UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 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 November 13, 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 September 30, 2017 (Unaudited) and December 31, 2016 (Audited)	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)	2
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Nine Months Ended September 30, 2017 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)	4
	Notes to the Unaudited Condensed Consolidated Financial Statements	5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	34
ITEM 4.	Controls and Procedures	34
PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	36
ITEM 1A.	Risk Factors	36
ITEM 2.	Unregistered Sale of Equity Securities and Use of Proceeds	36
ITEM 3	Defaults upon Senior Securities	36
ITEM 4.	Mine Safety Disclosures	36
ITEM 5.	Other Information	36
ITEM 6.	Exhibits	37
SIGNATURES		38

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS 

 

		September 30,				December 31,
		2017				2016
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash		$	130,125			$	57,841
Accounts receivable, net			558,141				257,974
Costs & earnings in excess of billings			151,445				-
Total current assets			839,711				315,815
Property and equipment, net			122,472				55,600
Intangible assets, net			3,215,604				279,744
Goodwill			664,329				-
Deposits and other assets			38,810				20,290
Total assets		$	4,880,926			$	671,449
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities			315,779				106,600
Advances from related parties			102,000				76,500
Billings in excess of costs			53,237				-
Deferred rent			7,245				4,243
Notes payable, current portion			10,268				-
Obligation pursuant to acquisitions			548,279				178,090
Convertible notes payable, net of discount			508,642				470,000
Convertible note payable - related party			265,593				274,574
Obligation to issue warrants			1,432,529				-
Total current liabilities			3,243,572				1,110,007
Long-term liabilities:
Notes payable, net of current portion			50,933				-
Total long-term liabilities			50,933				-
Total liabilities		$	3,294,505			$	1,110,007
Shareholders’ equity (deficit):
Preferred stock (Class A), $0.001 par value, 1,000,000 shares authorized; 1,000,000 issued and outstanding as of September 30, 2017 and December 31, 2016			1,000				1,000
Preferred stock (Class B), $0.001 par value, 13,000,000 shares authorized; 9,830,035 shares issued and outstanding as of September 30, 2017; 0 shares issued and outstanding as of December 31, 2016			9,830				-
Common stock; par value $0.001; 200,000,000 shares authorized; 28,644,522 shares issued and outstanding as of September 30, 2017; 28,533,411 shares issued and outstanding as of December 31, 2016			28,644				28,533
Additional paid-in capital			17,242,695				7,107,630
Accumulated deficit			(15,695,748	)			(7,575,721	)
Total shareholders’ equity (deficit)			1,586,421				(438,558	)
Total liabilities and shareholders’ equity (deficit)		$	4,880,926			$	671,449

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

  

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Revenue		$	1,129,746			$	612,017			$	2,837,145			$	1,477,345
Cost of revenue			814,031				447,690				2,192,366				1,149,278
Gross margin			315,715				164,327				644,779				328,067
Operating expenses:
Selling, general and administrative			269,143				78,784				649,973				285,545
Salaries and wages			315,316				179,176				602,254				448,372
Professional and legal fees			261,098				219,364				641,958				375,375
Depreciation and amortization			194,347				17,955				292,757				41,817
Total operating expenses			1,039,904				495,279				2,186,942				1,151,109
Loss from operations			(724,189	)			(330,952	)			(1,542,163	)			(823,042	)
Other income (expenses):
Change in fair value of liability of shares to be issued			-				(29,250	)			-				(19,250	)
Change in fair value of obligation to issue warrants			531,395				-				406,604				-
Change in fair value of convertible notes			115,000				(1,393	)			(210,000	)			(233,342	)
Change in fair value of convertible note - related party			(34,725	)			(697	)			8,971				(107,107	)
Change in fair value of contingent consideration			(25,078	)			-				10,186				-
Loss on extinguishment of debt			-				-				(4,611,395	)			-
Loss on induced conversion of convertible note			-				-				(1,503,876	)			-
Loss on impairment of intangible assets			-				-				-				(1,278,323	)
Interest expense			(117,760	)			(9,493	)			(678,354	)			(23,560	)
Other expenses			468,832				(40,833	)			(6,577,864	)			(1,661,582	)
Net loss		$	(255,357	)		$	(371,785	)		$	(8,120,027	)		$	(2,484,624	)
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend			(8,044,958	)			-				(11,200,845	)			-
Net loss attributable to common shareholders		$	(8,300,315	)		$	(371,785	)		$	(19,320,872	)		$	(2,484,624	)
Net loss per share attributable to common shareholders - basic and diluted		$	(0.29	)		$	(0.01	)		$	(0.68	)		$	(0.09	)
Weighted average common shares outstanding - basic and diluted			28,644,522				27,290,360				28,592,643				27,290,360

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT) 

(UNAUDITED)

 

		Common Stock								Preferred Stock (Class A)								Preferred Stock (Class B)								Additional Paid-In				Accumulated				Total Shareholders’ Equity
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				(Deficit)
Balance at December 31, 2016			28,533,411			$	28,533				1,000,000			$	1,000				-				-			$	7,107,630			$	(7,575,721	)		$	(438,558	)
Beneficial conversion feature of Series B convertible preferred stock			-				-				-				-				-				-				11,200,845				-				11,200,845
Deemed dividend on conversion of Series B convertible preferred stock to common stock			-				-				-				-				-				-				(11,200,845	)			-				(11,200,845	)
Issuance of Series B preferred shares			-				-				-				-				9,830,035				8,289				2,976,711				-				2,985,000
Cost of issuance of Series B preferred shares																											(1,941,633	)							(1,941,633	)
Stock options issued pursuant to acquisition consideration			-				-				-				-				-				-				916,643				-				916,643
Stock options issued in satisfaction of contingent consideration			-				-				-				-				-				-				871,193				-				871,193
Induced conversion of convertible debt			-				-				-				-				-				1,541				2,002,335				-				2,003,876
Issuance of common stock per share purchase agreements			111,111				111				-				-				-				-				99,889				-				100,000
Warrant issuances to investors			-				-				-				-				-				-				93,200				-				93,200
Beneficial conversion feature on convertible debt			-				-				-				-				-				-				535,332				-				535,332
Reacquisition price of convertible debt			-				-				-				-				-				-				4,581,395				-				4,581,395
																															.
Net loss			-				-				-				-				-				-				-				(8,120,027	)			(8,120,027	)
Balance at September 30, 2017			28,644,522			$	28,644				1,000,000			$	1,000				9,830,035			$	9,830			$	17,242,695			$	(15,695,748	)		$	1,586,421

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For the Nine Months Ended September 30,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(8,120,027	)		$	(2,484,624	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			292,757				41,817
Amortization of debt discounts			244,843				-
Change in fair value of liability of shares to be issued			-				19,250
Change in fair value of obligation to issue warrants			(406,604	)			-
Change in fair value of convertible notes			210,000				233,342
Change in fair value of convertible note - related party			(8,971	)			107,107
Change in fair value of contingent consideration			(10,186	)			-
Loss on extinguishment of debt			4,611,395				-
Loss on induced conversion of convertible note			1,503,876				-
Loss on impairment of intangible assets			-				1,278,323
Loss on beneficial conversion feature of convertible note			390,666				-
Non-employee stock compensation expense			-				150,710
Change in operating assets and liabilities:
Accounts receivable			(246,375	)			(53,507	)
Prepaid expenses			-				16,595
Deposits			(14,640	)			-
Costs in excess of billings			(54,547	)			-
Accounts payable and accrued expenses			122,875				88,501
Deferred rent			3,002				-
Billings in excess of costs			29,270				-
Net cash used in operating activities			(1,452,666	)			(602,486	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(31,054	)			(2,231	)
Payments for business combination, net of cash acquired			(1,631,313	)			-
Payments for asset acquisition			(46,872	)			(419,830	)
Net cash used in investing activities			(1,709,239	)			(422,061	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties			60,500				-
Payments pursuant to advances from related parties			(32,000	)			-
Payments pursuant to notes payable			(3,466	)			-
Proceeds from the issuance of convertible notes payable			229,167				200,000
Proceeds from the issuance of convertible note payable - related party			-				300,000
Proceeds from the issuance of a promissory note			255,000				-
Proceeds from the issuance of common stock			100,000				385,143
Proceeds from the issuance of Series B convertible preferred stock			2,624,988				-
Net cash provided by financing activities			3,234,189				885,143
Net change in cash			72,284				(139,404	)
Cash, beginning of period			57,841				154,282
Cash, end of period		$	130,125			$	14,878
Supplemental disclosure of cash and non-cash transactions:
Financing of property and equipment purchases		$	52,082			$	-
Common stock issued pursuant to asset acquisition		$	-			$	944,875
Cost of issuance of Series B preferred shares		$	(1,941,633	)		$	-
Stock options issued pursuant to acquisition consideration		$	916,643			$	-
Stock options issued pursuant to contingent consideration as part of acquisition		$	871,193			$	-
Warrant issuances to investors		$	93,200			$	-
Reacquisition price of convertible debt		$	4,581,395			$	-

 

  See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.	Description of Business

 

Helix TCS, Inc. (the “Company” or “Helix”) was incorporated in Delaware on March 13, 2014. Pursuant to the acquisition of the assets of Helix TCS, LLC, as discussed below, the Company changed its name from Jubilee4 Gold, Inc. to Helix TCS, Inc. effective October 25, 2015.

 

Effective October 25, 2015, the Company entered into an acquisition and exchange agreement with Helix TCS LLC. The transaction contemplated under the Agreement closed 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.

 

On April 11, 2016, the Company acquired the assets of Revolutionary Software, LLC (“Revolutionary”) (see Note 6). Furthermore, on June 2, 2017, the Company entered into a Membership Interest Purchase Agreement in which the Company purchased all issued and outstanding Units of Security Grade Protective Services, Ltd. (“Security Grade”), which comprised of 800,000 Class A Units and 200,000 Class B Units. The merger was accounted for as a business combination in accordance with ASC 805 (see Note 5).

 

2.	Revision of Prior Period Financial Statements

 

The Company corrected certain immaterial errors in its financial statements contained herein. In accordance with ASC 650-10-S99 and S55 (formerly Staff Accounting Bulletins (“SAB”) No. 99 and No. 108), Accounting Changes and Error Corrections, the Company concluded that these errors were, individually, and in the aggregate, not material, quantitatively or qualitatively, to the financial statements in these periods.

 

In October 2015, the Company’s shareholders’ and its Board of Directors approved a 1 for 4 reverse split of the Company’s common stock. The reverse split was effective on October 27, 2015. Prior to the reverse split the Company had 3,908,617 shares issued and outstanding. Upon further review and reconciliation of the Company’s transfer agent reports it was determined that due to rounding, the share count as of December 31, 2014 was understated by 26 shares of common stock. The balance at December 31, 2014 of common stock was originally reported at 977,154 and revised as 977,180.

 

During the year ended December 31, 2015, the Company issued common stock on the open market. Upon further review and reconciliation of the Company’s transfer agent reports it was determined that the share count was overstated by 56 shares of common stock. The total issuance of common stock on the open market for the year ended December 31, 2015 was originally reported as 1,087 shares of common stock and is being revised as 1,031.

 

Furthermore, during the year ended December 31, 2016, specifically the three months ended March 31, 2016, the Company issued 150,000 shares of restricted common stock to a third party for professional consulting services rendered that was not accounted for. The Company performed an evaluation of the 150,000 shares of restricted common stock and determined they should be accounted for in accordance with ASC 718, Compensation – Stock Based Compensation, and ASC 505, Equity Based Payments to Non-Employees. The common stock issued to third parties for non-cash consideration were valued based on the fair market value of the services provided or the fair market value of the common stock on the measurement date, whichever was readily determinable. The 150,000 shares of restricted common stock resulted in additional professional and legal expense of $55,710 and increases in common stock and additional paid-in capital of $150 and $55,560, respectively.

 

Additionally, it was determined that the Weighted Average Common Shares Outstanding – basic and diluted for the three months ending March 31, 2017 was incorrectly stated on the Consolidated Statements of Operations in the original Form 10-Q filing. This error resulted in the Weighted Average Common Shares Outstanding – basic and diluted being understated by 1,923,185 shares and the Net Loss per Common Share – basic and diluted being overstated by $.02.

 

During the year ended December 31, 2016 the Company issued three Unsecured Convertible Promissory Notes to three individual investors referred to as Note One, Note Two and Note Three (collectively “the Notes”) The Notes were initially measured at fair value pursuant to ASC 480, Distinguishing Liabilities from Equity and subsequently measured at fair value with changes in fair value recognized in earnings. All Notes were converted into common stock of the Company on December 31, 2016, though in the Form 10-Q/A for the quarterly period ended March 31, 2017, filed with the SEC on July 7, 2017, the Notes were not fair valued in which the changes in fair value were not reported in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2016. This was the first time the unaudited condensed consolidated statement of operations for the three months ended March 31, 2016 was filed with the Securities and Exchange Commission (“SEC”). For the three months ended March 31, 2016 the change in fair value of the Notes resulted in a non-cash loss of $384,303. The omission of the change in the fair value of convertible notes resulted in the Net Loss per Common Share – basic and diluted – being understated by $0.02 for the three months ended March 31, 2016.

 

 

Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s amended audited consolidated financial statements for the year ended December 31, 2016 included in the Company’s Amended Fiscal 2016 Annual Report on Form 10-K/A, filed with the SEC on July 7, 2017. In addition, the Company’s future Quarterly Reports on Form 10-Q for subsequent quarterly periods during the current fiscal year will reflect the impact of the revision in the comparative prior quarter and year-to-date periods.

  

The following table summarizes the effects of the revisions on the financial statements for the periods reported.

 

		Previously Reported				Adjustments				Restated
Condensed Consolidated Balance Sheet as of March 31, 2017
Common stock		$	28,383			$	150			$	28,533
Additional paid-in capital		$	12,190,797			$	55,560			$	12,246,357
Accumulated deficit		$	(12,987,681	)		$	(55,710	)		$	(13,043,391	)
Condensed Consolidated Balance Sheet as of December 31, 2016
Common stock		$	28,383			$	150			$	28,533
Additional paid-in capital		$	7,052,070			$	55,560			$	7,107,630
Accumulated deficit		$	(7,520,011	)		$	(55,710	)		$	(7,575,721	)
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017
Net loss per common share - basic and diluted		$	(0.21	)		$	0.02			$	(0.19	)
Weighted average common shares outstanding - basic and diluted			26,610,226				1,923,185				28,533,411
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016
Professional and legal fees		$	54,472			$	55,710			$	110,182
Change in fair value of convertible notes		$	20,014			$	(384,303	)		$	(364,289	)
Net loss		$	(203,620	)		$	(440,013	)		$	(643,633	)
Net loss per common share - basic and diluted		$	(0.01	)		$	(0.02	)		$	(0.03	)
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016
Non-employee stock compensation expense		$	95,000			$	55,710			$	150,710

 

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

 

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

 

At September 30, 2017, the Company had a working capital deficit of approximately $2,403,861 as compared to working capital deficit of approximately $794,192 at December 31, 2016. The decrease of $1,609,669 in the Company’s working capital from December 31, 2016 to September 30, 2017 was primarily the result of an obligation pursuant to the acquisition of Security Grade. 

 

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 though acquisitions, and transforming the assets acquired from Revolutionary. 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 and beyond.

 

 

The Company plans to generate positive cash flow from its recently-completed asset acquisition and business combination to address some of the liquidity concerns. However, to execute the Company’s business plan, service existing indebtedness and implement its business strategy, the Company anticipates that it will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. The Company cannot be sure that any additional funding, if needed, will be available on terms favorable to the Company or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute the Company’s current stockholders’ ownership and could also result in a decrease in the market price of the Company’s common stock. The terms of those securities issued by the Company in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. The Company also may be required to recognize non-cash expenses in connection with certain securities it issues, such as convertible notes and warrants, which may adversely impact the Company’s operating results and financial condition. Furthermore, any debt financing, if available, may subject the Company to restrictive covenants and significant interest costs. There can be no assurance that the Company will be able to raise additional capital, when needed, to continue operations in their current form.

 

4.	Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Helix TCS, LLC (“Helix TCS”), Security Consultants Group, LLC (“Security Consultants”), Boss Security Solutions, Inc. (“Boss Security”), Security Consultants Group Oregon, LLC (“Security Oregon”) and Security Grade Protective Services, Ltd., (“Security Grade”) (since June 2, 2017).

 

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) impairment of goodwill and intangible assets, 4) valuation of convertible notes payable 5) valuation of stock options 6) fair value of assets and liabilities acquired pursuant to business combination and 7) revenue recognition. Actual results could differ from estimates.

 

Cash and Cash 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.

 

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 at September 30, 2017 and December 31, 2016, respectively.

 

Long-Lived Assets, Including Definite Lived Intangible Assets 

 

Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Definite-lived intangible assets primarily consist of non-compete agreements and customer relationships. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.

 

Accounting for Acquisitions 

 

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

  

Revenue Recognition

 

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

 

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

 

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

 

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

 

Expenses

 

Cost of Revenue

 

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

 

 

Operating Expenses

 

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

  

Other Expenses

 

Other expenses, net consisted of the change in the fair value of obligation to issue warrants, the change in the fair value of convertible notes, the change in fair value of convertible note related party, loss on extinguishment of debt, loss on induced conversion of convertible note and interest expense.

 

Property and Equipment

 

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

 

Contingencies

 

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

 

Leases

 

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

 

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

 

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

 

Advertising

 

Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $7,298 and $11,131 for the three months ended September 30, 2017 and 2016, respectively, and $12,477 and $30,100 for the nine months ended September 30, 2017 and 2016, respectively.

 

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the nine months ended September 30, 2017 and 2016.

 

Distinguishing Liabilities from Equity

 

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

 

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

 

Initial Measurement

 

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

 

Subsequent Measurement – Financial instruments classified as liabilities

 

The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other income (expenses).

 

Beneficial Conversion Feature

 

If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a Beneficial Conversion Feature (“BCF”). A beneficial conversion feature is recorded by the Company as a debt discount pursuant to ASC 470-20, Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the beneficial conversion feature and the Company amortizes the discount to interest expense over the life of the debt.

 

The Company accounts for the beneficial conversion feature on its convertible preferred stock in accordance with ASC 470-20, Debt with Conversion and Other Options. The BCF of convertible preferred stock is normally characterized as the convertible portion or feature that provides a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of convertible preferred stock when issued. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.

 

To determine the effective conversion price, the Company first allocates the proceeds received to the convertible preferred stock and then uses those allocated proceeds to determine the effective conversion price. If the convertible instrument is issued in a basket transaction (i.e., issued along with other freestanding financial instruments), the proceeds should first be allocated to the various instruments in the basket. Any amounts paid to the investor when the transaction is consummated (e.g., origination fees, due diligence costs) represent a reduction in the proceeds received by the issuer. The intrinsic value of the conversion option should be measured using the effective conversion price for the convertible preferred stock on the proceeds allocated to that instrument. The effective conversion price represents proceeds allocable to the convertible preferred stock divided by the number of shares into which it is convertible. The effective conversion price is then compared to the per share fair value of the underlying shares on the commitment date.

 

 

The accounting for a BCF requires that the BCF be recognized by allocating the intrinsic value of the conversion option to additional paid-in capital, resulting in a discount on the convertible preferred stock. This discount should be accreted from the date on which the BCF is first recognized through the earliest conversion date for instruments that do not have a stated redemption date. The intrinsic value of the BCF is recognized as a deemed dividend on convertible preferred stock over a period specified in the guidance.

 

Share-based Compensation

 

The Company accounts for stock-based compensation to employees in conformity with the provisions of ASC Topic 718, Stock Based Compensation. Stock-based compensation to employees consist of stock options grants and restricted shares that are recognized in the statement of operations based on their fair values at the date of grant.

 

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50, Equity-Based Payments to Non-Employees based upon the fair-value of the underlying instrument. The equity instruments, are valued using the Black-Scholes valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which services are received.

 

The Company calculates the fair value of option grants utilizing the Black-Scholes pricing model, and estimates the fair value of the stock based upon the estimated fair value of the common stock. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.

 

The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight- line basis over the requisite service period of the award.

 

Fair Value of Financial Instruments

 

ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.

 

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

  

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

 

	●	Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
	●	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 September 30, 2017 and December 31, 2016. Factors that the Company considered when estimating the fair value of its debt included market conditions and the term of the debt. The level of the debt would be considered as Level 2.

 

Additional Disclosures Regarding Fair Value Measurements

 

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

 

Contingent Consideration

 

The Company’s contingent consideration measured at fair value on a recurring basis are comprised of performance-based awards issued to certain former owners of the acquired businesses in exchange for future services. Contingent liabilities are valued using significant inputs that are not observable in the market, which are defined as Level 3 inputs according to fair value measurement accounting. The Company estimates the fair value of contingent liabilities based on certain milestones of the acquired businesses and estimated probabilities of achievement, then discounts the liabilities to present value. The Company believes its estimates and assumptions are reasonable, however, there is significant judgment involved. During the three months ended September 30, 2017, the Company satisfied its contingent consideration liability related to the Security Grade Acquisition. The change in the fair value associated with the contingent consideration was $(25,078) and $10,186 for the three and nine months ended September 30, 2017, respectively.

 

Earnings (Loss) per Share

 

The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the 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 and nine months ended September 30, 2017 and September 30, 2016 as their effect would be anti-dilutive.

 

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

 

 

The anti-dilutive shares of common stock outstanding for three months ended and nine months ended September 30, 2017 and September 30, 2016 were as follows:

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Potentially dilutive securities:
Convertible notes payable			226,320				1,558,226				226,320				1,558,226
Convertible Preferred A Stock			1,000,000				16,746,127				1,000,000				16,746,127
Convertible Preferred B Stock			9,830,035				-				9,830,035				-
Warrants			2,557,195				1,920,000				2,557,195				1,920,000

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle (issued as Accounting Standards Update “ASU” 2014-09 by the FASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 by one year, and would allow entities the option to early adopt the new revenue standard as of the original effective date. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is in the process of performing an initial review of custom contracts to determine the impact that ASU 2014-09 and its subsequent updates will have on the Company’s consolidated financial statements or financial statement disclosures upon adoption. Based on this preliminary review, the Company believes that the timing and measurement of revenue for these customers will be similar to the current revenue recognition. However, this view is preliminary and could change based on the detailed analysis associated with the conversion and implementation phases of ASU 2014-09. The Company will complete the assessment during 2017, and will include other customers as part of the review

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.

 

 

5.	Business Combination

 

On June 2, 2017 (the “Closing”), the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) in which the Company purchased all issued and outstanding Units of Security Grade Protective Services, Ltd. (“Security Grade”), which comprised of 800,000 Class A Units and 200,000 Class B Units. At closing, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”). Furthermore, provided that, within the first 60 days following the closing, no material customer identified in the Agreement terminates its contractual relationship with the Company and that all contracts with such material customers are in full force and effect without default or cancellation as of the 60^th day following the closing, on the 61^st day following the closing, the Company shall issue 207,427 additional stock options (the “Additional Stock Options”). In the event of termination, cancellation or default of any contract with one or more material customer identified in the Agreement within the first 60 days following the closing, the stock options received by the acquiree shall be reduced and/or forfeited to the extent necessary (pro rata based upon their ownership interest in the Company immediately preceding the closing) by a percentage equal to the revenue received by the Company from the terminating customer(s) in the 180 days immediately preceding such termination divided by the revenue received by the Company from all material customers identified in the Agreement in the 180 days immediately preceding such termination. As of September 30, 2017, the Company has a liability pursuant to the Agreement of $500,373 payable nine months following the Closing. 

 

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

 

Base Price - Cash		$	2,100,373
Base Price - Stock Options			916,643
Contingent Consideration - Stock Options			916,643
Total Purchase Price		$	3,933,659

  

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

 

Total acquisition costs for the Security Grade acquisition incurred during the three and nine months ended September 30, 2017 was $0 and $17,659, respectively and is included in selling, general and administrative expense in the Company’s Statements of Operations.

 

The initial stock options are included as part of the purchase price – please see Note 16 for the Company’s valuation methods and assumptions. The Company determined the fair value of the contingent consideration to be $916,643 at June 2, 2017 and recorded it as a liability in its unaudited condensed consolidated balance sheets. For the three and nine months ended September 30, 2017, the Company recorded a change in fair value of contingent consideration of $(25,078) and $10,186, respectively. The Company satisfied their contingent consideration liability during the three months ended September 30, 2017.

 

 

Unaudited Pro Forma Results

 

The operating results of the acquired business has been included in the Company’s income statement since closing. The revenues and net income (loss) of the acquired business was as follows:

 

		For the Three Months Ended September 30, 2017								For the Nine Months Ended September 30, 2017
Acquisition		Total Revenue				Net Income				Total Revenue				Net Income
Security Grade Protective Services, Ltd		$	579,951			$	180,292			$	1,239,369			$	139,470
Total		$	579,951			$	180,292			$	1,239,369			$	139,470

 

The following table below represents the revenue, net loss and loss per share effect of the acquired company, as reported in our consolidated financial statements and on a pro forma basis as if the acquisition occurred on January 1, 2016. These pro forma results are not necessarily indicative of the results that actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
Description		2017				2016				2017				2016
Revenues		$	1,709,697			$	1,026,401			$	3,607,865			$	2,503,599
Net loss			(75,065	)			(291,282	)			(7,970,731	)			(2,387,097	)
Net loss attributable to common shareholders			(8,120,023	)			(291,282	)			(19,171,576	)			(2,387,097	)
Loss per share attributable to common shareholders:
Basic and diluted-as pro forma (unaudited)			(0.28	)			(0.01	)			(0.67	)			(0.09	)

  

6.	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.
	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 June 30, 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 8. As of September 30, 2017, the Company has a liability pursuant to the Revolutionary asset acquisition of $47,906.

 

 

7.	Property and Equipment, Net

 

Property and equipment consisted of the following:

 

		September 30, 2017				December 31, 2016
Furniture and equipment		$	16,332			$	14,731
Software			743				-
Vehicles			175,412				68,295
Total			192,487				83,026
Less: Accumulated depreciation			(70,015	)			(27,426	)
Property and equipment, net		$	122,472			$	55,600

 

Depreciation expense was $19,553 and $4,424 for the three months ended September 30, 2017 and 2016, respectively, and $42,589 and $16,519 for the nine months ended September 30, 2017 and 2016, respectively.

 

8.	Intangible Assets, Net

 

The following table summarizes the Company’s intangible assets:

 

								September 30, 2017
		Estimated Useful Life (Years)		Gross Carrying Amount at December 31, 2016				Assets Acquired Pursuant to Business Combination (1)				Accumulated Amortization				Net Book Value
Database		5		$	93,427			$	-			$	(27,476	)		$	65,951
Tradenames and trademarks		10			100,000				25,000				(15,526	)			109,474
Web addresses		5			125,000				5,000				(37,089	)			92,911
Customer list		5			-				3,154,578				(207,310	)			2,947,268
				$	318,427			$	3,184,578			$	(287,401	)		$	3,215,604

 

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

 

(1)	On April 11, 2016, the Company acquired various assets of Revolutionary Software, LLC. (See Note 6)
(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.
(3)	On June 2, 2017, the Company acquired various assets of Security Grade, Ltd. (See Note 5)

 

The Company uses the straight-line method to determine the amortization expense for its definite lived intangible assets. Amortization expense related to the purchased intangible assets was $173,344 and $13,531 for the three months ended September 30, 2017 and 2016, respectively, and $248,718 and $25,298 for the nine months ended Sept 30, 2017 and 2016, respectively.

 

 

9.	Costs, Estimated Earnings and Billings

 

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows as of September 30, 2017 and December 31, 2016:

 

		September 30, 2017				December 31, 2016
Costs incurred on uncompleted contracts		$	281,634			$	-
Estimated earnings			120,700				-
Cost and estimated earnings earned on uncompleted contracts			402,334				-
Billings to date			304,126				-
Costs and estimated earnings in excess of billings on uncompleted contracts			98,208				-
Costs in excess of billings		$	151,445			$	-
Billings in excess of cost			(53,237	)			-
		$	98,208			$	-

 

10.	Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following:

 

		September 30, 2017				December 31, 2016
Accounts payable		$	156,447			$	83,308
Accrued expenses			112,099				14,805
Accrued interest			47,233				8,487
Total		$	315,779			$	106,600

  

11.	Convertible Notes Payable

  

		September 30, 2017				December 31, 2016
Note Four, 0% convertible promissory note, unsecured, maturing June 1, 2017, net of debt discount for debt issuance costs and BCF		$	-			$	470,000
Note Five, 10% convertible promissory note, fixed secured, originally maturing September 12, 2017, net of debt discount for debt issuance costs, warrants and BCF			183,334				-
Note Six, 10% convertible promissory note, fixed secured, originally maturing September 13, 2017			25,000				-
Note Seven, 10% convertible promissory note, fixed secured, originally maturing October 26, 2017, net of debt discount for debt issuance costs and warrants			300,308
			508,642				470,000
Less: Current portion			(508,642	)			(470,000	)
Long-term portion		$	-			$	-

 

 

On December 16, 2015, the Company entered into an Unsecured Convertible Promissory Note (“Note One”) with an investor (the “Investor”). The Investor provided the Company with $100,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note One due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note One was convertible at the election of the Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. The Company evaluated Note One in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that Note One will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of December 31, 2015, the fair value of the liability was $90,436 and accordingly the Company recorded a gain in regard to the change in fair value of $9,546 for the year ended December 31, 2015. On December 31, 2016, the Company and the Investor of Note One entered into an Amendment and Extension Agreement (“Amended Note One”). Per Amendment Note One, the conversion rate under Note One was amended to a new conversion rate of $1.00 per share, for the outstanding principal balance and any accrued and unpaid interest to date. If the Investor elects to convert the entire outstanding principal balance of the note on or before ten (10) days from the date of the Amended Note One, the Investor of Note One receives the right to purchase 50,000 restricted shares of common stock of the Company at $1.00 per common share, for cash. On December 31, 2016, the Amended Note One was converted into 107,000 shares of restricted common stock. In addition, the Investor elected to purchase 50,000 restricted shares of common stock of the Company, which the Company received proceeds of $50,000 (“Amended Note One Subscription”). In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the Amended Note One and Amended Note One Subscription of $1,003,751. The Company did not record a change in the fair value of Note One for the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, the Company recorded a loss and gain, respectively, pertaining to the change in fair value of Note One of $465 and $80,969. The interest expense associated with Note One was $0 and $1,765 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note One was $0 and $5,236 for the nine months ended September 30, 2017 and 2016, respectively.

 

On December 18, 2015, the Company entered into an Unsecured Convertible Promissory Note (“Note Two”) with a second investor (the “Second Investor”). The Second Investor provided the Company with $100,000 in cash, which was received by the Company during the year ended December 31, 2016. The Company promised to pay the principal amount, together with interest at the annual rate of 7%, with principal and accrued interest on Note Two due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Two was convertible at the election of the Second Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. On December 31, 2016, the Company and the Second Investor of Note Two entered into an Amendment and Extension Agreement (“Amended Note Two”). Per Amendment Note Two, the conversion rate under Note Two was amended to a new conversion rate of $1.00 per common share, for the outstanding principal balance and any accrued and unpaid interest to date. If the Second Investor elects to convert the entire outstanding principal balance of the note on or before ten (10) days from the date of the Amended Note Two, the Second Investor of Note Two receives the right to purchase 50,000 restricted shares of common stock of the Company at $1.00 per share, for cash. On December 31, 2016, the Amended Note Two was converted into 107,000 shares of restricted common stock. In addition, the Investor elected to purchase 50,000 restricted shares of common stock of the Company, which the Company received proceeds of $50,000 (“Amended Note Two Subscription”). In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the Amended Note Two and Amended Note Two Subscription of $1,003,751. The Company did not record a change in the fair value of Note Two for the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, the Company recorded a loss and gain, respectively, pertaining to the change in fair value of Note Two of $465 and $80,969. The interest expense associated with Note Two was $0 and $1,765 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note Two was $0 and $5,236 for the nine months ended September 30, 2017 and 2016, respectively. 

 

On February 12, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Three”) with a third investor (the “Third Investor”). The Third Investor provided the Company with $100,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note Three due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Three was convertible at the election of the Third Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. On December 31, 2016, the Company and the Investor of Note Three entered into an Amendment and Extension Agreement (“Amended Note Three”). Per Amended Note Three, the conversion rate under Note Three was amended to a new conversion rate of $1.00 per share, for the outstanding principal balance and any accrued and unpaid interest to date. If the Investor elects to convert the entire outstanding principal balance of the note on or before ten (10) days from the date of the Amended Note Three, the Investor of Note Three receives the right to purchase 25,000 restricted shares of common stock of the Company at $1.00 per common share, for cash. On December 31, 2016, the Amended Note Three was converted into 106,000 shares of restricted common stock. In addition, the Investor elected to purchase 25,000 restricted shares of common stock of the Company, which the Company received proceeds of $25,000 (“Amended Note Three Subscription”). In accordance with ASC 470, Debt, the Company recorded a loss on induced conversion associated with the Amended Note Three and Amended Note Three Subscription of $882,641. For the three and nine months ended September 30, 2016, the Company recorded a loss and gain, respectively, pertaining to the change in fair value of Note Three of $465 and $71,405. The interest expense associated with Note Three was $0 and $1,765 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note Three was $0 and $4,430 for the nine months ended September 30, 2017 and 2016, respectively.

 

 

On September 30, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Four”) with a fourth investor (the “Fourth Investor”) in which the Fourth Investor provided the Company $500,000 in cash. As of December 31, 2016, the Class B Preferred Shares were not established as a result of Holder Default, in which, the Fourth Investor did not act in good faith towards the prompt negotiation, execution and delivery of the Class B Preferred Shares.

 

On March 31, 2017, the First Amendment to Note Four (the “Amended Note”) was entered by the Company and the Fourth Investor. In the absence of a Company Event of Default or Fourth Investor Event of Default, Amended Note is payable by issuance upon conversion into Class B Preferred Shares of the Company, which was to occur no later than June 1, 2017. The Amended Note was converted on May 17, 2017 (see below). The Amended Note had the following conversion features:

 

	●	Automatic Conversion. The principal balance of the Amended Note 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 Amended Note. For the avoidance of doubt, the Holder will receive the same number of shares as it would have for its investment if it had converted at a $12,000,000 valuation on October 20, 2016 given the 26,587,497 shares outstanding at that time. For the avoidance of doubt, the Note will convert into 1,162,500 shares.

 

 

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

  

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

 

On May 17, 2017, pursuant to the Series B Preferred Stock Purchase Agreement (see Note 13), Note Four was converted into 1,540,649 Series B Preferred Shares in which the conversion feature into common stock was altered from $0.43 per share of common stock to $0.3245385 per share of the Series B Preferred Stock. In accordance with ASC 470, the Company recorded a loss on induced conversion associated with the conversion of Note Four of $1,503,876.

 

On February 13, 2017, the Company entered into a $183,333 10% Fixed Secured Convertible Promissory Note (“Note Five”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $166,666 in cash, which was received by the Company during the period ended March 31, 2017. The additional $16,666 was retained by the Fourth Investor for due diligence and legal bills for the transaction. The Company promised to pay the principal amount, together with guaranteed interest at the annual rate of 10%, with principal and accrued interest on Note Five due and payable on September 12, 2017 (unless converted under terms and provisions as set forth within Note Five). The principal balance of Note Five was convertible at the election of the Fourth Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $1.50 per share. In conjunction with Note Five, the Company issued a warrant to the third investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share.

 

The Company evaluated the embedded conversion feature within the above convertible note under ASC 815 and determined the conversion feature did not meet the definition of a derivative and therefore should not be bifurcated. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to the convertible note payable and a total debt discount of $183,333 was recorded.

 

The company recorded a debt discount relating to the warrants issued in the amount of $22,000 based on the relative fair values of Note Five without the warrants and the warrants themselves at the effective date of Note Five. The additional $16,666 retained by the Fourth Investor for due diligence and legal bills for the transaction will be recorded as a debt discount. The calculated value of the beneficial conversion feature and the combined value of the debt discount resulted in a value greater than the value of the debt and as such, the total discount was limited to the value of the debt balance of $183,333. Therefore, the debt discount related to the beneficial conversion feature was in the amount of $144,666. The excess value of the beneficial conversion feature discount was recognized as a loss in earnings and recorded as a component of interest expense in the amount of $390,666.

 

The debt discounts will be amortized to interest expense over the life of Note Five.  Amounts amortized to interest expense were approximately $64,603 and $0 for the three months ended September 30, 2017 and 2016, respectively.  Amounts amortized to interest expense were approximately $183,333 and $0 for the nine months ended September 30, 2017 and 2016, respectively. Note Five was fully amortized at September 30, 2017. The interest expense associated with Note Five was $6,460 and $0 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note Five was $18,333 and $0 for the nine months ended September 30, 2017 and 2016, respectively.

 

On February 13, 2017, the Company entered into a $25,000 10% Fixed Secured Convertible Promissory Note (“Note Six”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $25,000 in cash, which was received by the Company during the period ended March 31, 2017. The Company promised to pay the principal amount, together with guaranteed interest at the annual rate of 10%, with principal and accrued interest on Note Six due and payable on September 13, 2017. The principal balance of Note Six was convertible at the election of the Fourth Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $6.10 per share. Note Six became effective on February 14, 2017 upon the execution by the Company and the Holder of numerous exhibit documents.

 

 

The Company evaluated Note Six in accordance with ASC 815, Derivatives and Hedging 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 $2,713 and $0 for the nine months ended September 30, 2017 and 2016, respectively.  The interest expense associated with Note Six was $1,090 and $0 for the three months ended September 30, 2017 and 2016, respectively. 

 

On April 26, 2017, the Company entered into a $100,000 10% Secured Convertible Promissory Note (“Note Seven”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $72,000 in cash proceeds, which was received by the Company during the three months ended June 30, 2017. Note Seven is due on October 26, 2017 and the Company must pay guaranteed interest on the principal balance at an amount equivalent to 10% of the note amount. The principal balance of Note Seven is convertible at the election of the Fourth Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at the lower of $1.00 or a 50% discount to the lowest closing bid price of the Company’s common stock for the 30 Trading Days prior to conversion. In conjunction with Note Seven, the Company issued a warrant to the fourth investor to purchase 150,000 shares of the Company’s common stock at $1.00 per share.

 

The Company evaluated Note Seven in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that Note Seven will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. At inception, April 26, 2017, the fair value of Note Seven was $618,000 while as of September 30, 2017, the fair value of the liability was $310,000. Accordingly, the Company recorded a change in fair value loss of $210,000 related to Note Seven. In addition, the company recorded a debt discount relating to the warrants issued in the amount of $43,200 based on the relative fair values of Note Seven without the warrants and the warrants themselves at inception of Note Seven. The additional $25,000 retained by the Third Investor for due diligence and legal bills for the transaction and $3,000 paid to legal counsel was recorded as a debt discount.

 

The debt discounts will be amortized to interest expense over the life of Note Seven.  Amounts amortized to interest expense were approximately $36,220 and $0 for the three months ended September 30, 2017 and 2016, respectively.  Amounts amortized to interest expense were approximately $61,510 and $0 for the nine months ended September 30, 2017 and 2016, respectively. The unamortized discount balance at September 30, 2017 was approximately $9,690. The interest expense associated with Note Seven was $5,027 and $0 for the three months ended September 30, 2017 and 2016, respectively. Interest expense associated with Note Seven was $8,579 and $0 for the nine months ended September 30, 2017 and 2016, respectively.

 

On November 16, 2017, the Company amended the terms of Notes Five, Six and Seven, whose original maturity dates were September 12, 2017, September 12, 2017 and October 26, respectively. These notes now mature on May 16, 2018. See Note 20 for details relating to the amended terms of Note Five, Six and Seven.

 

12.	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 $0 as of September 30, 2017. The Company has an additional loan outstanding from a Company executive. The advance does not accrue interest and has no definite repayment terms. The loan balance was $102,000 as of September 30, 2017.

 

Convertible Note Payable

 

On March 11, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Eight”) with Paul Hodges, a Director of the Company (the “Related Party Holder”). The Related Party Holder provided the Company with $150,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note Eight due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Eight was convertible at the election of the Related Party Holder, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. The Company evaluated Note Eight in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that Note Eight will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2017, the fair value of the liability was $265,593 and accordingly the Company recorded a credit regarding the change in fair value of $8,971 and loss of $34,725, respectively for the nine and three months ended September 30, 2017. For the three and nine months ended September 30, 2016, the Company recorded a charge in the change in fair value of $697 and $107,107, respectively. The interest expense associated with Note Eight was $2,675 and $2,646 for the three months ended September 30, 2017 and 2016. The interest expense associated with Note Eight was $7,853 and $7,853 for the nine months ended September 30, 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 September 30, 2017, the warrants granted are not exercisable.

 

13.	Promissory Notes and Notes Payable

 

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. In conjunction with the Series B Preferred Stock Purchase Agreement, as discussed in Note 13, the Company satisfied its liability in exchange for Series B Preferred Stock. As of September 30, 2017, the Company had $0 outstanding on the unsecured promissory note. The interest expense associated with the unsecured promissory note was $0 for the three months ended September 30, 2017. The interest expense associated with the unsecured promissory note was $2,570 for the nine months ended September 30, 2017.

 

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. In conjunction with the Series B Preferred Stock Purchase Agreement, as discussed in Note 13, the Company satisfied its liability in exchange for Series B Preferred Stock. As of September 30, 2017, the Company had $0 outstanding on the unsecured promissory note. The interest expense associated with the unsecured promissory note was $0 for the three months ended September 30, 2017. The interest expense associated with the unsecured promissory note was $2,570 for the nine months ended September 30, 2017.

 

14.	Notes Payable

 

Notes payable consisted of the following:

 

		September 30, 2017				December 31, 2016
Vehicle financing loans payable, between 4.7% and 7.0% interest and maturing between June 2022 and July 2022		$	44,344			$	-
Loans Payable - Credit Union			16,857
Less: Current portion of loans payable			(10,268	)			-
Long-term portion of loans payable		$	50,933			$	-

  

The interest expense associated with the notes payable was $230 and $300 for the three months ended September 30, 2017 and 2016, respectively. The interest expense associated with the notes payable was $460 and $600 for the nine months ended September 30, 2017 and 2016, respectively.

 

 

15.	Shareholders’ Equity (Deficit)

 

Common Stock

 

In May 2017, the Company issued 111,111 shares of restricted common stock to an investor per a subscription agreement for total proceeds of $100,000.

 

Series A convertible preferred stock

 

In October 2015, the Company issued a total of 1,000,000 shares of its Class A Preferred Stock as part of a reorganization in which Helix Opportunities LLC contributed 100% of itself and its wholly-owned subsidiaries, Security Consultants Group, LLC and Boss Security Solutions, Inc. to the Company in exchange for 1,000,000 convertible preferred shares of the Company. The Class A Preferred Stock included super majority voting rights and were convertible into 60% of the Company’s common stock. During the three months ended September 30, 2017, the Company modified the conversion rate on the Class A Preferred Stock to a 1:1 ratio. This modification reduced the amount of potentially dilutive Convertible Series A Stock by 15,746,127 shares to a total of 1,000,000 at September 30, 2017. 

 

Series B convertible preferred stock

 

Series B Preferred Stock Purchase Agreement

 

On May 17, 2017, the Company sold to accredited investors an aggregate of 5,781,426 Series B Preferred Shares for gross proceeds of $1,875,000 and converted a $500,000 Unsecured Convertible Promissory Note into 1,536,658 Series B Preferred Shares. This tranche of Series B Preferred Shares are convertible into 7,318,084 shares of common stock based on the current conversion price, at a purchase price of $0.325 per share. Net proceeds were approximately $1,772,500 after legal and placement agent fees listed below and the satisfaction of the promissory notes discussed in Note 12.

 

In connection with the Series B Preferred Stock Purchase Agreement, the Company is obligated to issue warrants to a third-party for services to purchase 462,195 shares of common stock at $0.325 per share (see Note 15). These warrants have been accounted for as an obligation to issue because as of the balance sheet date the Company did not deliver the warrants though incurred the obligation; accordingly, they were recognized as a liability on the unaudited condensed consolidated balance sheet and cost of issuance of Series B preferred shares on the unaudited condensed consolidated statement of shareholders’ equity (deficit).

 

On July 28, 2017, as contemplated by the Initial Series B Preferred Purchase Agreement, the Parties entered into a second Series B Preferred Stock Purchase Agreement (the “Second Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 1,680,000 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $840,000.

 

On August 29, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a third Series B Preferred Stock Purchase Agreement (the “Third Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 369,756 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $120,000.

 

On September 15, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a third Series B Preferred Stock Purchase Agreement (the “Third Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 462,195 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $150,000.

 

Series B Preferred Stock

 

In accordance with the Certificate of Incorporation, there were 9,000,000 authorized Series B Preferred Stock at a par value of $ 0.001. In connection with the Series B Preferred Stock Purchase Agreement, on May 12, 2017, the Company filed a Certificate of Designation (the “Certificate of Designations”) with the Secretary of State of the State of Delaware to designate the preferences, rights and limitations of the Series B Preferred Shares. On August 23, 2017 the Certificate of Designations was amended and restated to increase the number of shares of Series B Preferred Stock authorized to be 13,000,000. 

 

 

Conversion:

 

Each Series B Preferred Share is convertible at the option of the holder at any time on or after May 12, 2018 into such number of shares of the Company’s common stock equal to the number of Series B Preferred Shares to be converted, multiplied by the Preferred Conversation Rate. The Preferred Conversion Rate shall be the quotient obtained by dividing the Preferred Stock Original Issue Price ($0.3253815) by the Preferred Stock Conversation Price in effect at the time of the conversion (the initial conversion price will be equal to the Preferred Stock Original Issue Price, subject to adjustment in the event of stock splits, stock dividends, and fundamental transactions). Based on the current conversion price, the Series B Preferred Shares are convertible into 9,830,035 shares of common stock. A fundamental transaction means: (i) our merger or consolidation with or into another entity, (ii) any sale of all or substantially all of our assets in one transaction or a series of related transactions, (iii) any reclassification of our Common Stock or any compulsory share exchange by which Common Stock is effectively converted into or exchanged for other securities, cash or property; or (iv) sale of shares below the preferred stock conversion price. Each Series B Preferred Share will automatically convert into common stock upon the earlier of (i) notice by the Company to the holders that the Company has elected to convert all outstanding Series B Preferred Shares at any time on or after May 12, 2018; or (ii) immediately prior to the closing of a firmly underwritten initial public offering (involving the listing of the Company’s Common Stock on an Approved Stock Exchange) pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Common Stock for the account of the Company in which the net cash proceeds to the Company (before underwriting discounts, commissions and fees) are at least fifty million dollars ($50,000,000).

 

Beneficial Conversion Feature – Series B Preferred Stock (deemed dividend):

 

Each share of Series B Preferred Stock is convertible into shares of common stock, at any time at the option of the holder at any time on or after May 12, 2018. On May 17, 2017, the date of issuances of the Series B, the publicly traded common stock price was $3.98.

 

Based on the guidance in ASC 470-20-20, the Company determined that a beneficial conversion feature exists, as the effective conversion price for the Series B preferred shares at issuance was less than the fair value of the common stock into which the preferred shares are convertible. A beneficial conversion feature based on the intrinsic value at the date of issuances for the Series B preferred shares is scheduled below. For the three and nine months ended September 30, 2017, the beneficial conversion amount of $8,044,958 and $11,200,845 was accreted back to the preferred stock as a deemed dividend and charged to additional paid in capital in the absence of earning as the beneficial conversion feature is amortized over time through the earliest conversion date, May 12, 2018. Provided below is a schedule of the issuances of Series B preferred shares and the amount accredited to deemed dividend at September 30, 2017.

 

For the Three Months Ended September 30, 2017
Issuance Date		Beneficial Conversion Feature Term (months)		Number of shares				Fair Value of Beneficial Conversion Feature				Amount accreted as a deemed dividend				Unamortized Beneficial Conversion Feature
May 17, 2017		12			7,318,084			$	25,247,098			$	(6,311,775	)		$	15,779,436
July 29, 2017		9.5			1,680,000				6,804,000				(1,493,561	)			5,310,439
August 29, 2017		8.5			369,756				1,148,263				(143,533	)			1,004,730
September 15, 2017		8			462,195				1,435,329				(96,089	)			1,339,240
Total					9,830,035			$	34,634,690			$	(8,044,958	)		$	23,433,845

 

For the Nine Months Ended September 30, 2017
Issuance Date		Beneficial Conversion Feature Term (months)		Number of shares				Fair Value of Beneficial Conversion Feature				Amount accreted as a deemed dividend				Unamortized Beneficial Conversion Feature
May 17, 2017		12			7,318,084			$	25,247,098			$	(9,467,662	)		$	15,779,436
July 29, 2017		9.5			1,680,000				6,804,000				(1,493,561	)			5,310,439
August 29, 2017		8.5			369,756				1,148,263				(143,533	)			1,004,730
September 15, 2017		8			462,195				1,435,329				(96,089	)			1,339,240
Total					9,830,035			$	34,634,690			$	(11,200,845	)		$	23,433,845

  

Dividends, Voting Rights and Liquidity Value:

 

Pursuant to the Certificate of Designations, the Series B Preferred Shares shall bear no dividends, except that if the Board shall declare a dividend payable upon the then-outstanding shares of the Company’s common stock. The Series B Preferred Shares vote together with the common stock and all other classes and series of stock of the Company as a single class on all actions to be taken by the stockholders of the Company including, but not limited to, actions amending the certification of incorporation of the Company to increase the number of authorized shares of the common stock. Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series B Preferred Shares are entitled to (i) first receive distributions out of our assets in an amount per share equal to the Stated Value plus all accrued and unpaid dividends, whether capital or surplus before any distributions shall be made on any shares of common stock and (ii) second, on an as-converted basis alongside the common stock.

 

 

Classification:

 

These Series B Preferred Shares are classified within permanent equity on the Company’s consolidated balance sheet as they do not meet the criteria that would require presentation outside of permanent equity under ASC 480, Distinguishing Liabilities from Equity.

 

16.	Stock Options

 

As part of the Membership Interest Purchase Agreement entered into between the Company and Security Grade, on June 2, 2017 (see Note 5), the Company granted to the selling Members the option to purchase up to 414,854 shares of the Company’s common stock at a price of $0.001 per share. Of the 414,854 options granted, 207,427 were vested at closing and equity classified. The vesting of the remaining 207,427 shares were subject to certain milestones being achieved and was initially recognized as contingent consideration, both a component of purchase price. As a result of the milestones being met during the three months ended September 30, 2017, the remaining 207,427 shares have also vested. The options have an expiration date of 36 months from the closing date. The exercise price will be based on the fair market value of the share on the date of grant.

 

The fair value of the stock options was estimated using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgement. The assumptions at the inception date are as follows:

 

		As of August 2, 2017				As of June 2, 2017
Exercise Price		$	0.001			$	0.001
Fair value of company’s common stock		$	4.20			$	4.42
Dividend yield			0	%			0	%
Expected volatility			179.9	%			181.2	%
Risk Free interest rate			1.52	%			1.42	%
Expected life (years)			2.67				2.67

 

Stock option activity for the nine-months ended September 30, 2017 is as follows:

 

		Shares Underlying Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)
Outstanding at January 1, 2017			-				-				-
Granted			414,854			$	0.001				3.00
Forfeited and expired			-				-				-
Exercised			-				-				-
Outstanding at September 30, 2017			414,854			$	0.001				2.67
Vested options at September 30, 2017			414,854			$	0.001				2.67

 

17.

Warrants

 

On February 13, 2017, the Company entered into a $183,333 Fixed secured Convertible Promissory Note (“Note Five”) with a fourth investor (the “Fourth Investor”). The Fourth Investor provided the Company with $166,666 in cash, which was received by the Company during the period ended March 31, 2017. The additional $16,666 was retained by the Fourth Investor for due diligence and legal bills for the transaction. In conjunction with Note Five, the Company issued a warrant, of which the value was derived and based off the fair value of Note Five, to the fourth investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after February 14, 2017 and on or before February 12, 2022, by delivery to the Company of the Notice of Exercise. As of September 30, 2017, the warrants granted were not exercised.

 

 

In connection with the issuance of the Note Seven the Company issued a warrant (the “Warrant”) to the Purchaser to purchase 150,000 shares of Common Stock pursuant to the terms and provisions thereunder. The Warrant is exercisable at any time within five (5) years of issuance and entitles the Purchaser to purchase 150,000 shares of the Common Stock at an exercise price of the lesser of either i) $1.00 or ii) a 50% discount to the lowest closing bid price thirty (30) trading days immediately preceding conversion, subject to certain adjustments.

 

Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after April 26, 2017 and on or before April 26, 2022, by delivery to the Company of the Notice of Exercise. As of September 30, 2017, the warrants granted were not exercised.

 

A summary of warrant activity is as follows:

 

September 30, 2017
		Warrant Shares				Weighed Average Exercise Price
Balance at beginning of period			1,920,000			$	0.16
Warrants granted			637,195			$	0.51
Balance at end of period			2,557,195			$	0.25

 

 Liability to issue warrants

 

In connection with the Series B Preferred Stock Purchase Agreement, the Company is obligated to issue warrants to a third-party for services to purchase 462,195 shares of common stock at $0.325 per share. These warrants have been accounted for as an obligation to issue because as of the balance sheet date the Company did not deliver the warrants though incurred the obligation; accordingly, they were recognized as a liability on the unaudited condensed consolidated balance sheet and cost of issuance of Series B preferred shares on the unaudited condensed consolidated statement of shareholders’ equity (deficit).

 

The fair value of the Company’s obligation to issue warrants was calculated using the Black-Scholes model and the following assumptions:

 

		As of September 30, 2017				As of May 17, 2017
Fair value of company’s common stock		$	3.10			$	3.98
Dividend yield			0	%			0	%
Expected volatility			243.5	%			181.2	%
Risk Free interest rate			1.62	%			1.42	%
Expected life (years)			2.63				3.00
Fair value of financial instruments - warrants		$	1,432,529			$	1,839,133

 

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

 

		Amount
Balance as of January 1, 2017		$	-
Fair value of warrants at date of inception			1,839,133
Change in fair value of liability to issue warrants			(406,604	)
Balance as of September 30, 2017		$	1,432,529

 

		Amount
Balance as of June 30, 2017		$	1,963,924
Change in fair value of liability to issue warrants			(531,395	)
Balance as of September 30, 2017		$	1,432,529

 

The Company recorded a charge of $531,395 and $406,604 for the three and nine months ended September 30, 2017 as a result of the change in the fair value of the obligation which was recorded in other income (expense) on the consolidated statements of operations.

  

 

18.	Income Taxes

 

No provision for U.S. federal or state income taxes has been recorded as the Company has incurred net operating losses since inception. Significant components of the Company’s net deferred income tax assets for the nine months ended September 30, 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 nine months ended September 30, 2017 and 2016, the company has a net operating loss carry forward of approximately $5,800,000 and $1,385,000, 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.

 

19.	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 $14,438 and $18,033 during the three months ended September 30, 2017 and 2016, respectively. Rent expense for the nine months ended September 30, 2017 and 2016 was $55,159 and $62,697, respectively.

 

20.	Subsequent Events

 

On October 11, 2017, as contemplated by the Initial Series B Preferred Purchase Agreement, the Parties entered into a Series B Preferred Stock Purchase Agreement (the “Fifth Series B Purchase Agreement”) whereby the Company conducted a fifth closing of the sale of its Series B Preferred Stock and issued and sold to the Purchaser 231,097.5 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $75,000.

  

On October 31, 2017, as contemplated by the Initial Series B Preferred Purchase Agreement, the Parties entered into a Series B Preferred Stock Purchase Agreement (the “Sixth Series B Purchase Agreement”) whereby the Company conducted a sixth closing of the sale of its Series B Preferred Stock and issued and sold to the Purchaser 246,504 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $80,000.

 

On October 31, 2017, as contemplated by the Initial Series B Preferred Purchase Agreement, the Parties entered into a Series B Preferred Stock Purchase Agreement (the “Seventh Series B Purchase Agreement”) whereby the Company conducted a seventh closing of the sale of its Series B Preferred Stock and issued and sold to the Purchaser 795,833 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $477,500.

 

On November 16, 2017, the Company amended Notes Five, Six, and Seven with the Fourth Investor. All three notes shall have maturity dates that are six months from November 16, 2017, shall convert at a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion, shall incur interest at an annual rate of 5%, and shall be prepayable at any time at 110% of the unpaid principal and accrued interest balances. Notes Six and Seven may be repaid by November 21, 2017 at a principal amount that is reduced by 15% of the stated Principal Amount. The Note Five, Six and Seven Principal Amounts are amended to $281,900, $38,441 and $131,107, respectively. 

 

 

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

 

Forward-Looking Statements

 

The following discussion of our financial condition and results of operations for the three and nine months ended September 30, 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/A for the year ended December 31, 2016, as filed on July 7, 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, we believe that no other activity carries as much potential for unforeseen negative impact as a lapse in compliance operations. Helix brings a broad range of compliance services to firms in the cannabis industry, safeguarding their ability to operate while increasing their access to services that offer them a competitive edge.

 

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

 

We have greatly enhanced our core operations with the recent acquisition of Security Grade. Security Grade is a market leader in the security profession and provides a broad range of services, from security consulting to installation of surveillance technology. Consistent with our team of professionals, Security Grade employs specialists with extensive experience and exposure to all areas of security related services. This strategic acquisition will help field the growing demand in the Legal Cannabis Industry.

 

 

Results of Operations for the three months ended September 30, 2017 and 2016

 

The following table shows our results of operations for the three months ended September 30, 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 September 30,								Change
		2017				2016				Dollars				Percentage
Revenue		$	1,129,746			$	612,017			$	517,729				85	%
Cost of revenue			814,031				447,690				366,341				82	%
Gross margin			315,715				164,327				151,388				92	%
Operating expenses			1,039,904				495,279				544,625				110	%
Loss from operations			(724,189	)			(330,952	)			(393,237	)			119	%
Other (expense) income, net			468,832				(40,833	)			509,665				-1248	%
Net loss			(255,357	)			(371,785	)			116,428				-31	%
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend			(8,044,958	)			-				(8,044,958	)			N/A
Net loss attributable to common shareholders		$	(8,300,315	)		$	(371,785	)		$	(7,928,530	)			2133	%

 

Revenue

 

Total revenue for the three months period ended September 30, 2017 was $1,129,746 which represented an increase of $517,729 compared to total revenue of $612,017 for the three months ended September 30, 2016. The increase primarily resulted from a substantial increase in the number of clients serviced by Helix, the introduction of retail transportation services, and additional revenue resulting from the Security Grade acquisition. 

 

Cost of Revenue

 

Cost of revenue for the three months ended September 30, 2017 and 2016 primarily consisted of hourly compensation for security personal. Cost of revenue increased by $366,341 for the three months ended September 30, 2017, to $814,031 as compared to $447,690 for the three months ended September 30, 2016. The increase primarily resulted from a substantial increase in the number of clients serviced by Helix, which required the hiring of additional employees.

 

Operating Expenses

 

Our operating expenses encompass selling, general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during the three months ended September 30, 2017 and 2016 were $1,039,904 and $495,279 respectively. The overall $544,625 increase in operating expenses was primarily attributable to the following increases in operating expenses of:

 

	●	Selling, general and administrative expenses – $190,359
	●	Salaries and wages – $136,140
	●	Professional and legal fees – $41,734
	●	Depreciation and amortization – $176,392

 

 

The $190,359 increase in selling, general and administrative expenses is a result of increases in rent expense, advertising and travel expenses resulting from an expansion in our operations requiring greater office space, as well as work done to expand the Company into new states. The $136,140 increase in salaries and wages resulted from a significant increase in administrative headcount. The $41,734 increase in professional and legal fees primarily resulted from legal and accounting costs associated with being a fully reporting public company. The $176,932 increase in depreciation and amortization was due to the acquisition of vehicles for the retail transportation business, amortization of debt discounts and intangible assets acquired in the Security Grade acquisition.

 

 Other (Expense) Income

 

Other (expense) income, net consisted of loss on the change in fair value of liability to issue warrants, loss on the change in the fair value of convertible notes, gain on the change in fair value of convertible notes – related party, gain on the change in fair value of contingent consideration, and interest expense. Other income (expense), net during the three months ended September 30, 2017 and 2016 was $468,832 and $(40,833) respectively. The $509,665 increase in other income (expense) was primarily attributable to a gain on fair value of convertible notes of $115,000, gain on fair value of obligation to issue warrants of $531,395 and interest expense of $117,760. The gain on fair value of convertible notes related to the change in the fair value of a secured convertible promissory note, gain on fair value of the obligation to issue warrants related to the change in the fair value of the Company’s obligation to issue warrants and interest expense was due to debt discounts associated with the issuance of convertible notes.

 

Net Loss

 

We had a net loss of $255,357 for the three months ended September 30, 2017, compared to a net loss of $371,785 for the three months ended September 30, 2016. 

 

Convertible preferred stock beneficial conversion feature accreted as a deemed dividend

 

The convertible preferred stock beneficial conversion feature accreted as a deemed dividend resulted from the effective conversion price of the Series B preferred shares at issuance being less than the fair value of the common stock into which the preferred shares are convertible. The result was a non-cash charge in the amount of $8,044,958 for the three months ended September 30, 2017 compared to $0 for the three months ended September 30, 2016.

 

Net Loss Attributable to common shareholders

 

For the foregoing reasons, we had a net loss attributable to common shareholders of $8,300,315 for the three months ended September 30, 2017, or $0.29 net loss per share attributable to common shareholders - basic and diluted, compared to net loss attributable to common shareholders of $371,785 for the three months ended September 30, 2016, or $0.01 net loss per share attributable to common shareholders – basic and diluted. 

 

  

Results of Operations for the nine months ended September 30, 2017 and 2016

 

The following table shows our results of operations for the nine months ended September 30, 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 Nine Months Ended September 30,								Change
		2017				2016				Dollars				Percentage
Revenue		$	2,837,145			$	1,477,345			$	1,359,800				92	%
Cost of revenue			2,192,366				1,149,278				1,043,088				91	%
Gross margin			644,779				328,067				316,712				97	%
Operating expenses			2,186,942				1,151,109				1,035,833				90	%
Loss from operations			(1,542,163	)			(823,042	)			(719,121	)			87	%
Other (expense) income, net			(6,577,864	)			(1,661,582	)			(4,916,282	)			296	%
Net loss			(8,120,027	)			(2,484,624	)			(5,635,403	)			227	%
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend			(11,200,845	)			-				(11,200,845	)			N/A
Net loss attributable to common shareholders		$	(19,320,872	)		$	(2,484,624	)		$	(16,836,248	)			678	%

 

Revenue

 

Total revenue for the nine months period ended September 30, 2017 was $2,837,145, which represented an increase of $1,359,800 compared to total revenue of $1,477,345 for the nine months ended September 30, 2016. The increase primarily resulted from a substantial increase in the number of clients serviced by Helix, the introduction of retail transportation services, additional revenue resulting from the Security Grade acquisition and the development of the Cannabase Reach Platform, which did not previously exist. 

 

Cost of Revenue

 

Cost of revenue for the nine months ended September 30, 2017 and 2016 primarily consisted of hourly compensation for security personal. Cost of revenue increased by $1,043,088 for the nine months ended September 30, 2017, to $2,192,366 as compared to $1,149,278 for the nine months ended September 30, 2016. The increase primarily resulted from a substantial increase in the number of clients serviced by Helix, which required the hiring of additional employees.

 

Operating Expenses

 

Our operating expenses encompass selling, general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during the nine months ended September 30, 2017 and 2016 were $2,186,942 and $1,151,109 respectively. The overall $1,035,833 increase in operating expenses was primarily attributable to the following increases in operating expenses of:

 

	●	Selling, general and administrative expenses – $364,428
	●	Salaries and wages – $153,882
	●	Professional and legal fees – $266,583
	●	Depreciation and amortization – $250,940

 

 

The $364,428 increase in selling, general and administrative expenses is a result of increases in rent expense, advertising and travel expenses resulting from an expansion in our operations requiring greater office space, as well as work done to expand the Company into new states. The $153,882 increase in salaries and wages resulted from a significant increase in administrative headcount. The $266,583 increase in professional and legal fees primarily resulted from legal and accounting costs associated with being a fully reporting public company. The $250,940 increase in depreciation and amortization was due to the acquisition of vehicles for the retail transportation business, amortization of debt discounts and intangible assets acquired in the Security Grade acquisition.

 

Other (Expense) Income

 

Other (expense) income, net consisted of loss on the change of fair value of liability of warrants to be issued, loss on extinguishment of debt, change in the fair value of convertible note – related party, change in the fair value of convertible notes, change in the fair value of contingent consideration, loss on induced conversion of convertible note and interest expense. Other income (expense), net during the nine months ended September 30, 2017 and 2016 was $(6,577,864) and $(1,661,582) respectively. The $4,916,282 increase in other income (expense) was primarily attributable to the change in fair value of liability of warrants to be issued of $406,604, loss on extinguishment of debt of $(4,611,395), change of fair value of convertible note – related party of $8,971, change in the fair value of convertible notes of $(210,000), change in the fair value of contingent consideration of $10,186, loss on induced conversion of convertible note of $(1,503,876) and interest expense of $678,354. The loss on extinguishment was a one-time non-cash charge based on an amended convertible note, the loss on induced conversion of convertible notes was a one-time non-cash charge based on convertible notes amended and converted at a share price lower than market, the change in fair value of convertible notes related to the change in the fair value of a secured convertible promissory note, and the interest expense was due to a beneficial conversion feature relating to a convertible note and debt discount amortized to interest expense..

 

Net Loss

 

We had a net loss of $8,120,027 for the nine months ended September 30, 2017, compared to net loss of $2,484,624 for the nine months ended September 30, 2016. 

 

Convertible preferred stock beneficial conversion feature accreted as a deemed dividend

 

The convertible preferred stock beneficial conversion feature accreted as a deemed dividend resulted from the effective conversion price of the Series B preferred shares at issuance being less than the fair value of the common stock into which the preferred shares are convertible. The result was a non-cash charge in the amount of $11,200,845 for the nine months ended September 30, 2017 compared to $0 for the nine months ended September 30, 2016.

 

Net Loss Attributable to common shareholders

 

For the foregoing reasons, we had a net loss attributable to common shareholders of $19,320,872 for the nine months ended September 30, 2017, or $0.68 net loss per share attributable to common shareholders – basic and diluted, compared to net loss attributable to common shareholders of $2,484,624 for the nine months ended September 30, 2016, or $0.09 net loss per share attributable to common shareholders – basic and diluted. 

 

Liquidity, Capital Resources and Cash Flows

 

Going Concern

 

Management believes that we will continue to incur losses for the immediate future. Therefore, we may either need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. For the three and nine months ended September 30, 2017, we have generated revenue and are trying to achieve positive cash flows from operations.

 

 

As of September 30, 2017, we had a cash balance of $130,125, accounts receivable, net of $558,141 and $3,243,572 in current liabilities. At the current cash consumption rate, we will 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.

 

Capital Resources

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

 

		September 30, 2017				December 31, 2016				Change
Current assets		$	839,711			$	315,815			$	523,896
Current liabilities			3,243,572				1,110,007				2,133,565
Working capital (deficit)		$	(2,403,861	)		$	(794,192	)		$	(1,609,669	)

 

As of September 30, 2017, and December 31, 2016, we had a cash balance of $130,125 and $57,841, respectively.

 

Summary of Cash Flows. 

 

		For the Nine Months Ended September 30,
		2017				2016
Net cash used in operating activities		$	(1,452,666	)		$	(602,486	)
Net cash used in investing activities			(1,709,239	)			(422,061	)
Net cash provided by financing activities			3,234,189				885,143

 

Net cash used in operating activities. Net cash used in operating activities for the nine months ended September 30, 2017 was 1,452,666. This included a net loss of $8,120,027, non-cash charge related to depreciation and amortization of $292,757, non-cash loss of $210,000 regarding the change in fair value of convertible notes, non-cash gain of $8,971 regarding the fair value of convertible notes – related party, non-cash gain of $10,186 regarding the change in fair value of contingent consideration, non-cash loss on beneficial conversion feature of $390,666, non-cash loss on extinguishment of debt of $4,611,395, non-cash loss on induced conversion of convertible note of $1,503,876, non-cash gain on the change in fair value of warrants to be issued of $406,604 and changes in accounts receivable, deposits, accounts payable, accrued expenses and deferred rent of $160,415. Net cash used in operating activities for the nine months ended September 30, 2016 was $602,486. This included a net loss of $2,484,624, non-cash loss of $19,250 on the fair value of liability of shares to be issued, non-cash non-employee stock compensation expense of $150,710, non-cash charge related to depreciation and amortization of $41,817, non-cash loss on the change in the fair value of convertible notes of $233,342, non-cash loss on the change in fair value of convertible notes – related party of $107,107, non-cash loss on the impairment of intangible assets of $1,278,323 and changes in accounts receivable, prepaid expenses, deposits, and accounts payable and accrued expenses of $51,589.

 

Net cash used in investing activities. Net cash used in investing activities for the nine months ended September 30, 2017 was $1,709,239, which consisted of capital expenditures of $31,054, cash payments pursuant to the Revolutionary asset acquisition and Security Grade business acquisition of $1,631,313. Net cash used in investing activities for the nine months ended September 30, 2016 was $422,061, which consisted of $419,830 regarding cash payment pursuant to an acquisition and capital expenditures of $2,231. 

 

Net cash provided by financing activities. Net cash provided by financing activities for the nine months ended September 30, 2017 was $3,234,189, which resulted from proceeds from the issuance of convertible notes payable of $229,167, proceeds of $255,000 from the issuance of promissory notes and advances from shareholders of $60,500, proceeds from the issuance of common stock of $100,000, proceeds from the issuance of Series B convertible preferred stock of $2,624,988, payments pursuant to advances from related parties of $32,000 and payments pursuant to notes payable of $3,466. Net cash provided by financing activities for the nine months ended September 30, 2016 was $885,143, which resulted from the issuance of convertible notes of $200,000, proceeds from the issuance of a convertible note to related parties of $300,000 and the proceeds of $385,143 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/A for the year ended December 31, 2016 filed with the SEC on July 07, 2017 and should be read in conjunction with the Original filing on Form 10-K filed with the SEC on April 17, 2017.

 

Related Party Transactions

 

The Company has a loan outstanding from Helix Opportunities, LLC which is 50% owned by our Chief Executive Officer and 50% owned by a director of the Company. The advance does not accrue interest and has no definite repayment terms. The loan balance was $0 as of September 30, 2017. The Company has an additional loan outstanding from a Company executive. The advance does not accrue interest and has no definite repayment terms. The loan balance was $102,000 as of September 30, 2017.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable for a smaller reporting company.

 

ITEM 4. Controls and Procedures 

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures 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 September 30, 2017, the end of the period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Based on that evaluation, management has concluded that the Company did not maintain effective internal control over financial reporting as of the nine months ended September 30, 2017 due to the existence of material weaknesses in the internal control over financial reporting described below.

 

 

A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management has determined that we did not maintain effective internal controls over financial reporting as of September 30, 2017 due to the existence of the following material weaknesses identified by management:

 

●

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 nine months ended September 30, 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. 

 

Other than as described below, 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.

 

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.

 

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

 

On July 20, 2017 one former employee filed a lawsuit in the United States District Court for the District of Colorado alleging violations of the Fair Labor Standards Act on behalf of themselves and other employees. The plaintiffs seek damages for our alleged failure to compensate them appropriately for the overtime hours they worked as purported “non-exempt” employees.

 

At this time, the Company is not able to predict the outcome of the lawsuits, any possible loss or possible range of loss associated with the lawsuits or any potential effect on the Company’s business, results of operations or financial condition. However, the Company believes the lawsuit are 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/A for the fiscal year end December 31, 2016 filed with the SEC on July 07, 2017.

 

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

 

During the nine months ended September 30, 2017, we issued 111,111shares of restricted common stock to an investor per a subscription agreement, with proceeds received totaling $100,000. We also issued 9,830,035 shares of our Series B Preferred Stock to an investor pursuant to a Series B Purchase Agreement with net proceeds received totaling approximately $2,882,500 We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to issue the common stock. The securities were offered and sold without any form of general solicitation of general advertising and the offerees made representations that they were accredited investors.

 

ITEM 3. Defaults upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosure

 

Not applicable.

 

ITEM 5. Other Information

 

None.

 

 

ITEM 6. Exhibits

 

Exhibit No.		Description
10.1		Form of Helix TCS, Inc. Series B Preferred Stock Purchase Agreement dated May 17, 2017 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on May 22, 2017).
10.2		Form of Helix TCS, Inc. Second Series B Preferred Stock Purchase Agreement. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on August 2, 2017).
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: November 20, 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		November 20, 2017
Zachary L. Venegas		(Principal Executive Officer)
		(Principal Financial Officer)
/s/ Paul Hodges		Director		November 20, 2017
Paul Hodges
/s/ Scott Ogur		Director		November 20, 2017
Scott Ogur

 

 

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