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EX-32.2 - CERTIFICATION - Helix Technologies, Inc.f10q0918ex32-2_helixtcsinc.htm
EX-32.1 - CERTIFICATION - Helix Technologies, Inc.f10q0918ex32-1_helixtcsinc.htm
EX-31.2 - CERTIFICATION - Helix Technologies, Inc.f10q0918ex31-2_helixtcsinc.htm
EX-31.1 - CERTIFICATION - Helix Technologies, Inc.f10q0918ex31-1_helixtcsinc.htm

 

 

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, 2018

 

or

 

   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

Commission file number: 000-55722

 

HELIX TCS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   81-4046024

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

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 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, 2018, the registrant had 72,088,603 shares of its common stock, par value $0.001 per share, outstanding. 

 

 

 

 

 

 

Table of Contents

 

    PAGE
PART I FINANCIAL INFORMATION 1
     
ITEM 1. Financial Statements 1
  Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017 (audited) 1
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited) 2
  Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited) 3
  Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2018 (unaudited) 4
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited) 5
  Notes to the Condensed Consolidated Financial Statements 6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 39
ITEM 4. Controls and Procedures 39
     
PART II OTHER INFORMATION 41
     
ITEM 1. Legal Proceedings 41
ITEM 1A. Risk Factors 41
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
ITEM 3 Defaults upon Senior Securities 41
ITEM 4. Mine Safety Disclosures 41
ITEM 5. Other Information 41
ITEM 6. Exhibits 42
     
SIGNATURES 43

  

i

 

 

PART I – FINANCIAL INFORMATION 

 

ITEM 1. Financial Statements

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

  

   September 30,   December 31, 
   2018   2017 
ASSETS  (Unaudited)   (Audited) 
Current assets:        
Cash  $464,992   $868,554 
Accounts receivable, net   1,152,337    610,313 
Costs & earnings in excess of billings   24,792    40,847 
Total current assets   1,642,121    1,519,714 
           
Property and equipment, net   280,524    110,634 
Intangible assets, net   19,777,516    3,042,259 
Goodwill   39,913,559    664,329 
Deposits and other assets   518,124    68,313 
Total assets  $62,131,844   $5,405,249 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable and accrued liabilities  $1,319,261   $598,637 
Advances from related parties   55,250    124,750 
Billings in excess of costs   3,786    20,191 
Deferred rent   3,264    9,667 
Notes payable, current portion   7,582    11,179 
Obligation pursuant to acquisition   253,334    559,103 
Convertible notes payable, net of discount   132,625    812,393 
Convertible note payable - related party   -    243,506 
Promissory notes   250,000    - 
Contingent consideration   909,292    - 
Obligation to issue warrants   994,809    2,429,569 
Total current liabilities   3,929,203    4,808,995 
           
Long-term liabilities          
Notes payable, net of current portion   73,161    53,293 
Total long-term liabilities   73,161    53,293 
           
Total liabilities   4,002,364    4,862,288 
           
Shareholders’ equity:          
Preferred stock (Class A), $0.001 par value, 3,000,000 shares authorized; 1,000,000 issued and outstanding as of September 30, 2018 and December 31, 2017   1,000    1,000 
Preferred stock (Class B), $0.001 par value, 17,000,000 shares authorized; 13,784,201 issued and outstanding as of September 30, 2018 and December 31, 2017   13,784    13,784 
Common stock; par value $0.001; 200,000,000 shares authorized; 71,363,953 shares issued and outstanding as of September 30, 2018; 28,771,402 shares issued and outstanding as of December 31, 2017   71,364    28,771 
Additional paid-in capital   81,212,979    18,741,114 
Accumulated other comprehensive income   17,538    - 
Accumulated deficit   (23,187,185)   (18,241,708)
Total shareholders’ equity   58,129,480    542,961 
Total liabilities and shareholders’ equity  $62,131,844   $5,405,249 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

1

 

 

HELIX TCS, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
                 
Security and guarding  $1,141,676   $1,129,746   $3,432,651   $2,837,145 
Systems installation   318,850    -    454,113    - 
Software   1,653,195    -    2,229,337    - 
Total revenues  $3,113,721   $1,129,746   $6,116,101   $2,837,145 
Cost of revenue   1,203,187    814,031    3,892,716    2,192,366 
Gross margin   1,910,534    315,715    2,223,385    644,779 
                     
Operating expenses:                    
Selling, general and administrative   802,724    269,143    1,678,603    649,973 
Salaries and wages   1,888,155    315,316    4,308,994    602,254 
Professional and legal fees   473,651    261,098    1,362,205    641,958 
Depreciation and amortization   806,611    194,347    1,869,889    292,757 
Total operating expenses   3,971,141    1,039,904    9,219,691    2,186,942 
                     
Loss from operations   (2,060,607)   (724,189)   (6,996,306)   (1,542,163)
                     
Other income (expenses):                    
Change in fair value of convertible note   (17,880)   115,000    679,766    (210,000)
Change in fair value of convertible note - related party   -    (34,725)   118,506    8,971 
Change in fair value of obligation to issue warrants   136,920    531,395    1,434,760    406,604 
Change in fair value of contingent consideration   (131,994)   (25,078)   (131,994)   10,186 
Loss on induced conversion of convertible note   -    -    -    (1,503,876)
Loss on extinguishment of debt   -    -    -    (4,611,395)
Loss on impairment of Goodwill   -    -    (664,329)   - 
Gain on reduction of obligation pursuant to acquisition   50,361    -    607,415    - 
Interest income/(expense), net   21,622    (117,760)   6,705    (678,354)
Other income (expenses)   59,029    468,832    2,050,829    (6,577,864)
                     
Net loss  $(2,001,578)  $(255,357)  $(4,945,477)  $(8,120,027)
                     
Other comprehensive income:                    
Changes in foreign currency translation adjustment   17,538    -    17,538    - 
Total other comprehensive income   17,538    -    17,538    - 
Total comprehensive loss   (1,984,040)   (255,357)   (4,927,939)   (8,120,027)
                     
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend   -    (8,044,958)   (22,202,194)   (11,200,845)
                     
Net loss attributable to common shareholders  $(1,984,040)  $(8,300,315)  $(27,130,133)  $(19,320,872)
                     
Net loss per share attributable to common shareholders:                    
Basic  $(0.03)  $(0.29)  $(0.57)  $(0.68)
Diluted  $(0.03)  $(0.29)  $(0.57)  $(0.68)
                     
Weighted average common shares outstanding:                    
Basic   70,420,857    28,644,522    47,598,820    28,592,643 
Diluted   70,420,857    28,644,522    47,598,820    28,592,643 

 

 See accompanying notes to the unaudited condensed consolidated financial statements.

 

2

 

 

HELIX TCS, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2018   2017   2018   2017 
                 
Net loss, as reported  $(2,001,578)  $(255,357)  $(4,945,477)  $(8,120,027)
Other comprehensive income:                    
Foreign currency translation adjustments   17,538    -    17,538    - 
Comprehensive loss  $(1,984,040)  $(255,357)  $(4,927,939)  $(8,120,027)

 

 See accompanying notes to the unaudited condensed consolidated financial statements.

 

3

 

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

   Common Stock   Preferred Stock (Class A)   Preferred Stock (Class B)   Additional Paid-In   Accumulated Other Comprehensive   Accumulated   Total
Shareholders’
 
   Shares   Amount   Shares   Amount   Shares  

Amount

   Capital   Income   Deficit   Equity 
Balance at December 31, 2017   28,771,402   $28,771    1,000,000   $1,000    13,784,201   $13,784   $18,741,114   $-   $(18,241,708)   542,961 
                                                   
Beneficial conversion feature of Series B convertible preferred stock                                 22,202,194              22,202,194 
                                                   
Deemed dividend on conversion of Series B convertible preferred stock to common stock                                 (22,202,194)             (22,202,194)
                                                   
Issuance of common stock per stock subscription agreements   2,883,331    2,883                        2,592,114              2,594,997 
                                                   
Issuance of common stock resulting from convertible note conversion   205,974    206                        174,794              175,000 
                                                   
Issuance of restricted common stock   157,850    158                        452,821              452,979 
                                                   
Reduction in Additional Paid-In Cap ital due to Security Grade acquisition settlement agreement                                 (340,039)             (340,039)
                                                   
Restricted common stock issued as part of BioTrack acquisition   38,184,985    38,185                        57,513,848              57,552,033 
                                                   
Restricted common stock issued as part of Engeni acquisition   366,700    367                        388,335              388,702 
                                                   
Issuance of common stock to employees under Stock Incentive Plan   227,095    227                        308,842              309,069 
                                                   
Issuance of common stock resulting from inducement of consulting agreement   250,000    250                        336,250              336,500 
                                                   
Issuance of restricted common stock resulting from an investor relation consulting agreement   100,000    100                        101,900              102,000 
                                                   
Issuance of warrants pursuant to consulting agreement                                 943,000              943,000 
                                                   
Issuance of common stock resulting from exercise of stock options   216,616    217                                       217 
                                                   
Foreign currency translation                                      17,538         17,538 
                                                   
Net loss                                           (4,945,477)   (4,945,477)
                                                   
Balance at September 30, 2018   71,363,953   $71,364    1,000,000   $1,000    13,784,201   $13,784   $81,212,979   $17,538   $(23,187,185)  $58,129,480 

 

 See accompanying notes to the unaudited condensed consolidated financial statements.

 

4

 

 

HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

  

   For the Nine Months Ended
September 30,
 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(4,945,477)  $(8,120,027)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,869,889    292,757 
Amortization of debt discounts   -    244,843 
Share-based compensation expense   2,143,548    - 
Change in fair value of convertible notes   (504,768)   210,000 
Change in fair value of obligation to issue warrants   (1,434,760)   (406,604)
Change in fair value of convertible notes - related party   (93,506)   (8,971)
Change in fair value of contingent consideration   131,994    (10,186)
Loss on induced conversion of convertible debt   -    1,503,876 
Loss on extinguishment of debt   -    4,611,395 
Loss on beneficial conversion feature of convertible note   -    390,666 
Loss on impairment of goodwill   664,329    - 
Gain on reduction of obligation pursuant to acquisition   (607,415)   - 
Change in operating assets and liabilities:          
Accounts receivable   (373,314)   (246,375)
Prepaid expenses   -    - 
Deposits   (87,161)   (14,640)
Costs in excess of billings   16,055    (54,547)
Accounts payable and accrued expenses   26,044    122,875 
Deferred rent   (6,403)   3,002 
Billings in excess of costs   (16,405)   29,270 
Net cash used in operating activities   (3,217,350)   (1,452,666)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (85,665)   (31,054)
Payments for business combination, net of cash acquired   (79,664)   (1,631,313)
Cash acquired as part of business combination   454,306    - 
Payments for asset acquisition   (58,729)   (46,872)
Net cash provided by (used in) investing activities   230,248    (1,709,239)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from the issuance of convertible notes payable   -    229,167 
Payments pursuant to convertible notes payable - related party   (150,000)   - 
(Repayments to)/advances from related parties   (69,500)   60,500 
Repayment to related parties   -    (32,000)
Payments pursuant to notes payable   -    (3,466)
Proceeds from notes payable   16,271    - 
Proceeds from the issuance of a promissory note   250,000    255,000 
Proceeds from the issuance of common stock   2,595,214    100,000 
Proceeds from the issuance of Series B convertible preferred stock   -    2,624,988 
Net cash provided by financing activities   2,641,985    3,234,189 
           
Effect of foreign exchange rate changes on cash   (58,445)   - 
Net change in cash   (403,562)   72,284 
Cash, beginning of period   868,554    57,841 
Cash, end of period  $464,992   $130,125 
           
Supplemental disclosure of cash and non-cash transactions:          
Financing of property and equipment purchases  $-   $52,082 
Equity issuance pursuant to asset acquisition (non-cash acquisition of BioTrack)  $57,552,033   $- 
Equity issuance pursuant to asset acquisition (non-cash acquisition of Engeni)  $1,166,000   $- 
Cost of issuance of Series B preferred shares  $-   $(1,941,633)
Stock options issued pursuant to acquisition consideration  $-   $916,643 
Stock options issued pursuant to contingent consideration as part of acquisition  $-   $871,193 
Warrant issuances to investors  $-   $93,200 
Reacquisition price of convertible debt  $-   $4,581,395 
Partial conversion of convertible note into common stock  $175,000   $- 

 

See accompanying notes to the unaudited condensed consolidated financial statements. 

 

5

 

 

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Description of Business

 

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

 

Effective October 25, 2015, we entered into an acquisition and exchange agreement with Helix TCS, LLC. We closed the transaction contemplated under the acquisition and exchange agreement on December 23, 2015 and Helix TCS, LLC was merged into and with Helix. 

 

Effective October 1, 2015, for accounting purposes, as part of an acquisition amounting to a reorganization dated December 21, 2015, Helix Opportunities LLC exchanged 100% of Helix TCS, LLC and its wholly-owned subsidiaries, Security Consultants Group, LLC and Boss Security Solutions, Inc. to the Company in exchange for 20 million common shares and 1 million convertible preferred shares of the Company.

 

The acquisition of Helix was treated as a recapitalization for financial accounting purposes. Jubilee4 Gold, Inc. is considered the acquiree for accounting purposes and their historical financial statements before the Acquisition Agreement were replaced with the historical financial statements of the Company. The common stock account of the Company continues post-merger, while the retained earnings of the acquiree is eliminated. Furthermore, on April 11, 2016, the Company acquired the assets of Revolutionary Software, LLC (“Revolutionary”) (see Note 7).

 

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 consisted of 800,000 Class A Units and 200,000 Class B Units. At closing, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”). Furthermore, provided that, within the first 60 days following the Closing, no material customer identified in the Agreement terminates its contractual relationship with the Company and that all contracts with such material customers are in full force and effect without default or cancellation as of the 60th day following the Closing, on the 61st day following the Closing, the Company shall issue 207,427 additional stock options (the “Additional Stock Options”). The Company subsequently issued the 207,427 additional stock options on August 1, 2017 as well as a second cash payment of $800,000 pursuant to the original terms of the Agreement.

 

In the first quarter of 2018, the Company notified the selling members of Security Grade of their intent to exercise their right of setoff noted in the Agreement after discovering misrepresentations made by one of the selling members of Security Grade. The Company has settled with all of the six selling members. See Note 6 for further details surrounding the settlements.

 

On March 3, 2018, Helix, Inc. and its wholly owned subsidiary, Helix Acquisition Sub, Inc. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “BioTrack Merger Agreement”) with Bio-Tech Medical Software, Inc. (“BioTrackTHC”) and Terence J. Ferraro, as the representative of the BioTrackTHC shareholders. Pursuant to the BioTrackTHC Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into BioTrackTHC, with BioTrackTHC surviving the merger as a wholly-owned subsidiary of the Company.

 

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

 

On August 3, 2018 (the “Engeni Closing Date”), the Company and its wholly owned subsidiary, Engeni Merger Sub, LLC (“Engeni Merger Sub”), entered into an Agreement and Plan of Merger (the “Engeni Merger Agreement”) with Engeni LLC (“Engeni US”), Engeni S.A (“Engeni SA”), Scott Zienkewicz, Nicolas Heller and Alberto Pardo Saleme (the Engeni US members), and Scott Zienkewicz, as the representative of the Engeni US member. Pursuant to the Engeni Merger Agreement, Engeni Merger Sub merged with and into Engeni US, with Engeni US surviving the merger as a wholly-owned subsidiary of the Company (the “Engeni Merger”).

 

On the Engeni Closing Date, in connection with closing the Engeni Merger Agreement, the Company issued 366,700 shares of Company common stock to Engeni US members. Furthermore, the Company will also issue Engeni US members 366,700 and 366,600 shares of Company common stock upon achievement of specific objectives. If applicable, the Company will pay Engeni US members the aggregate amount of $100,000, on a pro rata basis, if Engeni SA reaches financial breakeven on or before December 31, 2018, as determined by the Company’s Chief Financial Officer and Scott Zienkewicz.

 

6

 

 

2. Revision of Prior Period Financial Statements

 

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

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

On October 11, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a fifth Series B Preferred Stock Purchase Agreement (the “Fifth Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 231,097 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $75,000. Upon further review of the Fifth Series B Purchase Agreement, it was noted the total number of shares issued under the Fifth Series B Purchase Agreement was 462,195 shares with total proceeds of $150,000. 

On October 31, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a sixth Series B Preferred Stock Purchase Agreement (the “Sixth Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 795,833 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $80,000. Upon further review of the Sixth Series B Purchase Agreement, it was noted the total number of shares issued under the Sixth Series B Purchase Agreement was 1,042,337 shares with total proceeds of $557,500. 

As a result of the October 11, 2017 and October 31, 2017 transactions, the Company recorded an increase of $477, $552,023 and $552,500 to Series B Preferred Shares – par amount, additional paid-in capital and accumulated deficit, respectively. 

On November 16, 2017, the Company amended Notes Five, Six, and Seven (“the Amended Notes”) with the Fourth Investor. All three notes shall have maturity dates that are six months from November 16, 2017, shall convert at a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion, shall incur interest at an annual rate of 5%, and shall be prepayable at any time at 110% of the unpaid principal and accrued interest balances. The amendment of Note Six and Seven included terms, permitting the Company the option to tender payment in full on or before November 21, 2017, at a 15% discount of the amended principal amounts. Note Five, Six and Seven Principal Amounts were amended to $281,900, $38,441 and $131,107, respectively. The Company evaluated the Amended Notes in accordance with ASC 480, Distinguishing Liabilities from Equity and determined the Amended Notes will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. At November 16, 2017, the principal amounts of Note Five, Six and Seven were $281,900, $38,441 and $131,107, respectively. As of December 31, 2017, the Company recorded the fair value of Note Five, Six and Seven at $812,393, $110,781 and $377,830, respectively. Therefore, the Company recorded a charge to the change in fair value of $(530,493), $(72,340) and $(246,723) related to Note Five, Six and Seven, respectively. 

Upon further review it was noted, on November 21, 2017, the Company paid the remaining principal balance, at the 15% discount on Notes Six and Seven in the amount of $144,259. Therefore, Notes Six and Seven did not have a balance as of December 31, 2017. 

As a result of the November 21, 2017 transaction, the Company recorded a reduction to convertible notes payable, net of discount of $488,611 and a credit to the change in fair value of convertible notes of $488,611. 

When taking into consideration the two transactions indicated above, the net impact to accumulated deficit was a charge of $63,889, resulting from the netting of the gain of $488,611 from the reduction in the fair value of convertible notes at December 31, 2017 offset by the $552,500 of additional expense associated with the Series B Purchase Agreement. 

Upon further review it was noted that, during the six months ended June 30, 2018 the Company erroneously recorded revenue for transactions with a consolidating entity and not recording the intercompany entry to eliminate the revenue. Therefore revenue and cost of revenues for the six months ended June 30, 2018 were overstated by $338,437. The Company will adjust for these errors on a prospective basis. 

Accordingly, 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, 2017 included in the Company’s Amended Fiscal 2017 Annual Report on Form 10-K/A, filed with the SEC on April 4, 2018. In addition, the Company’s future Quarterly Reports on Form 10-Q for subsequent quarterly periods during the current fiscal year will reflect the impact of the revision in the comparative prior quarter and year-to-date periods. 

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

    Previously
Reported
    Adjustments     Revised  
Condensed Consolidated Balance Sheet as of December 31, 2017                  
Convertible notes payable, net of discount   $ 1,301,004     $ (488,611 )   $ 812,393  
Total liabilities   $ 5,350,899     $ (488,611 )   $ 4,862,288  
Preferred Shares (Class B) Outstanding     13,306,599       477,602       13,784,201  
Preferred Shares (Class B) Par Amount   $ 13,307     $ 477     $ 13,784  
Additional Paid in Capital   $ 3,923,234     $ 552,023     $ 4,475,257  
Accumulated Deficit   $ (18,177,819 )   $ (63,889 )   $ (18,241,708 )
Total Shareholders’ Equity   $ 54,350     $ 488,611     $ 542,961  
Total Liabilities and Shareholders’ Equity   $ 5,405,249     $ -     $ 5,405,249  

 

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   Previously Reported  Adjustments  As revised
Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 2018         
Revenue  $3,340,817   $(338,437)  $3,002,380 
Cost of Revenue  $2,689,529   $(338,437)  $2,351,092 

   

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

 

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

At September 30, 2018, the Company had a working capital deficit of approximately $2,287,082, as compared to a working capital deficit of approximately $3,289,281 at December 31, 2017. The decrease of $1,002,199 in the Company’s working capital deficit from December 31, 2017 to September 30, 2018 was primarily the result of a decrease in the Company’s obligation to issue warrants and a decrease in the balance of the Company’s convertible notes payable, partially offset by a decrease in cash and increase in accounts payable and accrued liabilities. 

The Company’s future capital requirements for its operations will depend on many factors, including the profitability of its businesses, the number and cash requirements of other acquisition candidates that the Company pursues, and the costs of operations. The Company has been investing in expanding its operation in new states, its security service in Colorado, and upgrading the capabilities of BioTrackTHC. The Company’s management has taken several actions to ensure that it will have sufficient liquidity to meet its obligations through December 31, 2018, including growing and diversifying its revenue streams, selectively reducing expenses, and considering additional funding. Additionally, if the Company’s actual revenues are less than forecasted, the Company anticipates that variable expenses will also decline, and the Company’s management can implement expense reduction as necessary. The Company is evaluating other measures to further improve its liquidity, including the sale of equity or debt securities. Lastly, the Company may elect to reduce certain related-party and third-party debt by converting such debt into common shares. The Company’s management believes that these actions will enable the Company to meet its liquidity requirements through November 15, 2019. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during 2018 and beyond.  

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

4. Summary of Significant Accounting Policies

 

Principles of Consolidation 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Helix TCS, LLC (“Helix TCS”), Security Consultants Group, LLC (“Security Consultants”), Boss Security Solutions, Inc. (“Boss Security”), Security Consultants Group Oregon, LLC (“Security Oregon”), Security Grade, BioTrackTHC (since June 1, 2018), and Engeni US (since August 3, 2018)   

Use of Estimates  

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Use of estimates includes the following: 1) allowance for doubtful accounts, 2) estimated useful lives of property, equipment and intangible assets, 3) intangibles impairment, 4) valuation of convertible notes payable and 5) revenue recognition. Actual results could differ from estimates. 

Cash  

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

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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 $65,103 and $3,000 at September 30, 2018 and December 31, 2017, respectively.

 

Long-Lived Assets, Including Definite Lived Intangible Assets

 

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

  

Goodwill

 

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

 

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

 

Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash flows and the current fair value of the asset. It was determined that during the first quarter of 2018, the Company’s entire amount of goodwill attributable to the Security Grade acquisition was impaired. See Note 9 for a further discussion on the impairment.

 

Accounting for Acquisitions 

 

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

 

Business Combinations

 

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

  

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The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques. The estimated fair value of the net assets acquired was determined using the income approach to valuation based on the discounted cash flow method. Under this method, expected future cash flows of the business on a stand-alone basis are discounted back to a present value. The estimated fair value of identifiable intangible assets, consisting of software and trade name acquired were determined using the relief from royalty method.

   

The most significant assumptions under the relief from royalty method used to value software and trade names include: estimated remaining useful life, expected revenue, royalty rate, tax rate, discount rate and tax amortization benefit. The discounted cash flow method used to value non-compete agreements includes assumptions such as: expected revenue, term of the non-compete agreements, probability and ability to compete, operating margin, tax rate and discount rate. Management has developed these assumptions on the basis of historical knowledge of the business and projected financial information of the Company. These assumptions may vary based on future events, perceptions of different market participants and other factors outside the control of management, and such variations may be significant to estimated values.

  

Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

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

  

Segment Information

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer, who reviews the financial performance and the results of operations of the segments prepared in accordance with GAAP when making decisions about allocating resources and assessing performance of the Company.

 

Asset information by operating segment is not presented since the chief operating decision maker does not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s condensed unaudited consolidated financial statements.

 

Expenses

 

Cost of Revenues

 

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

 

Operating Expenses

 

Operating expenses encompass selling general and administrative expenses, salaries and wages, professional and legal fees 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 (Expense) Income, net

 

Other (expense) income, net consisted of change in fair value of convertible note, change in fair value of convertible note – related party, interest expense, change in fair value of obligation to issue warrants, loss on extinguishment of debt, loss on impairment of Goodwill and gain on reduction of obligation pursuant to acquisition.

  

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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 $9,079 and $7,298 for the three months ended September 30, 2018 and 2017, respectively, and $74,408 and $12,477 for the nine months ended September 30, 2018 and 2017, respectively.

  

Foreign Currency

 

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

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the nine months ended September 30, 2018 and 2017.

 

Comprehensive Loss

 

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

 

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Distinguishing Liabilities from Equity

 

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

 

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

  

Initial Measurement

 

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

 

Subsequent Measurement – Financial instruments classified as liabilities

 

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

   

Beneficial Conversion Feature

 

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

 

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

    

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

 

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

 

Share-based Compensation

 

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

 

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

 

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

 

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

 

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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, 2018 and December 31, 2017. Factors that the Company considered when estimating the fair value of its debt included market conditions and the term of the debt. The level of the debt would be considered as Level 2.

 

Additional Disclosures Regarding Fair Value Measurements

 

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

 

Earnings (Loss) per Share

 

The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted EPS excluded all potential dilutive shares if their effect was anti-dilutive.

 

Basic net loss per share is based on the weighted average number of common and common-equivalent shares outstanding. Potential common shares includable in the computation of fully-diluted per share results are not presented in the consolidated financial statements for the three and nine months ended September 30, 2018 and 2017 as their effect would be anti-dilutive.

 

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

 

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The anti-dilutive shares of common stock outstanding for the three and nine months ended September 30, 2018 and 2017 were as follows:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
Potentially dilutive securities:                
Convertible notes payable   106,957    226,320    106,957    226,320 
Convertible Preferred A Stock   1,000,000    1,000,000    1,000,000    1,000,000 
Convertible Preferred B Stock   13,784,201    9,830,035    13,784,201    9,830,035 
Warrants   3,307,073    2,557,195    3,307,073    2,557,195 
Stock options   8,739,669    -    8,739,669    - 

 

Reclassifications

 

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

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC. In April and May 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing”, ASU 2016-11, “Revenue Recognition and Derivatives and Hedging – Recession of SEC Guidance”, ASU 2016-12, “Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients”, and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”.  These ASUs each affect the guidance of the new revenue recognition standard in ASU 2014-09 and related subsequent ASUs. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies

 

On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers and all the related amendments” (“ASC 606”) to all contracts which were not completed or expired as of January 1, 2018 using the modified retrospective method. The Company had no cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while the comparative information will continue to be reported under the accounting standards in effect for those periods.

 

In February 2016, the FASB issued ASU 2016-02, “Leases”, which is effective for public entities for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of leases with terms of less than one year) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to ASC 842 (Leases), and ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provide (i) narrow amendments to clarify how to apply certain aspects of the new lease standard, (ii) entities with an additional (and optional) transition method to adopt the new leases standard, and (iii) lessors with a practical expedient for separating components of a contract. All ASUs are effective for annual periods and interim periods within those annual periods beginning after December 31, 2018. The Company is still evaluating the method of adoption. While the Company is continuing to assess all potential impacts of the new standard, the Company currently believes the most significant impact relates to its accounting for office space, colocation operating leases, and embedded leases within its supplier contracts.

 

14

 

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this standard on January 1, 2018.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350); Simplifying the Test for Goodwill Impairment. The amendments in this update simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public companies for the reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Accordingly, at March 31, 2018, goodwill was tested for potential impairment. As a result of the goodwill impairment test performed, it was determined that the carrying value for each reporting unit was higher than its fair value. Please refer to FN 9 for further detail.

 

In May 2017, the FASB issued ASU No 2017-09 “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (ASU 2017-09). ASU 2017-09 provides clarity and reduces both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all three of the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Note that the current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in ASU 2017-09. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The updated standard was adopted by the Company on January 1, 2018. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.

 

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

 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the ASU. The Company is evaluating the effect that this update will have on its financial statements and related disclosures.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASC 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. This update is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC 606. The Company is evaluating the effect that this update will have on its financial statements and related disclosures.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effect that this update will have on its financial statements and related disclosures. 

 

15

 

 

Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.

  

5. Revenue Recognition

 

Adoption of ASC 606 Revenue from Contracts with Customers

 

The Company adopted the new revenue standard, ASC 606, using the modified retrospective method with respect to all non-completed contracts as of January 1, 2018. This method required retrospective application of the new accounting standard to all unfulfilled contracts that were outstanding as of January 1, 2018. Revenues and contract assets and liabilities for contracts completed prior to January 1, 2018 are presented in accordance with ASC 605.

 

The Company has determined that there were no adjustments required with respect to the adoption of ASC 606 with respect to any prior periods.

 

Disaggregation of revenue 

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
Types of Revenues:                
Security and Guarding  $1,141,676   $1,129,746   $3,432,651   $2,837,145 
Systems Installation   318,850    -    454,113    - 
Software   1,653,195    -    2,229,337    - 
Total revenues  $3,113,721   $1,129,746   $6,116,101   $2,837,145 

 

The following is a description of the principal activities from which we generate our revenue.

   

Security and Guarding Revenue

 

Helix provides armed and unarmed guards, as well as armed transportation services. The guards are charged out at an hourly rate, with invoices typically sent to clients shortly after each month-end for the previous month, with revenue being recognized at a point in time once the service has been provided. Transportation services are typically invoiced on a per-run basis, with revenue being recognized at a point in time once the service has been completed.

 

Systems Installation Revenue

 

Security systems, including IP CCTV, intrusion alarm systems, perimeter alarm systems, and access controls are installed for clients. Installation jobs are estimated based on the cost of the equipment, the number of man hours expected to complete the work, supplies, travel, and any other ancillary costs. The installation is typically invoiced with 60% of the total price immediately after signing and the balance upon completion of the installation service. The timing of these contracts are short-term in nature and are less than 12 months in duration.

 

Software

 

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

 

The private-sector software entails cultivation tracking, inventory management, point of sale and analytic reporting to assist businesses in meeting their compliance requirements and effectively managing their businesses. Customers within the private sector business are charged an initial one-time installation fee and the revenues associated with these services are recognized upon completion of installation and configuration at a point in time. After the installation and configuration of the software is completed, the customer is invoiced monthly and revenues associated with these services are recognized monthly over a period of time in which the customer continues to use the software and related services.

 

16

 

 

The public-sector software assists government agencies in efficient oversight of cannabis related business under their jurisdiction. Revenues associated with governmental contracts are longer-term in nature and recognized upon completion of certain milestones over a period of time or on a completed-contract basis at a point in time. The Company considers the contract to be complete when all significant costs have been incurred and the customer accepts the project. Costs incurred prior to the customer accepting the project are deferred and reflected on the Balance Sheet as Work-in-process – Traceability.

 

Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in accordance with ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  Generally, the Company’s contracts include a single performance obligation that is separately identifiable, and therefore, distinct. Under ASC 606, the allocation of transaction price is not necessary if only one performance obligation is identified.

 

Significant Judgments

 

Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue, costs and satisfaction of performance obligation. The Company satisfies its performance obligations and subsequently recognizes revenue, at a point in time, as security and installation services are performed. There were no changes to the significant judgments used by the Company to determine the timing of satisfaction of the performance obligations under ASC 606.

 

Costs to Obtain or Fulfill Contract

 

The Company’s costs to fulfill or obtain contracts with customers primarily consist of commissions and legal costs. The Company provides sales team members with commissions at 0-6%. Although sales commissions are incremental in nature and are only incurred when a contract is obtained, there is no up-front commission paid on the satisfactory obtainment of a contract, resulting in no sales commissions being capitalized at September 30, 2018. The Company also incurs legal costs relating to the drafting and negotiating of contracts with select customers. Because legal costs are not incremental in nature and are incurred regardless of whether a contract is ultimately obtained, there were no legal costs capitalized as of September 30, 2018. The Company did not record amortization of costs incurred to obtain the contract or any impairment losses for the period ending September 30, 2018.

  

6. Business Combinations

 

Security Grade Acquisition

 

On June 2, 2017 (the “Closing”), the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) in which the Company purchased all issued and outstanding Units of Security Grade Protective Services, Ltd. (“Security Grade”), which comprised of 800,000 Class A Units and 200,000 Class B Units. At closing, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”). Furthermore, provided that, within the first 60 days following the closing, no material customer identified in the Agreement terminates its contractual relationship with the Company and that all contracts with such material customers are in full force and effect without default or cancellation as of the 60th day following the closing, on the 61st day following the closing, the Company shall deliver an additional $800,000 in cash and issue 207,427 additional stock options (the “Additional Stock Options”). In the event of termination, cancellation or default of any contract with one or more material customer identified in the Agreement within the first 60 days following the closing, the stock options received by the acquiree shall be reduced and/or forfeited to the extent necessary (pro rata based upon their ownership interest in the Company immediately preceding the closing) by a percentage equal to the revenue received by the Company from the terminating customer(s) in the 180 days immediately preceding such termination divided by the revenue received by the Company from all material customers identified in the Agreement in the 180 days immediately preceding such termination. As of September 30, 2018, the Company has a liability pursuant to the Agreement of $153,333 payable following the Closing.

  

17

 

 

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

 

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

 

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

  

The initial stock options are included as part of the purchase price. The Company determined the fair value of the contingent consideration to be $916,643 at June 2, 2017 and recorded it as a liability in its unaudited condensed consolidated balance sheets. The Company satisfied their contingent consideration liability during the third quarter of 2017. During the period ended September 30, 2018, the Company reached settlement agreements with all six selling members. As a result of these settlements, 80,979 options previously issued as part of the acquisition were cancelled.

 

BioTrack Acquisition

 

On March 3, 2018, Helix TCS, Inc. (the “Company”) and its wholly owned subsidiary, Helix Acquisition Sub, Inc. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bio-Tech Medical Software, Inc. (“BioTrackTHC”) and Terence J. Ferraro, as the representative of the BioTrackTHC shareholders. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into BioTrackTHC, with BioTrackTHC surviving the merger as a wholly-owned subsidiary of the Company (the “Merger”). On June 1, 2018, the Company closed the Merger. In connection with closing the Merger, the Company issued 38,184,985 unregistered shares of Company common stock to BioTrackTHC stockholders, of which 1,852,677 shares were held back to satisfy indemnification obligations in the Merger Agreement, if necessary. The Company also assumed the Bio-Tech Medical Software, Inc 2014 Stock Incentive Plan (“BioTrackTHC Stock Plan”), pursuant to which options exercisable for 8,132,410 shares of Company common stock are outstanding so that the BioTrackTHC stockholders will own 48% of the Company on a fully diluted basis.

 

The Merger is being accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary fair values of the assets acquired and liabilities assumed in the BioTrackTHC merger. These values are subject to change as we perform additional reviews of our assumptions utilized.

  

18

 

 

The Company has made a provisional allocation of the purchase price of the BioTrackTHC transaction to the assets acquired and the liabilities assumed as of the purchase date. The following table summarizes the provisional purchase price allocations relating to the BioTrackTHC transaction: 

 

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

 

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

 

The Company has not completed the valuation studies necessary to finalize the acquisition fair values of the assets acquired and liabilities assumed and related allocation of purchase price for BioTrackTHC. Accordingly, the type and value of the intangible assets amounts set forth above are preliminary. Once the valuation process is finalized for BioTrackTHC, there could be changes to the reported values of the assets acquired and liabilities assumed, including goodwill and intangible assets and those changes could differ materially from what is presented above.

  

Total acquisition costs for the BioTrackTHC merger incurred during the three and nine months ended September 30, 2018 was $116,624, and is included in selling, general and administrative expense in the Company’s Statements of Operations.

 

Unaudited Pro Forma Results

 

BioTrackTHC contributed revenues of $2,204,411 and a net loss of $(490,459) for the period June 1, 2018 through September 30, 2018, included in the Company’s consolidated condensed statements of operations.

 

The following table below represents the revenue, net loss and loss per share effect of the acquired company, as reported in our pro forma basis as if the acquisition occurred on January 1, 2017. These pro forma results are not necessarily indicative of the results that actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
Description  2018   2017   2018   2017 
Revenues  $3,134,396   $3,883,759   $8,957,690   $8,958,725 
Net loss   (2,045,530)   343,718    (5,213,028)   (7,911,500)
Net loss attributable to common shareholders   (2,027,992)   (7,701,240)   (27,397,684)   (19,320,872)
Loss per share attributable to common shareholders:                    
Basic and diluted-as pro forma (unaudited)   70,420,857    28,644,522    47,598,820    28,592,643 

  

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Engeni SA Acquisition

 

On August 3, 2018 (the “Engeni Closing Date”), the Company and its wholly owned subsidiary, Engeni Merger Sub, LLC (“Engeni Merger Sub”), entered into an Agreement and Plan of Merger (the “Engeni Merger Agreement”) with Engeni LLC (“Engeni US”), Engeni S.A (“Engeni SA”), Scott Zienkewicz, Nicolas Heller and Alberto Pardo Saleme (the members of Engeni US), and Scott Zienkewicz as the representative of the Engeni US members. Pursuant to the Engeni Merger Agreement, Engeni Merger Sub merged with and into Engeni US, with Engeni US surviving the merger as a wholly-owned subsidiary of the Company (the “Engeni Merger”). On the Engeni Closing Date, in connection with closing the Engeni Merger Agreement, the Company issued 366,700 shares of Company common stock to Engeni US members. Furthermore, the Company may also issue Engeni US members 366,700 and 366,600 shares of Parent common stock upon the achievement of specific objectives. If applicable, the Company will pay Engeni US members the aggregate amount of $100,000, on a pro rata basis, if Engeni SA reaches financial breakeven on or before December 31, 2018, as determined by the Company’s Chief Financial Officer and Scott Zienkewicz.

   

The Merger is being accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary fair values of the assets acquired and liabilities assumed in the Merger. These values are subject to change as we perform additional reviews of our assumptions utilized.

   

The Company has made a provisional allocation of the purchase price of the Merger transaction to the assets acquired and the liabilities assumed as of the purchase date. The following table summarizes the provisional purchase price allocations relating to the Merger transaction:

 

Base Price - Common Stock  $388,702 
Contingent Consideration - Common Stock   777,298 
Contingent Consideration - Cash   100,000 
Total Purchase Price  $1,266,000 

 

       Weighted Average Useful Life
Description  Fair Value   (in years)
Assets acquired:       
Cash  $5,609    
Accounts receivable and other assets   30,479    
Property, plant and equipment, net   57,830    
Software   449,568   3.3
Goodwill   778,552    
Total assets acquired  $1,322,038    
Liabilities assumed:        
Accounts payable  $56,038    
Total liabilities assumed   56,038    
Estimated fair value of net assets acquired  $1,266,000    

 

Total acquisition costs for the Engeni merger incurred during the three and nine months ended September 30, 2018 was $38,409, and is included in selling, general and administrative expense in the Company’s Statements of Operations.

  

7. 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 September 30, 2018, 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 9. Intangible Assets and Goodwill, Net. As of September 30, 2018, and December 31, 2017, the Company has a liability pursuant to the Revolutionary asset acquisition of $0 and $58,370, respectively.

   

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8. Property and Equipment, Net

 

At September 30, 2018 and December 31, 2017, property and equipment consisted of the following:

 

   September 30, 2018   December 31, 2017 
Furniture and equipment  $119,391   $16,332 
Software equipment   15,094    1,382 
Vehicles   205,157    175,647 
Total   339,642    193,361 
Less: Accumulated depreciation   (59,118)   (82,727)
Property and equipment, net  $280,524   $110,634 

 

Depreciation expense for the three months ended September 30, 2018 and 2017 was $27,528 and $19,553, respectively, and $63,421 and $42,589 for the nine months ended September 30, 2018 and 2017, respectively.

 

9. Intangible Assets, Net and Goodwill

 

The following table summarizes the Company’s intangible assets as of September 30, 2018 and December 31, 2017:

 

          September 30, 2018 
   Estimated Useful Life (Years)  Gross Carrying Amount   Assets Acquired Pursuant to Business Combination (2) (3)   Accumulated Amortization   Net Book Value 
Database  5  $93,427   $-   $(46,151)  $47,276 
Trade names and trademarks  5 - 10   125,000    466,081    (62,323)   528,758 
Web addresses  5   130,000    -    (63,075)   66,925 
Customer list  5   3,154,578    8,304,449    (1,388,176)   10,070,851 
Software  4.5   -    9,771,195    (707,489)   9,063,706 
      $3,503,005   $18,541,725   $(2,267,214)  $19,777,516 

 

          December 31, 2017 
   Estimated Useful Life (Years)  Gross Carrying Amount at December 31, 2016   Assets Acquired Pursuant to Business Combination (1)   Accumulated Amortization   Net Book Value 
Database  5  $93,427   $-   $(32,183)  $61,244 
Trade names and trademarks  10   100,000    25,000    (18,675)   106,325 
Web addresses  5   125,000    5,000    (43,639)   86,361 
Customer list  5   -    3,154,578    (366,249)   2,788,329 
      $318,427   $3,184,578   $(460,746)  $3,042,259 

 

(1) On June 2, 2017, the Company acquired various assets of Security Grade Protective Services, Ltd. (See Note 6)
(2) On June 1, 2018, the Company acquired various assets of BioTrackTHC (See Note 6)
(3) On August 3, 2018, the Company acquired various assets of Engeni (See Note 6)

   

The Company uses the straight-line method to determine the amortization expense for its definite lived intangible assets. Amortization expense related to the purchased intangible assets was $1,160,889 and $173,344 for the three months ended September 30, 2018 and 2017, respectively, and $1,806,468 and $248,718 for the nine months ended September 30, 2018 and 2017, respectively.

   

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The following table summarizes the Company’s Goodwill as of September 30, 2018:

 

   Total Goodwill 
Balance at January 1, 2018  $664,329 
Impairment of goodwill   (664,329)
Goodwill attributable to Biotrack acquisition   39,135,007 
Goodwill attributable to Engeni acquisition   778,552 
Balance at September 30, 2018  $39,913,559 

 

During the first quarter of 2018, the Company came to a settlement agreement with numerous Security Grade employees resulting from a misrepresentation of revenue and customer list information provided as part of the acquisition. Therefore, the Company considers the settlement to be an indicator for goodwill impairment testing. Accordingly, at March 30, 2018, goodwill was tested for potential impairment. As a result of the goodwill impairment test performed, it was determined that the carrying value for each reporting unit was higher than its fair value and therefore goodwill was fully impaired, which resulted in a write-off of $664,329 for the nine months ended September 30, 2018. As part of the BioTrack acquisition, Goodwill in the amount of $39,135,007 was recognized on the Company’s Condensed Consolidated Balance Sheet. As part of the Engeni US acquisition, Goodwill in the amount of $778,552 was recognized of the Company’s Condensed Consolidated Balance Sheet.

  

10. Accounts Payable and Accrued Expenses

 

As of September 30, 2018 and December 31, 2017, accounts payable and accrued expenses consisted of the following:

 

   September 30, 2018   December 31, 2017 
Accounts payable  $1,022,211   $334,751 
Accrued expenses   284,183    220,682 
Accrued interest   12,867    43,204 
Total  $1,319,261   $598,637 

 

11. Costs, Estimated Earnings and Billings

 

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows as of September 30, 2018 and December 31, 2017:

 

   September 30, 2018   December 31, 2017 
Costs incurred on uncompleted contracts  $118,741   $64,705 
Estimated earnings   50,261    27,731 
Cost and estimated earnings earned on uncompleted contracts   169,002    92,436 
Billings to date   147,996    71,778 
Costs and estimated earnings in excess of billings on uncompleted contracts   21,006    20,658 
           
Costs in excess of billings  $24,792   $40,848 
Billings in excess of cost   (3,786)   (20,190)
   $21,006   $20,658 

    

12. Convertible Note Payable

      

   September 30, 2018   December 31, 2017 
Note Five, 5% convertible promissory note, fixed secured, maturing May 16, 2018  $132,625   $812,393 
    132,625    812,393 
Less: Current portion   (132,625)   (812,393)
Long-term portion  $-   $- 

 

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

 

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

 

  Automatic Conversion. The principal balance of the Amended shall automatically convert into shares of Class B Preferred Shares upon execution by the Company and the Fourth Investor of definitive documentation relating to the $500,000, aggregate principal amount, and investment by the Fourth Investor in Class B Preferred Shares of the Company.
     
  Company Default. In the event of a Company Event of Default, the Fourth Investor the shall have the right to elect to (i) at any time prior to June 30, 2017, convert the aggregate outstanding principal amount of Note Four into Class B Preferred Shares equal to 6.3% of the Company’s equity capital calculated on a fully-diluted basis, or (ii) at any time commencing on July 1, 2017 and ending on September 31, 2017, have Note Four redeemed for cash at a redemption price, in aggregate, equal to 150% of the aggregate principal outstanding balance of Note Four or (iii) to convert Note Four into common shares of the Company equal to 6.3% of the Company’s equity capital calculated on a fully-diluted basis. In the event the Holder does not elect any remedy in the event of a Company Event of Default, on September 31, 2017 the Amended Note shall be converted in whole into common shares of the Company equal to 6.3% of the Company’s equity capital calculated on a fully-diluted basis.
     
  Holder Default. In the event of a Holder Event of Default, the Company shall have the right to either (i) redeem the Amended Note at par value at any time prior to June 1, 2017 or (ii) convert the outstanding principal balance into common shares of the Company at market value.
     
  The Valuation and Consideration provision in Section 2 of the Term Sheet is affirmed and ratified; provided, however, that the parties agree that the $12,000,000 valuation therein is subject to dilution of $600,000 from additional investments in the Company by third parties following the Holder’s $500,000 investment that is memorialized in the Note. For the avoidance of doubt, the Holder will receive the same number of shares as it would have for its investment if it had converted at a $12,000,000 valuation on October 20, 2016 given the 26,587,497 shares outstanding at that time. For the avoidance of doubt, the Note will convert into 1,162,500 shares.

  

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

 

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

 

On February 13, 2017, the Company entered into a $183,333 10% Fixed Secured Convertible Promissory Note (“Note Five”) with a third investor (the “Third Investor”). The Third Investor provided the Company with $166,666 in cash, which was received by the Company during the period ended March 31, 2017. The additional $16,666 was retained by the Third Investor for due diligence and legal bills for the transaction. The Company promised to pay the principal amount, together with guaranteed interest at the annual rate of 10%, with principal and accrued interest on Note Five due and payable on September 12, 2017 (unless converted under terms and provisions as set forth within Note Five). The principal balance of Note Five was convertible at the election of the Third Investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $1.50 per share. In conjunction with Note Five, the Company issued a warrant to the third investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share. Note Five became effective on February 14, 2017 upon the execution by the Company and the Holder of numerous exhibit documents.  In addition, the Company reserved 2,500,000 shares of the Company’s common stock for the Third Investor.

 

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

 

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

 

The debt discounts will be amortized to interest expense over the life of the note.  Amounts amortized to interest expense were approximately $39,286 for the three months ended March 31, 2017. The unamortized discount balance at March 31, 2017 was approximately $144,047.

  

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

 

The Company evaluated Note Six in accordance with ASC 815 to determine if the conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the conversion feature did not meet the requirements for bifurcation pursuant to ASC 815. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception and determined that Note Six did not have a beneficial conversion feature. As a result, the Company recorded the conventional convertible note as a debt instrument in its entirety. The interest expense associated with Note Six was $536 for the period ended March 31, 2017.

  

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

  

On November 16, 2017, the Company amended Notes Five, Six, and Seven (“the Amended Notes”) with the Fourth Investor. All three notes shall have maturity dates that are six months from November 16, 2017, shall convert at a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion, shall incur interest at an annual rate of 5%, and shall be prepayable at any time at 110% of the unpaid principal and accrued interest balances. The amendment of Note Six and Seven included terms, permitting the Company the option to tender payment in full on or before November 21, 2017, at a 15% discount of the amended principal amounts. At November 16, 2017, the principal amounts of Note Five, Six and Seven were $281,900, $38,441 and $131,107, respectively. On November 21, 2017, the Company paid the remaining principal balance, at the 15% discount on Notes Six and Seven in the amount of $144,259.

 

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

 

The Company evaluated Note Five in accordance with ASC 480, Distinguishing Liabilities from Equity and determined the Note Five will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2018, and December 31, 2017, the fair value of Note Five was $132,625 and $812,393, respectively. Therefore, the Company recorded a (loss) gain to the change in fair value of $(17,880) and $679,766 related to Note Five for the three and nine months ended September 30, 2018, respectively.

  

13. Related Party Transactions

 

Advances from Related Parties

 

The Company has a loan outstanding from a former Company executive. The advance does not accrue interest and has no definite repayment terms. The loan balance was $55,250 and $124,750 as of September 30, 2018 and December 31, 2017, respectively.

 

Convertible Note Payable

 

On March 11, 2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Eight”) with Paul Hodges, a Director of the Company (the “Related Party Holder”). The Related Party Holder provided the Company with $150,000 in cash, and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note Five due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Eight was convertible at the election of the Related Party Holder, in whole or in part, at any time or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding the date of conversion election. The Company evaluated Note Eight in accordance with ASC 480, Distinguishing Liabilities from Equity and determined that Note Eight will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings.

 

On February 20, 2018, the Company entered into an agreement to amend Note Eight (this “Amendment”) with the Related Party Holder March 2016 (the “Note”). The Company and Holders desire to extend the maturity date of the Note to August 20, 2018.

  

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

 

As of February 20, 2018, the fair value of the liability was $239,343, however due to termination of the conversion of the note into equity securities, Note Eight will be valued in its principal amount of $125,000 and accordingly the Company recorded a credit regarding the change in fair value of $0 and charge of $34,725 for the three months ended September 30, 2018 and 2017, respectively, and $118,506 and $8,971 for the nine months ended September 30, 2018 and 2017, respectively. The interest expense associated with Note Five was $2,479 and $2,675 for the three months ended September 30, 2018 and 2017, respectively and $10,217 and $7,853 for the nine months ended September 30, 2018 and 2017, respectively. Note Eight was paid in full on the Maturity Date.

 

Warrants

 

In March 2016, the Company issued 960,000 shares of restricted common stock to the Related Party Holder per a subscription agreement for total proceeds of $150,000. In conjunction with the subscription agreement, the Company issued a warrant to the Related Party Holder to purchase 1,920,000 restricted shares of the Company’s common stock at $0.16 per share. The Warrant Exercise Date is the later of the following to occur (i) March 9, 2017, (ii) ten (10) days after the Company’s notice to the holder of the warrant that the Company shall have an effective S-1 registration with the SEC; or (iii) ten (10) days after Company’s notice to the holder of the warrants that the Company has entered into an agreement for the sale of substantially all the assets or Common Stock of the Company. As of September 30, 2018, the warrants granted are not exercisable. 

 

Promissory Note

 

On August 29, 2018, the Company entered into an unsecured promissory note with an affiliate of an investor of the Company. Refer to Note 14 for additional details regarding the unsecured promissory note.

  

14. Promissory Notes

  

On February 13, 2017, the Company entered into an unsecured promissory note in the amount of $180,000. The unsecured promissory note has a fixed interest rate of 8% and was due and payable on June 30, 2017. In conjunction with the Series B Preferred Stock Purchase Agreement, as discussed in Note 16, the Company satisfied its liability in exchange for Series B Preferred Stock. The interest expense associated with the unsecured promissory note was $0 for the three months ended September 30, 2018 and 2017, respectively and $0 and $2,570 for the nine months ended September 30, 2018 and 2017, respectively.

 

On January 30, 2017, the Company entered into an unsecured promissory note in the amount of $75,000. The unsecured promissory note had a fixed interest rate of 8% and was due and payable on June 30, 2017. In conjunction with the Series B Preferred Stock Purchase Agreement, as discussed in Note 16, the Company satisfied its liability in exchange for Series B Preferred Stock. The interest expense associated with the unsecured promissory note was $0 for the three months ended September 30, 2018 and 2017, respectively and $0 and $2,570 for the nine months ended September 30, 2018 and 2017, respectively.

 

On August 29, 2018, the Company entered into an unsecured promissory note in the amount of $250,000. The unsecured promissory note has a fixed interest rate of 7% and is due and payable on July 31, 2019. As of September 30, 2018 and December 31, 2017, the Company had $250,000 and $0 outstanding on the unsecured promissory note. The interest expense associated with the unsecured promissory note was $1,534 and $0 for the three months ended September 30, 2018 and 2017, respectively, and $1,534 and $0 for the nine months ended September 30, 2018 and 2017, respectively.

   

15. Notes Payable

 

   September 30, 2018   December 31, 2017 
Vehicle financing loans payable, between 4.7% and 7.0% interest and maturing between June 2022 and July 2022  $75,090   $55,890 
Loans Payable - Credit Union   5,653    8,582 
Less: Current portion of loans payable   (7,582)   (11,179)
Long-term portion of loans payable  $73,161   $53,293 

 

The interest expense associated with the notes payable was $2,901 and $230 for the three months ended September 30, 2018 and 2017, respectively, and $4,321 and $600 for the nine months ended September 30, 2018 and 2017, respectively.

  

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16. Shareholders’ Equity

 

Common Stock

 

Subscription Agreements

 

In February 2018, the Company issued 222,222 shares of restricted common stock to an investor per a subscription agreement for total proceeds of $200,000.

 

In March 2018, the Company issued 500,000 shares of restricted common stock to an investor per a subscription agreement for total proceeds of $450,000.

 

In April 2018, the Company issued 500,000 shares of restricted common stock to an investor per a subscription agreement for total proceeds of $450,000.

 

In May 2018, the Company issued 244,444 shares of restricted common stock to an investor per a subscription agreement for total proceeds of $220,000.

 

In July 2018, the Company issued 327,777 shares of restricted common stock at $0.90 per share to an investor per a subscription agreement for total proceeds of $294,999.

 

In August 2018, the Company issued 327,777 shares of restricted common stock at $0.90 per share to an investor per a subscription agreement for total proceeds of $294,999.

 

In August 2018, the Company issued 183,333 shares of restricted common stock at $0.90 per share to an investor per a subscription agreement for total proceeds of $164,999.

 

In September 2018, the Company issued 577,778 shares of restricted common stock at $0.90 per share to an investor per a subscription agreement for total proceeds of $520,000.

 

Other Common Stock Issuances

 

In May 2018, the Company issued 50,000 shares of restricted common stock to a consultant per a consulting agreement.

 

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

 

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

 

In July 2018, one selling shareholder of Security Grade exercised their right to purchase 3,983 shares of the Company’s common stock.

 

In July 2018, the Company issued 200,000 shares of restricted common stock to consultants as an inducement to enter into a leak-out agreement with the Company.

 

In August 2018, the Company issued 100,000 shares of restricted common stock as part of an agreement entered into with an investor relation consultant.

 

In August 2018, the Company issued 366,700 shares of common stock as part of the Engeni US acquisition.

 

Conversion of Convertible Note to Common Stock

 

On February 15, 2018, the holder of a 10% fixed secured convertible promissory note issued by the Company elected their option to partially convert $50,000 in principal of the convertible note into 46,066 shares of the Company’s common stock.

 

On March 12, 2018, the same holder partially converted an additional $50,000 in principal of the convertible note into 63,963 shares of the Company’s common stock.

 

On March 21, 2018, the same holder partially converted an additional $75,000 in principal of the convertible note into 95,945 shares of the Company’s common stock.

 

Amended Convertible Note

 

On February 20, 2018, the Company entered into an agreement to amend a Convertible Promissory Note with the undersigned holder initially issued to such Holder and dated March 2016. The Company and Holders desire to extend the maturity date of the Note to August 20, 2018. The holder was issued 15,000 shares of the Company’s restricted common stock as part of the amendment.

 

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The Note is hereby amended as follows. The Company promises to pay (i) all accrued interest on the unpaid principal amount through December 31, 2017 and (ii) $25,000 in principal within 5 business days of the date of this Amendment. The Company agrees to issue 15,000 shares of restricted Company common stock as an inducement for this amendment within 10 business days of the date of this Amendment. The principal amount of the note will be reduced to $125,000. Unless extended by the Company, converted or prepaid earlier, all unpaid principal and unpaid accrued interest on this Note shall be due and payable on August 20, 2018 (the “Maturity Date”). All provisions related to conversion of the Note into equity securities of the Company are hereby deleted.

 

On May 16, 2018, the Company entered into a second amendment agreement of a Convertible Promissory Note with the holder of a 10% fixed secured convertible promissory note. The new Maturity Date is November 16, 2018. The new interest rate is 5%. The note is prepayable at 120% of the unpaid balance upon 10 business days’ notice to the holder, which has the option to convert, in whole or in part, during the notice period. The conversion price shall be equal to a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion.

 

2017 Omnibus Incentive Plan

 

On January 11, 2018, the Company issued 42,850 shares of the Company’s restricted common stock under the 2017 Omnibus Incentive Plan to select personnel of the Company. Additionally, on March 15, 2018, the Company issued an additional 100,000 shares of the Company’s common stock to select employees of the Company.

 

In May 2018, the Company issued 83,900 shares of common stock to various employees pursuant to the Company’s 2017 Omnibus Stock Incentive Plan.

 

In July 2018, the Company issued 100,000 shares of common stock to various employees pursuant to the Company’s 2017 Omnibus Stock Incentive Plan.

 

In August 2018, the Company issued 43,195 shares of common stock to various employees pursuant to the Company’s 2017 Omnibus Stock Incentive Plan.

 

Series A convertible preferred stock

 

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

 

Series B convertible preferred stock

 

Series B Preferred Stock Purchase Agreement

 

On May 17, 2017, the Company sold to accredited investors an aggregate of 5,781,426 Series B Preferred Shares for gross proceeds of $1,875,000 and converted a $500,000 Unsecured Convertible Promissory Note into 1,536,658 Series B Preferred Shares. This tranche of Series B Preferred Shares are convertible into 7,318,084 shares of common stock based on the current conversion price, at a purchase price of $0.325 per share. Net proceeds were approximately $1,772,500 after legal and placement agent fees listed below and the satisfaction of the promissory notes discussed in Note 14.

 

In connection with the Series B Preferred Stock Purchase Agreement, the Company is obligated to issue warrants to a third-party for services to purchase 462,195 shares of common stock at $0.325 per share (see Note 18). These warrants have been accounted for as an obligation to issue because as of the balance sheet date the Company did not deliver the warrants though incurred the obligation; accordingly, they were recognized as a liability on the 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 fourth 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.

 

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On October 11, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a fifth Series B Preferred Stock Purchase Agreement (the “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.

  

On October 31, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a sixth Series B Preferred Stock Purchase Agreement (the “Third Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 1,042,337 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $557,500.

 

On December 19, 2017, as contemplated by the Initial Series B Purchase Agreement, the Parties entered into a seventh Series B Preferred Stock Purchase Agreement (the “Third Series B Purchase Agreement”) whereby the Company issued and sold to accredited investors 2,449,634 shares of the Company’s Series B Preferred Stock in exchange for an aggregate cash payment equal to $795,000.

 

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 17,000,000.

 

Conversion:

 

Each Series B Preferred Share is convertible at the option of the holder at any time on or after May 12, 2018 into such number of shares of the Company’s common stock equal to the number of Series B Preferred Shares to be converted, multiplied by the Preferred Conversation Rate. The Preferred Conversion Rate shall be the quotient obtained by dividing the Preferred Stock Original Issue Price ($0.3253815) by the Preferred Stock Conversation Price in effect at the time of the conversion (the initial conversion price will be equal to the Preferred Stock Original Issue Price, subject to adjustment in the event of stock splits, stock dividends, and fundamental transactions). Based on the current conversion price, the Series B Preferred Shares are convertible into 13,306,599 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, 2018, the beneficial conversion amount of $14,998,505 and $22,202,194, respectively was accreted back to the preferred stock as a deemed dividend and charged to additional paid in capital in the absence of earning as the beneficial conversion feature is amortized over time through the earliest conversion date, May 12, 2018. As of June 30, 2018 the beneficial conversion feature was fully amortized. Provided below is a schedule of the issuances of Series B preferred shares and the amount accredited to deemed dividend at September 30, 2018.

   

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For the Nine Months Ended September 30, 2018
Issuance Date  Beneficial Conversion Feature Term (months)  Number of shares   Fair Value of Beneficial Conversion Feature   Amount accreted as a deemed dividend at December 31, 2017   Amount accreted as a deemed dividend for the Nine Months Ended September 30, 2018   Unamortized Beneficial Conversion Feature 
May 17, 2017  12   7,318,084   $25,247,098   $(15,779,436)  $(9,467,661)  $               - 
July 29, 2017  9.5   1,680,000    6,804,000    (3,674,634)   (3,129,366)   - 
August 29, 2017  8.5   369,756    1,148,263    (556,190)   (592,073)   - 
September 15, 2017  8   462,195    1,435,329    (648,601)   (786,728)   - 
October 11, 2017  7   462,195    1,121,036    (426,309)   (694,727)   - 
October 31, 2017  6.5   1,042,337    1,735,641    (548,570)   (1,187,071)   - 
December 19, 2017  5   2,449,634    6,921,347    (576,779)   (6,344,568)   - 
Total      13,784,201   $44,412,714   $(22,210,519)  $(22,202,194)  $- 

 

Dividends, Voting Rights and Liquidity Value:

 

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

 

Classification:

 

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

 

17. Stock Options

 

As part of the Membership Interest Purchase Agreement entered into between the Company and Security Grade, on June 2, 2017 (see Note 6), the Company granted to the selling Members the option to purchase up to 414,854 shares of the Company’s common stock at a price of $0.001 per share. Of the 414,854 options granted, 207,427 were vested at closing and equity classified. The vesting of the remaining 207,427 shares were subject to certain milestones being achieved and was initially recognized as contingent consideration, both a component of purchase price. As a result of the milestones being met during the third quarter of 2017, the remaining 207,427 shares have also vested. The options have an expiration date of 36 months from the closing date. The exercise price will be based on the fair market value of the share on the date of grant.

  

On March 6, 2018, the Company filed a lawsuit in the United States Court for the District of Colorado alleging violations in previously disclosed representations and warranties by the plaintiff as part of the Acquisition. Following the appointment of a registered Public Company Accounting Oversight Board (“PCAOB”) auditor, certain misrepresentations, primarily surrounding the misclassification of certain revenues as being recurring, were discovered, artificially inflating the price of the membership interest in Security Grade. As a result of the settlements with the selling shareholders, 80,979 options previously issued as part of the acquisition were cancelled.

 

As part of the Merger Agreement entered into between the Company and BioTrackTHC, on June 1, 2018 (see Note 6), the Company assumed the BioTrackTHC Stock Plan, pursuant to which options exercisable at prices between $0.001 to $1.66 per share for 8,132,410 shares of Company common stock are outstanding so that the BioTrackTHC stockholders will own 48% of the Company on a fully diluted basis as of the closing date.

 

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Stock option activity for the period ended September 30, 2018 is as follows:

 

   Shares Underlying Options   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term
(in years)
 
Outstanding at January 1, 2018   414,854   $0.001    2.42 
                
Granted   490,000   $1.92    0.51 
                
Options assumed pursuant to acquisition   8,132,410   $0.72    2.17 
                
Forfeited and expired   (80,979)  $0.001      
                
Exercised   (216,616)  $0.001      
                
Outstanding at September 30, 2018   8,739,669   $0.001    2.70 
                
Vested options at September 30, 2018   8,466,285   $0.69    2.19 

 

18. 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. On December 11, 2017, the investor exercised their purchase right in a net settlement cashless exercise.

 

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

 

Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after April 26, 2017 and on or before April 26, 2022, by delivery to the Company of the Notice of Exercise. On December 11, 2017, the investor exercised their purchase right in a net settlement cashless exercise.

 

During the nine months ended September 30, 2018, the Company entered into a Graduated Lock-Up Letter to induce the entering into of a consulting agreement in exchange for 50,000 shares of the Company’s common stock and the granting of 575,000 warrants for the purchase of common stock of the Company.  The company recognized compensation expense of $943,000 for the three and nine months ended September 30, 2018 relating to the granting of the new warrants.

  

A summary of warrant activity is as follows:

 

For the Nine Months Ended September 30, 2018
   Warrant Shares   Weighted Average Exercise Price 
Balance at January 1, 2018   2,732,073   $0.23 
           
Warrants granted   575,000   $0.01 
           
Balance at September 30, 2018   3,307,073   $0.19 

  

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Warrant Obligations

 

In connection with the Series B Preferred Stock Purchase Agreement (See FN 16), the Company is obligated to issue warrants to a third-party to purchase 812,073 shares of common stock at $0.325 per share for services rendered. These warrants have been accounted for as warrant obligations and are recognized as a liability on the unaudited condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017. For the three months ended September 30, 2018 and 2017, the Company recorded a credit and a charge in the change in fair value of the warrant obligations of $136,920 and $531,395, respectively, and is reflected in the unaudited condensed consolidated statements of operations, other income (expense). For the nine months ended September 30, 2018 and 2017, the Company recorded a credit and charge in the change in fair value of the warrant obligations of $1,434,760 and $406,604, respectively, and is reflected in the unaudited condensed consolidated statements of operations, other income (expense). Although the Company issued warrants during the first quarter of 2018, the rights entitled to the third-party holder of the warrants to purchase shares of the Company’s common stock was not exercised. Upon exercising the right to purchase the Company’s common stock by the third-party, the Company will de-recognize the liability for warrant obligations and reclassify the appropriate amount into equity.

 

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

 

   As of September 30, 2018   As of December 31, 2017   As of
May 17,
2017
 
Fair value of company’s common stock  $1.24   $3.00   $3.98 
Dividend yield   0%   0%   0%
Expected volatility   222.8%   266.4%   181.2%
Risk Free interest rate   2.88%   1.98%   1.42%
Expected life (years)   1.90    2.65    3.00 
Fair value of financial instruments - warrants  $994,809   $2,429,569   $1,839,133 

 

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

 

   Amount 
Balance as of January 1, 2018  $2,429,569 
      
Change in fair value of liability to issue warrants  $(1,434,760)
      
Balance as of September 30, 2018  $994,809 

 

   Amount 
Balance as of July 1, 2018  $1,131,729 
      
Change in fair value of liability to issue warrants  $(136,920)
      
Balance as of September 30, 2018  $994,809 

 

19. 2017 Omnibus Incentive Plan

 

The Company’s 2017 Omnibus Incentive Plan (the “2017 Plan”) was adopted by our Board of Directors and a majority of our voting security holders on October 17, 2017. The 2017 Plan permits the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and dividend equivalent rights to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the 2017 Plan at no less than the fair value of the underlying common stock as of the date of grant. Options granted under the Plan have a maximum term of ten years. Under the Plan, a total of 5,000,000 shares of common stock are reserved for issuance. As of September 30, 2018, there were 1,109,995 shares of common stock outstanding and 490,000 stock options were granted under the 2017 Plan.

  

20. 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, 2018 and 2017 consist of income tax loss carryforwards. These amounts are available for carryforward for use in offsetting taxable income of future years through 2035. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carry-forward period. Utilization of the net operating loss carry-forwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Due to the Company’s history of operating losses, these deferred tax assets arising from the future tax benefits are currently not likely to be realized and are thus reduced to zero by an offsetting valuation allowance. As a result, there is no provision for income taxes. 

 

For the nine months ended September 30, 2018 and 2017, the Company has a net operating loss carry forward of approximately $9,825,000 and $5,800,000, 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.

 

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21. Commitments and Contingencies

 

The Company is obligated under two operating lease agreements for office facilities in Colorado, Florida, Washington and Hawaii, which expire in February and March 2021.

 

Rent expense incurred under the Company’s operating leases amount to $133,211 and $14,438 during the three months ended September 30, 2018 and 2017, respectively and $217,662 and $55,159 for the nine months ended September 30, 2018 and 2017, respectively.

 

22. Segment Results

 

FASB ASC 280-10-50 requires use of the “management approach” model for segment reporting. The management approach is based on the way a company’s management organized segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision–making group is composed of the Chief Executive Officer. The Company operates in three segments, Security and guarding, Systems installation and Software.

 

Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements.

 

The following represents selected information for the Company’s reportable segments:

 

   For the Three Months Ended September 30,   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
                 
Security and guarding                
Revenue  $1,141,676   $1,129,746   $3,432,651   $2,837,145 
Cost of revenue   240,746    814,031    2,458,548    2,192,366 
Gross profit   900,930    315,715    974,103    644,779 
Total operating expenses   2,536,916    1,039,904    7,279,486    2,186,942 
Loss from operations   (1,635,986)   (724,189)   (6,305,383)   (1,542,163)
Total other income/(expense)   58,716    468,832    2,050,109    (6,577,864)
Total net income (loss)  $(1,577,270)  $(255,357)  $(4,255,274)  $(8,120,027)
                     
Systems installation                    
Revenue  $318,850   $-   $454,113   $- 
Cost of revenue   194,013    -    379,046    - 
Gross profit   124,837    -    75,067    - 
Total operating expenses   49,683    -    134,097    - 
Loss from operations   75,154    -    (59,030)   - 
Total other income/(expense)   406    -    804    - 
Total net income (loss)  $75,560   $-   $(58,226)  $- 
                     
Software                    
Revenue  $1,653,195   $-   $2,229,337   $- 
Cost of revenue   768,428    -    1,055,122    - 
Gross profit   884,767    -    1,174,215    - 
Total operating expenses   1,384,542    -    1,806,108    - 
Loss from operations   (499,775)   -    (631,893)   - 
Total other income/(expense)   (93)   -    (84)   - 
Total net income (loss)  $(499,868)  $-   $(631,977)  $- 

 

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23. Subsequent Events

 

 In October 2018 the Company issued 111,111 shares of restricted common stock at $0.90 per share to an investor per a subscription agreement for total proceeds of $100,000.

 

In October 2018 the Company issued 583,333 shares of restricted common stock at $0.90 per share to an investor per a subscription agreement for total proceeds of $524,999.

 

In October 2018 the Company entered into an executive employment agreement with Patrick Vo (the “Executive”) whereas the Company wishes to continue to employ the Executive as the Chief Executive Officer of its wholly owned Subsidiary, BioTrack THC. The Company will initially pay the Executive a base salary of $175,000 (“Base Salary”). Commencing with the calendar year 2019, the Executive will be eligible to receive an annual bonus targeted at up to fifty percent (50%) of Executive’s Base Salary plus an option grant to be determined by the Company’s Board of Directors or an applicable compensation committee of the Board, subject to specific provisions. The Executive will be entitled to such other benefits, and to participate in such benefit plans, as are generally made available to similarly situated employees of the Company from time to time, subject to Company policy and the terms and conditions of any applicable benefit plans.

 

In October 2018 the Company entered into an executive employment agreement with Terrance Ferraro (the “Executive”) whereas the Company wishes to continue to employ the Executive as the Chief Software Architect of its wholly owned Subsidiary, BioTrack THC. The Company will initially pay the Executive a base salary of $175,000 (“Base Salary”). Commencing with the calendar year 2019, the Executive will be eligible to receive an annual bonus targeted at up to fifty percent (50%) of Executive’s Base Salary plus an option grant to be determined by the Company’s Board of Directors or an applicable compensation committee of the Board, subject to specific provisions. The Executive will be entitled to such other benefits, and to participate in such benefit plans, as are generally made available to similarly situated employees of the Company from time to time, subject to Company policy and the terms and conditions of any applicable benefit plans.

 

In October 2018 the Company issued 10,000 shares of free trading shares at $1.02 per share to a shareholder per a corporate stock transfer for total proceeds of $10,200.

 

In October 2018 the Company issued an additional 10,000 shares of free trading shares at $1.02 per share to a shareholder per a corporate stock transfer for total proceeds of $10,200.

 

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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, 2018 and 2017 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, 2017, as filed on April 4, 2018 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.

 

Technology is a cornerstone of Helix’s service offering. Our