | 10.2 | | 05/01/17 | |
| | | | | | | | | | |
| 4.4 | | Form of Registration Rights Agreement, dated March 1, 2019, by and between Helix TCS, Inc. and Diamond Rock, LLC. | | | | | | Filed herewith | |
| Exhibit Number | | Description | | Filing | | Filing Exhibit | | Filing Date | |
| 10.1 | | Asset Purchase Agreement dated as of April 11, 2016 by Revolutionary Software, LLC and Helix TCS, Inc. | | 10-12G | | 10.1 | | 12/09/16 | |
| | | | | | | | | | |
| 10.2 | | Form of Convertible Promissory Note. | | 10-12G | | 4.1 | | 12/09/16 | |
| | | | | | | | | | |
| 10.3 | | Form of Unsecured Promissory Note. | | 8-K | | 10.1 | | 02/16/17 | |
| | | | | | | | | | |
| 10.4 | | Form of Investment Agreement dated as of February 13, 2017 by and between Helix TCS, Inc. and RedDiamond Partners, LLC. | | 8-K/A | | 10.6 | | 02/24/17 | |
| | | | | | | | | | |
| 10.5 | | Form of Subsidiary Guarantee dated as of February 13, 2017 by each of the signatories thereto. | | 8-K/A | | 10.7 | | 02/24/17 | |
| | | | | | | | | | |
| 10.6 | | Form of Security Agreement dated as of February 13, 2017 among Helix TCS, Inc., all of the Subsidiaries of Helix TCS, Inc. and RedDiamond Partners, LLC. | | 8-K/A | | 10.9 | | 02/24/17 | |
| | | | | | | | | | |
| 10.7 | | Form of Securities Purchase Agreement dated as of February 13, 2017 by and between Helix TCS, Inc. and RedDiamond Partners, LLC. | | 8-K/A | | 10.10 | | 02/24/17 | |
| | | | | | | | | | |
| 10.7.1 | | Annexes III and IV to the Securities Purchase Agreement. | | 8-K/A | | 10.2 | | 02/24/17 | |
| | | | | | | | | | |
| 10.8 | | Form of 10% Fixed Secured Convertible Promissory Note dated February 13, 2017 for $183,333.33 payable to RedDiamond Partners, LLC. | | 8-K/A | | 10.1 | | 02/24/17 | |
| | | | | | | | | | |
| 10.8.1 | | Amendment to 10% Fixed Secured Convertible Promissory Note dated February 13, 2017 for $183,333.33 payable to RedDiamond Partners, LLC, dated November 16, 2017. | | 10-K | | 10.8.1 | | 03/28/2018 | |
| | | | | | | | | | |
| 10.9 | | Form of 10% Fixed Secured Convertible Promissory Note dated February 13, 2017 for $25,0000 payable to RedDiamond Partners, LLC. | | 8-K/A | | 10.3 | | 02/24/17 | |
| | | | | | | | | | |
| 10.9.1 | | Amendment to 10% Fixed Secured Convertible Promissory Note dated February 13, 2017 for $25,000 payable to RedDiamond Partners, LLC, dated November 16, 2017. | | 10-K | | 10.9.1 | | 03/28/2018 | |
| | | | | | | | | | |
| 10.10 | | Form of Term Sheet and Summary of the Offering and Subscription Agreement for shares of common stock of Helix TCS, Inc. | | 10-K | | 10.13 | | 04/17/17 | |
| | | | | | | | | | |
| 10.11 | | Form of Term Sheet and Summary of the Offering and Subscription Agreement and Representations for Unsecured Convertible Promissory Note. | | 10-K | | 10.14 | | 04/17/17 | |
| | | | | | | | | | |
| 10.12 | | Form of Securities Purchase Agreement dated as of April 26, 2017 by and between Helix TCS, Inc. and RedDiamond Partners, LLC. | | 8-K | | 10.1 | | 05/01/17 | |
| | | | | | | | | | |
| 10.13 | | Form of Security Agreement dated as of April 26, 2017 among Helix TCS, Inc., all of the Subsidiaries of Helix TCS, Inc. and RedDiamond Partners, LLC. | | 8-K | | 10.3 | | 05/01/17 | |
| | | | | | | | | | |
| 10.14 | | Form of Subsidiary Guarantee dated as of April 26, 2017 by each of the signatories thereto. | | 8-K | | 10.4 | | 05/01/17 | |
| | | | | | | | | | |
| 10.15 | | Form of 10% Secured Convertible Promissory Note dated April 26, 2017 for $100,000 payable to RedDiamond Partners, LLC. | | 8-K | | 4.1 | | 05/01/17 | |
| | | | | | | | | | |
| 10.15.1 | | Amendment to 10% Secured Convertible Promissory Note dated April 26, 2017 for $100,0000 payable to RedDiamond Partners, LLC, dated November 16, 2017. | | 10-K | | 10.15.1 | | 03/28/2018 | |
| Exhibit Number | | Description | | Filing | | Filing Exhibit | | Filing Date | |
| 10.16 | | Form of Subscription Agreement and Representations for 111,111 shares of common stock of Helix TCS, Inc. dated as of May 2017. | | 8-K | | 10.1 | | 05/11/17 | |
| | | | | | | | | | |
| 10.17 | | Form of Helix TCS, Inc. Series B Preferred Stock Purchase Agreement dated May 17, 2017 by and among Helix TCS, Inc., Helix Opportunities, LLC and RSF4, LLC. | | 10-Q | | 10.1 | | 5/22/17 | |
| | | | | | | | | | |
| 10.18 | | Form of Helix TCS, Inc. Second Series B Preferred Stock Purchase Agreement by and among Helix TCS, Inc. and RSF4, LLC. | | 8-K | | 10.2 | | 8/02/17 | |
| | | | | | | | | | |
| 10.19 | | Form of Helix TCS, Inc. Third Series B Preferred Stock Purchase Agreement dated as of August 25, 2017 by and among Helix TCS, Inc. and RSF4, LLC. | | 8-K | | 10.2 | | 8/30/17 | |
| | | | | | | | | | |
| 10.20 | | Form of Helix TCS, Inc. Fourth Series B Preferred Stock Purchase Agreement dated as of September 15, 2017 by and among Helix TCS, Inc. and RSF4, LLC. | | 8-K | | 10.2 | | 9/21/17 | |
| | | | | | | | | | |
| 10.21 | | Form of Helix TCS, Inc. Fifth Series B Preferred Stock Purchase Agreement dated as of October 11, 2017 by and among Helix TCS, Inc. and RSF4, LLC. | | 8-K | | 10.3 | | 10/11/17 | |
| | | | | | | | | | |
| 10.22 | | Form of Helix TCS, Inc. Sixth Series B Preferred Stock Purchase Agreement dated as of October 31, 2017 by and among Helix TCS, Inc. and RSF4, LLC. | | 8-K | | 10.4 | | 11/2/17 | |
| | | | | | | | | | |
| 10.23 | | Form Helix TCS, Inc. Seventh Series B Preferred Stock Purchase Agreement dated as of October 31, 2017 by and among Helix TCS, Inc. and RSF4, LLC. | | 8-K | | 10.5 | | 11/2/17 | |
| | | | | | | | | | |
| 10.24 | | Form of Helix TCS, Inc. Eighth Series B Preferred Stock Purchase Agreement dated as of December 19, 2017 by and among Helix TCS, Inc. and RSF4, LLC. | | 8-K | | 10.7 | | 12/20/17 | |
| | | | | | | | | | |
| 10.25 | | Form of Helix TCS, Inc. Investor Rights Agreement dated May 17, 2017 by and among Helix TCS, Inc. and the investors listed, including Rose Capital. | | 10-Q | | 10.2 | | 5/22/17 | |
| | | | | | | | | | |
| 10.26 | | Form of Helix TCS, Inc. Right of First Refusal and Co-Sale Agreement dated May 17, 2017 by and among Helix TCS, Inc., those certain holders of Helix TCS, Inc. Series A Preferred and Common Stock listed and those person and entities listed. | | 10-Q | | 10.3 | | 5/22/17 | |
| | | | | | | | | | |
| 10.27 | | Form of Helix TCS, Inc. Voting Agreement dated May 17, 2017 by and among Helix TCS, Inc., those certain holders of Helix TCS, Inc. common stock and persons and entities listed therein. | | 10-Q | | 10.4 | | 5/22/17 | |
| | | | | | | | | | |
| 10.28 | | Form of Membership Interest Purchase Agreement by and between Helix TCS, Inc. and Security Grade Protective Services, Ltd. and Sellers dated June 2, 2017. | | 8-K | | 10.1 | | 06/08/17 | |
| Exhibit Number | | Description | | Filing | | Filing Exhibit | | Filing Date | |
| 10.29# | | Form of Employment Agreement dated 2017 by and between Security Grade Protective Services, Ltd. and Derek Porter. | | 8-K | | 10.2 | | 06/08/17 | |
| | | | | | | | | | |
| 10.30# | | Form of Employment Agreement dated 2017 by and between Security Grade Protective Services, Ltd. and David Beckett. | | 8-K | | 10.3 | | 06/08/17 | |
| | | | | | | | | | |
| 10.31# | | Helix TCS, Inc. 2017 Omnibus Stock Incentive Plan. | | 8-K | | 10.6 | | 11/16/17 | |
| | | | | | | | | | |
| 10.32# | | Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan. | | 8-K | | 10.32 | | 06/05/18 | |
| | | | | | | | | | |
| 10.33 | | Pledge and Security Agreement dated February 1, 2018 by RSF5, LLC and Helix TCS, Inc. for the benefit of BTC Investment LLC. | | 10-Q | | 10.33 | | 08/14/18 | |
| | | | | | | | | | |
| 10.34# | | Employment Agreement, dated March 19, 2019, by and between Helix TCS, Inc. and Zachary L. Venegas. | | 8-K | | 10.34 | | 03/21/2019 | |
| | | | | | | | | | |
| 10.35# | | Employment Agreement, dated March 19, 2019, by and between Helix TCS, Inc. and Scott M. Ogur. | | 8-K | | 10.35 | | 03/21/2019 | |
| | | | | | | | | | |
| 10.36 | | Form Securities Purchase Agreement, dated March 1, 2019, by and between Helix TCS, Inc. and each purchaser identified therein. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 10.37(a) | | Form Secured Convertible Promissory Note. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 10.37(b) | | Form Secured Convertible Promissory Note. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 10.38(a) | | Form of Common Stock Purchase Warrant of Helix TCS, Inc. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 10.38(b) | | Form of Common Stock Purchase Warrant of Helix TCS, Inc. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 10.39 | | Form of Security Agreement, dated March 1, 2019, by and between Helix TCS, Inc., the subsidiaries of Helix TCS, Inc. and DiamondRock LLC. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 10.40 | | Form of Subsidiary Guarantee, dated March 1, 2019 by each of the signatories thereto. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 10.41 | | Pledge Agreement, dated March 1, 2019, by Helix TCS, Inc. Helix TCS LLC and Engeni, LLC for the benefit of Rose Capital Fund I, LP. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 10.42 | | 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. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 24.1 | | Power of Attorney. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 31.2 | | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 32.1 | | Certification of Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | Filed herewith | |
| | | | | | | | | | |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | Filed herewith | |
| Exhibit Number | | Description | | Filing | | Filing Exhibit | | Filing Date | |
| | | | | | | | | | |
| 101.INS | | XBRL Instance Document. | | - | | - | | Filed herewith | |
| | | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document. | | - | | - | | Filed herewith | |
| | | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | - | | - | | Filed herewith | |
| | | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | - | | - | | Filed herewith | |
| | | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | - | | - | | Filed herewith | |
| | | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | - | | - | | 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: March 29, 2019 | By: | /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 | | March 29, 2019 |
| Zachary L. Venegas* | | (Principal Executive Officer) | | |
| | | | | |
| /s/Scott Ogur | | Chief Financial Officer | | March 29, 2019 |
| Scott Ogur | | (Principal Financial Officer) | | |
| | | | | |
| /s/Paul Hodges | | Director | | March 29, 2019 |
| Paul Hodges* | | | | |
| | | | | |
| /s/Patrick Vo | | Director | | March 29, 2019 |
| Patrick Vo* | | | | |
| | | | | |
| /s/Terence Ferraro | | Director | | March 29, 2019 |
| Terence Ferraro* | | | | |
| | | | | |
| /s/Andrew Schweibold | | Director | | March 29, 2019 |
| Andrew Schweibold* | | | | |
| | | | | |
| /s/Satyavrat Joshi | | Director | | March 29, 2019 |
| Satyavrat Joshi* | | | | |
| | | | | |
| * By: | Scott Ogur, as Attorney in Fact, pursuant to the
Power of Attorney dated March 29, 2019 and filed herewith. |
HELIX TCS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Helix TCS, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Helix TCS, Inc. (the "Company") as of December 31, 2018 and 2017, the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BF Borgers CPA PC
BF Borgers CPA PC
We have served as the Company's auditor since 2016.
Lakewood, CO
March 29, 2019
HELIX TCS, INC.
CONSOLIDATED BALANCE SHEETS
| | | December 31, | |
| | | 2018 | | | 2017 | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash | | $ | 285,761 | | | $ | 868,554 | |
| Accounts receivable, net | | | 1,184,923 | | | | 610,313 | |
| Prepaid expenses and other current assets | | | 409,800 | | | | - | |
| Costs & earnings in excess of billings | | | 42,869 | | | | 40,847 | |
| Total current assets | | | 1,923,353 | | | | 1,519,714 | |
| | | | | | | | | |
| Property and equipment, net | | | 349,518 | | | | 110,634 | |
| Intangible assets, net | | | 18,604,078 | | | | 3,042,259 | |
| Goodwill | | | 39,913,559 | | | | 664,329 | |
| Deposits and other assets | | | 146,990 | | | | 68,313 | |
| Total assets | | $ | 60,937,498 | | | $ | 5,405,249 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 1,702,713 | | | $ | 598,637 | |
| Advances from related parties | | | 45,250 | | | | 124,750 | |
| Billings in excess of costs | | | 155,192 | | | | 20,191 | |
| Deferred rent | | | 2,937 | | | | 9,667 | |
| Notes payable, current portion | | | 24,805 | | | | 11,179 | |
| Obligation pursuant to acquisition | | | 201,667 | | | | 559,103 | |
| Convertible notes payable, net of discount | | | 187,177 | | | | 812,393 | |
| Convertible note payable - related party | | | - | | | | 243,506 | |
| Due from related party | | | 32,489 | | | | - | |
| Contingent consideration | | | 908,604 | | | | - | |
| Obligation to issue warrants | | | 804,171 | | | | 2,429,569 | |
| Total current liabilities | | | 4,065,005 | | | | 4,808,995 | |
| | | | | | | | | |
| Long-term liabilities | | | | | | | | |
| Notes payable, net of current portion | | | 51,554 | | | | 53,293 | |
| Total long-term liabilities | | | 51,554 | | | | 53,293 | |
| | | | | | | | | |
| Total liabilities | | | 4,116,559 | | | | 4,862,288 | |
| | | | | | | | | |
| Shareholders’ equity (deficit): | | | | | | | | |
| Preferred stock (Class A), $0.001 par value, 3,000,000 shares authorized; 1,000,000 issued and outstanding as of December 31, 2018 and 2017, respectively | | | 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 December 31, 2018 and 2017, respectively | | | 13,784 | | | | 13,784 | |
| Common stock; par value $0.001; 200,000,000 shares authorized; 72,660,825 shares issued and outstanding as of December 31, 2018; 28,771,402 shares issued and outstanding as of December 31, 2017 | | | 72,660 | | | | 28,771 | |
| Additional paid-in capital | | | 83,138,792 | | | | 18,741,114 | |
| Accumulated other comprehensive income | | | 17,991 | | | | - | |
| Accumulated deficit | | | (26,423,288 | ) | | | (18,241,708 | ) |
| Total shareholders’ equity (deficit) | | | 56,820,939 | | | | 542,961 | |
| Total liabilities and shareholders’ equity (deficit) | | $ | 60,937,498 | | | $ | 5,405,249 | |
See accompanying notes to the consolidated financial statements.
HELIX TCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | For the Years Ended
December 31, | |
| | | 2018 | | | 2017 | |
| | | | | | | |
| Security and guarding | | $ | 4,889,472 | | | $ | 4,029,800 | |
| Systems installation | | | 499,138 | | | | - | |
| Software | | | 4,174,963 | | | | - | |
| Total revenues | | $ | 9,563,573 | | | $ | 4,029,800 | |
| Cost of revenue | | | 5,969,039 | | | | 2,885,459 | |
| Gross margin | | | 3,594,534 | | | | 1,144,341 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Selling, general and administrative | | | 2,491,518 | | | | 1,019,091 | |
| Salaries and wages | | | 5,918,594 | | | | 1,020,812 | |
| Professional and legal fees | | | 2,263,212 | | | | 2,410,356 | |
| Depreciation and amortization | | | 3,086,531 | | | | 477,364 | |
| Total operating expenses | | | 13,759,855 | | | | 4,927,623 | |
| | | | | | | | | |
| Loss from operations | | | (10,165,321 | ) | | | (3,783,282 | ) |
| | | | | | | | | |
| Other income (expense): | | | | | | | | |
| Change in fair value of convertible note | | | 450,216 | | | | (712,393 | ) |
| Change in fair value of convertible note - related party | | | 93,506 | | | | 31,068 | |
| Change in fair value of obligation to issue warrants | | | 1,625,398 | | | | 590,436 | |
| Change in fair value of contingent consideration | | | (131,306 | ) | | | - | |
| Loss on induced conversion of convertible note | | | - | | | | (1,503,876 | ) |
| Loss on sale of assets | | | - | | | | (2,232 | ) |
| Loss on extinguishment of debt | | | - | | | | (4,611,395 | ) |
| Loss on impairment of Goodwill | | | (664,329 | ) | | | - | |
| Gain on reduction of obligation pursuant to acquisition | | | 607,415 | | | | - | |
| Interest income (expense) | | | 2,841 | | | | (674,313 | ) |
| Other income (expense), net | | | 1,983,741 | | | | (6,882,705 | ) |
| | | | | | | | | |
| Net loss | | $ | (8,181,580 | ) | | $ | (10,665,987 | ) |
| | | | | | | | | |
| Other comprehensive income: | | | | | | | | |
| Changes in foreign currency translation adjustment | | | 17,991 | | | | - | |
| Total other comprehensive income | | | 17,991 | | | | - | |
| Total comprehensive loss | | | (8,163,589 | ) | | | (10,665,987 | ) |
| | | | | | | | | |
| Convertible preferred stock beneficial conversion feature accreted as a deemed dividend | | | (22,202,194 | ) | | | (22,210,520 | ) |
| | | | | | | | | |
| Net loss attributable to common shareholders | | $ | (30,365,783 | ) | | $ | (32,876,507 | ) |
| | | | | | | | | |
| Net loss per share attributable to common shareholders: | | | | | | | | |
| Basic | | $ | (0.56 | ) | | $ | (1.15 | ) |
| Diluted | | $ | (0.56 | ) | | $ | (1.15 | ) |
| | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | |
| Basic | | | 53,777,343 | | | | 28,612,727 | |
| Diluted | | | 53,777,343 | | | | 28,612,727 | |
See accompanying notes to the consolidated financial statements.
HELIX TCS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
| | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | Total | |
| | | Common Stock | | | Preferred Stock (Class A) | | | Preferred Stock (Class B) | | | Additional Paid-In | | | Other
Comprehensive | | | Accumulated | | | Shareholders’
Equity | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Income | | | Deficit | | | (Deficit) | |
| Balance at December 31, 2016 | | | 28,533,411 | | | | 28,533 | | | | 1,000,000 | | | | 1,000 | | | | - | | | | - | | | | 7,107,630 | | | | - | | | | (7,575,721 | ) | | | (438,558 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beneficial conversion feature of Series B convertible preferred stock | | | | | | | | | | | | | | | | | | | | | | | | | | | 22,210,520 | | | | - | | | | - | | | | 22,210,520 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deemed dividend on conversion of Series B convertible preferred stock to common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | (22,210,520 | ) | | | - | | | | - | | | | (22,210,520 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of Series B preferred shares | | | | | | | | | | | | | | | | | | | 13,784,201 | | | | 12,243 | | | | 4,475,257 | | | | - | | | | - | | | | 4,487,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of issuance of Series B preferred shares | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,941,633 | ) | | | | | | | | | | | (1,941,633 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options issued pursuant to acquisition consideration | | | | | | | | | | | | | | | | | | | | | | | | | | | 916,643 | | | | - | | | | - | | | | 916,643 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options issued in satisfaction of contingent consideration | | | | | | | | | | | | | | | | | | | | | | | | | | | 871,193 | | | | - | | | | - | | | | 871,193 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Induced conversion of convertible debt | | | | | | | | | | | | | | | | | | | | | | | 1,541 | | | | 2,002,335 | | | | - | | | | - | | | | 2,003,876 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock per share purchase agreements | | | 111,111 | | | | 111 | | | | | | | | | | | | | | | | | | | | 99,889 | | | | - | | | | - | | | | 100,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock relating to cashless exercise of warrants | | | 126,880 | | | | 127 | | | | | | | | | | | | | | | | | | | | 461,169 | | | | - | | | | - | | | | 461,296 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reversal of additional paid in capital - warrants related to cashless exercise of warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | (461,296 | ) | | | - | | | | - | | | | (461,296 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrant issuances to investors | | | | | | | | | | | | | | | | | | | | | | | | | | | 93,200 | | | | - | | | | - | | | | 93,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beneficial conversion feature on convertible debt | | | | | | | | | | | | | | | | | | | | | | | | | | | 535,332 | | | | - | | | | - | | | | 535,332 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reacquisition price of convertible debt | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,581,395 | | | | - | | | | - | | | | 4,581,395 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (10,665,987 | ) | | | (10,665,987 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | 3,949,997 | | | | 3,949 | | | | | | | | | | | | | | | | | | | | 3,551,047 | | | | | | | | | | | | 3,554,996 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock resulting from convertible note conversion | | | 205,974 | | | | 206 | | | | | | | | | | | | | | | | | | | | 174,794 | | | | | | | | | | | | 175,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of restricted common stock | | | 115,000 | | | | 115 | | | | | | | | | | | | | | | | | | | | 134,850 | | | | | | | | | | | | 134,965 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrant issuance to investor | | | | | | | | | | | | | | | | | | | | | | | | | | | 108,000 | | | | | | | | | | | | 108,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | 514,945 | | | | 515 | | | | | | | | | | | | | | | | | | | | 915,968 | | | | | | | | | | | | 916,483 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grant of an option to purchase common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | 629,200 | | | | | | | | | | | | 629,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock resulting from inducement of consulting agreement | | | 200,000 | | | | 200 | | | | | | | | | | | | | | | | | | | | 251,800 | | | | | | | | | | | | 252,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of restricted common stock resulting from an investor relation consulting agreement | | | 125,000 | | | | 125 | | | | | | | | | | | | | | | | | | | | 126,875 | | | | | | | | | | | | 127,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of warrants pursuant to consulting agreement | | | | | | | | | | | | | | | | | | | | | | | | | | | 943,000 | | | | | | | | | | | | 943,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock resulting from exercise of stock options | | | 226,822 | | | | 227 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 227 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 17,991 | | | | | | | | 17,991 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (8,181,580 | ) | | | (8,181,580 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2018 | | | 72,660,825 | | | $ | 72,660 | | | | 1,000,000 | | | $ | 1,000 | | | | 13,784,201 | | | $ | 13,784 | | | $ | 83,138,792 | | | $ | 17,991 | | | $ | (26,423,288 | ) | | $ | 56,820,939 | |
See accompanying notes to the consolidated financial statements.
HELIX TCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | For the Years Ended December 31, | |
| | | 2018 | | | 2017 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net loss | | $ | (8,181,580 | ) | | $ | (10,665,987 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 3,086,531 | | | | 477,364 | |
| Amortization of debt discounts | | | - | | | | 254,533 | |
| Share-based compensation expense | | | 3,110,648 | | | | - |
| Change in fair value of convertible notes | | | (450,216 | ) | | | 712,393 | |
| Change in fair value of obligation to issue warrants | | | (1,625,398 | ) | | | 590,436 | |
| Change in fair value of convertible notes - related party | | | (93,506 | ) | | | (31,068 | ) |
| Change in fair value of contingent consideration | | | 131,306 | | | | - | |
| Loss on induced conversion of convertible debt | | | - | | | | 1,503,876 | |
| Loss on extinguishment of debt | | | - | | | | 4,611,395 | |
| Loss on beneficial conversion feature of convertible note | | | - | | | | 390,666 | |
| Loss on impairment of goodwill | | | 664,329 | | | | - | |
| Gain on reduction of obligation pursuant to acquisition | | | (607,415 | ) | | | - | |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (415,939 | ) | | | (134,301 | ) |
| Prepaid expenses and other current assets | | | (406,997 | ) | | | - | |
| Deposits and other assets | | | 280,703 | | | | (44,143 | ) |
| Costs & earnings in excess of billings | | | (2,022 | ) | | | 56,051 | |
| Accounts payable and accrued expenses | | | 342,733 | | | | 587,062 | |
| Due from related party | | | 32,489 | | | | - | |
| Deferred rent | | | (6,730 | ) | | | 5,424 | |
| Billings in excess of costs | | | 135,001 | | | | (3,776 | ) |
| Net cash used in operating activities | | | (4,006,063 | ) | | | (1,690,075 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Purchase of property and equipment | | | (155,559 | ) | | | (30,478 | ) |
| Payments for business combination, net of cash acquired | | | - | | | | (1,631,313 | ) |
| Cash acquired as part of business combination | | | 454,306 | | | | - | |
| Payments for asset acquisition | | | (58,729 | ) | | | (46,872 | ) |
| Net cash provided by (used in) investing activities | | | 240,018 | | | | (1,708,663 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Proceeds from the issuance of convertible notes payable | | | - | | | | 229,167 | |
| Payments pursuant to convertible notes payable - related party | | | (150,000 | ) | | | - | |
| Payments pursuant to a promissory note | | | (250,000 | ) | | | - | |
| Payments pursuant to contingent consideration | | | (131,331 | ) | | | - | |
| Advances from related parties | | | (79,500 | ) | | | (32,000 | ) |
| Advances from shareholders | | | - | | | | 83,250 | |
| Payments pursuant to notes payable | | | (27,836 | ) | | | (3,466 | ) |
| Proceeds from notes payable | | | 39,723 | | | | - | |
| Proceeds from the issuance of a promissory note | | | 250,000 | | | | 255,000 | |
| Proceeds from the issuance of common stock | | | 3,555,223 | | | | 100,000 | |
| Proceeds from the issuance of Series B convertible preferred stock | | | - | | | | 3,577,500 | |
| Net cash provided by financing activities | | | 3,206,279 | | | | 4,209,451 | |
| Effect of foreign exchange rate changes on cash | | | (23,027 | ) | | | - | |
| Net change in cash | | | (582,793 | ) | | | 810,713 | |
| Cash, beginning of period | | | 868,554 | | | | 57,841 | |
| Cash, end of period | | $ | 285,761 | | | $ | 868,554 | |
| Supplemental disclosure of cash and non-cash transactions: | | | | | | | | |
| Financing of property and equipment purchases | | $ | - | | | $ | 52,082 | |
| Equity issuance pursuant to asset acquisition (non-cash acquisition of BioTrack) | | $ | 57,552,033 | | | $ | - | |
| Equity issuance pursuant to asset acquisition (non-cash acquisition of Engeni) | | $ | 388,702 | | | $ | - | |
| Cost of issuance of Series B preferred shares | | $ | - | | | $ | (1,941,633 | ) |
| Stock options issued pursuant to acquisition consideration | | $ | - | | | $ | 916,643 | |
| Stock options issued pursuant to contingent consideration as part of acquisition | | $ | - | | | $ | 871,193 | |
| Warrant issuances to investors | | $ | - | | | $ | 93,200 | |
| Reacquisition price of convertible debt | | $ | - | | | $ | 4,581,395 | |
| Partial conversion of convertible note into common stock | | $ | 175,000 | | | $ | - | |
See accompanying notes to the consolidated financial statements.
HELIX TCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 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 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”) (see Note 7).
On June 2, 2017, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) in which the Company purchased all issued and outstanding Units of Security Grade Protective Services, Ltd. (“Security Grade”), which comprised of 800,000 Class A Units and 200,000 Class B Units. At closing, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”). Furthermore, provided that, within the first 60 days following the closing, no material customer identified in the Agreement terminates its contractual relationship 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 closing, on the 61st day following the closing, the Company shall issue 207,427 additional stock options (the “Additional Stock Options”). 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 Agreement.
In the first quarter of 2018, the Company notified the selling members of Security Grade their intent on exercising their right of setoff noted in the Agreement after discovering misrepresentations made by one of the selling members of Security Grade. The Company has settled with all of the selling members. See Note 6 for further details surrounding the settlements.
On March 3, 2018, Helix, Inc. and its wholly owned subsidiary, Merger Sub, entered into the BioTrackTHC Merger Agreement with BioTrackTHC and Terence J. Ferraro, as the representative of the BioTrackTHC stockholders, pursuant to which Merger Sub merged with and into BioTrackTHC.
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 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 owned approximately 48% of the Company on a fully diluted basis as of 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 will also issue Engeni US members 366,700 and 366,600 shares of Company common stock upon 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. As of December 31, 2018, the Company has not paid this amount to the Engeni US members.
| 2. | Revision of Prior Period Financial Statements |
The Company corrected certain immaterial errors in its financial statements contained herein. In accordance with ASC 650-10-S99 and S55 (formerly Staff Accounting Bulletins (“SAB”) No. 99 and No. 108), Accounting Changes and Error Corrections, the Company concluded that these errors were, individually, and in the aggregate, not material, quantitatively or qualitatively, to the financial statements in these periods.
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 is 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 and the satisfaction of the promissory notes.
On October 11, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a fifth Series B Preferred Stock Purchase Agreement (the “Fifth Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 231,097 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $75,000. Upon further review of the Fifth Series B Purchase Agreement, it was noted the total number of shares issued under the Fifth Series B Purchase Agreement was 462,195 shares with total proceeds of $150,000.
On October 31, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a sixth Series B Preferred Stock Purchase Agreement (the “Sixth Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 795,833 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $80,000. Upon further review of the Sixth Series B Purchase Agreement, it was noted the total number of shares issued under the Sixth Series B Purchase Agreement was 1,042,337 shares with total proceeds of $557,500.
As a result of the October 11, 2017 and October 31, 2017 transactions, the Company recorded an increase of $477, $552,023 and $552,500 to Series B Preferred Shares – par amount, additional paid-in capital and accumulated deficit, respectively.
On November 16, 2017, the Company amended Notes Five, Six, and Seven (“the Amended Notes”) with the Fourth Investor. All three notes shall have maturity dates that are six months from November 16, 2017, shall convert at a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion, shall incur interest at an annual rate of 5%, and shall be prepayable at any time at 110% of the unpaid principal and accrued interest balances. The amendment of Note Six and Seven included terms, permitting the Company the option to tender payment in full on or before November 21, 2017, at a 15% discount of the amended principal amounts. Note Five, Six and Seven Principal Amounts were amended to $281,900, $38,441 and $131,107, respectively. The Company evaluated the Amended Notes in accordance with ASC 480, Distinguishing Liabilities from Equity and determined the Amended Notes will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. At November 16, 2017, the principal amounts of Note Five, Six and Seven were $281,900, $38,441 and $131,107, respectively. As of December 31, 2017, the Company recorded the fair value of Note Five, Six and Seven at $812,393, $110,781 and $377,830, respectively. Therefore, the Company recorded a charge to the change in fair value of $(530,493), $(72,340) and $(246,723) related to Note Five, Six and Seven, respectively.
Upon further review it was noted, on November 21, 2017, the Company paid the remaining principal balance, at the 15% discount on Notes Six and Seven in the amount of $144,259. Therefore, Notes Six and Seven did not have a balance as of December 31, 2017.
As a result of the November 21, 2017 transaction, the Company recorded a reduction to convertible notes payable, net of discount of $488,611 and a credit to the change in fair value of convertible notes of $488,611.
When taking into consideration the two transactions indicated above, the net impact to accumulated deficit was a charge of $63,889, resulting from the netting of the gain of $488,611 from the reduction in the fair value of convertible notes at December 31, 2017 offset by the $552,500 of additional expense associated with the Series B Purchase Agreement.
Upon further review it was noted that, during the six months ended June 30, 2018 the Company erroneously recorded revenue for transactions with a consolidating entity and not recording the intercompany entry to eliminate the revenue. Therefore revenue and cost of revenues for the six months ended June 30, 2018 were overstated by $338,437. The Company will adjust for these errors on a prospective basis.
Accordingly, the interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s amended audited consolidated financial statements for the year ended December 31, 2017 included in the Company’s Amended Fiscal 2017 Annual Report on Form 10-K/A, filed with the SEC on April 4, 2018. In addition, the Company’s future Quarterly Reports on Form 10-Q for subsequent quarterly periods during the current fiscal year will reflect the impact of the revision in the comparative prior quarter and year-to-date periods.
The following table summarizes the effects of the revisions on the financial statements for the periods reported.
| | | Previously
Reported | | | Adjustments | | | Revised | |
| Consolidated Balance Sheet as of December 31, 2017 | | | | | | | | | |
| Convertible notes payable, net of discount | | $ | 1,301,004 | | | $ | (488,611 | ) | | $ | 812,393 | |
| Total liabilities | | $ | 5,350,899 | | | $ | (488,611 | ) | | $ | 4,862,288 | |
| Preferred Shares (Class B) Outstanding | | | 13,306,599 | | | | 477,602 | | | | 13,784,201 | |
| Preferred Shares (Class B) Par Amount | | $ | 13,307 | | | $ | 477 | | | $ | 13,784 | |
| Additional Paid in Capital | | $ | 3,923,234 | | | $ | 552,023 | | | $ | 4,475,257 | |
| Accumulated Deficit | | $ | (18,177,819 | ) | | $ | (63,889 | ) | | $ | (18,241,708 | ) |
| Total Shareholders’ Equity | | $ | 54,350 | | | $ | 488,611 | | | $ | 542,961 | |
| Total Liabilities and Shareholders’ Equity | | $ | 5,405,249 | | | $ | - | | | $ | 5,405,249 | |
| | | Previously Reported | | | Adjustments | | | As revised | |
| Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 2018 | | | | | | | | | |
| Revenue | | $ | 3,340,817 | | | $ | (338,437 | ) | | $ | 3,002,380 | |
| Cost of Revenue | | $ | 2,689,529 | | | $ | (338,437 | ) | | $ | 2,351,092 | |
| 3. | Going Concern Uncertainty, Financial Condition and Management’s Plans |
The Company believes that there is substantial doubt about the Company’s ability to continue as a going concern. The Company believes that its available cash balance as of the date of this filing will not be sufficient to fund its anticipated level of operations for at least the next 12 months. The Company believes that its ability to continue operations depends on its ability to sustain and grow revenue and results of operations as well as its ability to access capital markets when necessary to accomplish the Company’s strategic objectives. The Company believes that the Company will continue to incur losses for the immediate future. The Company expects to finance future cash needs from the results of operations and, depending on the results of operations, the Company will need additional equity or debt financing until the Company can achieve profitability and positive cash flows from operating activities, if ever.
At December 31, 2018, the Company had a working capital deficit of approximately $2,141,652, as compared to working capital deficit of approximately $3,289,281 at December 31, 2017. The increase of $1,147,629 in the Company’s working capital from December 31, 2017 to December 31, 2018 was primarily the result of a decrease in the Company’s obligation to issue warrants, a decrease in the balance of the Company’s convertible notes payable, an increase in prepaid expenses and other current assets, and an increase in accounts receivable, partially offset by an increase in contingent consideration and accounts payable and accrued liabilities.
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 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 through December 31, 2019, 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 December 31, 2019. 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.
The Company plans to generate positive cash flow from its Colorado security operations, BioTrackTHC and Engeni acquisitions to address some of the liquidity concerns. However, to execute the Company’s business plan, service existing indebtedness and implement its business strategy, the Company anticipates that it will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. The Company cannot be sure that any additional funding, if needed, will be available on terms favorable to the Company or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute the Company’s current stockholders’ ownership and could also result in a decrease in the market price of the Company’s common stock. The terms of those securities issued by the Company in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. The Company also may be required to recognize non-cash expenses in connection with certain securities it issues, such as convertible notes and warrants, which may adversely impact the Company’s operating results and financial condition. Furthermore, any debt financing, if available, may subject the Company to restrictive covenants and significant interest costs. There can be no assurance that the Company will be able to raise additional capital, when needed, to continue operations in their current form.
| 4. | Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The 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), and Engeni US (since August 3, 2018).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Use of estimates includes the following: 1) allowance for doubtful accounts, 2) estimated useful lives of property, equipment and intangible assets, 3) intangibles impairment, 4) valuation of convertible notes payable and 5) 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 December 31, 2018 or 2017.
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 $76,156 and $3,000 at December 31, 2018 and 2017, respectively.
Long-Lived Assets, Including Definite 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. It was determined that during the first quarter of 2018, the Company’s entire amount of goodwill attributable to the Security Grade acquisition was impaired. See Note 9 for a further discussion on the impairment.
Accounting for Acquisitions
In accordance with the guidance for business combinations, the Company determines whether a transaction or other event is a business combination, which requires that the assets acquired, and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase. The Company capitalizes acquisition-related costs and fees associated with asset acquisitions and immediately expense acquisition-related costs and fees associated with business combinations.
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.
The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques. The estimated fair value of the net assets acquired was determined using the income approach to valuation based on the discounted cash flow method. Under this method, expected future cash flows of the business on a stand-alone basis are discounted back to a present value. The estimated fair value of identifiable intangible assets, consisting of software and trade name acquired were determined using the relief from royalty method.
The most significant assumptions under the relief from royalty method used to value software and trade names include: estimated remaining useful life, expected revenue, royalty rate, tax rate, discount rate and tax amortization benefit. The discounted cash flow method used to value non-compete agreements includes assumptions such as: expected revenue, term of the non-compete agreements, probability and ability to compete, operating margin, tax rate and discount rate. Management has developed these assumptions on the basis of historical knowledge of the business and projected financial information of the Company. These assumptions may vary based on future events, perceptions of different market participants and other factors outside the control of management, and such variations may be significant to estimated values.
Revenue Recognition
Under 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
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 consolidated financial statements.
Expenses
Cost of Revenue
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 and depreciation and amortization. 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 a gain on the change in fair value of obligation to issue warrants, gain on the change in the fair value of convertible notes, gain on the change in fair value of convertible notes – related party, loss on the change in fair value of contingent consideration, loss on impairment of goodwill, gain on reduction of obligation pursuant to acquisition, and interest 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.
Leases
Lease agreements are evaluated to determine if they are capital leases meeting any of the following criteria at inception: (a) transfer of ownership; (b) bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the leased property; or (d) the present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.
If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a capital lease; and if none of the four criteria are met, the lease is classified by the Company as an operating lease.
Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in liabilities.
Advertising
Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $96,420 and $43,509 for the years ended December 31, 2018 and 2017, 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 loss 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. The Company has incurred net operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the years ended December 31, 2018 and 2017.
Comprehensive Loss
Comprehensive loss consists of consolidated net loss and foreign currency translation adjustments. Foreign currency translation adjustments included in comprehensive 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.
Share-based Compensation
The Company accounts for stock-based compensation to employees in conformity with the provisions of ASC Topic 718,Stock Based Compensation. Stock-based compensation to employees consist of stock options grants and restricted shares that are recognized in the statement of operations based on their fair values at the date of grant.
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50,Equity-Based Payments to Non-Employees based upon the fair-value of the underlying instrument. The equity instruments, are valued using the Black-Scholes valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which services are received.
The Company calculates the fair value of option grants utilizing the Black-Scholes pricing model and estimates the fair value of the stock based upon the estimated fair value of the common stock. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.
The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight- line basis over the requisite service period of the award.
Fair Value of Financial Instruments
ASC Topic 820,Fair Value Measurements and Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:
| | ● | Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. |
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| | ● | 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. |
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| | ● | 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 December 31, 2018 and 2017. Factors that the Company considered when estimating the fair value of its debt included market conditions and the term of the debt. The level of the debt would be considered as Level 2.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of cash, accounts receivable, prepaid expenses, deposits, accounts payable and accrued liabilities, advances from shareholders and obligation pursuant to acquisition approximate their fair value due to the short-term maturity of those 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 and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted EPS excluded all potential dilutive shares if their effect was anti-dilutive.
Basic net loss per share is based on the weighted average number of common and common-equivalent shares outstanding. Potential common shares includable in the computation of fully-diluted per share results are not presented in the consolidated financial statements for the years ended December 31, 2018 and 2017 as their effect would be anti-dilutive.
Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of warrants, options, convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.
The anti-dilutive shares of common stock outstanding for years ended December 31, 2018 and 2017 were as follows:
| | | For the Years Ended December 31, | |
| | | 2018 | | | 2017 | |
| Potentially dilutive securities: | | | | | | |
| Convertible notes payable | | | 124,784 | | | | 433,668 | |
| Convertible Preferred A Stock | | | 1,000,000 | | | | 1,000,000 | |
| Convertible Preferred B Stock | | | 13,784,201 | | | | 13,784,201 | |
| Warrants | | | 3,418,184 | | | | 2,780,193 | |
| Stock options | | | 8,729,463 | | | | | |
Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform to the current period financial statement presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,“Revenue from Contracts with Customers” (“ASU 2014-09”).The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC. In April and May 2016, the FASB issued ASU 2016-10,“Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing”, ASU 2016-11,“Revenue Recognition and Derivatives and Hedging – Recession of SEC Guidance”, ASU 2016-12, “Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients”, and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. These ASUs each affect the guidance of the new revenue recognition standard in ASU 2014-09 and related subsequent ASUs. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies
On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers and all the related amendments” (“ASC 606”) to all contracts which were not completed or expired as of January 1, 2018 using the modified retrospective method. The Company had no cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while the comparative information will continue to be reported under the accounting standards in effect for those periods.
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard is effective for the Company on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides several optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we 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 transition. We do not currently expect to elect the practical expedient to not separate lease and non-lease components for any of our leases.
We expect that this standard will have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our office and equipment operating leases; and providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between now and adoption.
On adoption, we currently expect to recognize additional operating liabilities of approximately $393,000, with corresponding ROU assets of the same amount, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
In January 2017, the FASB issued ASU 2017-01,Business Combinations (Topic 805) Clarifying the Definition of a Business.The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this standard on January 1, 2018.
In January 2017, the FASB issued ASU No. 2017-04,Intangibles – Goodwill and Other (Topic 350); Simplifying the Test for Goodwill Impairment. The amendments in this update simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public companies for the reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has elected to early adopt the provisions of ASU 2017-04 and, 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. Please refer to Note 9 for further detail.
In May 2017, the FASB issued ASU No 2017-09“Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”(ASU 2017-09). ASU 2017-09 provides clarity and reduces both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all three of the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Note that the current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in ASU 2017-09. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The updated standard was adopted by the Company on January 1, 2018. The adoption of this accounting standard did not have a material impact on our 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 is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.
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 is evaluating the effect that this update will have on its financial statements and related disclosures.
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. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC 606. The Company is evaluating the effect that this update will have on its financial statements and related disclosures.
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 our consolidated financial statements and related disclosures.
Adoption of ASC 606 Revenue from Contracts with Customers
The Company adopted the new revenue standard, ASC 606, using the modified retrospective method with respect to all non-completed contracts as of January 1, 2018. This method required retrospective application of the new accounting standard to all unfulfilled contracts that were outstanding as of January 1, 2018. Revenues and contract assets and liabilities for contracts completed prior to January 1, 2018 are presented in accordance with ASC 605.
The Company has determined that there were no adjustments required with respect to the adoption of ASC 606 with respect to any prior periods.
Disaggregation of revenue
| | | For the Years Ended
December 31, | |
| | | 2018 | | | 2017 | |
| Types of Revenues: | | | | | | |
| Security and Guarding | | $ | 4,889,472 | | | $ | 4,029,800 | |
| Systems Installation | | | 499,138 | | | | - | |
| Software | | | 4,174,963 | | | | - | |
| Total revenues | | $ | 9,563,573 | | | $ | 4,029,800 | |
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, as well as armed transportation services. The guards are charged out at an hourly rate, with invoices typically sent to clients shortly after each month-end for the previous month, with revenue being recognized at a point in time once the service has been provided. 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 IP CCTV, 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 are short-term in nature, are less than 12 months in duration, and revenue is recognized over the term of the contracts.
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 Balance Sheet as Work-in-process – Traceability.
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, at a point in 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 December 31, 2018 and 2017. 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 December 31, 2018 and 2017. The Company did not record amortization of costs incurred to obtain the contract or any impairment losses for the years ended December 31, 2018 and 2017.
Security Grade Acquisition
On June 2, 2017, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) in which the Company purchased all issued and outstanding Units of Security Grade Protective Services, Ltd. (“Security Grade”), which comprised of 800,000 Class A Units and 200,000 Class B Units. At closing, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”). Furthermore, provided that, within the first 60 days following the closing, no material customer identified in the Agreement terminates its contractual relationship 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 closing, on the 61st day following the closing, the Company shall deliver 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 Agreement within the first 60 days following the closing, 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 Agreement in the 180 days immediately preceding such termination. As of December 31, 2018 and 2017, the Company had a liability pursuant to the Agreement of $101,667 and $500,373, 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 consolidated balance sheets. 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, a gain on reduction of obligation pursuant to acquisition in the amount of $607,415 has been recorded for the year ended December 31, 2018. This reflects an adjustment for both cash and the cancellation of 80,979 options previously issued as part of the acquisition (see Note 17).
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 stockholders, pursuant to which Merger Sub merged with and into BioTrackTHC (the “Merger”). On June 1, 2018, 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 owned approximately 48% of the Company on a fully diluted basis as of the BioTrackTHC Closing Date.
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 | | | |
Total acquisition costs for the BioTrackTHC merger incurred during the year ended December 31, 2018 was $116,624, and is included in selling, general and administrative expense in the Company’s Statements of Operations.
Unaudited Pro Forma Results
BioTrackTHC contributed revenues of $4,122,123 and a net loss of $(566,982) for the period June 1, 2018 through December 31, 2018, included in the Company’s consolidated statements of operations.
The following table below represents the revenue, net loss and loss per share effect of the acquired company, as reported in our pro forma basis as if the acquisition occurred on January 1, 2017. These pro forma results are not necessarily indicative of the results that actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.
| | | For the Year Ended
December 31 | |
| Description | | 2018 | | | 2017 | |
| Revenues | | $ | 12,445,949 | | | $ | 11,817,283 | |
| Net loss | | | (11,440,489 | ) | | | (11,017,372 | ) |
| Net loss attributable to common shareholders | | | (33,624,692 | ) | | | (32,876,507 | ) |
| Loss per share attributable to common shareholders: | | | | | | | | |
| Basic and diluted-as pro forma (unaudited) | | | (0.63 | ) | | | (1.15 | ) |
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, 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 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 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. As of December 31, 2018, the Company has not paid this amount to the Engeni US members.
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 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 Merger 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 Merger transaction:
| Base Price - Common Stock | | $ | 388,702 | |
| Contingent Consideration - Common Stock | | | 777,298 | |
| Contingent Consideration - Cash | | | 100,000 | |
| Total Purchase Price | | $ | 1,266,000 | |
| | | | | | 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 | | | |
Total acquisition costs for the Engeni merger incurred during the year ended December 31, 2018 was $38,409, and is included in selling, general and administrative expense in the Company’s Statements of Operations.
The acquisition of the assets of Revolutionary Software, LLC occurred via two transactions.
| | 1. | On March 14, 2016, the Company purchased one-third of the equity interest in Revolutionary for total consideration of $350,000 in cash and 75,000 shares of common stock of the Company. $50,000 was paid in cash at closing, with the balance ($300,000) being paid in twenty-four monthly installments of $10,417, with a final payment of $50,000 to be paid on the twenty-fifth month. |
| | | |
| | 2. | On April 11, 2016, the Company entered into an asset purchase agreement with Revolutionary; in which the Company purchased all of the intangible rights and property of Revolutionary for total consideration of $300,000 payable in two equal installments pursuant to a promissory note and 2,320,000 shares of restricted common stock of the Company. |
The total purchase price for the Revolutionary assets acquired was $1,596,750. The acquisition cost has been allocated over the intangible assets acquired in accordance with the guidance set forth in ASC 805,Business Combinations, please see Note 9. Intangible Assets, Net. As of December 31, 2018 and 2017, the Company has a liability pursuant to the Revolutionary asset acquisition of $0 and $58,370, respectively. As of December 31, 2018, the Company owed the initial seller $0.
| 8. | Property and Equipment, Net |
At December 31, 2018 and 2017, property and equipment consisted of the following:
| | | December 31, | |
| | | 2018 | | | 2017 | |
| Furniture and equipment | | $ | 264,659 | | | $ | 16,332 | |
| Software equipment | | | - | | | | 1,382 | |
| Vehicles | | | 202,700 | | | | 175,647 | |
| Total | | | 467,359 | | | | 193,361 | |
| Less: Accumulated depreciation | | | (117,841 | ) | | | (82,727 | ) |
| Property and equipment, net | | $ | 349,518 | | | $ | 110,634 | |
Depreciation expense for the years ended December 31, 2018 and 2017 was $106,625 and $55,301, respectively.
| 9. | Intangible Assets, Net and Goodwill |
The following table summarizes the Company’s intangible assets:
| | | | | | | | December 31, 2018 | |
| | | Estimated Useful Life (Years) | | Gross Carrying Amount at December 31, 2017 | | | Assets Acquired Pursuant to Business Combination (2) (3) | | | 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, 2017 | |
| | | Estimated Useful Life (Years) | | Gross Carrying Amount at December 31, 2016 | | | Assets Acquired Pursuant to Business Combination (1) | | | Accumulated Amortization | | | Net Book Value | |
| Database | | 5 | | $ | 93,427 | | | $ | - | | | $ | (32,183 | ) | | $ | 61,244 | |
| Trade names and trademarks | | 10 | | | 100,000 | | | | 25,000 | | | | (18,675 | ) | | | 106,325 | |
| Web addresses | | 5 | | | 125,000 | | | | 5,000 | | | | (43,639 | ) | | | 86,361 | |
| Customer list | | 5 | | | - | | | | 3,154,578 | | | | (366,249 | ) | | | 2,788,329 | |
| | | | | $ | 318,427 | | | $ | 3,184,578 | | | $ | (460,746 | ) | | $ | 3,042,259 | |
| (1) | On June 2, 2017, the Company acquired various assets of Security Grade Protective Services, Ltd. (See Note 6) |
| | |
| (2) | On June 1, 2018, the Company acquired various assets of BioTrackTHC (See Note 6) |
| | |
| (3) | On August 3, 2018, the Company acquired various assets of Engeni (See Note 6) |
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 $2,979,906 and $422,063 for the years ended December 31, 2018 and 2017, respectively.
The estimated future amortization expense for the next five years and thereafter is as follows:
| Years Ending December 31, | | Future amortization expense | |
| 2019 | | $ | 4,655,489 | |
| 2020 | | | 4,668,244 | |
| 2021 | | | 4,613,574 | |
| 2022 | | | 3,931,667 | |
| 2023 | | | 703,773 | |
| Thereafter | | | 31,331 | |
| Total | | $ | 18,604,078 | |
The following table summarizes the Company’s goodwill as of December 31, 2018 and 2017:
| | | Total Goodwill | |
| Balance at January 1, 2017 | | $ | - | |
| Goodwill attributable to Security Grade acquisition | | | 664,329 | |
| Balance at January 1, 2018 | | $ | 664,329 | |
| Impairment of goodwill | | | (664,329 | ) |
| Goodwill attributable to BiotrackTHC acquisition | | | 39,135,007 | |
| Goodwill attributable to Engeni acquisition | | | 778,552 | |
| Balance at December 31, 2018 | | $ | 39,913,559 | |
During the first quarter of 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 year ended December 31, 2018. As part of the BioTrackTHC acquisition, goodwill in the amount of $39,135,007 was recognized on the Company’s Consolidated Balance Sheet. As part of the Engeni US acquisition, goodwill in the amount of $778,552 was recognized on the Company’s Consolidated Balance Sheet.
| 10. | Costs, Estimated Earnings and Billings |
Costs, estimated earnings and billings on uncompleted contracts are summarized as follows as of December 31, 2018 and 2017:
| | | December 31, | |
| | | 2018 | | | 2017 | |
| Costs incurred on uncompleted contracts | | $ | 89,700 | | | $ | 64,704 | |
| Estimated earnings | | | 50,512 | | | | 27,730 | |
| Cost and estimated earnings earned on uncompleted contracts | | | 140,212 | | | | 92,434 | |
| Billings to date | | | 252,535 | | | | 71,778 | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | | (112,323 | ) | | | 20,656 | |
| | | | | | | | | |
| Costs in excess of billings | | $ | 42,869 | | | $ | 40,847 | |
| Billings in excess of cost | | | (155,192 | ) | | | (20,191 | ) |
| | | $ | (112,323 | ) | | $ | 20,656 | |
| 11. | Accounts Payable and Accrued Expenses |
As of December 31, 2018 and 2017, accounts payable and accrued expenses consisted of the following:
| | | December 31, | |
| | | 2018 | | | 2017 | |
| Accounts payable | | $ | 842,389 | | | $ | 334,751 | |
| Accrued expenses | | | 847,560 | | | | 220,682 | |
| Accrued interest | | | 12,764 | | | | 43,204 | |
| Total | | $ | 1,702,713 | | | $ | 598,637 | |
| 12. | Convertible Notes Payable |
| | | December 31, | |
| | | 2018 | | | 2017 | |
| Note Five, 5% convertible promissory note, fixed secured, maturing November 16, 2019 | | $ | 187,177 | | | $ | 812,393 | |
| | | | 187,177 | | | | 812,393 | |
| Less: Current portion | | | (187,177 | ) | | | (812,393 | ) |
| Long-term portion | | $ | - | | | $ | - | |
On September 30, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Four”) with a fourth investor (the “Fourth Investor”) in which the Fourth Investor provided the Company $500,000 in cash. As of December 31, 2016, the Class B Preferred Shares were not established as a result of Holder Default, in which, the Fourth Investor did not act in good faith towards the prompt negotiation, execution and delivery of the Class B Preferred Shares.
On March 31, 2017, the First Amendment to Note Four (the “Amended Note”) was entered by the Company and the Fourth Investor. In the absence of a Company Event of Default or Fourth Investor Event of Default, Amended Note is payable by issuance upon conversion into Class B Preferred Shares of the Company, which was to occur no later than June 1, 2017. The Amended Note had the following conversion features:
| | ● | Automatic Conversion. The principal balance of Note Four shall automatically convert into shares of Class B Preferred Shares upon execution by the Company and the Fourth Investor of definitive documentation relating to the $500,000, aggregate principal amount, investment by the Fourth Investor in Class B Preferred Shares of the Company. |
| | | |
| | ● | Company Default. In the event of a Company Event of Default, the Fourth Investor the shall have the right to elect to (i) at any time prior to June 30, 2017, convert the aggregate outstanding principal amount of Note Four into Class B Preferred Shares equal to 6.3% of the Company’s equity capital calculated on a fully-diluted basis, or (ii) at any time commencing on July 1, 2017 and ending on September 30, 2017, have Note Four redeemed for cash at a redemption price, in aggregate, equal to 150% of the aggregate principal outstanding balance of Note Four or (iii) to convert Note Four into common shares of the Company equal to 6.3% of the Company’s equity capital calculated on a fully-diluted basis. In the event the Holder does not elect any remedy in the event of a Company Event of Default, on September 30, 2017 the Note shall be converted in whole into common shares of the Company equal to 6.3% of the Company’s equity capital calculated on a fully-diluted basis. |
| | | |
| | ● | Holder Default. In the event of a Holder Event of Default, the Company shall have the right to either (i) redeem Note Four at par value at any time prior to June 1, 2017 or (ii) convert the outstanding principal balance into common shares of the Company at market value. |
| | ● | The Valuation and Consideration provision in Section 2 of the Term Sheet is affirmed and ratified; provided, however, that the parties agree that the $12,000,000 valuation therein is subject to dilution of $600,000 from additional investments in the Company by third parties following the Holder’s $500,000 investment that is memorialized in the Amended Note. For the avoidance of doubt, the Holder will receive the same number of shares as it would have for its investment if it had converted at a $12,000,000 valuation on October 20, 2016 given the 26,587,497 shares outstanding at that time. For the avoidance of doubt, the Note will convert into 1,162,500 shares. |
The Company evaluated the Amended Note and the embedded conversion feature under ASC 815 and determined the conversion feature did not meet the definition of a derivative and therefore should not be bifurcated. The Company then evaluated the Amended Note in accordance with ASC 480 and determined that Note Four will be accounted for as a liability measured at fair value.
Due to the terms of the Amendment, the Company evaluated Note Four under ASC 470-50 to determine if modification or extinguishment treatment was necessary. After performing the analysis under ASC 470-50, it was determined extinguishment treatment was appropriate and the Company should extinguish Note Four and recognize the Amended Note as new debt. At December 31, 2017, the Company recognized a loss on extinguishment of $4,611,395 on Note Four, which included $4,581,395 recorded in additional paid in capital plus $30,000 related to the write-off of the unamortized debt discount created upon the establishment of Note Four.
On May 17, 2017, pursuant to the Series B Preferred Stock Purchase Agreement (see Note 13), Note Four was converted into 1,540,649 Series B Preferred Shares in which the conversion feature into common stock was altered from $0.43 per share of common stock to $0.3245385 per share of the Series B Preferred Stock. In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the conversion of Note Four of $1,503,876.
On February 13, 2017, the Company entered into a $183,333 10% Fixed Secured Convertible Promissory Note (“Note Five”) with a third investor (the “Third Investor”). The Third 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 Third Investor for due diligence and legal bills for the transaction. The Company promised to pay the principal amount, together with guaranteed interest at the annual rate of 10%, with principal and accrued interest on Note Five due and payable on September 12, 2017 (unless converted under terms and provisions as set forth within Note Five). The principal balance of Note Five was convertible at the election of the Third Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $1.50 per share. In conjunction with Note Five, the Company issued a warrant to the third investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share. Note Five became effective on February 14, 2017 upon the execution by the Company and the Holder. In addition, the Company reserved 2,500,000 shares of the Company’s common stock for the Third Investor.
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 Third Investor for due diligence and legal bills for the transaction will be recorded as a debt discount. The calculated value of the beneficial conversion feature and the combined value of the debt discount resulted in a value greater than the value of the debt and as such, the total discount was limited to the value of the debt balance of $183,333. Therefore, the debt discount related to the Beneficial Conversion Feature was in the amount of $144,666. The excess value of the Beneficial Conversion Feature discount was recognized as a loss in earnings and recorded as an interest expense in the amount of $390,666 and will be amortized through Maturity of Note Five. The debt discounts will be amortized to interest expense over the life of the note.
On February 13, 2017, the Company entered into a $25,000 10% Fixed Secured Convertible Promissory Note (“Note Six”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $25,000 in cash, which was received by the Company during the period ended March 31, 2017. The Company promised to pay the principal amount, together with guaranteed interest at the annual rate of 10%, with principal and accrued interest on Note Six due and payable on September 13, 2017. The principal balance of Note Six was convertible at the election of the Fourth Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $6.10 per share. Note Six became effective on February 14, 2017 upon the execution by the Company and the Holder of numerous exhibit documents.
The Company evaluated Note Six in accordance with ASC 815 to determine if the conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the conversion feature did not meet the requirements for bifurcation pursuant to ASC 815. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception and determined that Note Six did not have a beneficial conversion feature. As a result, the Company recorded the conventional convertible note as a debt instrument in its entirety. The interest expense associated with Note Six was $536 for the period ended March 31, 2017.
On April 26, 2017, the Company entered into a $100,000 10% Secured Convertible Promissory Note (“Note Seven”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $72,000 in cash proceeds, which was received by the Company during the three months ended June 30, 2017. Note Seven is due on October 26, 2017 and the Company must pay guaranteed interest on the principal balance at an amount equivalent to 10% of the note amount. The principal balance of Note Seven is convertible at the election of the Fourth Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at the lower of $1.00 or a 50% discount to the lowest closing bid price of the Company’s common stock for the 30 Trading Days prior to conversion. In conjunction with Note Seven, the Company issued a warrant to the fourth investor to purchase 150,000 shares of the Company’s common stock at $1.00 per share.
On November 16, 2017, the Company amended Notes Five, Six, and Seven (“the Amended Notes”) with the Fourth Investor. All three notes shall have maturity dates that are six months from November 16, 2017, shall convert at a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion, shall incur interest at an annual rate of 5%, and shall be prepayable at any time at 110% of the unpaid principal and accrued interest balances. The amendment of Note Six and Seven included terms, permitting the Company the option to tender payment in full on or before November 21, 2017, at a 15% discount of the amended principal amounts. At November 16, 2017, the principal amounts of Note Five, Six and Seven were $281,900, $38,441 and $131,107, respectively. On November 21, 2017, the Company paid the remaining principal balance, at the 15% discount on Notes Six and Seven in the amount of $144,259.
On May 16, 2018, the Company amended Note Five (“Second Amendment”) with the Fourth Investor. The Second Amendment states that Note Five shall have a maturity of November 16, 2018 and shall be prepayable 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.
The Company evaluated Note Five in accordance with ASC 480, Distinguishing Liabilities from Equity and determined the Note Five will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of December 31, 2018 and 2017, the fair value of Note Five was $187,177 and $812,393, respectively. Therefore, the Company recorded a gain (loss) to the change in fair value of $450,216 and $(530,493) related to Note Five for the years ended December 31, 2018 and 2017, respectively.
| 13. | Related Party Transactions |
Advances from Related Parties
The Company has a loan outstanding from a former Company executive. The advance does not accrue interest and has no definite repayment terms. The loan balance was $45,250 and $124,750 for the years ended December 31, 2018 and 2017, respectively.
Convertible Note Payable
On March 11, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Eight”) with Paul Hodges, a Director of the Company (the “Related Party Holder”). The Related Party Holder provided the Company with $150,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note Eight due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Eight was convertible at the election of the Related Party Holder, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. The Company evaluated Note Eight in accordance with ASC 480,Distinguishing Liabilities from Equity and determined that Note 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 (this “Amendment”) with the Related Party Holder. The Company and Holder desired to extend the maturity date of the Note to August 20, 2018.The Note 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 this amendment within 10 business days of the date of the Amendment. The principal amount of the note will be reduced to $125,000. Unless extended by the Company, converted or prepaid earlier, all unpaid principal and unpaid accrued interest on this Note shall be due and payable on August 20, 2018 (the “Maturity Date”). All provisions related to conversion of the Note into equity securities of the Company were terminated as part of this 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 $93,506 and $31,068 for the years ended December 31, 2018 and 2017, respectively. The interest expense associated with Note Eight was $5,806 and $10,528 for the years ended December 31, 2018 and 2017, respectively. Note Eight was paid in full on the Maturity Date.
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 December 31, 2018, the warrants granted are not exercisable.
On January 30, 2017, the Company entered into an unsecured promissory note in the amount of $75,000. The unsecured promissory note has a fixed interest rate of 8% and was due and payable on June 30, 2017. In conjunction with the Series B Preferred Stock Purchase Agreement, as discussed in Note 16, the Company satisfied its liability in exchange for Series B Preferred Stock. The interest expense associated with the unsecured promissory note was $0 and $2,570 for the years ended December 31, 2018 and 2017, respectively.
On February 13, 2017, the Company entered into an unsecured promissory note in the amount of $180,000. The unsecured promissory note has a fixed interest rate of 8% and was due and payable on June 30, 2017. In conjunction with the Series B Preferred Stock Purchase Agreement, as discussed in Note 16, the Company satisfied its liability in exchange for Series B Preferred Stock. The interest expense associated with the unsecured promissory note was $0 and $2,570 for the years ended December 31, 2018 and 2017, respectively.
On August 29, 2018, the Company entered into an unsecured promissory note in the amount of $250,000. The unsecured promissory note has a fixed interest rate of 7% and is due and payable on July 31, 2019. As of December 31, 2018 the unsecured promissory note was paid off in full. The interest expense associated with the unsecured promissory note was $3,021 and $0 for the years ended December 31, 2018 and 2017, respectively.
Notes payable consisted of the following:
| | | December 31, | |
| | | 2018 | | | 2017 | |
| Vehicle financing loans payable, between 4.7% and 7.0% interest and maturing between June 2022 and July 2022 | | $ | 71,284 | | | $ | 55,890 | |
| Loans Payable - Credit Union | | | 5,075 | | | | 8,582 | |
| Less: Current portion of loans payable | | | (24,805 | ) | | | (11,179 | ) |
| Long-term portion of loans payable | | $ | 51,554 | | | $ | 53,293 | |
The interest expense associated with the notes payable was $5,281 and $700 for the years ended December 31, 2018 and 2017, respectively.
| 16. | Shareholders’ Equity (Deficit) |
Common Stock
Subscription Agreements
The table below reflect shares of restricted common stock issued in relation to Subscription Agreements during the year-ended December 31, 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 | |
| July 2018 | | | 327,777 | | | | 294,999 | |
| August 2018 | | | 327,777 | | | | 294,999 | |
| August 2018 | | | 183,333 | | | | 164,999 | |
| September 2018 | | | 577,778 | | | | 520,000 | |
| October 2018 | | | 694,444 | | | | 625,000 | |
| November 2018 | | | 150,000 | | | | 135,000 | |
| December 2018 | | | 222,222 | | | | 200,000 | |
| | | | 3,949,997 | | | $ | 3,554,996 | |
The table below reflect shares of restricted common stock issued in relation to Subscription Agreements during the year-ended December 31, 2017:
| Date of Sale | | Number of Shares Sold | | | Total Proceeds | |
| May 2017 | | | 111,111 | | | $ | 100,000 | |
| | | | 111,111 | | | $ | 100,000 | |
Other Common Stock Issuances
In December 2017, the Company issued 126,880 shares of restricted common stock to an investor following a cashless exercise of warrants.
In June 2018, the Company issued 38,184,985 shares of common stock as part of the BioTrackTHC acquisition.
In June and August of 2018, three selling shareholders of Security Grade exercised their right to purchase 212,633 and 14,189 shares of the Company’s common stock.
In July 2018, the Company issued 200,000 shares of restricted common stock to a consultant per a consulting agreement.
In August and December 2018, the Company issued 100,000 and 25,000 shares of restricted common stock as part of an agreement entered into with an investor relation consultant.
In August 2018, the Company issued 366,700 shares of common stock as part of the Engeni US acquisition.
In December 2018, the Company issued 100,000 shares of restricted common stock to a consultant as an inducement to enter into the agreement.
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 their 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.
Amended Convertible Note
On February 20, 2018, the Company entered into an agreement to amend a Convertible Promissory Note with the undersigned holder initially issued to such Holder and dated March 2016. The Company and Holders desired to extend the maturity date of the Note to August 20, 2018. The holder was issued 15,000 shares of the Company’s restricted common stock as part of the amendment.
The Note 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 this amendment within 10 business days of the date of the Amendment. The principal amount of the note will be reduced to $125,000. Unless extended by the Company, converted or prepaid earlier, all unpaid principal and unpaid accrued interest on this Note shall be due and payable on August 20, 2018 (the “Maturity Date”). All provisions related to conversion of the Note into equity securities of the Company are hereby deleted.
On May 16, 2018, the Company entered into a second amendment agreement of a Convertible Promissory Note with the holder of a 10% fixed secured convertible promissory note. The new Maturity Date is November 16, 2018. The new interest rate is 5%. The note is prepayable at 120% of the unpaid balance upon 10 business days’ notice to the holder, which has the option to convert, in whole or in part, during the notice period. The conversion price shall be equal to a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion.
2017 Omnibus Incentive Plan
The table below reflects shares issued under the 2017 Omnibus Incentive Plan during the year-ended December 31, 2018. There were no shares issued under the 2017 Omnibus Incentive Plan during the year-ended December 31, 2017.
| Date of Sale | | Number of Shares Issued | | | Total Expense | |
| January 2018 | | | 42,850 | | | $ | 173,014 | |
| March 2018 | | | 100,000 | | | | 250,000 | |
| May 2018 | | | 133,900 | | | | 223,774 | |
| July 2018 | | | 100,000 | | | | 126,000 | |
| August 2018 | | | 10,000 | | | | 10,600 | |
| August 2018 | | | 33,195 | | | | 33,195 | |
| October 2018 | | | 20,000 | | | | 20,400 | |
| November 2018 | | | 75,000 | | | | 79,500 | |
| Ending Balance | | | 514,945 | | | $ | 916,483 | |
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. 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 14.
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). 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 consolidated balance sheet and cost of issuance of Series B preferred shares of $1,941,633 on the consolidated statement of shareholders’ equity (deficit).
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-end 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 | |
Series B Preferred Stock
In accordance with the Certificate of Incorporation, there were 9,000,000 authorized Series B Preferred Stock at a par value of $ 0.001. In connection with the Series B Preferred Stock Purchase Agreement, on May 12, 2017, the Company filed a Certificate of Designation (the “Certificate of Designations”) with the Secretary of State of the State of Delaware to designate the preferences, rights and limitations of the Series B Preferred Shares. 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 at any time on or after May 12, 2018 into such number of shares of the Company’s common stock equal to the number of Series B Preferred Shares to be converted, multiplied by the Preferred Conversation Rate. The Preferred Conversion Rate shall be the quotient obtained by dividing the Preferred Stock Original Issue Price ($0.3253815) by the Preferred Stock Conversation Price in effect at the time of the conversion (the initial conversion price will be equal to the Preferred Stock Original Issue Price, subject to adjustment in the event of stock splits, stock dividends, and fundamental transactions). Based on the current conversion price, the Series B Preferred Shares are convertible into 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 year ended December 31, 2018, the beneficial conversion amount of $22,202,194 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. As of December 31, 2018, the beneficial conversion feature was fully amortized. Provided below is a schedule of the issuances of Series B preferred shares and the amount accredited to deemed dividend at December 31, 2018.
| For the Year Ended December 31, 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 Year Ended December 31, 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.
As part of the Membership Interest Purchase Agreement entered into between the Company and Security Grade, on June 2, 2017 (see Note 6), 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 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 April 30, 2018 and have expiration dates ranging from March 2023 to March 2028.
The fair value of the stock options was estimated using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgement. The assumptions at the inception date are as follows:
| | | March 28,
2018
to
December 31,
2018 | | | June 2,
2017
to
December 31,
2017 | |
| Exercise Price | | $ | 1.90 to $2.09 | | | $ | 0.001 | |
| Fair value of company's common stock | | $ | 0.90 to $1.90 | | | $ | 3.00 to $4.42 | |
| Dividend yield | | | 0 | % | | | 0 | % |
| Expected volatility | | | 186.64% to 253.52 | % | | | 179.9% to 266.4 | % |
| Risk free interest rate | | | 2.35% to 2.59 | % | | | 1.42% to 1.98 | % |
| Expected life (years) remaining | | | 4.24 to 10.00 | | | | 2.42 to 3.00 | |
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 the settlements with the selling shareholders, 80,979 options previously issued as part of the acquisition were cancelled.
As part of the Merger Agreement entered into between the Company and BioTrackTHC, on June 1, 2018 (see Note 6), the Company assumed the BioTrackTHC Stock Plan, pursuant to which options exercisable at prices between $0.001 to $1.66 per share for 8,132,410 shares of Company common stock are outstanding so that the BioTrackTHC stockholders owned approximately 48% of the Company on a fully diluted basis as of the BioTrackTHC Closing Date Stock option activity for the years ended December 31, 2018 and 2017 is as follows:
| | | Shares Underlying Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | |
| Outstanding at January 1, 2017 | | | - | | | | | | | | | |
| Granted | | | 414,854 | | | $ | 0.001 | | | | 3.00 | |
| Forfeited and expired | | | - | | | | - | | | | | |
| Exercised | | | - | | | | - | | | | | |
| Outstanding at January 1, 2018 | | | 414,854 | | | $ | 0.001 | | | | 2.42 | |
| Granted | | | 490,000 | | | $ | 1.916 | | | | 8.84 | |
| Options assumed pursuant to acquisition – BioTrackTHC Stock Plan | | | 3,841,492 | | | $ | 0.790 | | | | 1.84 | |
| Options assumed pursuant to acquisition – Management Awards | | | 4,290,918 | | | $ | 0.439 | | | | 2.34 | |
| Exercised | | | (226,822 | ) | | $ | 0.001 | | | | 1.50 | |
| Forfeited and expired | | | (80,979 | ) | | $ | 0.001 | | | | | |
| Outstanding at December 31, 2018 | | | 8,729,463 | | | $ | 0.671 | | | | 2.44 | |
| | | | | | | | | | | | | |
| Vested options at December 31, 2018 | | | 8,466,285 | | | $ | 0.600 | | | | 2.05 | |
On February 13, 2017, the Company entered into a $183,333 Fixed secured Convertible Promissory Note (“Note Five”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $166,666 in cash, which was received by the Company during the quarter ended March 31, 2017. The additional $16,666 was retained by the Fourth Investor for due diligence and legal bills for the transaction. In conjunction with Note Five, the Company issued a warrant, of which the value was derived and based off the fair value of Note Five, to the fourth investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after February 14, 2017 and on or before February 12, 2022, by delivery to the Company of the Notice of Exercise. On December 11, 2017, the investor exercised their purchase right in a net settlement cashless exercise.
In connection with the issuance of the Note Seven the Company issued a warrant (the “Warrant”) to the Purchaser to purchase 150,000 shares of Common Stock pursuant to the terms and provisions thereunder. The Warrant is exercisable at any time within five (5) years of issuance and entitles the Purchaser to purchase 150,000 shares of the Common Stock at an exercise price of the lesser of either i) $1.00 or ii) a 50% discount to the lowest closing bid price thirty (30) trading days immediately preceding conversion, subject to certain adjustments.
Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after April 26, 2017 and on or before April 26, 2022, by delivery to the Company of the Notice of Exercise. On December 11, 2017, the investor exercised their purchase right in a net settlement cashless exercise.
During the year ended December 31, 2018, the Company entered into a Graduated Lock-Up Letter to induce the entering into of a consulting agreement in exchange for 50,000 shares of the Company’s common stock and the granting of 575,000 warrants for the purchase of common stock of the Company. The company recognized compensation expense of $943,000 for the year ended December 31, 2018 relating to the granting of the new warrants.
On December 12, 2018, the Company sold an aggregate of 222,222 units (the “December 2018 Units”) of the Company’s securities to Conifer Insurance Company (“Conifer”) at a purchase price of $0.90 per unit for total proceeds of $200,000. Each December 2018 Unit consists of one share of the Company’s common stock and a warrant (“December Warrant”) exercisable to purchase one half of one share of common stock of the Company. As of December 31, 2018, the warrants granted were not exercised.
Each December Warrant is exercisable at any time on or after 90 days from the issuance date until the four-year anniversary issuance date. Each December Warrant is exercisable at a price of $1.25 per one half of one share of common stock (thereby requiring the exercise of two warrants to purchase one share of common stock).
The December Warrants were recorded as a component of shareholders’ equity (deficit) and the company recognized compensation expense of $108,000 for the year ended December 31, 2018 relating to the granting of the new warrants.
A summary of warrant activity is as follows:
| For the Year Ended December 31, 2018 |
| | | Warrant Shares | | | Weighted Average Exercise Price | |
| Balance at beginning of the period, January 1, 2017 | | | 1,920,000 | | | $ | 0.16 | |
| Warrants granted | | | 987,073 | | | $ | 0.41 | |
| Warrants exercised | | | (175,000 | ) | | | | |
| Balance at January 1, 2018 | | | 2,732,073 | | | $ | 0.23 | |
| Warrants granted | | | 686,111 | | | $ | 0.21 | |
| Balance at December 31, 2018 | | | 3,418,184 | | | $ | 0.23 | |
Warrant Obligations
In connection with the Series B Preferred Stock Purchase Agreement (See Note 16), the Company is obligated to issue warrants to a third-party to purchase 812,073 shares of common stock at $0.325 per share for services rendered. These warrants have been accounted for as warrant obligations and are recognized as a liability on the Consolidated Balance Sheets as of December 31, 2018 and 2017. For the years ended December 31, 2018 and 2017, the Company recorded a credit and a charge in the change in fair value of the warrant obligations of $1,625,398 and $590,436, respectively, and is reflected in the Consolidated Statements of Operations, other income (expenses). Although the Company issued warrants during the first quarter of 2018, the rights entitled to the third-party holder of the warrants to purchase shares of the Company’s common stock was not exercised. Upon exercising the right to purchase the Company’s common stock by the third-party, the Company will de-recognize the liability for warrant obligations and reclassify the appropriate amount into equity.
The fair value of the Company’s obligation to issue warrants was calculated using the Black-Scholes model and the following assumptions:
| | | As of December 31, 2018 | | | As of December 31, 2017 | | | As of
May 17, 2017 | |
| Fair value of company's common stock | | $ | 0.90 | | | $ | 3.00 | | | $ | 3.98 | |
| Dividend yield | | | 0 | % | | | 0 | % | | | 0 | % |
| Expected volatility | | | 175.0 | % | | | 266.4 | % | | | 181.2 | % |
| Risk free interest rate | | | 2.49 | % | | | 1.98 | % | | | 1.42 | % |
| Expected life (years) | | | 1.65 | | | | 2.65 | | | | 3.00 | |
| Fair value of financial instruments - warrants | | $ | 804,171 | | | $ | 2,429,569 | | | $ | 1,839,133 | |
The change in fair value of the financial instruments – warrants is as follows:
| | | Amount | |
| Balance as of January 1, 2017 | | $ | - | |
| Fair value of warrants at date of inception | | | 1,839,133 | |
| Change in fair value of liability to issue warrants | | | 590,436 | |
| Balance as of January 1, 2018 | | $ | 2,429,569 | |
| Change in fair value of liability to issue warrants | | $ | (1,625,398 | ) |
| Balance as of December 31, 2018 | | $ | 804,171 | |
| 19. | 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, nonstatutory 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 490,000 shares of common stock and 514,945 shares of common stock were granted.
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. The BioTrackTHC Stock Plan will annually increase the number of shares of common stock authorized for issuance thereunder to 15% of the Company’s common stock outstanding as of the first day of each calendar year beginning January 1, 2016 (see Note 6 and 17).
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 Note 6 and 17).
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 years ended December 31, 2018 and 2017 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 years ended December 31, 2018, and 2017, the Company has a net operating loss carry forwards of approximately $12,686,000 and $7,380,000, 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.
| 21. | Commitments and Contingencies |
The Company is obligated under operating lease agreements for office facilities in Colorado, Florida, Washington and Hawaii, which expire in February and March 2021.
Rent expense incurred under the Company’s operating leases amounted to $362,607 and $68,138 during the years ended December 31, 2018 and 2017, respectively.
Future minimum payments of the Company’s operating leases are as follows:
| Years Ending December 31, | | Future Minimum Lease Payments | |
| 2019 | | $ | 473,495 | |
| 2020 | | | 420,291 | |
| 2021 | | | 275,223 | |
| 2022 | | | 198,144 | |
| 2023 | | | 199,144 | |
| Thereafter | | | 205,135 | |
| Total | | $ | 1,771,432 | |
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 consolidated financial statements.
The following represents selected information for the Company’s reportable segments:
| | | For the Years Ended December 31, | |
| | | 2018 | | | 2017 | |
| Security and guarding | | | | | | |
| Revenue | | $ | 4,889,472 | | | $ | 4,029,800 | |
| Cost of revenue | | | 3,618,173 | | | | 2,885,459 | |
| Gross profit | | | 1,271,299 | | | | 1,144,341 | |
| Total operating expenses (1) | | | 10,545,306 | | | | 4,927,623 | |
| Loss from operations | | | (9,274,007 | ) | | | (3,783,282 | ) |
| Total other income (expense) | | | 2,257,285 | | | | (6,882,705 | ) |
| Total net loss | | $ | (7,016,722 | ) | | $ | (10,665,987 | ) |
| | | | | | | | | |
| Systems installation | | | | | | | | |
| Revenue | | $ | 499,138 | | | $ | - | |
| Cost of revenue | | | 531,567 | | | | - | |
| Gross profit | | | (32,429 | ) | | | - | |
| Total operating expenses | | | 168,159 | | | | - | |
| Loss from operations | | | (200,588 | ) | | | - | |
| Total other expense | | | (273,642 | ) | | | - | |
| Total net loss | | $ | (474,230 | ) | | $ | - | |
| | | | | | | | | |
| Software | | | | | | | | |
| Revenue | | $ | 4,174,963 | | | $ | - | |
| Cost of revenue | | | 1,819,299 | | | | - | |
| Gross profit | | | 2,355,664 | | | | - | |
| Total operating expenses | | | 3,046,390 | | | | - | |
| Loss from operations | | | (690,726 | ) | | | - | |
| Total other income | | | 98 | | | | - | |
| Total net loss | | $ | (690,628 | ) | | $ | - | |
| (1) | Total operating expenses for the years ended December 31, 2018 and 2017 contained certain corporate expenditures totaling $8,891,677 and $3,435,626, respectively, which benefit all segments of the business but are not specifically allocable to any one segment. |
On February 25, 2019, the Company issued a press release announcing that Vicente Fox Quesada has agreed to join the Company’s board of directors.
Issuance of Promissory Note
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% per annum and is due and payable upon the maturity date of March 31, 2019. On March 2, 2019, the unsecured promissory note was paid in full.
Issuance of Investment Units
From January 10, 2019 to March 5, 2019, the Company sold an aggregate of 1,255,222 units (the “RC Units”) of the Company’s securities to RC Feeder II, LLC (“RC”) at a purchase price of $0.90 per unit for total proceeds of $1,129,700. Each RC Unit consists of one share of the Company’s common stock and a warrant (“RC Warrant”) exercisable to purchase one half of one share of common stock of the Company.
Each RC Warrant is exercisable at any time on or after 90 days from the issuance date until the four-year anniversary issuance date. Each RC Warrant is exercisable at a price of $1.25 per one half of one share of common stock (thereby requiring the exercise of two warrants to purchase one share of common stock).
Acquisition of Green Tree International, Inc.
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.
Issuance of Common Stock
In February 2019, the Company issued 100,000 shares of the Company’s common stock registered under the 2017 Omnibus Stock Incentive Plan to an employee of the Company.
In March 2019, the Company issued 250,000 shares of the Company’s common stock registered under the 2017 Omnibus Stock Incentive Plan to select employees of the Company.
In March 2019, certain option holders exercised their rights under the BioTrackTHC Stock Plan and were issued 62,847 shares for total proceeds of approximately $20,000.
Purchase Agreements
On March 1, 2019, the Company entered into two securities purchase agreementsin substantially the same form pursuant to which the Company agreed to sell secured convertible promissory notes (the “Convertible Notes”) and common stock purchase warrants (the “Warrants”) for an aggregate cash purchase price of $1,950,000 (collectively, the “Purchase Agreements”).
The Convertible Notes have an initial aggregate principal balance of $1,950,000 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 Convertible Notes mature on March 1, 2020. Upon certain events, the Convertible Notes will convert into shares of the Company’s common stock at a per share conversion price equal to the lesser of (a) $0.90 and (b) a 30% discount to the Company’s 30-day weighted average listed price per share immediately before the date of conversion. The Convertible Notes have other features, such as adjustments to the conversion price under certain circumstances.
The Warrants are exercisable for five years to purchase up to an aggregate of 696,430 shares of the Company’s common stock at a price of $1.40 per share. The Warrants have anti-dilution provisions that provide for an adjustment to the exercise price in the event of a future sale of the company’s common stock at a lower price, subject to certain exceptions.
In connection with the Purchase Agreement, on March 1, 2019, the Company entered into a Security Agreement (the “Security Agreement”) and a Pledge Agreement (the “Pledge Agreement”) pursuant to which all of its obligations to repay the Convertible Note is secured by all the assets of the Company, as further defined in the Security Agreement (the “Collateral”), and guaranteed by its subsidiaries (collectively, the “Guarantors”) pursuant to a subsidiary guaranty agreement (the “Subsidiary Guaranty Agreement”) executed by the Guarantors and acknowledged by the Company in favor of the investors. Pursuant to the Subsidiary Guaranty Agreement, the Guarantors jointly and severally, unconditionally and irrevocably, guarantee to the investors and their respective successors, endorsees, transferees and assigns, the prompt and complete payment and performance when due, of all obligations under the Convertible Notes and the Security Agreement.
On March 11, 2019, the Company entered into three common stock purchase warrant agreementsin substantially the same form pursuant to which the Company agreed to sell common stock purchase warrants for an aggregate cash purchase price of $90,000.
The Warrants are exercisable for three years to purchase up to an aggregate of 100,000 shares of the Company’s common stock at a price of $0.90 per share. The Warrants have anti-dilution provisions that provide for an adjustment to the exercise price in the event of a future sale of the company’s common stock at a lower price, subject to certain exceptions.
Conversion of Convertible Note to Common Stock
On March 7, 2019, the holder of a 10% fixed secured convertible promissory note issued by the Company elected their option to partially convert $75,882 in principal of the convertible note into 100,000 shares of the Company’s common stock.
Executive Employment Agreements
On March 19, 2019, the Company entered into an executive Employment Agreement (the “Venegas Employment Agreement”) with Zachary L. Venegas, its Chief Executive Officer and Executive Chairman of the Company’s board of directors (the “Board”).
The Venegas Employment Agreement provides that Mr. Venegas’s employment is “at-will.” Under the terms of the Venegas Employment Agreement, the Company must pay Mr. Venegas a salary at a rate of not less than $200,000 per year to continue as Chief Executive Officer and Executive Chairman of the Board. Mr. Venegas is also eligible to receive an annual bonus targeted at 50% of his base salary, plus stock options for the right to purchase up to 500,000 shares of our common stock, beginning with the 2018 calendar year. Mr. Venegas’s eligibility for the cash and equity bonus is based upon the achievement of pre-established individual and Company objectives, as set forth in the Venegas Employment Agreement and as determined by the Board.
The Venegas Employment Agreement provides that if Mr. Venegas resigns from the Company, he can choose to remain Executive Chairman of the Board, so long as he beneficially owns a minimum of 20% of the shares he held as of the date of the Venegas Employment Agreement. The Venegas Employment Agreement also provides that if Mr. Venegas’s employment is terminated by the Company without Cause (as defined in the Venegas Employment Agreement) or Mr. Venegas resigns for Good Reason (as defined in the Venegas Employment Agreement), provided that Mr. Venegas signs a release of claims, he will be entitled to the following separation benefits: (i) continued payment of his then-current base salary for a period of 18 months; (ii) he may sell to the Company at the trailing 10 day VWAP shares of Company stock sufficient to generate proceeds equal to the difference between $800,000 and the cumulative amounts received by him from all previous sales he has made of Company stock, and (iii) all outstanding options to purchase common stock of the Company then held by Mr. Venegas, to the extent unvested, will vest ratably by month for 18 months and any unexercised options will expire 21 months after termination, subject to certain limitations to the extent the options are designated as non-statutory stock options.
The Venegas Employment Agreement also includes certain non-competition and non-solicitation of customer and employee restrictions during Mr. Venegas’s employment and for a period of 18 months following any termination of employment, in addition to other customary terms, including provisions covering confidentiality and non-disclosure obligations, return of Company property, and assignment of inventions covenants.
On March 19, 2019, the Company entered into an executive Employment Agreement (the “Ogur Employment Agreement”) with Scott M. Ogur, its Chief Financial Officer and a member of the Board.
The Ogur Employment Agreement provides that Mr. Ogur’s employment is “at-will.” Under the terms of the Ogur Employment Agreement, the Company must pay Mr. Ogur a salary at a rate of not less than $180,000 per year, effective as of January 1, 2019, to continue as Chief Financial Officer and a member of the Board. Mr. Ogur is also eligible to receive an annual bonus targeted at 50% of his base salary, plus stock options for the right to purchase up to 300,000 shares of our common stock, beginning with the 2018 calendar year. Mr. Ogur’s eligibility for the cash and equity bonus is based upon the achievement of pre-established individual and Company objectives, as set forth in the Ogur Employment Agreement and as determined by the Board.
The Ogur Employment Agreement provides that if Mr. Ogur resigns from the Company, he can choose to remain a member of the Board, so long as he beneficially owns a minimum of 70% of the shares he held as of the date of the Ogur Employment Agreement. The Ogur Employment Agreement also provides that if Mr. Ogur’s employment is terminated by the Company without Cause (as defined in the Ogur Employment Agreement) or Mr. Ogur resigns for Good Reason (as defined in the Ogur Employment Agreement), provided that Mr. Ogur signs a release of claims, he will be entitled to the following separation benefits: (i) continued payment of his then-current base salary for a period of 12 months; (ii) he may sell to the Company at the trailing 10 day VWAP shares of Company stock sufficient to generate proceeds equal to the difference between $800,000 and the cumulative amounts received by him from all previous sales he has made of Company stock, and (iii) all outstanding options to purchase common stock of the Company then held by Mr. Ogur, to the extent unvested, will vest ratably by month for 12 months and any unexercised options will expire 15 months after termination, subject to certain limitations to the extent the options are designated as non-statutory stock options.
The Ogur Employment Agreement also includes certain non-competition and non-solicitation of customer and employee restrictions during Mr. Ogur’s employment and for a period of 18 months following any termination of employment, in addition to other customary terms, including provisions covering confidentiality and non-disclosure obligations, return of Company property, and assignment of inventions covenants.
F-44
