UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549 

 

FORM 10-Q

 

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

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.)

 

5300 DTC Parkway, Suite 300

Greenwood Village, CO 80111

(Address of Principal Executive Offices) (Zip Code)

 

Telephone: (720) 328-5372

(Registrant’s telephone number)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	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 May 18, 2017, the registrant had 28,644,522 shares of its common stock, par value $0.001 per share, outstanding.

 

 

 

Table of Contents

 

		PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	2
	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 2017 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	4
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	5
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	24
ITEM 4.	Controls and Procedures	24
PART II	OTHER INFORMATION	25
ITEM 1.	Legal Proceedings	25
ITEM 1A.	Risk Factors	26
ITEM 2.	Unregistered Sale of Equity Securities and Use of Proceeds	26
ITEM 3	Defaults upon Senior Securities	26
ITEM 4.	Mine Safety Disclosures	26
ITEM 5.	Other Information	27
ITEM 6.	Exhibits	28
SIGNATURES		29

 

 

PART 1 – FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31,
		2017				2016
ASSETS			(Unaudited)				(Audited)
Current assets:
Cash		$	84,247			$	57,841
Accounts receivable, net			273,558				257,974
Total current assets			357,805				315,815
Property and equipment, net			69,067				55,600
Intangible assets, net			266,323				279,744
Deposits			20,735				20,290
Total assets		$	713,930			$	671,449
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	131,275			$	106,600
Advances from related party			81,500				76,500
Deferred rent			5,127				4,243
Convertible notes payable, net of discount			564,286				470,000
Convertible note payable - related party			286,985				274,574
Promissory notes			255,000				-
Obligation pursuant to acquisition			157,258				178,090
Total current liabilities			1,481,431				1,110,007
Total liabilities			1,481,431				1,110,007
Shareholders' equity:
Preferred stock (Class A), $0.001 par value, 20,000,000 shares authorized; 1,000,000 issued and outstanding as of March 31, 2017 and December 31, 2016			1,000				1,000
Common stock; par value $0.001; 200,000,000 shares authorized; 28,383,441 shares issued and outstanding as of March 31, 2017; 28,383,441 shares issued and outstanding as of December 31, 2016			28,383				28,383
Additional paid-in capital			12,190,797				7,052,070
Accumulated deficit			(12,987,681	)			(7,520,011	)
Total shareholders' equity (deficit)			(767,501	)			(438,558	)
Total liabilities and shareholders' equity (deficit)		$	713,930			$	671,449

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

HELIX TCS, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months Ended March 31,
		2017				2016
Revenue		$	691,737			$	380,592
Cost of revenue			610,203				375,186
Gross margin			81,534				5,406
Operating expenses:
General and administrative			177,981				59,697
Salaries and wages			161,732				107,199
Professional and legal fees			128,709				54,472
Depreciation and amortization			21,627				7,672
Total operating expenses			490,049				229,040
Loss from operations			(408,515	)			(223,634	)
Other expenses:
Gain on fair value of liability of shares to be issued			-				25,000
Loss on extinguishment of debt			(4,611,395	)			-
Change in fair value of convertible note - related party			(12,411	)			-
Interest expense			(435,349	)			(4,986	)
Other expenses			(5,059,155	)			20,014
Net loss		$	(5,467,670	)		$	(203,620	)
Net loss per common share - basic and diluted		$	(0.21	)		$	(0.01	)
Weighted average common shares outstanding - basic and diluted			26,610,226				23,508,797

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

ELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT

 

		Common Stock								Preferred Stock (Class A)								Additional Paid-In				Accumulated				Total Shareholders' Equity
		Shares				Amount				Shares				Amount				Capital				Deficit				(Deficit)
Balance at December 31, 2016			28,383,441			$	28,383				1,000,000			$	1,000			$	7,052,070			$	(7,520,011	)		$	(438,558	)
Warrant issuances to investors			-				-				-				-				22,000				-				22,000
																											-
Beneficial conversion feature on convertible debt			-				-				-				-				535,332				-				535,332
																											-
Reacquisition price of convertible debt			-				-				-				-				4,581,395				-				4,581,395
Net loss			-				-				-				-				-				(5,467,670	)			(5,467,670	)
Balance at March 31, 2017			28,383,441			$	28,383				1,000,000			$	1,000			$	12,190,797			$	(12,987,681	)		$	(767,501	)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Three Months Ended March 31,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(5,467,670	)		$	(203,620	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			58,865				7,672
Change in fair value of convertible notes			12,411				-
Gain on fair value of liability of shares to be issued			-				(25,000	)
Loss on beneficial conversion feature			390,666				-
Loss on extinguishment of debt			4,611,395				-
Non-employee stock compensation expense			-				95,000
Change in operating assets and liabilities:
Accounts receivable			(15,585	)			(81,396	)
Prepaid expenses			-				13,089
Deposits			(445	)			8
Accounts payable and accrued expenses			24,675				4,643
Deferred rent			884				-
Net cash used in operating activities			(384,804	)			(189,604	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(19,625	)			(2,176	)
Payments pursuant to acquisition			(20,832	)			(50,000	)
Net cash (used in) provided by investing activities			(40,457	)			(52,176	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable			191,667				250,000
Proceeds from issuance of common stock			-				150,000
Proceeds from promissory notes			255,000				-
Advances from shareholders			5,000				-
Net cash provided by financing activities			451,667				400,000
Net change in cash			26,406				158,220
Cash, beginning of period			57,841				154,282
Cash, end of period		$	84,247			$	312,502

  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.	Description of Business

 

Helix TCS, Inc. (the “Company” or “Helix”) was incorporated in Delaware on March 13, 2014. Pursuant to the acquisition of the assets of Helix TCS, LLC, as discussed below, 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 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 Agreement of Helix TCS, LLC was treated as a recapitalization for financial accounting purposes. Jubilee4 Gold, Inc. is considered the acquiree for accounting purposes and their historical financial statements before the Acquisition Agreement were replaced with the historical financial statements of the Company. The common stock account of the Company continues post-merger, while the retained earnings of the acquiree is eliminated. The historical information of Helix TCS, Inc. is presented for comparative purposes. Furthermore, effective, April 11, 2016 the Company acquired the assets of Revolutionary Software, LLC (see Note 4).

 

2.	Going Concern Uncertainty, Financial Condition and Management’s Plans

 

The Company believes that there is substantial doubt about the Company’s ability to continue as a going concern. The Company believes that its available cash balance as of the date of this filing will not be sufficient to fund its anticipated level of operations for at least the next 12 months. The Company believes that its ability to continue operations depends on its ability to sustain and grow revenue and results of operations as well as its ability to access capital markets when necessary to accomplish the Company’s strategic objectives. The Company believes that 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 may need additional equity or debt financing until the Company can achieve profitability and positive cash flows from operating activities, if ever. 

 

At March 31, 2017, the Company had a working capital deficit of approximately $1,123,626, as compared to working capital deficit of approximately $794,192 at December 31, 2016. The decrease of $329,434 in the Company’s working capital from December 31, 2016 to March 31, 2017 was primarily the result of an increase in convertible notes payable and promissory notes.

 

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 courier service in Colorado, and transforming the assets acquired from Revolutionary Software. The Company’s management has taken several actions to ensure that it will have sufficient liquidity to meet its obligations through December 31, 2017, including growing and diversifying its revenue streams, selectively reducing expenses, and discussing additional funding with potential investors. Additionally, if the Company’s actual revenues are less than forecasted, the Company anticipates that variable expenses will also decline, and the Company’s management can implement expense reduction as necessary. The Company is evaluating other measures to further improve its liquidity, including the sale of equity or debt securities. Lastly, the Company may elect to reduce certain related-party and third party debt by converting such debt into common shares. The Company’s management believes that these actions will enable the Company to meet its liquidity requirements through December 31, 2017. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during 2017.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company plans to generate positive cash flow from its recently-completed asset acquisition 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.

 

3.	Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Helix TCS, LLC (“Helix TCS”), Security Consultants Group, LLC (“Security Consultants”), Boss Security Solutions, Inc. (“Boss Security”) and Revolutionary Software, LLC (“Revolutionary”) (since April 2016).

 

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 and Cash equivalents

 

Cash consists of checking accounts. The Company considers all highly-liquid investments purchased with a maturity of three months or less at the time of purchase to be cash.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.

 

Management charges balances off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company determines when receivables are past due or delinquent based on how recently payments have been received.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Allowance for doubtful accounts was $31,767 and $31,767 at March 31, 2017 and December 31, 2016, 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.

 

Accounting for Acquisitions 

 

In accordance with the guidance for business combinations, the Company determines whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase. The Company capitalizes acquisition-related costs and fees associated with asset acquisitions and immediately expense acquisition-related costs and fees associated with business combinations. 

 

Revenue Recognition

 

The Company recognizes revenue when: (1) persuasive evidence of an arrangement exists, (2) the services have been rendered to the customer, (3) the sales price is fixed or determinable and, (4) collectability is reasonably assured. The Company’s revenues are principally derived from providing security services to its clientele.

 

The security services revenue is generated from performing armed and unarmed guarding which is contracted for on an hourly basis. Revenues associated with these contracted services are recognized under time-based arrangements as services are provided.

 

Additionally, the Company provides transportation security services, which are generally contracted for on a per run basis and sometimes additional fees and surcharges are also billed to the client depending on the length of the run. Revenues associated with these services are recognized as the transportation service is provided.

 

The Company generates advertising revenues from consumer advertising on its Cannabase platform. Revenue is recognized over the contract period associated with each specific advertising campaign.

 

Expenses

 

Cost of Revenue

 

The cost of revenue is the total cost incurred to obtain a sale and the cost of the goods or services sold. Cost of revenue primarily consisted of hourly compensation for security personal.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Operating Expenses

 

Operating expenses encompass selling general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company.

  

Other Expenses

 

Other expenses, net consisted of the change in fair value of convertible note – related party and interest expense.

 

Property and Equipment

 

Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives are 3 years for vehicles and 5 years for furniture and equipment. Maintenance and repairs are expensed as incurred and major improvements are capitalized. When assets are sold, or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in other income.

 

Contingencies

 

Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.

 

Leases

 

Lease agreements are evaluated to determine if they are capital leases meeting any of the following criteria at inception: (a) transfer of ownership; (b) bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the leased property; or (d) the present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.

 

If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a capital lease; and if none of the four criteria are met, the lease is classified by the Company as an operating lease.

 

Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in liabilities.

 

Advertising

 

Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $3,791 and $2,931 for the three months ended March 31, 2017 and 2016, respectively.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 three months ended March 31, 2017 and 2016.

 

Distinguishing Liabilities from Equity

 

The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.

 

Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.

 

Initial Measurement

 

The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.

 

Subsequent Measurement - Financial instruments classified as liabilities

 

The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other 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. A beneficial conversion feature is recorded by the Company as a debt discount pursuant to ASC Topic 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.

 

Share-based Compensation

 

In accordance with ASC 718, Compensation – Stock Based Compensation, and ASC 505, Equity Based Payments to Non-Employees, the Company accounts for share-based payment using the fair value method. Common shares issued to third parties for non-cash consideration are valued based on the fair market value of the services provided or the fair market value of the common stock on the measurement date, whichever is readily determinable.

 

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).

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:

 

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

 

Certain assets and liabilities of the Company are required to be recorded at fair value either on a recurring or non-recurring basis. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction based on market participants. The following section describes the valuation methodologies that the Company used to measure, for disclosure purposes, its financial instruments at fair value.

 

Convertible notes payable

 

The fair value of the Company’s convertible notes payable, approximated the carrying value as of March 31, 2017 and December 31, 2016. Factors that the Company considered when estimating the fair value of its debt included market conditions and the term of the debt. The level of the debt would be considered as Level 2.

 

Additional Disclosures Regarding Fair Value Measurements

 

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

 

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 income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS excluded all dilutive potential 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 three months ended March 31, 2017 and March 31, 2016 as their effect would be anti-dilutive.

 

Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of warrants, options, convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The anti-dilutive shares of common stock outstanding for three months ended March 31, 2017 and March 31, 2016 were as follows:

 

		For the Three Months Ended March 31,
		2017				2016
Potentially dilutive securities:
Convertible notes payable			188,820				1,685,935
Convertible preferred stock			45,413,506				-
Warrants			1,945,000				1,920,000

 

Reclassifications

 

Certain reclassifications have been made to the prior period financial statements to conform to the current period financial statement presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09 is that an entity should recognize 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 and services. This standard is effective for fiscal years and interim reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in this update deferred the effective date for implementation of ASU 2014-09 by one year and is now effective for annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016 including interim reporting periods within that period. Topic 606 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the effects of ASU 2014-09 and related ASUs noted below on its consolidated financial statements.

 

From March through December 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606):Narrow-Scope Improvements and Practical Expedients and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. These amendments are intended to improve and clarify the implementation guidance of Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements of ASU No. 2014-09 and ASU No. 2015-14.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero-coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The guidance is effective for the Company beginning after December 15, 2017, although early adoption is permitted. The Company currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash a consensus of the FASB Emerging Issues Task Force (“ASU 2016-18”). ASU 2016-18 requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement cash flows. The new standard is expected to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. The Company currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

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 currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

 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. Although the Company cannot anticipate future goodwill impairment, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate a material impact on the Company’s financial statements. The current accounting policies and procedures are not anticipated to change, except for the elimination of the Step 2 analysis. The Company currently is in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

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.

 

4.	Asset Acquisition

 

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. As of March 31, 2017, the Company owed the initial seller $157,258.
	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. As of March 31, 2017, the Company owed Revolutionary $0.

 

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 6. Intangible Assets, Net.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5.	Property and Equipment, Net

 

At March 31, 2017 and December 31, 2016, property and equipment consisted of the following:

 

		March 31, 2017				December 31, 2016
Furniture and equipment		$	16,332			$	14,731
Vehicles			88,367				68,295
Total			104,699				83,026
Less: Accumulated depreciation			(35,632	)			(27,426	)
Property and equipment, net		$	69,067			$	55,600

 

Depreciation expense for the three months ended March 31, 2017 and 2016 was $8,206 and $7,672, respectively.

 

6.	Intangible Assets, Net

 

The following table summarizes the Company’s intangible assets as of March 31, 2017 and December 31, 2016:

 

		Estimated				Carrying Amount at				December 31, 2016
		Useful Life (Years)				December 31, 2015				Assets Acquired (1)				Impairment (2)				Accumulated Amortization				Net Book Value
In-process software			5			$	-			$	800,500			$	(800,500	)		$	-			$	-
Database			5				-				571,250				(477,823	)			(13,464	)			79,963
Trade names			10				-				100,000				-				(7,205	)			92,795
Web addresses			5				-				125,000				-				(18,014	)			106,986
						$	-			$	1,596,750			$	(1,278,323	)		$	(38,683	)		$	279,744

 

						March 31, 2017
		Estimated Useful Life (Years)				Gross Carrying Amount				Accumulated Amortization				Net Book Value
In-process software			5			$	-			$	-			$	-
Database			5				93,427				(18,135	)			75,292
Trade names			10				100,000				(9,705	)			90,295
Web addresses			5				125,000				(24,264	)			100,736
						$	318,427			$	(52,104	)		$	266,323

 

(1)

On April 11, 2016, the Company acquired various assets of Revolutionary Software, LLC (See ‘Note 4”).

(2)

During the second quarter for the Year ended December 31, 2016, the Company performed the two-step indefinite lived impairment test and determined the in-process software and database acquired failed both tests. Based on the testing performed, the Company recorded a non-cash impairment charge of $1,278,323.

 

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 $13,421 and $0 for the three months ended March 31, 2017 and 2016, respectively.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7.	Accounts Payable and Accrued Expenses

 

 

As of March 31, 2017 and December 2016, accounts payable and accrued expenses consisted of the following:

 

		March 31, 2017				December 31, 2016
Accounts payable		$	88,263			$	83,308
Accrued expenses			34,527				14,805
Accrued interest			8,485				8,487
Total		$	131,275			$	106,600

 

8.	Convertible Notes Payable

 

		March 31, 2017				December 31, 2016
Note One, 7% convertible promissory note, unsecured, maturing December 31, 2017		$	-			$	-
Note Two, 7% convertible promissory note, unsecured, maturing December 31, 2017			-				-
Note Three, 7% convertible promissory note, unsecured, maturing December 31, 2017			-				-
Note Four, 0% convertible promissory note, unsecured, maturing November 1, 2016, net of debt discount for debt issuance costs			-				470,000
Note Five, 10% convertible promissory note, fixed secured, maturing September 12, 2017, net of debt discount for debt issuance costs, warrants and beneficial conversion feature			39,286				-
Note Six, 10% convertible promissory note, fixed secured, maturing September 13, 2017			25,000				-
Amended Note, 0% convertible promissory note, unsecured, maturing June 1, 2017			500,000				-
			564,286				470,000
Less: Current portion			(564,286	)			(470,000	)
Long-term portion		$	-			$	-

 

On December 16, 2015, the Company entered into an Unsecured Convertible Promissory Note (“Note One”) with an investor (the “Investor”). The Investor provided the Company with $100,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note One due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note One was convertible at the election of the Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. The Company evaluated Note One in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that Note One will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of December 31, 2015, the fair value of the liability was $90,436 and accordingly the Company recorded gain in regards to the change in fair value of $9,546 for the year ended December 31, 2015. On December 31, 2016, the Company and the Investor of Note One entered into an Amendment and Extension Agreement (“Amended Note One”).Per Amendment Note One, the conversion rate under Note One was amended to a new conversion rate of $1.00 per share, for the outstanding principal balance and any accrued and unpaid interest to date. If the Investor elects to convert the entire outstanding principal balance of the note on or before ten (10) days from the date of the Amended Note One, the Investor of Note One receives the right to purchase 50,000 restricted shares of common stock of the Company at $1.00 per common share, for cash. On December 31, 2016, the Amended Note One was converted into 107,000 shares of restricted common stock. In addition, the Investor elected to purchase 50,000 restricted shares of common stock of the Company, which the Company received proceeds of $50,000 (“Amended Note One Subscription”) (See Note 13). In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the Amended Note One and Amended Note One Subscription of $1,003,751. The interest expense associated with Note One was $0 and $1,745 for the three months ended March 31, 2017 and 2016, respectively.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On December 18, 2015, the Company entered into an Unsecured Convertible Promissory Note (“Note Two”) with a second investor (the “Second Investor”). The Second Investor provided the Company with $100,000 in cash, which was received by the Company during the year ended December 31, 2016. The Company promised to pay the principal amount, together with interest at the annual rate of 7%, with principal and accrued interest on Note Two due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Two was convertible at the election of the Second Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. On December 31, 2016, the Company and the Second Investor of Note Two entered into an Amendment and Extension Agreement (“Amended Note Two”). Per Amendment Note Two, the conversion rate under Note Two was amended to a new conversion rate of $1.00 per common share, for the outstanding principal balance and any accrued and unpaid interest to date. If the Second Investor elects to convert the entire outstanding principal balance of the note on or before ten (10) days from the date of the Amended Note Two, the Second Investor of Note Two receives the right to purchase 50,000 restricted shares of common stock of the Company at $1.00 per share, for cash. On December 31, 2016, the Amended Note Two was converted into 107,000 shares of restricted common stock. In addition, the Investor elected to purchase 50,000 restricted shares of common stock of the Company, which the Company received proceeds of $50,000 (“Amended Note Two Subscription”) (See Note 13). In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the Amended Note Two and Amended Note Two Subscription of $1,003,751. The interest expense associated with Note Two was $0 and $1,745 for the three months ended March 31, 2017 and 2016, respectively.

 

On February 12, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Three”) with a third investor (the “Third Investor”). The Third Investor provided the Company with $100,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note Three due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Three was convertible at the election of the Third Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. On December 31, 2016, the Company and the Investor of Note Three entered into an Amendment and Extension Agreement (“Amended Note Three”). Per Amended Note Three, the conversion rate under Note Three was amended to a new conversion rate of $1.00 per share, for the outstanding principal balance and any accrued and unpaid interest to date. If the Investor elects to convert the entire outstanding principal balance of the note on or before ten (10) days from the date of the Amended Note Three, the Investor of Note Three receives the right to purchase 25,000 restricted shares of common stock of the Company at $1.00 per common share, for cash. On December 31, 2016, the Amended Note Three was converted into 106,000 shares of restricted common stock. In addition, the Investor elected to purchase 25,000 restricted shares of common stock of the Company, which the Company received proceeds of $25,000 (“Amended Note Three Subscription”) (See Note 13). In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the Amended Note Three and Amended Note Three Subscription of $882,641. The interest expense associated with Note Three was $0 and $921 for the three months ended March 31, 2017 and 2016.

 

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 Holder. In the absence of a Company Event of Default or Holder 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 the Amended 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, and 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 31, 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 31, 2017 the Amended 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 the Amended Note 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 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.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Due to the terms of the Amendment, the Company evaluated Note Four under ASC 470-50 to determine if modification or extinguishment treatment was necessary. After performing the analysis under ASC 470-50, it was determined extinguishment treatment was appropriate and the Company should extinguish Note Four and recognize the Amended Note as new debt. The Company recognized a loss on extinguishment of $4,611,395 on Note Four.

 

The Company evaluated the Amended Note and the embedded conversion feature under ASC 815 and determined the conversion feature did not meet the definition of a derivative and therefore should not be bifurcated. The Company then evaluated the Amended Note in accordance with ASC 480 and determined that Note Four will be accounted for as a liability measured at fair value. As of March 31, 2017, the fair value of the liability was $500,000.

 

On 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 become effective on February 14, 2017 upon the execution by the Company and the Holder of numerous exhibit documents.

 

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.  Amounts amortized to interest expense were approximately $39,286 for the three months ended March 31, 2017. The unamortized discount balance at March 31, 2017 was approximately $144,047.

 

On February 13, 2017, the Company entered into a $25,000 10% Fixed Secured Convertible Promissory Note (“Note Six”) with a third investor (the “Third Investor”). The Third 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 Third 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 become 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.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

9.	Related Party Transactions

 

Advances from Related Parties

 

The Company has a loan outstanding from Helix Opportunities. The advance does not accrue interest and has no definite repayment terms. The loan balance was $81,500 as of March 31, 2017.

 

Convertible Note Payable

 

On March 11, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Five”) 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 Five due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Five 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 Five in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that 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 March 31, 2017, the fair value of the liability was $286,985 and accordingly the Company recorded a charge regarding the change in fair value of $12,411 for the three months ended March 31, 2017. The interest expense associated with Note Five was $2,589 and $575 for the three months ended March 31, 2017 and 2016.

 

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 March 31, 2017, the warrants granted are not exercisable.

 

On February 13, 2017, the Company entered into a $183,333 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. 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. 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. As of March 31, 2017, the warrants granted were not exercised.

 

A summary of warrant activity is as follows:

 

March 31, 2017
		Warrant Shares				Weighted Average  Exercise Price
Balance at beginning of period			1,920,000			$	0.16
Warrants granted			25,000			$	1.00
Balance at end of period			1,945,000			$	0.18

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

10.	Promissory Notes

 

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 is due and payable on June 30, 2017. As of March 31, 2017 and December 31, 2016, the Company had $180,000 and $0 outstanding on the unsecured promissory note. The interest expense associated with the unsecured promissory note was $1,016 and $0 for the three months ended March 31, 2017 and 2016.

 

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 is due and payable on June 30, 2017. As of March 31, 2017 and December 31, 2016, the Company had $75,000 and $0 outstanding on the unsecured promissory note. The interest expense associated with the unsecured promissory note was $1,791 and $0 for the three months ended March 31, 2017 and 2016.

 

11.	Stockholders’ Equity (Deficit)

 

Preferred Stock (Class A)

 

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 includes super majority voting rights and are convertible into 60% of the Company’s common stock.

 

12.	Income Taxes

 

No provision for U.S. federal or state income taxes has been recorded as the Company has incurred net operating losses since inception. Significant components of the Company’s net deferred income tax assets for the three months ended March 31, 2017 and 2016 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 three months ended March 31, 2017 and 2016, the Company has a net operating loss carry forward of approximately $3,838,000 and $564,000, 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.

 

13.	Commitments and Contingencies

 

The Company is obligated under an operating lease agreement for an office facility in Colorado, which expires on February 28, 2021.

 

Rent expense incurred under the Company’s operating leases amount to $18,210 and $26,631 during the three months ended March 31, 2017 and 2016, respectively.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

14.	Subsequent Events

 

On April 26, 2017, the Company entered into a securities purchase agreement with RedDiamond Partners, LLC, (the “Purchaser”) in connection with the issuance of a 10% secured convertible promissory note (the “Convertible Note”), in the aggregate principal amount of $104,000, with an original issue discount of $26,000 convertible into shares of the Company’s common stock. The Convertible Note bears a ten percent (10%) annual interest rate and is convertible into shares of Common Stock at a conversion price of $1.00 per share (the “Conversion Shares”), subject to certain adjustments, and matures on October 26, 2017.

 

In connection with the issuance of the Convertible Note 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.

 

On May 8, 2017, the Company entered into a subscription agreement (the “Subscription Agreement”) with an accredited investor (the “Investor”). Pursuant to the Subscription Agreement, the Investor purchased 111,111 shares of the Company’s common stock, par value $0.001 per share, for an aggregate purchase price of $100,000 or $0.90 per share.

 

On May 15, 2017, the Company filed a certificate of designations, preferences and rights (the “Certificate of Designations”) with the Secretary of State of the State of Delaware pursuant to which the Company set forth the designation, powers, rights, privileges, preferences and restrictions of the Company’s Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred”). The Series B Preferred is convertible into the Company’s common stock (“Common Stock”) at the holder’s option at any time after May 12, 2018 and automatically converts into Common Stock at any time after May 12, 2018 upon either the affirmative vote of a majority of Series B Preferred holders or a “Qualified Initial Public Offering” of the Company’s securities, as defined in the Certificate of Designations.

 

The number of shares of the Common Stock to which a holder of the Series B Preferred shall be entitled upon conversion shall be the product obtained by multiplying the Preferred Conversion Rate, as defined below, then in effect by the number of shares of the Series B Preferred Stock being converted. The conversion rate in effect at any time for conversion of the Series B Preferred Stock (the “Preferred Conversion Rate”) shall be the quotient obtained dividing the Preferred Stock Original Issue Price (as defined in the Certificate of Designations) by the preferred stock conversion price which shall initially be equal to the Preferred Stock Original Issue Price, for an effective initial conversion ratio equal to 1:1, subject to adjustment.

 

The Series B Preferred shall 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. Each holder of shares of the Series B Preferred shall be entitled to the number of votes equal to the number of shares of the Common Stock into which such shares of the Series B Preferred are then convertible. For so long as any the shares of the Series B Preferred remain outstanding, in addition to any other vote or consent required by the Company’s Certificate of Incorporation or bylaws, the vote or written consent of the holders of at least a majority of the outstanding shares of the Series B Preferred, voting or consenting together as a separate class, shall be necessary for authorizing, effecting or validating certain transactions as further described in the Certificate of Designations.

 

Additionally, the Series B Preferred holders may elect a Director to sit on the Company’s Board of Directors.

 

On May 17, 2017, the Company entered into that certain Series B Preferred Stock Purchase Agreement (the “Purchase Agreement”) by and among the Company, Helix Opportunities, LLC, a Delaware limited liability company (“Helix LLC”), and RSF4, LLC, a Delaware limited liability company (the “Purchaser” or “Rose Capital”). Pursuant to the Purchase Agreement, the Company sold to the Purchaser an aggregate of 7,318,084 shares of the Company Series B Preferred Stock (“Series B Preferred Stock) for the following consideration (i) the conversion of an outstanding note in the principal aggregate amount of $500,000 issued by the Company in favor of an affiliate of Purchaser into 1,536,658 shares of Series B Preferred Stock and (ii) $1,875,000 in cash for the issuance. In accordance with the terms of the Purchase Agreement, the Company, Helix LLC, and the Investor also entered into (i) an Investors Rights Agreement (the “Investors Rights Agreement”), (ii) a Right of First Refusal and Co- Sale Agreement (the “ROFR Agreement”), and (iii) a Voting Agreement (the “Voting Agreement”). In connection with the additional investment, the Company paid off promissory notes with an outstanding balance of $255,000 held by the Purchaser (See Note 10).

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Investor Rights Agreement grants the holders of the Company’s Series A Preferred Stock (“Series A Preferred Stock”) and Series B Preferred Stock (collectively, the “Preferred Holders”) certain registration rights including but not limited to the right to demand registration of the shares of Common Stock underlying both the Series A Preferred Stock and the Series B Preferred Stock (the “Conversion Shares”) after the earlier of the third anniversary of the date of the Investors Rights Agreement or 180 days following the Company’s first firm commitment underwritten public offering of its Common Stock The Investor Rights Agreement also grants the Preferred Holders the right to have any of their shares of Conversion Shares included in any registration statement filed by the Company, subject to limitations as set forth therein.

 

Pursuant to the Investor Rights Agreement the Company also covenants to provide Rose Capital with certain financial information of the Company related to the Company’s financial forecasts and annual fiscal budget to be held confidentially. Additionally, the Preferred Holders holding at least 5% of the issued and outstanding of the preferred stock of the Company (each a “Major Investor”) shall have a right to purchase such Major Investor’s pro rata share of all equity securities that the Company may, from time to time, propose to sell and issue after May 17, 2017, other than the equity securities excluded therein. Each Major Investor’s pro rata share is equal to the ratio of (a) the number of shares of the Company’s outstanding Common Stock (treating all shares of convertible preferred stock or warrants to acquire convertible preferred stock on an as-converted to common stock basis and including all shares of Common Stock issuable upon the exercise of outstanding warrants or options) which such Major Investor holds of record immediately prior to the issuance of such equity securities to (b) the total number of shares of the Company’s outstanding Common Stock (treating all shares of convertible preferred stock or warrants to acquire convertible preferred stock on an as-converted to common stock basis and including all shares of Common Stock issuable upon the exercise of outstanding warrants or options) immediately prior to the issuance of such equity securities.

 

Pursuant to the ROFR Agreement if a Preferred Holder proposes to Transfer (as defined in the ROFR Agreement) any shares of such Preferred Holder’s stock, the Preferred Holder shall promptly give written notice (the “Notice”) simultaneously to the Company and to each of the Major Investors at least thirty (30) days prior to the closing of such Transfer.

 

With the exception of Exempt Transfers (as defined in ROFR), for a period of thirty (30) days following receipt of any Notice each Major Investor shall have the right, exercisable upon written notice to the Preferred Holder to purchase its pro rata share of the Preferred Holder stock subject to the Notice and on the same terms and conditions as set forth therein. The Major Investors who so exercise their rights (the “Participating Major Investors”) shall effect the purchase of the Preferred Holder stock in accordance with the terms therein.

 

In the event that not all of the Major Investors elect to purchase their pro rata share of the Preferred Holder stock then the Preferred Holder shall promptly give written notice to each of the Participating Major Investors the (the “Overallotment Notice”), which shall set forth the number of shares of Preferred Holder stock not purchased and shall offer such Participating Major Investors the right to acquire such unsubscribed shares.

 

In the event that the Major Investors do not elect to purchase all of the Preferred Holder stock available the Preferred Holder shall promptly give written notice (the “Second Notice”) to the Company, which shall set forth the number of shares of Preferred Holder stock not purchased by the Major Investors and the Company shall then have the right, to purchase all or a portion of the Preferred Holder stock subject to the Second Notice on the same terms and conditions

as set forth therein.

 

In the event the Major Investors and the Company fail to exercise their respective rights to purchase all of the Preferred Holder stock, then the Preferred Holder shall first deliver to the Company and each Major Investor written notice (the “Co-Sale Notice”) that each Major Investor shall have the right, exercisable upon written notice to such Preferred Holder with a copy to the Company within fifteen (15) days after receipt of the Co- Sale Notice, to participate in such Transfer of Preferred Holder stock on the same terms and conditions.

 

The Voting Agreement requires the Company, Helix LLC and the Purchaser to vote their respective shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock to among other things, elect or appoint at least one representative of the Series A Preferred Stock and one representative of the Series B Preferred Stock to the Board of Directors (the “Board”) and maintain such representation on the Board so long as the Series B Preferred Stock remains outstanding.  

 

The above descriptions of the Purchase Agreement, Investor Rights Agreement, ROFR Agreement and Voting Agreement do not purport to be complete and are qualified in their entirety by the full text of the forms of such documents, which are attached as exhibits hereto and incorporated herein by reference.

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  

 

Forward-Looking Statements

 

The following discussion of our financial condition and results of operations for the three months ended March 31, 2017 and 2016 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed on April17, 2017 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Unless expressly indicated or the context requires otherwise, the terms "Helix", the “Company”, “we”, “us”, and “our” refer to Helix TCS, Inc.

        

Overview

 

Helix’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 – a combination that is truly unmatched in the Legal Cannabis Industry.

 

Technology is a cornerstone of Helix’s service offering. We offer clients the only true technology platform in the industry, allowing 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.

 

As our flagship service offering, we offer simply the highest standard in security operations: transport, armed and unarmed guarding, training, investigation, and special services in the industry. From the training of our guard staff, to the sophistication and effectiveness of our literally, battle-tested protocols, to our responsiveness to client needs and suggestions, Helix delivers integrated operating environments that are unmatched in the industry.

 

Results of Operations for the three months ended March 31, 2017 and 2016

 

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 three months ended March 31, 2017, we have generated revenue and are trying to achieve positive cash flows from operations.

 

 

The following table shows our results of operations for the three months ended March 31, 2017 and 2016. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

		For the Three Months Ended March 31,								Change
		2017				2016				Dollars				Percentage
Revenue		$	691,737			$	380,592			$	311,145				82	%
Cost of revenue			610,203				375,186				235,017				63	%
Gross margin			81,534				5,406				76,128				1408	%
Operating expenses			490,049				229,040				261,009				114	%
Loss from operations			(408,515	)			(223,634	)			(184,881	)			83	%
Other income (expense), net			(5,059,155	)			20,014				(5,079,169	)			-25378	%
Net loss		$	(5,467,670	)		$	(203,620	)		$	(5,264,050	)			2585	%

 

Revenue

 

Total revenue for the three month period ended March 31, 2017 was $691,737, which represented an increase of $311,145 compared to total revenue of $380,592 for the three months ended March 31, 2016. The increase primarily resulted from a substantial increase in the number of clients serviced by Helix, the introduction of retail transportation services, and the development of the Cannabase Reach Platform, which did not previously exist.

 

Cost of Revenue

 

Cost of revenue for the three months ended March 31, 2017 and 2016 primarily consisted of hourly compensation for security personal. Cost of revenue increased by $235,017 for the three months ended March 31, 2017, to $610,203 as compared to $375,186 for the three months ended March 31, 2016. The increase primarily resulted from a substantial increase in the number of clients serviced by Helix, which required the hiring of additional employees.

 

Operating Expenses

 

Our operating expenses encompass selling, general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during the three months ended March 31, 2017 and 2016 were $490,049 and $229,040 respectively. The overall $261,009 increase in operating expenses was primarily attributable to the following increases in operating expenses of:

 

	●	General and administrative expenses – $118,284
	●	Salaries and wages – $54,533
	●	Professional and legal fees – $74,237
	●	Depreciation and amortization – $13,955

 

 

The $118,284 increase in general and administrative expenses resulted from increases in rent expense, advertising and travel expenses resulting from an expansion in our operations requiring greater office space, as well as work done to expand the Company into new states. The $54,533 increase in salaries and wages resulted from a significant increase in administrative headcount. The $74,237 increase in professional and legal fees primarily resulted from legal and accounting costs associated with being a fully reporting public company. The $13,955 increase in depreciation and amortization was due to the acquisition of vehicles for the retail transportation business and amortization of debt discounts.

 

Other Income (Expenses)

 

Other income (expense), net consisted of gain on fair value of liability of shares to be issues, loss on extinguishment of debt, change in the fair value of convertible note – related party and interest expense. Other income (expense), net during the three months ended March 31, 2017 and 2016 was ($5,059,155) and $20,014 respectively. The ($5,079,169) decrease in other income (expense) was primarily attributable to a gain on fair value of liability of shares to be issued of 25,00, loss on extinguishment of debt of (4,611,395), change of fair value of convertible note – related party of (12,411) and interest expense of $430,363. The gain on fair value of liability of shares to be issued related to issuance of shares recorded as nonemployee stock compensation, the loss on extinguishment was a one-time non-cash charge based on an amended convertible note and the interest expense was due to a beneficial conversion feature relating to a convertible note.

 

Net Loss

 

For the foregoing reasons, we had a net loss of $5,467,670 for the three months ended March 31, 2017, or $(0.21) per share (basic and diluted), compared to net loss of $203,620 for the three months ended March 31, 2016, or $(0.01) per share (basic and diluted).

 

Liquidity, Capital Resources and Cash Flows

 

Going Concern

 

The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business.

 

As of March 31, 2017, we had a cash balance of $84,247, accounts receivable, net of $273,558 and $1,481,431 in current liabilities. At the current cash consumption rate, we may need to consider additional funding sources toward the end of fiscal 2017. We are taking proactive measures to reduce operating expenses, drive growth in revenue and expeditiously resolve any remaining legal matters.

 

The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.

 

The condensed consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

 

Capital Resources 

 

The following table summarizes total current assets, liabilities and working capital for the periods indicated:

 

		March 31, 2017				December 31, 2016				Change
Current assets		$	357,805			$	315,815			$	41,990
Current liabilities			1,481,431				1,110,007				371,424
Working capital		$	(1,123,626	)		$	(794,192	)		$	(329,434	)

 

As of March 31, 2017, and December 31, 2016, we had a cash balance of $84,247 and $57,841, respectively.

 

 

Summary of Cash Flows.

 

		For the Three Months Ended March 31,
		2017				2016
Net cash used in operating activities		$	(384,804	)		$	(189,604	)
Net cash (used in) provided by investing activities			(40,457	)			(52,176	)
Net cash provided by financing activities			451,667				400,000

 

Net cash used in operating activities. Net cash used in operating activities for the three months ended March 31, 2017 was $384,804. This included a net loss of $5,467,670, non-cash charge related to depreciation and amortization of $58,865, non-cash gain of $12,411 on the fair value of convertible notes, noncash loss on beneficial conversion feature of $390,666, noncash loss on extinguishment of debt of $4,611,395 and changes in accounts receivable, deposits, accounts payable and accrued expenses of $9,529. Net cash used in operating activities for the three months ended March 31, 2016 was $189,604. This included a net loss of $203,620, noncash gain of $25,000 on the fair value of liability of shares to be issued, noncash non-employee stock compensation expense of $95,000, noncash charge related to depreciation of $7,672 and changes in accounts receivable, prepaid expenses, deposits, and accounts payable and accrued expenses of $63,656.

 

Net cash used in investing activities. Net cash used in investing activities for the three months ended March 31, 2017 was $40,457, which consisted of capital expenditures of $19,625 and cash payments pursuant to the Revolutionary asset acquisition of $20,832. Net cash used in investing activities for the three months ended March 31, 2016 was $52,176, which consisted of $50,000 in regard to cash payment pursuant to an acquisition and capital expenditures of $2,176.

 

Net cash provided by financing activities. Net cash provided by financing activities for the three months ended March 31, 2017 was $451,667, which resulted from proceeds from the issuance of convertible notes payable of $191,667, proceeds of $255,000 from the issuance of promissory notes and advances from shareholders of $5,000. Net cash provided by financing activities for the three months ended March 31, 2016 was $400,000, which resulted from the issuance of convertible notes of $250,000 and the proceeds of $150,000 from the issuance of common stock.

 

Off-Balance Sheet Arrangements

 

None. 

 

Critical Accounting Policies and Estimates

 

Critical accounting policies and estimates are further discussed in our Annual Report on form 10-K for the fiscal year end December 31, 2016.

 

Related Party Transactions

 

The Company has a loan outstanding from Helix Opportunities. The advance does not accrue interest and has no definite repayment terms. The loan balance was $81,500 as of March 31, 2017.

 

On March 11, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Five”) 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 Five due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Five 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 Five in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that 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 March 31, 2017, the fair value of the liability was $286,985 and accordingly the Company recorded a charge regarding the change in fair value of $12,411 for the three months ended.

 

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

 

 

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable for a smaller reporting company.

 

ITEM 4. Controls and Procedures 

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures 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 and Financial Officer, to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control problems or acts of fraud, if any, within the Company have been detected.

 

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2017, the end of the period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Based on that evaluation, management has concluded that the Company did not maintain effective internal control over financial reporting as of the three months ended March 31, 2017 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 March 31, 2017 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.

 

 

This quarterly report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting because we are a “smaller reporting company.” Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this quarterly report. 

 

Changes in internal control over financial reporting

 

During the three months ended March 31, 2017, there was no change in our internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

Occasionally, we may be involved in claims and legal proceedings arising from the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on our consolidated financial statements. Contingencies are inherently unpredictable and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. 

 

There is currently no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self- regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material effect on the Company, with the exception of:

 

Baker, et al. v. Helix TCS, Inc.

 

On March 8, 2017, two former employees filed a lawsuit in the United States District Court for the District of Colorado alleging violations of the Fair Labor Standards Act and the Colorado Wage Act on behalf of themselves and other employees. The plaintiffs seek damages for our alleged failure to compensate them appropriately for the overtime hours they worked as purported “non-exempt” employees. On April 3, 2017, we moved to dismiss the complaint.

 

At this time, the Company is not able to predict the outcome of the lawsuit, any possible loss or possible range of loss associated with the lawsuit or any potential effect on the Company’s business, results of operations or financial condition. However, the Company believes the lawsuit is wholly without merit and will defend itself from these claims vigorously.

  

ITEM 1A. Risk Factors

 

As of the date of this Report, there have been no material changes in the risk factors previously included in Item 1A- “Risk Factors,” in our Annual Report on form 10-K for the fiscal year end December 31, 2016.

 

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

 

There were no unregistered sales of equity securities for the quarter ended March 31, 2017 that were not otherwise disclosed or required to be reported on a Current Report on Form 8-K.

 

ITEM 3. Defaults upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosure

 

Not applicable.

ITEM 5. Other Information

 

On May 17, 2017, the Company entered into that certain Series B Preferred Stock Purchase Agreement (the “Purchase Agreement”) by and among the Company, Helix Opportunities, LLC, a Delaware limited liability company (“Helix LLC”), and RSF4, LLC, a Delaware limited liability company (the “Purchaser” or “Rose Capital”). Pursuant to the Purchase Agreement, the Company sold to the Purchaser an aggregate of 7,318,084 shares of the Company Series B Preferred Stock (“Series B Preferred Stock) for the following consideration (i) the conversion of an outstanding note in the principal aggregate amount of $500,000 issued by the Company in favor of an affiliate of Purchaser into 1,536,658 shares of Series B Preferred Stock and (ii) $1,875,000 in cash for the issuance. In accordance with the terms of the Purchase Agreement, the Company, Helix LLC, and the Investor also entered into (i) an Investors Rights Agreement (the “Investors Rights Agreement”), (ii) a Right of First Refusal and Co- Sale Agreement (the “ROFR Agreement”), and (iii) a Voting Agreement (the “Voting Agreement”).

 

The Investor Rights Agreement grants the holders of the Company’s Series A Preferred Stock (“Series A Preferred Stock”) and Series B Preferred Stock (collectively, the “Preferred Holders”) certain registration rights including but not limited to the right to demand registration of the shares of Common Stock underlying both the Series A Preferred Stock and the Series B Preferred Stock (the “Conversion Shares”) after the earlier of the third anniversary of the date of the Investors Rights Agreement or 180 days following the Company’s first firm commitment underwritten public offering of its Common Stock The Investor Rights Agreement also grants the Preferred Holders the right to have any of their shares of Conversion Shares included in any registration statement filed by the Company, subject to limitations as set forth therein.

 

Pursuant to the Investor Rights Agreement the Company also covenants to provide Rose Capital with certain financial information of the Company related to the Company’s financial forecasts and annual fiscal budget to be held confidentially. Additionally, the Preferred Holders holding at least 5% of the issued and outstanding of the preferred stock of the Company (each a “Major Investor”) shall have a right to purchase such Major Investor’s pro rata share of all equity securities that the Company may, from time to time, propose to sell and issue after May 17, 2017, other than the equity securities excluded therein. Each Major Investor’s pro rata share is equal to the ratio of (a) the number of shares of the Company’s outstanding Common Stock (treating all shares of convertible preferred stock or warrants to acquire convertible preferred stock on an as-converted to common stock basis and including all shares of Common Stock issuable upon the exercise of outstanding warrants or options) which such Major Investor holds of record immediately prior to the issuance of such equity securities to (b) the total number of shares of the Company’s outstanding Common Stock (treating all shares of convertible preferred stock or warrants to acquire convertible preferred stock on an as-converted to common stock basis and including all shares of Common Stock issuable upon the exercise of outstanding warrants or options) immediately prior to the issuance of such equity securities.

 

Pursuant to the ROFR Agreement if a Preferred Holder proposes to Transfer (as defined in the ROFR Agreement) any shares of such Preferred Holder’s stock, the Preferred Holder shall promptly give written notice (the “Notice”) simultaneously to the Company and to each of the Major Investors at least thirty (30) days prior to the closing of such Transfer.

 

With the exception of Exempt Transfers (as defined in ROFR), for a period of thirty (30) days following receipt of any Notice each Major Investor shall have the right, exercisable upon written notice to the Preferred Holder to purchase its pro rata share of the Preferred Holder stock subject to the Notice and on the same terms and conditions as set forth therein. The Major Investors who so exercise their rights (the “Participating Major Investors”) shall effect the purchase of the Preferred Holder stock in accordance with the terms therein.

 

In the event that not all of the Major Investors elect to purchase their pro rata share of the Preferred Holder stock then the Preferred Holder shall promptly give written notice to each of the Participating Major Investors the (the “Overallotment Notice”), which shall set forth the number of shares of Preferred Holder stock not purchased and shall offer such Participating Major Investors the right to acquire such unsubscribed shares.

 

In the event that the Major Investors do not elect to purchase all of the Preferred Holder stock available the Preferred Holder shall promptly give written notice (the “Second Notice”) to the Company, which shall set forth the number of shares of Preferred Holder stock not purchased by the Major Investors and the Company shall then have the right, to purchase all or a portion of the Preferred Holder stock subject to the Second Notice on the same terms and conditions as set forth therein.

 

In the event the Major Investors and the Company fail to exercise their respective rights to purchase all of the Preferred Holder stock, then the Preferred Holder shall first deliver to the Company and each Major Investor written notice (the “Co-Sale Notice”) that each Major Investor shall have the right, exercisable upon written notice to such Preferred Holder with a copy to the Company within fifteen (15) days after receipt of the Co- Sale Notice, to participate in such Transfer of Preferred Holder stock on the same terms and conditions.

 

The Voting Agreement requires the Company, Helix LLC and the Purchaser to vote their respective shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock to among other things, elect or appoint at least one representative of the Series A Preferred Stock and one representative of the Series B Preferred Stock to the Board of Directors (the “Board”) and maintain such representation on the Board so long as the Series B Preferred Stock remains outstanding.  

 

The above descriptions of the Purchase Agreement, Investor Rights Agreement, ROFR Agreement and Voting Agreement do not purport to be complete and are qualified in their entirety by the full text of the forms of such documents, which are attached as exhibits hereto and incorporated herein by reference.

 

 

ITEM 6. Exhibits

 

Exhibit No.		Description
3.1		Form of Series B Preferred Stock Certificate of Designations (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed May 19, 2017)
10.1		Form of Series B Preferred Purchase Agreement *
10.2		Form of Investor Rights Agreement *
10.3		Form of Right of First Refusal and Co-Sale Agreement *
10.4		Form of Voting Agreement *
31.1		Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). *
31.2		Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). *
32.1		Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2		Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101.INS		XBRL Instance Document *
101.SCH		XBRL Taxonomy Extension Schema *
101.CAL		XBRL Taxonomy Extension Calculation Linkbase *
101.DEF		XBRL Taxonomy Extension Definition Linkbase *
101.LAB		XBRL Taxonomy Extension Label Linkbase *
101.PRE		XBRL Taxonomy Extension Presentation Linkbase *

 

* Filed herewith 

 

 

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: May 22, 2017	By:	/s/ Zachary L. Venegas
		Zachary L. Venegas
		Chief Executive Officer (Principal Executive Officer) (Principal Financial Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Zachary L. Venegas		Chief Executive Officer		May 22, 2017
Zachary L. Venegas		(Principal Executive Officer)
		(Principal Financial Officer)
/s/ Paul Hodges		Director		May 22, 2017
Paul Hodges