NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
1.
|
Description of Business
|
Helix TCS, Inc. (the “Company”
or “Helix”) was incorporated in Delaware on March 13, 2014. Pursuant to the acquisition of the assets of Helix TCS,
LLC, as discussed below, we changed our name from Jubilee4 Gold, Inc. to Helix TCS, Inc. effective October 25, 2015.
Effective October 25, 2015, we entered
into an acquisition and exchange agreement with Helix TCS, LLC. We closed the transaction contemplated under the acquisition and
exchange agreement on December 23, 2015 and Helix TCS, LLC was merged into and with Helix.
Effective October 1, 2015, for accounting
purposes, as part of an acquisition amounting to a reorganization dated December 21, 2015, Helix Opportunities LLC exchanged 100%
of Helix TCS, LLC and its wholly-owned subsidiaries, Security Consultants Group, LLC and Boss Security Solutions, Inc. to the
Company in exchange for 20 million common shares and 1 million convertible preferred shares of the Company.
The acquisition of Helix was treated as
a recapitalization for financial accounting purposes. Jubilee4 Gold, Inc. is considered the acquiree for accounting purposes and
their historical financial statements before the Acquisition Agreement were replaced with the historical financial statements
of the Company. The common stock account of the Company continues post-merger, while the retained earnings of the acquiree is
eliminated. Furthermore, on April 11, 2016, the Company acquired the assets of Revolutionary Software, LLC (“Revolutionary”).
On March 3, 2018, Helix, Inc. and its
wholly owned subsidiary, Helix Acquisition Sub, Inc. (“Merger Sub”), entered into an Agreement and Plan of Merger
(the “Merger Agreement”) with Bio-Tech Medical Software, Inc. (“BioTrackTHC”) and Terence J. Ferraro,
as the representative of the BioTrackTHC shareholders, pursuant to which Merger Sub merged with and into BioTrackTHC (the “Merger”).
On June 1, 2018 (the “BioTrackTHC
Closing Date”), in connection with closing the Merger, the Company issued 38,184,985 unregistered shares of its common stock
to BioTrackTHC stockholders, of which 1,852,677 shares were held back to satisfy indemnification obligations in the Merger Agreement,
if necessary. The Company also assumed the Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan (“BioTrackTHC Stock
Plan”), pursuant to which options exercisable in the amount of 8,132,410 shares of common stock are outstanding. As a result,
BioTrackTHC stockholders will own 48% of the Company on a fully diluted basis on the BioTrackTHC Closing Date.
On August 3, 2018 (the “Engeni Closing
Date”), the Company and its wholly owned subsidiary, Engeni Merger Sub, LLC (“Engeni Merger Sub”), entered into
an Agreement and Plan of Merger (the “Engeni Merger Agreement”) with Engeni LLC (“Engeni US”), Engeni
S.A (“Engeni SA”), Scott Zienkewicz, Nicolas Heller and Alberto Pardo Saleme (the Engeni US members), and Scott Zienkewicz,
as the representative of the Engeni US members. Pursuant to the Engeni Merger Agreement, Engeni Merger Sub merged with and into
Engeni US, with Engeni US surviving the merger as a wholly-owned subsidiary of the Company (the “Engeni Merger”).
On the Engeni Closing Date, in connection
with closing the Engeni Merger Agreement, the Company issued 366,700 shares of Company common stock to Engeni US members. Furthermore,
the Company subsequently issued Engeni US members 733,300 shares of Company common stock on April 2, 2019.
On February 5, 2019, the Company and its
wholly owned subsidiary, Merger Sub, entered into an Agreement and Plan of Merger (the “Amercanex Merger Agreement”)
with Green Tree International, Inc., a corporation incorporated under the laws of the state of Colorado operating under the tradename
“Amercanex International Exchange” (“Amercanex”). Pursuant to the Amercanex Merger Agreement, subject
to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into Amercanex, with Amercanex surviving
the merger as a wholly-owned subsidiary of the Company. The Merger is expected to close during the third quarter of 2019.
On April 1, 2019 (“Tan Security
Closing Date”), the Company entered into a Membership Interest and Stock Purchase Agreement (the “Tan Security Acquisition
Agreement”) with Tan’s International Security and Tan’s International LLC (collectively, “Tan Security”).
Pursuant to the Tan Security Acquisition Agreement, the Company purchased all membership interests and capital stock of Tan Security
and collectively holds 100% of the interests of Tan Security (the “Tan Security Acquisition”).
|
2.
|
Going Concern Uncertainty, Financial Condition and Management’s Plans
|
The Company believes that there is substantial
doubt about the Company’s ability to continue as a going concern. The Company believes that its available cash balance as
of the date of this filing will not be sufficient to fund its anticipated level of operations for at least the next 12 months.
The Company believes that its ability to continue operations depends on its ability to sustain and grow revenue and results of
operations as well as its ability to access capital markets when necessary to accomplish the Company’s strategic objectives.
The Company believes that it will continue to incur losses for the immediate future. The Company expects to finance future cash
needs from its results of operations and, depending on the results of operations, the Company may need additional equity or debt
financing until it can achieve profitability and positive cash flows from operating activities, if ever.
At June 30, 2019, the Company had a working
capital deficit of $3,715,022, as compared to a working capital deficit of $2,233,652 at December 31, 2018. The increase of $1,481,370
in the Company’s working capital deficit from December 31, 2018 to June 30, 2019 was primarily the result of a non-cash
increase in the fair market value of the Company’s convertible notes payable, net of discount – related party and
an increase in the warrant liability, partially offset by a decrease in contingent consideration.
The Company’s future capital requirements
for its operations will depend on many factors, including the profitability of its businesses, the number and cash requirements
of other acquisition candidates that the Company pursues, and the costs of operations. The Company has been investing in expanding
its operation in new states, its security service in Colorado and California, and upgrading the capabilities of BioTrackTHC. The
Company’s management has taken several actions to ensure that it will have sufficient liquidity to meet its obligations
for the next twelve months, including growing and diversifying its revenue streams, selectively reducing expenses, and considering
additional funding. Additionally, if the Company’s actual revenues are less than forecasted, the Company anticipates that
variable expenses will also decline, and the Company’s management can implement expense reduction as necessary. The Company
is evaluating other measures to further improve its liquidity, including the sale of equity or debt securities. Lastly, the Company
may elect to reduce certain related-party and third-party debt by converting such debt into common shares. The Company’s
management believes that these actions will enable the Company to meet its liquidity requirements through August 16, 2020. There
is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during
2019 and beyond.
On May 31, 2019 the Company filed with
the SEC a registration statement on Form S-1 under the Securities Act, with respect to the securities being offered. The
Company is working with an investment bank to identify investors in anticipation of raising up to $5 million in new equity capital.
The Company plans to generate positive
cash flow from its Colorado and California security operations, BioTrackTHC and Engeni software operations to address some of
the liquidity concerns. However, to execute the Company’s business plan, service existing indebtedness and implement its
business strategy, the Company anticipates that it will need to obtain additional financing from time to time and may choose to
raise additional funds through public or private equity or debt financings, borrowings from affiliates or other arrangements.
The Company cannot be sure that any additional funding, if needed, will be available on terms favorable to the Company or at all.
Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute the Company’s
current stockholders’ ownership and could also result in a decrease in the market price of the Company’s common stock.
The terms of those securities issued by the Company in future capital transactions may be more favorable to new investors and
may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. The Company also
may be required to recognize non-cash expenses in connection with certain securities it issues, such as convertible notes and
warrants, which may adversely impact the Company’s operating results and financial condition. Furthermore, any debt financing,
if available, may subject the Company to restrictive covenants and significant interest costs. There can be no assurance that
the Company will be able to raise additional capital, when needed, to continue operations in their current form.
|
3.
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The accompanying condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include
Helix TCS, LLC (“Helix TCS”), Security Consultants Group, LLC (“Security Consultants”), Boss Security
Solutions, Inc. (“Boss Security”), Security Consultants Group Oregon, LLC (“Security Oregon”), Security
Grade, BioTrackTHC (since June 1, 2018, Engeni US (since August 3, 2018), and Tan Security (since April 1, 2019).
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. Significant estimates made by management include, but are not limited to allowance for doubtful accounts,
purchase accounting allocations, recoverability and useful lives of property, equipment and intangible assets, valuation of convertible
notes payable, contingencies, warrant liabilities, equity compensation and revenue recognition. Actual results could differ from
estimates.
Cash
Cash consists of checking accounts. The
Company considers all highly liquid investments purchased with a maturity of three months or less at the time of purchase to be
cash equivalents. The Company has no cash equivalents as of June 30, 2019 or December 31, 2018.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the
invoiced amount, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review
of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience,
customer specific facts and economic conditions.
Management charges balances off against
the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company
determines when receivables are past due, or delinquent based on how recently payments have been received.
Outstanding account balances are reviewed
individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable. Allowance for doubtful accounts was $77,046 and $76,156 at
June 30, 2019 and December 31, 2018, respectively.
Long-Lived Assets, Including Definite Lived Intangible
Assets
Long-lived assets, other than goodwill
and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such
assets. Definite-lived intangible assets primarily consist of non-compete agreements and customer relationships. For long-lived
assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through
its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between
the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.
Goodwill
Goodwill, which
represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized;
rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. Helix reviews goodwill for
possible impairment annually during the fourth quarter, or whenever events or circumstances indicate that the carrying amount
may not be recoverable.
The impairment
model prescribes a two-step method for determining goodwill impairment. However, an entity is permitted to first assess
qualitative factors to determine whether the two-step goodwill impairment test is necessary. The qualitative factors
considered by Helix may include, but are not limited to, general economic conditions, Helix’s outlook, market performance
of Helix’s industry and recent and forecasted financial performance. Further testing is only required if the entity determines,
based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its
carrying amount. Otherwise, no further impairment testing is required. In the first step, Helix determines the fair value of its
reporting unit using a discounted cash flow analysis. If the net book value of the reporting unit exceeds its fair value, Helix
then performs the second step of the impairment test, which requires allocation of the reporting unit’s fair value to all
of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business combinations with
any residual fair value being allocated to goodwill. An impairment charge is recognized when the implied fair value of Helix’s
goodwill is less than its carrying amount.
Assumptions and
estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment
charges in future periods. Such assumptions include projections of future cash flows and the current fair value of the asset
Accounting for Acquisitions
In accordance with the guidance for business
combinations, the Company determines whether a transaction or other event is a business combination, which requires that the assets
acquired, and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition
method. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition.
Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest
in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill
or a gain from a bargain purchase. The Company capitalizes acquisition-related costs and fees associated with asset acquisitions
and immediately expenses acquisition-related costs and fees associated with business combinations.
The Company accounts for its business
combinations under the provisions of Accounting Standards Codification (“ASC”) Topic 805-10,
Business Combinations
(“ASC 805-10”), which requires that the purchase method of accounting be used for all business combinations. Assets
acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective
fair values. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized
and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets
and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business
combinations and are expensed as incurred. If the business combination provides for contingent consideration, the Company records
the contingent consideration at fair value at the acquisition date and any changes in fair value after the acquisition date are
accounted for as measurement-period adjustments. Changes in fair value of contingent consideration resulting from events after
the acquisition date, such as earn-outs, are recognized as follows: 1) if the contingent consideration is classified as equity,
the contingent consideration is not re-measured and its subsequent settlement is accounted for within equity, or 2) if the contingent
consideration is classified as a liability, the changes in fair value are recognized in earnings.
Revenue Recognition
Under Financial Accounting Standards Board
(“FASB”) Topic 606,
Revenue from Contacts with Customers
(“ASC 606”), the Company recognizes
revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is
expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model
prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and
(v) recognize revenues when (or as) the Company satisfies a performance obligation.
The security services revenue is generated
from performing armed and unarmed guarding which is contracted for on an hourly basis. Revenues associated with these contracted
services are recognized under time-based arrangements as services are provided.
Additionally, the Company provides transportation
security services, which are generally contracted for on a per-run basis and sometimes additional fees and surcharges are also
billed to the client depending on the length of the run. Revenues associated with these services are recognized as the transportation
service is provided.
The Company also generates revenue from
developing and licensing seed to sale cannabis compliance software to both private-sector and public-sector (government agencies)
businesses that are involved in cannabis related operations. The Company also generates revenue from on-going training, support
and software customization services.
Occasionally, the Company will enter into
systems installation arrangements. Installation jobs are estimated based on the cost of equipment to be installed, the number
of hours expected to be incurred to complete the job and other ancillary costs. Revenue associated with these services are recognized
over the arrangement period.
Lastly, the Company generates advertising
revenues from consumer advertising on its Cannabase platform. Revenue is recognized over the contract period associated with each
specific advertising campaign.
Segment Information
FASB ASC Topic 280,
Segment Reporting
,
establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating
decision maker is the Chief Executive Officer, who reviews the financial performance and the results of operations of the segments
prepared in accordance with GAAP when making decisions about allocating resources and assessing performance of the Company.
Asset information by operating segment
is not presented since the chief operating decision maker does not review this information by segment. The reporting segments
follow the same accounting policies used in the preparation of the Company’s condensed unaudited consolidated financial
statements.
Expenses
Cost of Revenues
The cost of revenues is the
total cost incurred to obtain a sale and the cost of the goods or services sold. Cost of revenues primarily
consisted of hourly compensation for security personnel and employees involved in the creation and development of licensing software.
Operating Expenses
Operating expenses encompass selling general
and administrative expenses, salaries and wages, professional and legal fees, depreciation and amortization, and loss on impairment
of Goodwill. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses.
Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside
legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly
traded company.
Other Income (Expense), net
Other income (expense), net consisted
of change in fair value of convertible note, change in fair value of convertible note – related party, change in fair value
of contingent consideration, change in fair value of warrant liability, loss on issuance of warrants, gain on reduction of obligation
pursuant to acquisition and interest (expense) income.
Property and Equipment
Property and equipment are stated at cost
and depreciated on a straight-line basis over their estimated useful lives. Useful lives are 3 years for vehicles and 5 years
for furniture and equipment. Maintenance and repairs are expensed as incurred and major improvements are capitalized. When assets
are sold, or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss
is included in other income.
Contingencies
Occasionally, the Company may be involved
in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability
when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these
estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated
financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex
judgments about future events and can rely heavily on estimates and assumptions.
Advertising
Advertising costs are expensed as incurred
and included in selling, general and administrative expenses and amounted to $178,219 and $34,963 for the three months ended June
30, 2019 and 2018, respectively, and $247,490 and $61,737 for the six months ended June 30, 2019 and 2018, respectively.
Foreign Currency
The local currency is the functional currency
for one entity’s operations outside the United States. Assets and liabilities of these operations are translated to U.S.
dollars at the exchange rate in effect at the end of each period. Income statement accounts are translated at the average exchange
rate prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period
are included as a component of other comprehensive income within shareholders’ equity. Gains and losses from foreign currency
transactions are included in net loss for the period.
Income Taxes
The Company accounts for income taxes
under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities
are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of
consolidated net income (loss) and foreign currency translation adjustments. Foreign currency translation adjustments included
in comprehensive income (loss) were not tax-effected as investments in international affiliates are deemed to be permanent.
Distinguishing Liabilities from
Equity
The Company relies on the guidance provided
by ASC Topic 480,
Distinguishing Liabilities from Equity
, to classify certain redeemable and/or convertible instruments.
The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the
liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding
shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial
instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented
between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine
temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the
option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.
Initial Measurement
The Company records its financial instruments
classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.
Subsequent Measurement – Financial
instruments classified as liabilities
The Company records the fair value of
its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial
instruments classified as liabilities are recorded as other expense/income.
Beneficial Conversion Feature
If the conversion features of conventional
convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a Beneficial Conversion
Feature (“BCF”). A beneficial conversion feature is recorded by the Company as a debt discount pursuant to ASC 470-20,
Debt with Conversion and Other Options
. In those circumstances, the convertible debt is recorded net of the discount related
to the beneficial conversion feature and the Company amortizes the discount to interest expense over the life of the debt.
The Company accounts for the beneficial
conversion feature on its convertible preferred stock in accordance with ASC 470-20,
Debt with Conversion and Other Options
.
The BCF of convertible preferred stock is normally characterized as the convertible portion or feature that provides a rate of
conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of convertible
preferred stock when issued. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded
when the contingency is resolved.
To determine the effective conversion
price, the Company first allocates the proceeds received to the convertible preferred stock and then uses those allocated proceeds
to determine the effective conversion price. If the convertible instrument is issued in a basket transaction (i.e., issued along
with other freestanding financial instruments), the proceeds should first be allocated to the various instruments in the basket.
Any amounts paid to the investor when the transaction is consummated (e.g., origination fees, due diligence costs) represent a
reduction in the proceeds received by the issuer. The intrinsic value of the conversion option should be measured using the effective
conversion price for the convertible preferred stock on the proceeds allocated to that instrument. The effective conversion price
represents proceeds allocable to the convertible preferred stock divided by the number of shares into which it is convertible.
The effective conversion price is then compared to the per share fair value of the underlying shares on the commitment date.
The accounting for a BCF requires that
the BCF be recognized by allocating the intrinsic value of the conversion option to additional paid-in capital, resulting in a
discount on the convertible preferred stock. This discount should be accreted from the date on which the BCF is first recognized
through the earliest conversion date for instruments that do not have a stated redemption date. The intrinsic value of the BCF
is recognized as a deemed dividend on convertible preferred stock over a period specified in the guidance.
Share-based Compensation
The Company accounts for stock-based compensation
to employees in conformity with the provisions of ASC Topic 718,
Stock Based Compensation
. Stock-based compensation to
employees consist of stock options grants and restricted shares that are recognized in the statement of operations based on their
fair values at the date of grant.
The measurement of stock-based compensation
is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which
services are received.
The Company calculates the fair value
of option grants utilizing the Black-Scholes pricing model and estimates the fair value of the stock based upon the estimated
fair value of the common stock. The amount of stock-based compensation recognized during a period is based on the value of the
portion of the awards that are ultimately expected to vest.
The resulting stock-based compensation
expense for both employee and non-employee awards is generally recognized on a straight- line basis over the requisite service
period of the award.
Fair Value of Financial Instruments
ASC Topic 820,
Fair Value Measurements
and Disclosures
(“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted
accounting principles.
ASC Topic 820 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions
developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions
about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three
broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic
820 are described as follows:
|
|
●
|
Level 1 – Unadjusted quoted prices in active markets for
identical assets or liabilities that are accessible at the measurement date.
|
|
|
|
|
|
|
●
|
Level 2 – Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices
for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets
that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived
principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
|
|
|
●
|
Level 3 – Inputs that are unobservable for the asset or liability.
|
Certain assets and liabilities of the
Company are required to be recorded at fair value either on a recurring or non-recurring basis. Fair value is determined based
on the price that would be received for an asset or paid to transfer a liability in an orderly transaction based on market participants.
The following section describes the valuation methodologies that the Company used to measure, for disclosure purposes, its financial
instruments at fair value.
Convertible notes payable
The fair value of the Company’s
convertible notes payable, approximated the carrying value as of June 30, 2019 and December 31, 2018. Factors that the Company
considered when estimating the fair value of its debt included market conditions and the term of the debt. The level of the debt
would be considered as Level 2.
Warrant liabilities
The fair value of the Company’s warrant
liabilities approximated the carrying value as of June 30, 2019 and December 31, 2018. Factors that the Company considered when
estimating the fair value of its warrants included market conditions and the term of the warrants. The level of the warrant liabilities
would be considered as Level 3.
Additional Disclosures Regarding Fair
Value Measurements
The carrying value of cash, accounts receivable,
prepaid expenses and other current assets, deposits and other assets, accounts payable and accrued liabilities, advances from related
parties and obligation pursuant to acquisition approximate their fair value due to the short-term maturity of those items.
Earnings (Loss) per Share
The Company follows ASC 260,
Earnings Per Share
, which requires presentation of basic and diluted
earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures. Basic
EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares
outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during
the period including stock options and warrants, using the treasury stock method, and convertible debt and convertible securities,
using the if-converted method.
For the three months ended June 30,
2018 and the six months ended June 30, 2019 and 2018, potential common shares includable in the computation of fully-diluted
per share results are not presented in the condensed consolidated financial statements as their effect would be
anti-dilutive. For the three months ended June 30, 2019, dilutive earnings per share are calculated by dividing net income
attributable to common shareholders less the change in fair value of warrant liability, the change in fair value of
convertible notes, interest expense on convertible notes, and the debt discount amortized on convertible notes. The
calculation of diluted EPS excludes 24,571,582 shares for securities which have been deemed to be anti-dilutive.
Earnings per share for the three and six
months ended June 30, 2019 and 2018 were calculated as follows:
|
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
4,811,718
|
|
|
$
|
(9,032,037
|
)
|
|
$
|
(6,025,736
|
)
|
|
$
|
(24,469,219
|
)
|
|
Effect of dilutive instruments on net loss
|
|
|
(7,024,580
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net income (loss) attributable to common shareholders - diluted
|
|
$
|
(2,212,862
|
)
|
|
$
|
(9,032,037
|
)
|
|
$
|
(6,025,736
|
)
|
|
$
|
(24,469,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - basic
|
|
|
75,470,238
|
|
|
|
42,673,528
|
|
|
|
74,324,689
|
|
|
|
35,907,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants and convertible securities
|
|
|
5,766,440
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - diluted
|
|
|
81,236,678
|
|
|
|
42,673,528
|
|
|
|
74,324,689
|
|
|
|
35,907,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.68
|
)
|
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.68
|
)
|
The anti-dilutive shares of common stock outstanding
for the three and six months ended June 30, 2019 and 2018 were as follows:
|
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Potentially dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
|
-
|
|
|
|
135,634
|
|
|
|
2,704,577
|
|
|
|
135,634
|
|
|
Convertible Preferred A Stock
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
Convertible Preferred B Stock
|
|
|
13,784,201
|
|
|
|
13,784,201
|
|
|
|
13,784,201
|
|
|
|
13,784,201
|
|
|
Warrants
|
|
|
-
|
|
|
|
3,307,073
|
|
|
|
4,925,558
|
|
|
|
3,307,073
|
|
|
Stock options
|
|
|
9,787,381
|
|
|
|
8,704,345
|
|
|
|
9,787,381
|
|
|
|
8,704,345
|
|
Reclassifications
Certain reclassifications have been made
to the prior period financial statements to conform to the current period financial statement presentation. These reclassifications
had no effect on net earnings or cash flows as previously reported.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU
2016-.02,
Leases (Topic 842)
(“Topic 842”) which requires the recognition of right-of-use assets and lease
liabilities on the balance sheet. The most prominent of the changes in the standard is the recognition of right-of-use (“ROU”)
assets and lease liabilities by lessees for those leases classified as operating leases.
The Company adopted the new standard on
January 1, 2019 and used the modified retrospective approach with the effective date as the date of initial application. Consequently,
prior period balances and disclosures have not been restated. The Company elected certain practical expedients, which among other
things, allowed us to carry forward prior conclusions about lease identification and classification.
Adoption of the standard resulted in the
balance sheet recognition of additional lease assets and lease liabilities of approximately $1,500,000. The new standard also
provides practical expedients for an entity’s ongoing accounting. The Company currently has elected the short-term lease
recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU
assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases
of those assets in separate lease and non-lease components for all our leases. For additional information regarding the Company’s
leases, see Note 18 in the notes to condensed consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815):
I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception
. Part I of this update addresses the complexity of accounting for certain financial instruments with down
round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the
strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and
complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features
that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty
of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the
FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements
about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling
interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2018. The Company adopted this ASU as of January 1, 2019.
The amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU
2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income
. The amendments in this ASU allow a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded
tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. The amendments
in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early
adoption is permitted in any interim period after issuance of the ASU. The Company adopted this ASU as of January 1, 2019. The
amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting
, which expands the
scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees and applies to
all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s
own operations by issuing share-based payment awards. ASC 718 does not apply to share-based payments used to effectively provide
(1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract
accounted for under ASC 606. This update is effective for public business entities for fiscal years beginning after December 15,
2018, including interim periods within that fiscal year. The Company adopted this ASU as of January 1, 2019. The amendments in
this ASU did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
.
ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. The ASU is effective for
annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted.
The Company is evaluating the effect that this update will have on its financial statements and related disclosures.
Management has evaluated other recently
issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on the Company’s
consolidated financial statements and related disclosures.
Disaggregation of revenue
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Types of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security and Guarding
|
|
$
|
1,347,529
|
|
|
$
|
1,197,201
|
|
|
$
|
2,552,240
|
|
|
$
|
2,290,975
|
|
|
Systems Installation
|
|
|
174,067
|
|
|
|
100,699
|
|
|
|
202,608
|
|
|
|
135,263
|
|
|
Software
|
|
|
2,377,277
|
|
|
|
576,142
|
|
|
|
4,515,132
|
|
|
|
576,142
|
|
|
Total revenues
|
|
$
|
3,898,873
|
|
|
$
|
1,874,042
|
|
|
$
|
7,269,980
|
|
|
$
|
3,002,380
|
|
The following is a description of the
principal activities from which we generate our revenue.
Security and Guarding Revenue
Helix provides armed and unarmed guards,
monitoring of security alarms and cameras, as well as armed transportation services. The guards are charged out at an hourly rate,
as are the monitoring services, with invoices typically sent to clients shortly after each month-end for the previous month, with
revenue being recognized over time. The customer simultaneously receives and consumes benefits provided by the Helix performance.
Transportation services are typically invoiced on a per-run basis, with revenue being recognized at a point in time once the service
has been completed.
Systems Installation Revenue
Security systems, including Internet Protocol
camera, intrusion alarm systems, perimeter alarm systems, and access controls are installed for clients. Installation jobs are
estimated based on the cost of the equipment, the number of man hours expected to complete the work, supplies, travel, and any
other ancillary costs. The installation is typically invoiced with 60% of the total price immediately after signing and the balance
upon completion of the installation service. The timing of these contracts are short-term in nature and are less than 12 months
in duration, and revenue is recognized over the term of the contracts, utilizing the cost-to-cost method.
Software
The Company generates revenue from developing
and licensing seed to sale cannabis compliance software to both private-sector and public-sector (government agencies) clients
that are involved in cannabis related operations. The Company also generates revenue from on-going training, support and software
customization services.
The private-sector software entails cultivation
tracking, inventory management, point of sale and analytic reporting to assist businesses in meeting their compliance requirements
and effectively managing their businesses. Customers within the private sector business are charged an initial one-time installation
fee and the revenues associated with these services are recognized upon completion of installation and configuration at a point
in time. After the installation and configuration of the software is completed, the customer is invoiced monthly and revenues
associated with these services are recognized monthly over a period of time in which the customer continues to use the software
and related services.
The public-sector software assists government
agencies in efficient oversight of cannabis related business under their jurisdiction. Revenues associated with governmental contracts
are longer-term in nature and recognized upon completion of certain milestones over a period of time or on a completed-contract
basis at a point in time. The Company considers the contract to be complete when all significant costs have been incurred and
the customer accepts the project. Costs incurred prior to the customer accepting the project are deferred and reflected on the
condensed consolidated balance sheets as prepaid expenses and other current assets.
Performance Obligations
A performance obligation is a promise
in a contract to transfer a distinct good or service to the customer and is the unit of account in accordance with ASC 606. A
contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as,
the performance obligation is satisfied. Generally, the Company’s contracts include a single performance obligation
that is separately identifiable, and therefore, distinct. Under ASC 606, the allocation of transaction price is not necessary
if only one performance obligation is identified.
Significant Judgments
Accounting for long-term contracts involves
the use of various techniques to estimate total contract revenue, costs and satisfaction of performance obligation. The Company
satisfies its performance obligations and subsequently recognizes revenue, over time, as security and installation services are
performed. There were no changes to the significant judgments used by the Company to determine the timing of satisfaction of the
performance obligations under ASC 606.
Costs to Obtain or Fulfill Contract
The Company’s costs to fulfill or
obtain contracts with customers primarily consist of commissions and legal costs. The Company provides sales team members with
commissions at 0-6%. Although sales commissions are incremental in nature and are only incurred when a contract is obtained, there
is no up-front commission paid on the satisfactory obtainment of a contract, resulting in no sales commissions being capitalized
at June 30, 2019 and December 31, 2018. The Company also incurs legal costs relating to the drafting and negotiating of contracts
with select customers. Because legal costs are not incremental in nature and are incurred regardless of whether a contract is
ultimately obtained, there were no legal costs capitalized as of June 30, 2019 and December 31, 2018. The Company did not record
amortization of costs incurred to obtain the contract or any impairment losses for the period ending June 30, 2019 and 2018.
Security Grade Acquisition
On June 2, 2017 (the “Security Grade
Closing Date”), the Company entered into a Membership Interest Purchase Agreement (the “Security Grade Acquisition
Agreement”) in which the Company purchased all issued and outstanding units of Security Grade Protective Services, Ltd.
(“Security Grade”), which consisted of 800,000 Class A Units and 200,000 Class B Units. On the Security Grade Closing
Date, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”).
Furthermore, provided that, within the first 60 days following the Security Grade Closing Date, no material customer identified
in the Security Grade Acquisition Agreement terminates its contractual relationship with the Company and that all contracts with
such material customers are in full force and effect without default or cancellation as of the 60th day following the Security
Grade Closing Date, on the 61st day following the Security Grade Closing Date, the Company shall issue an additional $800,000
in cash and issue 207,427 additional stock options (the “Additional Stock Options”). In the event of termination,
cancellation or default of any contract with one or more material customer identified in the Security Grade Acquisition Agreement
within the first 60 days following the Security Grade Closing Date, the stock options received by the acquiree shall be reduced
and/or forfeited to the extent necessary (pro rata based upon their ownership interest in the Company immediately preceding the
closing) by a percentage equal to the revenue received by the Company from the terminating customer(s) in the 180 days immediately
preceding such termination divided by the revenue received by the Company from all material customers identified in the Security
Grade Acquisition Agreement in the 180 days immediately preceding such termination. The Company subsequently issued the 207,427
Additional Stock Options on August 1, 2017 as well as a second cash payment of $800,000 pursuant to the original terms of the
Security Grade Acquisition Agreement.
In the first quarter of 2018, the Company
notified the selling members of Security Grade of their intent to exercise their right of setoff noted in the Security Grade Acquisition
Agreement after discovering misrepresentations made by one of the selling members of Security Grade. The Company has settled with
all of the six selling members. As of June 30, 2019 and December 31, 2018, the Company has a liability pursuant to the Security
Grade Acquisition Agreement of $0 and $101,667, respectively, payable following the closing.
The merger is being accounted for as a
business combination in accordance with ASC 805. The Company’s allocation of the purchase price was calculated as follows:
|
Base Price – Cash
|
|
$
|
2,100,373
|
|
|
Base Price - Stock Options
|
|
|
916,643
|
|
|
Contingent Consideration - Stock Options
|
|
|
916,643
|
|
|
Total Purchase Price
|
|
$
|
3,933,659
|
|
|
|
|
|
|
|
Weighted
Average
Useful Life
|
|
Description
|
|
Fair Value
|
|
|
(in years)
|
|
Assets acquired:
|
|
|
|
|
|
|
Cash
|
|
$
|
14,137
|
|
|
|
|
Accounts receivable
|
|
|
53,792
|
|
|
|
|
Costs & earnings in excess of billings
|
|
|
96,898
|
|
|
|
|
Property, plant and equipment, net
|
|
|
27,775
|
|
|
|
|
Trademarks
|
|
|
25,000
|
|
|
10
|
|
Customer lists
|
|
|
3,154,578
|
|
|
5
|
|
Web address
|
|
|
5,000
|
|
|
5
|
|
Goodwill
|
|
|
664,329
|
|
|
|
|
Other assets
|
|
|
3,880
|
|
|
|
|
Total assets acquired
|
|
$
|
4,045,389
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
Billings in excess of costs
|
|
$
|
23,967
|
|
|
|
|
Loans payable
|
|
|
18,414
|
|
|
|
|
Credit card payable and other liabilities
|
|
|
69,349
|
|
|
|
|
Total liabilities assumed
|
|
|
111,730
|
|
|
|
|
Estimated fair value of net assets acquired
|
|
$
|
3,933,659
|
|
|
|
The Initial Stock Options are included
as part of the purchase price. The Company determined the fair value of the contingent consideration to be $916,643 at June 2,
2017 and recorded it as a liability in its unaudited condensed consolidated balance sheet. The Company satisfied their contingent
consideration liability during the third quarter of 2017. During the year ended December 31, 2018, the Company reached settlement
agreements with all six selling members. As a result of these settlements, 79,486 options previously issued as part of the acquisition
were cancelled (see Note 14).
BioTrackTHC Acquisition
On March 3, 2018, the Company and its
wholly owned subsidiary, Merger Sub, entered into the Merger Agreement with BioTrackTHC and Terence J. Ferraro, as the representative
of the BioTrackTHC shareholders, pursuant to which Merger Sub merged with and into BioTrackTHC. On the BioTrackTHC Closing Date,
the Company closed the Merger. In connection with closing the Merger, the Company issued 38,184,985 unregistered shares of Company
common stock to BioTrackTHC stockholders, of which 1,852,677 shares were held back to satisfy indemnification obligations in the
Merger Agreement, if necessary. The Company also assumed the BioTrackTHC Stock Plan, pursuant to which options exercisable for
8,132,410 shares of Company common stock are outstanding so that the BioTrackTHC stockholders will own 48% of the Company on a
fully diluted basis at closing.
The Merger is being accounted for as a
business combination in accordance with ASC 805. The Company’s allocation of the purchase price was calculated as follows:
|
Base Price - Common Stock
|
|
$
|
44,905,542
|
|
|
Base Price - Stock Options
|
|
|
12,646,491
|
|
|
Total Purchase Price
|
|
$
|
57,552,033
|
|
|
|
|
|
|
|
Weighted
Average
Useful Life
|
|
Description
|
|
Fair Value
|
|
|
(in years)
|
|
Assets acquired:
|
|
|
|
|
|
|
Cash
|
|
$
|
448,697
|
|
|
|
|
Accounts receivable
|
|
|
128,427
|
|
|
|
|
Prepaid expenses
|
|
|
351,615
|
|
|
|
|
Property, plant and equipment, net
|
|
|
72,252
|
|
|
|
|
Goodwill
|
|
|
39,135,007
|
|
|
|
|
Customer list
|
|
|
8,304,449
|
|
|
5
|
|
Software
|
|
|
9,321,627
|
|
|
4.5
|
|
Tradename
|
|
|
466,081
|
|
|
4.5
|
|
Total assets acquired
|
|
$
|
58,228,155
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
223,581
|
|
|
|
|
Other liabilities
|
|
|
452,541
|
|
|
|
|
Total liabilities assumed
|
|
|
676,122
|
|
|
|
|
Estimated fair value of net assets acquired
|
|
$
|
57,552,033
|
|
|
|
Engeni SA Acquisition
On the Engeni Closing Date, the Company
and its wholly owned subsidiary, Engeni Merger Sub, entered into the Engeni Merger Agreement with Engeni US, Engeni SA, the members
of Engeni US, and Scott Zienkewicz as the representative of the Engeni US members. Pursuant to the Engeni Merger Agreement, Engeni
Merger Sub merged with and into Engeni US, with Engeni US surviving the merger as a wholly-owned subsidiary of the Company. On
the Engeni Closing Date, in connection with closing the Engeni Merger Agreement, the Company issued 366,700 shares of Company
common stock to Engeni US members. Furthermore, the Company may also issue Engeni US members 366,700 and 366,600 shares of Parent
common stock upon the achievement of specific objectives. If applicable, the Company will pay Engeni US members the aggregate
amount of $100,000, on a pro rata basis, if Engeni SA reaches financial breakeven on or before December 31, 2018, as determined
by the Company’s Chief Financial Officer and Scott Zienkewicz.
The Engeni Merger is being accounted for
as a business combination in accordance with ASC 805. The Company has determined fair values of the assets acquired and liabilities
assumed in the Engeni Merger. These values are subject to change as we perform additional reviews of our assumptions utilized.
During the first quarter of 2019, it was
determined Engeni SA did not reach financial breakeven and therefore the contingent consideration of $100,000 was deemed by the
Company not to be payable and was reduced to zero. In accordance with ASC 805-30-35-1, the Company recognized the change
in the fair value of contingent consideration subsequent to the acquisition date in general and administrative expenses. The Company’s
allocation of the purchase price was calculated as follows:
|
|
|
As Adjusted
|
|
|
Base Price - Common Stock
|
|
$
|
388,702
|
|
|
Contingent Consideration - Common Stock
|
|
|
777,298
|
|
|
Contingent Consideration - Cash
|
|
|
-
|
|
|
Total Purchase Price
|
|
$
|
1,166,000
|
|
|
|
|
|
|
|
Weighted
Average
Useful Life
|
|
Description
|
|
Fair Value
|
|
|
(in years)
|
|
Assets acquired:
|
|
|
|
|
|
|
Cash
|
|
$
|
5,609
|
|
|
|
|
Accounts receivable and other assets
|
|
|
30,479
|
|
|
|
|
Property, plant and equipment, net
|
|
|
57,830
|
|
|
|
|
Software
|
|
|
449,568
|
|
|
3.3
|
|
Goodwill
|
|
|
778,552
|
|
|
|
|
Total assets acquired
|
|
$
|
1,322,038
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
56,038
|
|
|
|
|
Total liabilities assumed
|
|
|
56,038
|
|
|
|
|
Estimated fair value of net assets acquired
|
|
$
|
1,266,000
|
|
|
|
The Company determined the fair value
of the contingent consideration to be $777,298 at August 3, 2018 and recorded it as a liability in its unaudited condensed consolidated
balance sheets. On April 2, 2019, the Company satisfied their contingent consideration liability and issued 733,300 shares of
the Company’s common stock to Engeni US members.
Tan’s International Security
On the Tan Security Closing Date, the
Company entered into the Tan Security Acquisition Agreement. Pursuant to the Tan Security Acquisition Agreement, Helix purchased
all membership interests and capital stock of Tan Security and collectively holds 100% of the interests of Tan Security. The purchase
price of $100,000 in cash plus 250,000 shares of the Company’s restricted common stock will be paid to Rocky Tan as follows:
|
|
●
|
250,000 shares of Helix Stock at closing.
|
|
|
|
|
|
|
●
|
$25,000 at closing
|
|
|
|
|
|
|
●
|
$25,000 on the 4-month anniversary of the Tan Security Closing Date
|
|
|
|
|
|
|
●
|
$25,000 on the 8-month anniversary of the Tan Security Closing Date
|
|
|
|
|
|
|
●
|
$25,000 on the 12-month anniversary of the Tan Security Closing Date
|
The Tan Security Acquisition is being
accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary fair values of the
assets acquired and liabilities assumed in the Tan Security Acquisition. These values are subject to change as we perform additional
reviews of our assumptions utilized.
The Company has made a provisional allocation
of the purchase price of the Tan Security transaction to the assets acquired and the liabilities assumed as of the purchase date.
The following table summarizes the provisional purchase price allocations relating to the Tan Security Acquisition:
|
Base Price – Cash at closing
|
|
$
|
25,000
|
|
|
Base Price – Deferred cash payment (including $25,000 to be made on the 4,8 and 12-month
anniversaries of closing)
|
|
|
75,000
|
|
|
Base Price – Common Stock
|
|
|
710,000
|
|
|
Total Purchase Price
|
|
$
|
810,000
|
|
|
Description
|
|
Fair Value
|
|
|
Assets acquired:
|
|
|
|
|
Cash
|
|
$
|
2,940
|
|
|
Accounts receivable
|
|
|
7,635
|
|
|
Goodwill
|
|
|
821,807
|
|
|
Total assets acquired
|
|
$
|
832,382
|
|
|
Liabilities assumed:
|
|
|
|
|
|
Accounts payable
|
|
$
|
12,526
|
|
|
Other liabilities
|
|
|
9,856
|
|
|
Total liabilities assumed
|
|
|
22,382
|
|
|
Estimated fair value of net assets acquired
|
|
$
|
810,000
|
|
The Company has not completed the assessment
necessary to finalize the acquisition fair values of the assets acquired and liabilities assumed and related allocation of purchase
price for Tan Security. Accordingly, the type and value of the intangible assets amounts set forth above are preliminary. Once
the valuation process is finalized for Tan Security, there could be changes to the reported values of the assets acquired and
liabilities assumed, including goodwill and those changes could differ materially from what is presented above.
|
6.
|
Property and Equipment, Net
|
At June 30, 2019 and December 31, 2018,
property and equipment consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Furniture and equipment
|
|
$
|
139,782
|
|
|
$
|
264,659
|
|
|
Software equipment
|
|
|
352,505
|
|
|
|
-
|
|
|
Vehicles
|
|
|
201,066
|
|
|
|
202,700
|
|
|
Total
|
|
|
693,353
|
|
|
|
467,359
|
|
|
Less: Accumulated depreciation
|
|
|
(147,535
|
)
|
|
|
(117,841
|
)
|
|
Property and equipment, net
|
|
$
|
545,818
|
|
|
$
|
349,518
|
|
Depreciation expense for the three months
ended June 30, 2019 and 2018 was $29,509 and $32,893, respectively, and $47,222 and $35,893 for the six months ended June 30,
2019 and 2018, respectively.
|
7.
|
Intangible Assets, Net and Goodwill
|
The following table summarizes the Company’s
intangible assets as of June 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
June 30,
2019
|
|
|
|
|
Estimated
Useful Life
(Years)
|
|
Gross
Carrying
Amount
|
|
|
Assets
Acquired
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Database
|
|
5
|
|
$
|
93,427
|
|
|
$
|
-
|
|
|
$
|
(60,119
|
)
|
|
$
|
33,308
|
|
|
Trade names and trademarks
|
|
5 - 10
|
|
|
591,081
|
|
|
|
-
|
|
|
|
(149,063
|
)
|
|
|
442,018
|
|
|
Web addresses
|
|
5
|
|
|
130,000
|
|
|
|
-
|
|
|
|
(82,511
|
)
|
|
|
47,489
|
|
|
Customer list
|
|
5
|
|
|
11,459,027
|
|
|
|
-
|
|
|
|
(3,101,382
|
)
|
|
|
8,357,645
|
|
|
Software
|
|
4.5
|
|
|
9,771,195
|
|
|
|
-
|
|
|
|
(2,356,189
|
)
|
|
|
7,415,006
|
|
|
Domain Name
|
|
5
|
|
|
-
|
|
|
|
17,383
|
|
|
|
(143
|
)
|
|
|
17,240
|
|
|
|
|
|
|
$
|
22,044,730
|
|
|
$
|
17,383
|
|
|
$
|
(5,749,407
|
)
|
|
$
|
16,312,706
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
|
|
Estimated
Useful Life
(Years)
|
|
Gross
Carrying
Amount
at
December 31,
2017
|
|
|
Assets
Acquired
Pursuant
to
Business
Combination
(1) (2)
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Database
|
|
5
|
|
$
|
93,427
|
|
|
$
|
-
|
|
|
$
|
(50,858
|
)
|
|
$
|
42,569
|
|
|
Trade names and trademarks
|
|
5 - 10
|
|
|
125,000
|
|
|
|
466,081
|
|
|
|
(91,554
|
)
|
|
|
499,527
|
|
|
Web addresses
|
|
5
|
|
|
130,000
|
|
|
|
-
|
|
|
|
(69,625
|
)
|
|
|
60,375
|
|
|
Customer list
|
|
5
|
|
|
3,154,578
|
|
|
|
8,304,449
|
|
|
|
(1,965,520
|
)
|
|
|
9,493,507
|
|
|
Software
|
|
4.5
|
|
|
-
|
|
|
|
9,771,195
|
|
|
|
(1,263,095
|
)
|
|
|
8,508,100
|
|
|
|
|
|
|
$
|
3,503,005
|
|
|
$
|
18,541,725
|
|
|
$
|
(3,440,652
|
)
|
|
$
|
18,604,078
|
|
|
(1)
|
On June 1, 2018, the Company acquired various assets of BioTrackTHC (See Note 5)
|
|
(2)
|
On August 3, 2018, the Company acquired various assets of Engeni (See Note 5)
|
The Company uses the straight-line method
to determine the amortization expense for its definite lived intangible assets. Amortization expense related to the purchased
intangible assets was $1,160,827 and $476,003 for the three months ended June 30, 2019 and 2018, respectively, and $2,308,755
and $645,579 for the six months ended June 30, 2019 and 2018, respectively.
The following table summarizes the Company’s
Goodwill as of June 30, 2019 and December 31, 2018:
|
|
|
Total Goodwill
|
|
|
Balance at December 31, 2017
|
|
$
|
664,329
|
|
|
Impairment of goodwill
|
|
|
(664,329
|
)
|
|
Goodwill attributable to BiotrackTHC acquisition
|
|
|
39,135,007
|
|
|
Goodwill attributable to Engeni acquisition
|
|
|
778,552
|
|
|
Balance at December 31, 2018
|
|
$
|
39,913,559
|
|
|
Goodwill attributable to Tan Security acquisition
|
|
|
821,807
|
|
|
Balance at June 30, 2019
|
|
$
|
40,735,366
|
|
During the period ended March 31, 2018,
the Company came to a settlement agreement with multiple Security Grade employees resulting from a misrepresentation of revenue
and customer list information provided as part of the acquisition. Therefore, the Company considers the settlement to be an indicator
for goodwill impairment testing. Accordingly, at March 31, 2018, goodwill was tested for potential impairment. As a result of
the goodwill impairment test performed, it was determined that the carrying value for each reporting unit was higher than its
fair value and therefore goodwill was fully impaired, which resulted in a write-off of $664,329 for the three months ended March
31, 2018.
|
8.
|
Costs, Estimated Earnings and Billings
|
Costs, estimated earnings and billings
on uncompleted contracts are summarized as follows as of June 30, 2019 and December 31, 2018:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
140,289
|
|
|
$
|
89,700
|
|
|
Estimated earnings
|
|
|
49,366
|
|
|
|
50,512
|
|
|
Cost and estimated earnings earned on uncompleted contracts
|
|
|
189,655
|
|
|
|
140,212
|
|
|
Billings to date
|
|
|
304,500
|
|
|
|
252,535
|
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
(114,845
|
)
|
|
|
(112,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Costs in excess of billings
|
|
$
|
12,017
|
|
|
$
|
42,869
|
|
|
Billings in excess of cost
|
|
|
(126,862
|
)
|
|
|
(155,192
|
)
|
|
|
|
$
|
(114,845
|
)
|
|
$
|
(112,323
|
)
|
|
9.
|
Accounts Payable and Accrued Liabilities
|
As of June 30, 2019 and December 31, 2018,
accounts payable and accrued liabilities consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Accounts payable
|
|
$
|
857,610
|
|
|
$
|
842,389
|
|
|
Accrued compensation and related expenses
|
|
|
56,332
|
|
|
|
33,869
|
|
|
Accrued expenses
|
|
|
1,138,368
|
|
|
|
826,455
|
|
|
Lease obligation - current
|
|
|
410,826
|
|
|
|
-
|
|
|
Total
|
|
$
|
2,463,136
|
|
|
$
|
1,702,713
|
|
|
10.
|
Convertible Note Payable
|
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Note Five, 5% interest, convertible promissory
note, fixed secured, maturing November 16, 2019
|
|
$
|
-
|
|
|
$
|
187,177
|
|
|
Note Ten, 25% interest, convertible
promissory note, fixed secured, maturing March 1, 2020, net of debt discount for warrants
|
|
|
423,700
|
|
|
|
-
|
|
|
|
|
|
423,700
|
|
|
|
187,177
|
|
|
Less: Current portion
|
|
|
(423,700
|
)
|
|
|
(187,177
|
)
|
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
On February 13, 2017, the Company entered
into a $183,333 10% Fixed Secured Convertible Promissory Note (“Note Five”) with an investor (the “First Investor”).
The First Investor provided the Company with $166,666 in cash, which was received by the Company during the period ended March
31, 2017. The additional $16,666 was retained by the First Investor for due diligence and legal bills for the transaction.
The Company evaluated the embedded conversion
feature within the above convertible note under ASC 815 and determined the conversion feature did not meet the definition of a
derivative and therefore should not be bifurcated. Then the Company evaluated the conversion feature for a beneficial conversion
feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to the convertible
note payable and a total debt discount of $183,333 was recorded.
The Company recorded a debt discount relating
to the warrants issued in the amount of $22,000 based on the relative fair values of Note Five without the warrants and the warrants
themselves at the effective date of Note Five. The additional $16,666 retained by the First Investor for due diligence and legal
bills for the transaction will be recorded as a debt discount. The calculated value of the beneficial conversion feature and the
combined value of the debt discount resulted in a value greater than the value of the debt and as such, the total discount was
limited to the value of the debt balance of $183,333. Therefore, the debt discount related to the beneficial conversion feature
was in the amount of $144,666.
On November 16, 2017, the Company amended
Note Five (the “First Amendment”) with the First Investor. The First Amendment has a maturity date that is six months
from November 16, 2017, converts at a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during
the 30 trading days preceding such conversion, incurs interest at an annual rate of 5%, and is prepayable at any time at 110%
of the unpaid principal and accrued interest balance. At November 16, 2017, the principal amount of Note Five was $281,900.
On May 16, 2018, the Company amended Note
Five (“Second Amendment”) with the First Investor. The Second Amendment states that Note Five shall have a maturity
of November 16, 2018 and shall be pre-payable at any time at 120% of the unpaid principal and accrued interest balance. The principal
amount as of the date of the Second Amendment was $112,305.
In November 2018, the Company amended
Note Five (“Third Amendment”) with a second investor. The Third Amendment states that Note Five shall have a maturity
of November 16, 2019. The principal amount as of the date of the Third Amendment was $115,136. During March 2019, the remaining
principal of $112,305 was converted into 155,421 shares of common stock. The interest expense associated with Note Five was $0
and $5,839 for the three months ended June 30, 2019 and 2018, respectively, and $0 and $7,878 for the six months ended June 30,
2019 and 2018, respectively.
On March 1, 2019, the Company entered
into a $450,000 Secured Convertible Promissory Note (“Note Ten”) with a third investor. The third investor provided
the Company with $450,000 in cash proceeds, which was received by the Company during the period ended June 30, 2019. Note Ten
will mature on March 1, 2020 and bear interest at a rate of 25% per annum, payable by the Company half in cash and half in kind
on a quarterly basis. The principal balance of Note Ten is convertible at the election of the third investor, in whole or in part,
at any time or from time to time, into the Company’s common stock at the lower of $0.90 per share or a 30% discount to the
Company’s 30-day weighted average listed price per share immediately before the date of conversion. In conjunction with
Note Ten, the Company issued a warrant to the third investor to purchase 160,715 shares of the Company’s common stock at
$1.40 per share.
The Company evaluated Note Ten in accordance
with ASC 480,
Distinguishing Liabilities from Equity
and determined Note Ten will be accounted for as a liability
initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of June
30, 2019, the fair value of Note Ten was $661,581. Accordingly, the Company recorded a change in fair value of ($845,622) and
$211,581 related to Note Ten for the three and six months ended June 30, 2019, respectively.
In addition, the company recorded a debt discount
relating to the warrants issued in the amount of $355,847 based on the residual fair value of the warrants themselves at inception
of Note Ten. Debt discounts amortized to interest expense were $88,718 and $117,966 for the three and six months ended June 30,
2019, respectively. The unamortized discount balance at June 30, 2019 was $237,881. On May 31, 2019, the Company issued 15,625
restricted shares of common stock as paid-in-kind (“PIK”) interest payments in the amount of $14,062. Accrued interest
expense associated with Note Ten was $9,247 as of June 30, 2019, which includes PIK interest payable.
|
11.
|
Related Party Transactions
|
Advances from Related Parties
The Company had
a loan outstanding from a former Company executive. The loan balance was $0 and $45,250 as of June 30, 2019 and December 31, 2018,
respectively.
Convertible Note Payable
On March 11,
2016, the Company entered into an Unsecured Convertible Promissory Note (“Note Eight”) with Paul Hodges, a Director
of the Company (the “Related Party Holder”). The Related Party Holder provided the Company with $150,000 in cash,
and the Company promised to pay the principal amount, together with interest at an annual rate of 7%, with principal and accrued
interest on Note Eight due and payable on December 31, 2017 (unless converted under terms and provisions as set forth below).
The principal balance of Note Eight was convertible at the election of the Related Party Holder, in whole or in part, at any time
or from time to time, into the Company’s common stock at a forty percent (40%) discount to the average market closing price
for the previous five (5) trading days, preceding the date of conversion election. The Company evaluated Note Eight in accordance
with ASC 480,
Distinguishing Liabilities from Equity
and determined that Note Eight will be accounted for as a liability
initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings.
On February 20, 2018, the Company entered
into an agreement to amend Note Eight (the “Amendment”) with the Related Party Holder. The Company and Holder desired
to extend the maturity date of Note Eight to August 20, 2018 (the “Maturity Date”). Note Eight was amended as follows.
The Company promises to pay (i) all accrued interest on the unpaid principal amount through December 31, 2017 and (ii) $25,000
in principal within 5 business days of the date of the Amendment. The Company agrees to issue 15,000 shares of restricted Company
common stock as an inducement for the Amendment within 10 business days of the date of the Amendment. The principal amount of
Note Eight will be reduced to $125,000. Unless extended by the Company, converted or prepaid earlier, all unpaid principal and
unpaid accrued interest on Note Eight shall be due and payable on the Maturity Date. All provisions related to conversion of Note
Eight into equity securities of the Company were terminated as part of the Amendment.
As of February
20, 2018, the fair value of the liability was $239,343, however due to termination of the conversion of the note into equity securities,
Note Eight will be valued in its principal amount of $125,000 and accordingly the Company recorded a credit regarding the
change in fair value of $0 for the three months ended June 30, 2019 and 2018, respectively, and $0 and $118,506 for the six months
ended June 30, 2019 and 2018, respectively. The interest expense associated with Note Eight was $0 for the three months ended
June 30, 2019 and 2018, respectively, and $0 and $2,402 for the six months ended June 30, 2019 and 2018, respectively. Note Eight
was paid in full on the Maturity Date.
On March 1, 2019, the Company entered
into a $1,500,000 Secured Convertible Promissory Note (“Note Nine”) with a related party entity (the Second Related
Party Holder”). A Managing Member of the Second Related Party Holder is also a Director of the Company. The Second Related
Party Holder provided the Company with $1,475,000 in cash proceeds, which was received by the Company during the period ended
June 30, 2019. The additional $25,000 was retained by the fourth investor for legal bills for the transaction. Note Nine will
mature on March 1, 2020 and bear interest at a rate of 25% per annum, payable by the Company half in cash and half in kind on
a quarterly basis. The principal balance of Note Nine is convertible at the election of the fourth investor, in whole or in part,
at any time or from time to time, into the Company’s common stock at the lower of $0.90 per share or a 30% discount to the
Company’s 30-day weighted average listed price per share immediately before the date of conversion. In conjunction with
Note Nine, the Company issued a warrant to the fourth investor to purchase 535,715 shares of the Company’s common stock
at $1.40 per share.
The Company evaluated Note Nine in accordance
with ASC 480,
Distinguishing Liabilities from Equity
and determined Note Nine will be accounted for as a liability
initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of June
30, 2019, the fair value of Note Nine was $2,205,270. Accordingly, the Company recorded a change in fair value of ($2,818,739)
and $705,270 related to Note Nine for the three and six months ended June 30, 2019, respectively.
In addition, the company recorded a debt
discount relating to the warrants issued in the amount of $1,186,153 based on the residual fair value of the warrants at inception
of Note Nine. The additional $25,000 retained by the fourth investor for legal bills for the transaction will be recorded as a
debt discount. Debt discounts amortized to interest expense were $301,959 and $401,506 for the three and six months ended June
30, 2019, respectively. The unamortized discount balance at June 30, 2019 was $809,647. On May 31, 2019, the Company issued 52,083
restricted shares of common stock as PIK interest payments in the amount of $46,875. Accrued interest expense associated with
Note Nine was $30,822 as of June 30, 2019, which includes PIK interest payable. As of June 30, 2019, the balance of Note Nine,
net of debt discount for warrants and legal bills was $1,395,623.
Warrants
In March 2016, the Company issued 960,000
shares of restricted common stock to the Related Party Holder per a subscription agreement for total proceeds of $150,000. In
conjunction with the subscription agreement, the Company issued a warrant to the Related Party Holder to purchase 1,920,000 restricted
shares of the Company’s common stock at $0.16 per share. The Warrant Exercise Date is the later of the following to occur
(i) March 9, 2017, (ii) ten (10) days after the Company’s notice to the holder of the warrant that the Company shall have
an effective S-1 registration with the SEC; or (iii) ten (10) days after Company’s notice to the holder of the warrants
that the Company has entered into an agreement for the sale of substantially all the assets or Common Stock of the Company. As
of June 30, 2019, the warrants granted are not exercisable.
On March 1, 2019, in connection with the
issuance of Note Nine, the Company issued warrants, of which the value was derived and based off the fair value of Note Nine,
to the investor to purchase 535,715 shares of the Company’s common stock at $1.40 per share. Exercise of the purchase rights
represented by the warrant may be made, in whole or in part, at any time or times on or after March 1, 2019 and on or before March
1, 2024, by delivery to the Company of the Notice of Exercise.
The Company determined that the warrants
associated with Note Nine are puttable for cash upon a fundamental transaction at the option of the holder and as such required
classification as a liability pursuant to ASC 480,
Distinguishing Liabilities from Equity
. The Company has no plans
to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining
term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant
liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting
period with changes being recorded as a component of other income in the statement of operations. At inception, March 1, 2019,
the fair value of the warrant liability was $1,186,153 while as of June 30, 2019, the fair value of the warrant liability was
$471,346. Accordingly, the Company recorded a change in fair value of $(857,730) and $(714,807) during the three and six months
ended June 30, 2019, respectively, which is reflected in the unaudited condensed consolidated statements of operations.
Promissory Note
On January 3, 2019, the Company entered
into an unsecured promissory note in the amount of $280,000. The unsecured promissory note has a fixed interest rate of 10% and
is due and payable on March 31, 2019. On March 2, 2019, the unsecured promissory note was paid off in full.
Notes payable consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Vehicle financing loans payable, between
4.7% and 7.0% interest and maturing between June 2022 and July 2022
|
|
$
|
58,910
|
|
|
$
|
71,284
|
|
|
Loans Payable - Credit Union
|
|
|
6,127
|
|
|
|
5,075
|
|
|
Less: Current portion of loans payable
|
|
|
(24,805
|
)
|
|
|
(24,805
|
)
|
|
Long-term portion of loans payable
|
|
$
|
40,232
|
|
|
$
|
51,554
|
|
The interest expense associated with the
notes payable was $890 and $720 for the three months ended June 30, 2019 and 2018, respectively, and $2,681 and $1,420 for the
six months ended June 30, 2019 and 2018, respectively.
Common Stock
Subscription Agreements
The table below reflects shares of restricted
common stock issued in relation to subscription agreements during the period ended June 30, 2018:
|
Date of Sale
|
|
Number
of Shares
Sold
|
|
|
Total
Proceeds
|
|
|
February 2018
|
|
|
222,222
|
|
|
$
|
200,000
|
|
|
March 2018
|
|
|
500,000
|
|
|
|
450,000
|
|
|
April 2018
|
|
|
500,000
|
|
|
|
450,000
|
|
|
May 2018
|
|
|
244,444
|
|
|
|
219,999
|
|
|
|
|
|
1,466,666
|
|
|
$
|
1,319,999
|
|
Other Common Stock Issuances
In June 2018, the Company issued 38,184,985
shares of common stock as part of the BioTrackTHC acquisition.
On June 7, 2018, two selling shareholders
of Security Grade exercised their right to purchase 212,633 shares of the Company’s common stock.
In January 2019, the Company issued 20,000
shares of restricted common stock to a consultant per a consulting agreement and recorded shared based compensation expense of
$27,400.
In March and June 2019, the Company issued
1,255,222 and 166,667 shares of common stock as part of investment unit purchase agreements (see Note 15).
In March and June 2019, certain option
holders exercised their rights under the BioTrackTHC Stock Plan and were issued 62,847 and 47,084 shares of common stock, respectively,
for no cash proceeds.
In March and April 2019, certain option
holders exercised their rights under the BioTrackTHC Stock Plan and were issued 6,082 and 57,461 shares of common stock for total
proceeds of $4,805 and $21,808, respectively.
In April 2019, the Company issued 250,000
shares of common stock as part of the Tan Security acquisition.
In April 2019, a selling shareholder of
Security Grade exercised their right to purchase 15,101 shares of the Company’s common stock.
In April 2019, the Company issued 733,300
shares of common stock in satisfaction of the Engeni contingent consideration (see Note 5).
In May 2019, the Company issued
15,625 and 52,083 restricted shares of common stock as PIK interest payments in the amount of $14,062 and $46,875,
respectively (see Notes 10 and 11).
Conversion of Convertible Note to
Common Stock
On February 15, 2018, March 12, 2018 and
March 21, 2018, the holder of a 10% fixed secured convertible promissory note issued by the Company elected its option to partially
convert $50,000, $50,000 and $75,000 in principal of the convertible note into 46,066, 63,963, and 95,945 shares of the Company’s
common stock.
On March 7, 2019 and March 28, 2019, the
holder of a 10% fixed secured convertible promissory note issued by the Company elected its option to fully convert $75,882 and
$42,055 in principal of the convertible note into 100,000 and 55,421 shares of the Company’s common stock.
2017 Omnibus Incentive Plan
The table below reflects shares issued
under the 2017 Omnibus Incentive Plan during the period ended June 30, 2019:
|
Date of Issuance
|
|
Number
of Shares
Issued
|
|
|
Total Share
Based
Compensation
|
|
|
March 2019
|
|
|
250,000
|
|
|
$
|
320,000
|
|
|
|
|
|
250,000
|
|
|
$
|
320,000
|
|
The table below reflects shares issued
under the 2017 Omnibus Incentive Plan during the period ended June 30, 2018:
|
Date of Issuance
|
|
Number
of Shares
Issued
|
|
|
Total Share
Based
Compensation
|
|
|
January 2018
|
|
|
42,850
|
|
|
$
|
173,014
|
|
|
March 2018
|
|
|
100,000
|
|
|
|
250,000
|
|
|
May 2018
|
|
|
133,900
|
|
|
|
223,774
|
|
|
|
|
|
276,750
|
|
|
$
|
646,788
|
|
Series A convertible preferred stock
In October 2015, the Company issued a total
of 1,000,000 shares of its Class A Preferred Stock as part of a reorganization in which Helix Opportunities LLC contributed 100%
of itself and its wholly-owned subsidiaries, Security Consultants Group, LLC and Boss Security Solutions, Inc. to the Company
in exchange for 1,000,000 convertible preferred shares of the Company. The Class A Preferred Stock included super majority voting
rights and were convertible into 60% of the Company’s common stock. During the third quarter of 2017, the Company modified
the conversion rate on the Class A Preferred Stock to a 1:1 ratio. This modification reduced the amount of potentially dilutive
Convertible Series A Stock by 15,746,127 shares to a total of 1,000,000 at September 30, 2017.
Series B convertible preferred stock
Series B Preferred Stock Purchase Agreement
On May 17, 2017, the Company sold to accredited
investors an aggregate of 5,781,426 Series B Preferred Shares for gross proceeds of $1,875,000 and converted a $500,000 Unsecured
Convertible Promissory Note into 1,536,658 Series B Preferred Shares. This tranche of Series B Preferred Shares are convertible
into 7,318,084 shares of common stock based on the current conversion price, at a purchase price of $0.325 per share. Net proceeds
were approximately $1,772,500 after legal and placement agent fees listed below and the satisfaction of the promissory notes discussed
in Note 11.
In connection with the Series B Preferred
Stock Purchase Agreement, the Company is obligated to issue warrants to a third-party for services to purchase 462,195 shares
of common stock at $0.325 per share (see Note 18). These warrants have been accounted for as an obligation to issue because as
of the balance sheet date the Company did not deliver the warrants though incurred the obligation; accordingly, they were recognized
as a liability on the unaudited condensed consolidated balance sheet and cost of issuance of Series B preferred shares on the
unaudited condensed consolidated statement of shareholders’ equity.
The table below reflects the shares issued
under the Series B Preferred Purchase Agreement of the initial tranche, Second Series B Purchase Agreement and the various issuances
under the Third Series B Purchase Agreement during the year-ended December 31, 2017:
|
Date of Sale
|
|
Number of
Shares
Sold
|
|
|
Total
Proceeds
|
|
|
Initial
|
|
|
|
|
|
|
|
May 2017
|
|
|
7,318,084
|
|
|
$
|
1,875,000
|
|
|
Second
|
|
|
|
|
|
|
|
|
|
July 2017
|
|
|
1,680,000
|
|
|
|
840,000
|
|
|
Third
|
|
|
|
|
|
|
|
|
|
August 2017
|
|
|
369,756
|
|
|
|
120,000
|
|
|
September 2017
|
|
|
462,195
|
|
|
|
150,000
|
|
|
October 2017
|
|
|
462,195
|
|
|
|
150,000
|
|
|
October 2017
|
|
|
1,042,337
|
|
|
|
557,500
|
|
|
December 2017
|
|
|
2,449,634
|
|
|
|
795,000
|
|
|
Ending Balance
|
|
|
13,784,201
|
|
|
$
|
4,487,500
|
|
In accordance with the Certificate of
Incorporation, there were 9,000,000 authorized Series B Preferred Stock at a par value of $ 0.001. In connection with the Series
B Preferred Stock Purchase Agreement, on May 12, 2017, the Company filed a Certificate of Designation (the “Certificate
of Designations”) with the Secretary of State of the State of Delaware to designate the preferences, rights and limitations
of the Series B Preferred Shares. On August 23, 2017 the Certificate of Designations was amended and restated to increase the
number of shares of Series B Preferred Stock authorized to be 17,000,000.
Conversion:
Each Series B Preferred Share is convertible
at the option of the holder into such number of shares of the Company’s common stock equal to the number of Series B Preferred
Shares to be converted, multiplied by the Preferred Conversation Rate. The Preferred Conversion Rate shall be the quotient obtained
by dividing the Preferred Stock Original Issue Price ($0.3253815) by the Preferred Stock Conversation Price in effect at the time
of the conversion (the initial conversion price will be equal to the Preferred Stock Original Issue Price, subject to adjustment
in the event of stock splits, stock dividends, and fundamental transactions). Based on the current conversion price, the Series
B Preferred Shares are convertible into 13,784,201 shares of common stock. A fundamental transaction means: (i) our merger or
consolidation with or into another entity, (ii) any sale of all or substantially all of our assets in one transaction or a series
of related transactions, (iii) any reclassification of our Common Stock or any compulsory share exchange by which Common Stock
is effectively converted into or exchanged for other securities, cash or property; or (iv) sale of shares below the preferred
stock conversion price. Each Series B Preferred Share will automatically convert into common stock upon the earlier of (i) notice
by the Company to the holders that the Company has elected to convert all outstanding Series B Preferred Shares at any time on
or after May 12, 2018; or (ii) immediately prior to the closing of a firmly underwritten initial public offering (involving the
listing of the Company’s Common Stock on an Approved Stock Exchange) pursuant to an effective registration statement under
the Securities Act of 1933, as amended, covering the offer and sale of the Common Stock for the account of the Company in which
the net cash proceeds to the Company (before underwriting discounts, commissions and fees) are at least fifty million dollars
($50,000,000).
Beneficial Conversion Feature –
Series B Preferred Stock (deemed dividend):
Each share of Series B Preferred Stock
is convertible into shares of common stock, at any time at the option of the holder at any time on or after May 12, 2018.
On May 17, 2017, the date of issuances of the Series B, the publicly traded common stock price was $3.98.
Based on the guidance in ASC 470-20-20,
the Company determined that a beneficial conversion feature exists, as the effective conversion price for the Series B preferred
shares at issuance was less than the fair value of the common stock into which the preferred shares are convertible. A beneficial
conversion feature based on the intrinsic value at the date of issuances for the Series B preferred shares is scheduled below.
For the three and six months ended June 30, 2018, the beneficial conversion amount of $14,998,505 and $22,202,194, respectively
was accreted back to the preferred stock as a deemed dividend and charged to additional paid in capital in the absence of earning
as the beneficial conversion feature is amortized over time through the earliest conversion date, May 12, 2018. Provided below
is a schedule of the issuances of Series B preferred shares and the amount accredited to deemed dividend at June 30, 2018. As
of June 30, 2019 and 2018, the beneficial conversion feature was fully amortized.
|
For the Six Months Ended
June 30, 2018
|
|
Issuance Date
|
|
Beneficial
Conversion
Feature
Term
(months)
|
|
Number of
shares
|
|
|
Fair
Value of
Beneficial
Conversion
Feature
|
|
|
Amount
accreted as a
deemed
dividend at
December 31,
2017
|
|
|
Amount
accreted as
a deemed
dividend for
the Six
Months
Ended June 30,
2018
|
|
|
Unamortized
Beneficial
Conversion
Feature
|
|
|
May 17, 2017
|
|
12
|
|
|
7,318,084
|
|
|
$
|
25,247,098
|
|
|
$
|
(15,779,436
|
)
|
|
$
|
(9,467,661
|
)
|
|
$
|
-
|
|
|
July 29, 2017
|
|
9.5
|
|
|
1,680,000
|
|
|
|
6,804,000
|
|
|
|
(3,674,634
|
)
|
|
|
(3,129,366
|
)
|
|
|
-
|
|
|
August 29, 2017
|
|
8.5
|
|
|
369,756
|
|
|
|
1,148,263
|
|
|
|
(556,190
|
)
|
|
|
(592,073
|
)
|
|
|
-
|
|
|
September 15, 2017
|
|
8
|
|
|
462,195
|
|
|
|
1,435,329
|
|
|
|
(648,601
|
)
|
|
|
(786,728
|
)
|
|
|
-
|
|
|
October 11, 2017
|
|
7
|
|
|
462,195
|
|
|
|
1,121,036
|
|
|
|
(426,309
|
)
|
|
|
(694,727
|
)
|
|
|
-
|
|
|
October 31, 2017
|
|
6.5
|
|
|
1,042,337
|
|
|
|
1,735,641
|
|
|
|
(548,570
|
)
|
|
|
(1,187,071
|
)
|
|
|
-
|
|
|
December 19, 2017
|
|
5
|
|
|
2,449,634
|
|
|
|
6,921,348
|
|
|
|
(576,780
|
)
|
|
|
(6,344,568
|
)
|
|
|
-
|
|
|
Total
|
|
|
|
|
13,784,201
|
|
|
$
|
44,412,715
|
|
|
$
|
(22,210,520
|
)
|
|
$
|
(22,202,194
|
)
|
|
$
|
-
|
|
Dividends, Voting Rights and Liquidity
Value:
Pursuant to the Certificate of Designations,
the Series B Preferred Shares shall bear no dividends, except that if the Board shall declare a dividend payable upon the then-outstanding
shares of the Company’s common stock. The Series B Preferred Shares vote together with the common stock and all other classes
and series of stock of the Company as a single class on all actions to be taken by the stockholders of the Company including,
but not limited to, actions amending the certificate of incorporation of the Company to increase the number of authorized shares
of the common stock. Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series B Preferred
Shares are entitled to (i) first receive distributions out of our assets in an amount per share equal to the Stated Value plus
all accrued and unpaid dividends, whether capital or surplus before any distributions shall be made on any shares of common stock
and (ii) second, on an as-converted basis alongside the common stock.
Classification:
These Series B Preferred Shares are classified
within permanent equity on the Company’s consolidated balance sheet as they do not meet the criteria that would require
presentation outside of permanent equity under ASC 480,
Distinguishing Liabilities from Equity
.
On March 15, 2018 the Company awarded
Zachary Venegas two options to purchase a total of 490,000 shares of the Company’s common stock at prices ranging from $1.90
to $2.09 per share. These options vested on June 28, 2018 and have expiration dates ranging from March 2023 to March 2028.
As part of the Membership Interest Purchase
Agreement entered into between the Company and Security Grade, on June 2, 2017 (see Note 5), the Company granted to the selling
Members the option to purchase up to 414,854 shares of the Company’s common stock at a price of $0.001 per share. Of the
414,854 options granted, 207,427 were vested at closing and equity classified. The vesting of the remaining 207,427 shares were
subject to certain milestones being achieved and was initially recognized as contingent consideration, both a component of purchase
price. As a result of the milestones being met during the third quarter of 2017, the remaining 207,427 shares have also vested.
The options have an expiration date of 36 months from the closing date. The exercise price will be based on the fair market value
of the share on the date of grant.
On March 6, 2018, the Company filed a
lawsuit in the United States Court for the District of Colorado alleging violations in previously disclosed representations and
warranties by the plaintiff as part of the Acquisition. Following the appointment of a registered Public Company Accounting Oversight
Board (“PCAOB”) auditor, certain misrepresentations, primarily surrounding the misclassification of certain revenues
as being recurring, were discovered, artificially inflating the price of the membership interest in Security Grade. As a result
of certain settlements with the selling shareholder, as of June 30, 2018, 70,151 options previously issued as part of the acquisition
were cancelled. Subsequently, as of December 31, 2018, the remaining settlements with the selling shareholders were settled and
a total of 79,486 options previously issued as part of the acquisition were cancelled.
On February 6, 2019 the Company awarded
an executive an option to purchase a total of 100,000 shares of the Company’s common stock at an exercise price $1.51 per
share. These options vested on May 6, 2019 and have an expiration date of February 6, 2024.
On March 19, 2019 the Company awarded
the Chief Financial Officer, two options to purchase a total of 300,000 shares of the Company’s common stock at prices ranging
from $2.35 to $2.59 per share. These options shall vest over a three-year period from March 2020 to March 2022 and have expiration
dates ranging from March 2024 to March 2029.
On March 19, 2019 the Company awarded
the Chief Executive Officer, two options to purchase a total of 500,000 shares of the Company’s common stock at prices ranging
from $2.35 to $2.59 per share. These options shall vest over a three-year period from March 2020 to March 2022 and have expiration
dates ranging from March 2024 to March 2029.
On May 2, 2019, the Company awarded an
investor an option to purchase a total of 125,000 shares of the Company’s common stock at an exercise price of $2.03 per
share. 62,500 of the options shall vest immediately and 62,500 of the options shall vest on August 2, 2019 provided the marketing
agreement between the Company and grantee has not been terminated. These options shall expire on May 1, 2024.
In May and June 2019, the Company awarded
five employees, an option to purchase a total of 50,000, 40,000, 50,000, 50,000, and 30,000 shares of the Company’s common
stock at prices ranging from $1.05 to $2.03 per share. These options shall vest over a period ranging from September 2019 to June
2020 and have expiration dates ranging from May 2024 to June 2024.
Stock option activity for the period ended
June 30, 2019 is as follows:
|
|
|
Shares
Underlying
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual
Term
(in years)
|
|
|
Outstanding at January 1, 2019
|
|
|
8,730,956
|
|
|
$
|
0.671
|
|
|
|
2.44
|
|
|
Granted
|
|
|
1,245,000
|
|
|
$
|
2.106
|
|
|
|
7.06
|
|
|
Exercised
|
|
|
(188,575
|
)
|
|
$
|
0.261
|
|
|
|
1.08
|
|
|
Forfeited and expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
9,787,381
|
|
|
$
|
0.862
|
|
|
|
2.98
|
|
|
Vested options at June 30, 2019
|
|
|
8,900,021
|
|
|
$
|
0.749
|
|
|
|
2.13
|
|
On March 1, 2019, in connection with the
issuance of Note Ten, the Company issued warrants, of which the value was derived and based off the fair value of Note Ten, to
the investor to purchase 160,715 shares of the Company’s common stock at $1.40 per share. Exercise of the purchase rights
represented by the warrant may be made, in whole or in part, at any time or times on or after March 1, 2019 and on or before March
1, 2024, by delivery to the Company of the Notice of Exercise.
The Company determined that the warrants
associated with Note Ten are puttable for cash upon a fundamental transaction at the option of the holder and as such required
classification as a liability pursuant to ASC 480,
Distinguishing Liabilities from Equity
. The Company has no plans
to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining
term of the outstanding warrants. In accordance with ASC 480, the outstanding warrants are recognized as a warrant liability on
the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with
changes being recorded as a component of other income in the statement of operations. At inception, March 1, 2019, the fair value
of the warrant liability was $355,847 while as of June 30, 2019, the fair value of the warrant liability was $141,404. Accordingly,
the Company recorded a change in fair value of the warrant liability of $(257,320) and $(214,443) related to Note Ten for the
three and six months ended June 30, 2019, respectively.
On January 10, 2019, the Company entered
into an Investment Unit Purchase Agreement (the “First Investment Agreement”) to issue and sell investment units to
an investor, in which the investment units consist of one share of the common stock of the Company, and a warrant exercisable
for one half share of common stock of the Company at an Exercise Price of $1.25 per share for cash at a price per investment unit
of $0.90.
On March 5, 2019, the Company sold an
aggregate of 1,255,222 units of the Company’s securities to an investor at a purchase price of $0.90 per unit for total
proceeds of $1,129,700. In connection with the First Investment Agreement, the investor is entitled to purchase from the Company,
at the Exercise Price, at any time on or after 90 days from the issuance date, 627,611 shares of the Company’s common stock
(the “March Warrant Shares”).
The Company determined that the warrants
are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability
pursuant to ASC 480,
Distinguishing Liabilities from Equity
. The Company has no plans to consummate a fundamental
transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants.
In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet
and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded
as a component of other income in the statement of operations.
The fair value of the March Warrant Shares
at issuance on January 10, 2019 is in excess of the proceeds received, the warrant liability is required to be recorded at fair
value with the excess of the fair value over the proceeds received recognized as a loss in earnings. The gross proceeds from the
1,255,222 investment units at $0.90 was $1,129,700. The fair value of the March Warrant Shares at issuance was $1,717,506.
The amount to be recognized as a loss in earnings is calculated as follows:
|
Proceeds from January investment units
|
|
$
|
1,129,700
|
|
|
Par value of common stock issues
|
|
$
|
(1,255
|
)
|
|
Fair value of warrants
|
|
$
|
(1,717,506
|
)
|
|
Loss on issuance of warrants (January 10, 2019 issuance)
|
|
$
|
(589,061
|
)
|
|
Loss on issuance of warrants (March 11, 2019 issuance)
|
|
$
|
(198,148
|
)
|
|
Total loss on issuance of warrants
|
|
$
|
(787,209
|
)
|
As of June 30, 2019, the fair value of
the warrant liability was $538,847 and the Company recorded a change in fair value of the warrant liability of $(1,046,606) and
$(1,178,659) for the three and six months ended June 30, 2019, respectively.
On March 11, 2019, the Company issued
warrants to an investment bank to purchase a total of 100,000 restricted shares of the Company’s common stock at a per share
purchase price of $0.90. The warrants are exercisable at any time six months after the issuance date within three years of issuance.
The Company determined that the warrants
are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability
pursuant to ASC 480,
Distinguishing Liabilities from Equity
. The Company has no plans to consummate a fundamental
transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants.
In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the condensed consolidated
balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes
being recorded as a component of other income in the condensed consolidated statement of operations. At inception, March 11, 2019,
the fair value of the warrant liability was $198,148 while as of June 30, 2019, the fair value of the warrant liability was $82,162.
Accordingly, the Company recorded a change in fair value of the warrant liability of $(168,380) and $(115,986) related to the
warrants for the three and six months ended June 30, 2019, respectively.
On June 14, 2019, the Company entered
into another Investment Unit Purchase Agreement (the “Second Investment Agreement”) to issue and sell investment units
to an investor (the “investor”), in which the investment units consist of one share of the common stock of the Company,
and a warrant exercisable for one half share of common stock of the Company at an exercise price of $1.25 per share for cash at
a price per investment unit of $0.90.
On June 24, 2019, the Company sold an
aggregate of 166,667 units of the Company’s securities to an investor at a purchase price of $0.90 per unit for total proceeds
of $150,000. In connection with the Second Investment Agreement, the investor is entitled to purchase from the Company, at the
exercise price, at any time on or after 90 days from the issuance date, 83,333 shares of the Company’s common stock (the
“June Warrant Shares”).
The gross proceeds from the 166,667 investment
units at $0.90 was $150,000. The fair value of the June Warrant Shares at issuance was $83,586 while as of June 30,
2019, the fair value of the warrant liability was $73,073. Accordingly, the Company recorded a change in fair value of the warrant
liability of ($10,513) related to the warrants for the three and six months ended June 30, 2019.
A summary of warrant activity is as follows:
|
For the Six Months Ended June
30, 2019
|
|
|
|
Warrant
Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
Balance at January 1, 2019
|
|
|
3,418,184
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants granted
|
|
|
1,507,374
|
|
|
$
|
1.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
|
4,925,558
|
|
|
$
|
0.55
|
|
The fair value of the Company’s
warrant liability was calculated using the Black-Scholes model and the following assumptions:
|
|
|
As of
June 30,
2019
|
|
|
As of
December 31,
2018
|
|
|
Fair value of company’s common stock
|
|
$
|
1.06
|
|
|
$
|
0.90
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
135% - 140%
|
|
|
|
175.0
|
%
|
|
Risk Free interest rate
|
|
|
1.72% - 2.56%
|
|
|
|
2.49
|
%
|
|
Expected life (years)
|
|
|
3.19
|
|
|
|
1.65
|
|
|
Fair value of financial instruments - warrants
|
|
$
|
2,199,266
|
|
|
$
|
896,171
|
|
The change in fair value of the financial instruments –
warrants is as follows:
|
|
|
Amount
|
|
|
Balance as of January 1, 2019
|
|
$
|
896,171
|
|
|
|
|
|
|
|
|
Fair value of warrants issued
|
|
|
3,541,240
|
|
|
|
|
|
|
|
|
Change in fair value of liability to issue warrants
|
|
|
(2,238,145
|
)
|
|
|
|
|
|
|
|
Balance as of June 30, 2019
|
|
$
|
2,199,266
|
|
|
|
|
Amount
|
|
|
Balance as of April 1, 2019
|
|
$
|
5,986,781
|
|
|
|
|
|
|
|
|
Fair value of warrants issued
|
|
|
83,586
|
|
|
|
|
|
|
|
|
Change in fair value of liability to issue warrants
|
|
|
(3,871,101
|
)
|
|
|
|
|
|
|
|
Balance as of June 30, 2019
|
|
$
|
2,199,266
|
|
|
16.
|
Stock-Based Compensation
|
2017 Omnibus Incentive Plan
The Company’s 2017 Omnibus Incentive
Plan (the “2017 Plan”) was adopted by our Board of Directors and a majority of our voting securities on October 17,
2017. The 2017 Plan permits the granting of incentive stock options, non-statutory stock options, stock appreciation rights, restricted
stock awards, restricted stock unit awards and dividend equivalent rights to eligible employees, directors and consultants. We
grant options to purchase shares of common stock under the 2017 Plan at no less than the fair value of the underlying common stock
as of the date of grant. Options granted under the Plan have a maximum term of ten years. Under the Plan, a total of 5,000,000
shares of common stock are reserved for issuance, of which options to purchase 1,735,000 and 490,000 shares of common stock and
764,945 and 514,945 shares of common stock were granted as of June 30, 2019 and December 31, 2018, respectively.
Bio-Tech Medical Software, Inc. 2014
Stock Incentive Plan
On October 22, 2014, BioTrackTHC approved
and adopted the BioTrackTHC Stock Plan. The BioTrackTHC Stock Plan set aside and reserved 600,000 shares of BioTrackTHC’s
common stock for grant and issuance in accordance with its terms and conditions. Persons eligible to receive awards from the BioTrackTHC
Stock Plan include employees (including officers and directors) of BioTrackTHC or its affiliates and consultants who provide significant
services to BioTrackTHC or its affiliates (the “Grantees”). The BioTrackTHC Stock Plan permits BioTrackTHC to issue
to Grantees qualified and/or non-qualified options to purchase BioTrackTHC’s common stock, restricted common stock, performance
units, and performance shares. The term of each award under the BioTrackTHC Stock Plan shall be no more than ten years from the
date of grant thereof. BioTrackTHC’s Board of Directors or a committee designated by the Board of Directors is responsible
for administration of the BioTrackTHC Stock Plan and has the sole discretion to determine which Grantees will be granted awards
and the terms and conditions of the awards granted.
BioTrackTHC Management Awards
On September 1, 2015 and November 1, 2015,
BioTrackTHC’s Board approved individual employee option grants (the “Executive Grants”) for three executives
(the “Executives”). Pursuant to the Executive Grants, the Executives were each granted stock options to purchase 146,507
shares (totaling 439,521 shares) of BioTrackTHC’s common stock (the “Option”) at an exercise price equal to
approximately $7.67. The options vest as to 25% of the shares subject to the Options, one year after the date of grant and then
in equal quarterly installments for the three years thereafter, subject to the Executive’s continued employment with BioTrackTHC
(see Notes 1 and 5).
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 six months ended June 30, 2019 and 2018 consist of income tax loss carryforwards.
These amounts are available for carryforward for use in offsetting taxable income of future years through 2035. Realization of
the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carry-forward
period. Utilization of the net operating loss carry-forwards may be subject to a substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Due to the Company’s
history of operating losses, these deferred tax assets arising from the future tax benefits are currently not likely to be realized
and are thus reduced to zero by an offsetting valuation allowance. As a result, there is no provision for income taxes.
For the six months ended June 30, 2019
and 2018, the Company has a net operating loss carry forward of approximately $15,098,000 and $8,365,000, respectively. Utilization
of these net loss carry forwards is subject to the limitations of Internal Revenue Code Section 382. The Company applied
a 100% valuation reserve against the deferred tax benefit as the realization of the benefit is not certain.
|
18.
|
Commitments and Contingencies
|
Under Topic 842, operating lease expense
is generally recognized evenly on a straight-line basis. The Company has operating leases primarily consisting of facilities with
remaining lease terms of one year to five years. The lease term represents the period up to the early termination date unless
it is reasonably certain that the Company will not exercise the early termination option. Certain leases include rental payments
that are adjusted periodically based on changes in consumer price and other indices.
Leases with an initial term of twelve
months or less are not recorded on the condensed consolidated balance sheet. For lease agreements entered into or reassessed after
the adoption of Topic 842, the Company combines the lease and non-lease components in determining the lease liabilities and ROU
assets.
Activity related to the Company’s leases was as follows:
|
|
|
Six Months Ended
June
30,
2019
|
|
|
Operating lease expense
|
|
$
|
297,566
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
$
|
150,696
|
|
|
ROU assets obtained in exchange for operating lease obligations
|
|
$
|
1,499,752
|
|
The Company’s lease agreements
generally do not provide an implicit borrowing rate, therefore an internal incremental borrowing rate is determined based on information
available at lease commencement date for purposes of determining the present value of lease payments. The Company used the incremental
borrowing rate on December 31, 2018 for all leases that commenced prior to that date.
ROU lease assets and lease liabilities
for the Company’s operating leases were recorded in the condensed consolidated balance sheet as follows:
|
|
|
As of
June 30,
2019
|
|
|
Other assets
|
|
$
|
1,293,245
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
410,826
|
|
|
Other long-term liabilities
|
|
|
962,716
|
|
|
Total lease liabilities
|
|
$
|
1,373,542
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
3.05
|
|
|
Weighted average discount rate
|
|
|
6.00
|
%
|
Future lease payments included in the
measurement of lease liabilities on the condensed consolidated balance sheet as of June 30, 2019, for the following five fiscal
years and thereafter were as follows:
|
|
|
As of
June 30,
2019
|
|
|
2019 - Remaining
|
|
|
238,684
|
|
|
2020
|
|
|
393,413
|
|
|
2021
|
|
|
248,223
|
|
|
2022
|
|
|
195,144
|
|
|
2023
|
|
|
200,944
|
|
|
Thereafter
|
|
|
205,434
|
|
|
Total future minimum lease payments
|
|
$
|
1,481,842
|
|
|
Less imputed interest
|
|
|
(108,300
|
)
|
|
Total
|
|
$
|
1,373,542
|
|
As of June 30, 2019, the Company had additional
operating lease obligations for a lease with a future effective date of approximately $600,000. This operating lease will commence
during the first quarter of fiscal 2022 with a lease term of three years.
As of December 31, 2018, future minimum
lease payments, as defined under the previous lease accounting guidance of ASC Topic 840, under noncancelable operating leases
for the following five fiscal years and thereafter were as follows:
|
|
|
Operating
leases
|
|
|
2019
|
|
$
|
473,495
|
|
|
2020
|
|
|
420,291
|
|
|
2021
|
|
|
275,223
|
|
|
2022
|
|
|
198,144
|
|
|
2023
|
|
|
199,144
|
|
|
Thereafter
|
|
|
205,135
|
|
|
Total lease payments
|
|
$
|
1,771,432
|
|
FASB ASC 280-10-50 requires use of the
“management approach” model for segment reporting. The management approach is based on the way a company’s management
organized segments within the company for making operating decisions and assessing performance. Reportable segments are based
on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates
a company.
Operating segments are defined as components
of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision
maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s
chief operating decision–making group is composed of the Chief Executive Officer. The Company operates in three segments,
Security and guarding, Systems installation and Software.
Asset information by operating segment
is not presented below since the chief operating decision maker does not review this information by segment. The reporting segments
follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial
statements.
The following represents selected information for the Company’s
reportable segments:
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Security and guarding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,347,529
|
|
|
$
|
1,197,201
|
|
|
$
|
2,552,240
|
|
|
$
|
2,290,975
|
|
|
Cost of revenue
|
|
|
797,944
|
|
|
|
1,273,693
|
|
|
|
1,738,530
|
|
|
|
2,064,398
|
|
|
Gross margin
|
|
|
549,585
|
|
|
|
(76,492
|
)
|
|
|
813,710
|
|
|
|
226,577
|
|
|
Total operating expenses
|
|
|
1,903,371
|
|
|
|
2,455,685
|
|
|
|
3,637,078
|
|
|
|
5,152,876
|
|
|
Loss from operations
|
|
|
(1,353,786
|
)
|
|
|
(2,532,177
|
)
|
|
|
(2,823,368
|
)
|
|
|
(4,926,299
|
)
|
|
Total other income (expense)
|
|
|
7,265,540
|
|
|
|
735,239
|
|
|
|
(979,410
|
)
|
|
|
2,656,120
|
|
|
Total net income (loss)
|
|
$
|
5,911,754
|
|
|
$
|
(1,796,938
|
)
|
|
$
|
(3,802,778
|
)
|
|
$
|
(2,270,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems installation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
174,067
|
|
|
$
|
100,699
|
|
|
$
|
202,608
|
|
|
$
|
135,263
|
|
|
Cost of revenue
|
|
|
337,852
|
|
|
|
-
|
|
|
|
499,610
|
|
|
|
-
|
|
|
Gross margin
|
|
|
(163,785
|
)
|
|
|
100,699
|
|
|
|
(297,002
|
)
|
|
|
135,263
|
|
|
Total operating expenses
|
|
|
154,822
|
|
|
|
-
|
|
|
|
187,453
|
|
|
|
-
|
|
|
Loss from operations
|
|
|
(318,607
|
)
|
|
|
100,699
|
|
|
|
(484,455
|
)
|
|
|
135,263
|
|
|
Total other income
|
|
|
513
|
|
|
|
-
|
|
|
|
433
|
|
|
|
-
|
|
|
Total net (loss) income
|
|
$
|
(318,094
|
)
|
|
$
|
100,699
|
|
|
$
|
(484,022
|
)
|
|
$
|
135,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,377,277
|
|
|
$
|
576,142
|
|
|
$
|
4,515,132
|
|
|
$
|
576,142
|
|
|
Cost of revenue
|
|
|
860,903
|
|
|
|
286,694
|
|
|
|
1,683,778
|
|
|
|
286,694
|
|
|
Gross margin
|
|
|
1,516,374
|
|
|
|
289,448
|
|
|
|
2,831,354
|
|
|
|
289,448
|
|
|
Total operating expenses
|
|
|
2,309,704
|
|
|
|
421,566
|
|
|
|
4,585,917
|
|
|
|
421,566
|
|
|
Loss from operations
|
|
|
(793,330
|
)
|
|
|
(132,118
|
)
|
|
|
(1,754,563
|
)
|
|
|
(132,118
|
)
|
|
Total other income
|
|
|
11,978
|
|
|
|
9
|
|
|
|
11,970
|
|
|
|
9
|
|
|
Total net loss
|
|
$
|
(781,352
|
)
|
|
$
|
(132,109
|
)
|
|
$
|
(1,742,593
|
)
|
|
$
|
(132,109
|
)
|
On July 29, 2019, the Company entered
into an unsecured promissory note in the amount of $300,000. The unsecured promissory note has a fixed interest rate of 12% per
annum and is due and payable upon the maturity date of January 29, 2020.
In August 2019, the Company paid $25,000 in
cash as part of the original purchase price of Tan Security pursuant to the original terms of the Tan Security Acquisition Agreement.
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 six months ended June 30, 2019 and 2018 should be read in conjunction with
our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this
report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item
1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed on April 1, 2019 with
the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,”
“should,” “could,” and similar expressions to identify forward-looking statements.
Unless expressly indicated or the context requires otherwise,
the terms “Helix”, the “Company”, “we”, “us”, and “our” refer to Helix
TCS, Inc.
Overview
Helix TCS, Inc. provides critical infrastructure
solutions to the legal cannabis industry. Our mission is to provide clients with the best-in-class critical infrastructure services
through a single integrated platform which enables them to run their businesses more safely, efficiently, and profitably. As we
increase our platform’s scale and scope, clients will be able to realize greater cost savings and operating advantages.
Our team is composed of former military,
law enforcement, and technology professionals with deep experience in security and law enforcement, intelligence, technology design
and development, partner relations, data aggregation, venture capital, private equity, risk-management, banking, and finance.
Technology is a cornerstone of Helix’s
service offering. Our technology platform allows clients to manage their business in a compliant manner with BioTrackTHC’s
seed-to-sale software, as well as managing inventory and supply costs through Cannabase. We also provide bespoke monitoring
and transport solutions. We focus on utilizing technology as an operations multiplier, bringing in and managing unique partnerships
across the tech spectrum to tailor and guarantee desired outcomes for our clients.
Within the cannabis industry, no other
activity carries as much potential for unforeseen negative impact as a lapse in compliance operations. Helix brings a broad range
of compliance services to firms in the cannabis industry, safeguarding their ability to operate while increasing their access
to services that offer them a competitive edge.
We have greatly enhanced our core operations
with the acquisitions of Security Grade, BioTrackTHC, Engeni and Tan Security. Security Grade is a market leader in the security
profession and provides a broad range of services, from security consulting to installation of surveillance technology. Consistent
with our team of professionals, Security Grade employs specialists with extensive experience and exposure to all areas of security
related services. BioTrackTHC specializes in providing cannabis software services, ranging from monitoring of plant inventory
to point-of-sale solutions. BioTrackTHC’s software is used by 9 government entities and more than 2,000 commercial client
locations across 34 U.S. states and 6 countries. Engeni provides a turnkey and comprehensive digital presence solution for small
businesses. The Engeni Growth solution includes an optimized web page, a fully-paid Google pay-per-click campaign, lead capture
& lead delivery and ubiquitous directory/map listings. Engeni has also become the Company’s offshore software development
platform, and is currently working on the second generation of the BioTrackTHC software. These strategic acquisitions will help
field the growing demand in the Legal Cannabis Industry. Tan Security, a licensed security company, provided the Company a platform
with which to expand security operations in the state of California.
Results of Operations for the three months ended June
30, 2019 and 2018
The following table shows our results
of operations for the three months ended June 30, 2019 and 2018. The historical results presented below are not necessarily indicative
of the results that may be expected for any future period.
|
|
|
For the Three
Months Ended June 30,
|
|
|
Change
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollars
|
|
|
Percentage
|
|
|
Revenue
|
|
$
|
3,898,873
|
|
|
$
|
1,874,042
|
|
|
$
|
2,024,831
|
|
|
|
108
|
%
|
|
Cost of revenue
|
|
|
1,996,699
|
|
|
|
1,560,387
|
|
|
|
436,312
|
|
|
|
28
|
%
|
|
Gross margin
|
|
|
1,902,174
|
|
|
|
313,655
|
|
|
|
1,588,519
|
|
|
|
506
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
4,367,897
|
|
|
|
2,877,251
|
|
|
|
1,490,646
|
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,465,723
|
)
|
|
|
(2,563,596
|
)
|
|
|
97,873
|
|
|
|
-4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
7,278,031
|
|
|
|
735,248
|
|
|
|
6,542,783
|
|
|
|
890
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,812,308
|
|
|
$
|
(1,828,348
|
)
|
|
$
|
6,640,646
|
|
|
|
-363
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign currency translation adjustment
|
|
$
|
(590
|
)
|
|
$
|
-
|
|
|
$
|
(590
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred
stock beneficial conversion feature accreted as a deemed dividend
|
|
|
-
|
|
|
|
(7,203,689
|
)
|
|
|
7,203,689
|
|
|
|
-100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
4,811,718
|
|
|
$
|
(9,032,037
|
)
|
|
$
|
13,843,755
|
|
|
|
-153
|
%
|
Revenue
Total revenue for the three-month period
ended June 30, 2019 was $3,898,873, which represented an increase of $2,024,831 compared to total revenue of $1,874,042 for the
three months ended June 30, 2018. The increase primarily resulted from additional revenue resulting from the BioTrackTHC acquisition
and an increase in the number of clients serviced by our security operations.
Cost of Revenues
Cost of revenues for the three months
ended June 30, 2019 and 2018 primarily consisted of hourly compensation for security personnel and employees involved in the creation
and development of licensing software. Cost of revenues increased by $436,312 for the three months ended June 30, 2019, to $1,996,699
as compared to $1,560,387 for the three months ended June 30, 2018. The increase primarily resulted from the acquisition of BioTrackTHC
and a substantial increase in the number of clients serviced by Helix security, which required the hiring of additional employees.
Operating Expenses
Our operating expenses encompass selling,
general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative
expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue
generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting,
marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during
the three months ended June 30, 2019 and 2018 were $4,367,897 and $2,877,251, respectively. The overall $1,490,646 increase in
operating expenses was attributable to the following increases/(decreases) in operating expenses of:
|
|
●
|
Selling, general and administrative – $642,492
|
|
|
|
|
|
|
●
|
Salaries and wages – $(1,113)
|
|
|
|
|
|
|
●
|
Professional and legal fees – $523,306
|
|
|
|
|
|
|
●
|
Depreciation and amortization – $325,961
|
The $642,492 increase in selling, general
and administrative expenses is a result of increases in rent expense, advertising and travel expenses resulting from an expansion
in our operations. The $1,113 decrease in salaries and wages resulted from a decrease in stock compensation expense. The $523,306
increase in professional and legal fees primarily resulted from an increase in legal fees and costs associated with fundraising.
The $325,961 increase in depreciation and amortization was due to amortization of intangible assets acquired in the BioTrackTHC
and Engeni acquisitions.
Other Income (Expense), net
Other income (expense), net consisted
of a change in the fair value of convertible notes, change in the fair value of convertible notes – related party, change
in fair value of warrant liability, change in fair value of contingent consideration, gain on reduction of obligation pursuant
to acquisition and interest (expense) income. Other income (expense), net during the three months ended June 30, 2019 and 2018
was $7,278,031 and $735,248, respectively. The $6,542,783 increase in other income (expense), net was primarily attributable to
a gain on the change in fair value of convertible notes of $845,622, gain on the change in fair value of convertible notes –
related party of $2,818,739, gain on the change in fair value of warrant liability of $3,871,101, partially offset by interest
expense of $514,081 during the three months ended June 30, 2019.
Net income
(loss)
For the foregoing
reasons, we had net income of $4,812,308 for the three months ended June 30, 2019, or $0.06 per basic share, compared to a net
loss of $1,828,348 for the three months ended June 30, 2018, or $0.04 net loss per common share – basic and diluted.
Convertible preferred stock beneficial
conversion feature accreted as a deemed dividend
The convertible preferred stock beneficial
conversion feature accreted as a deemed dividend resulted from the effective conversion price of the Series B preferred shares
at issuance being less than the fair value of the common stock into which the preferred shares are convertible. The result was
a non-cash charge in the amount of $0 for the three months ended June 30, 2019 compared to $7,203,689 for the three months ended
June 30, 2018.
Net income
(loss) Attributable to common shareholders
For the foregoing
reasons, we had a net gain attributable to common shareholders of $4,811,718 for the three months ended June 30, 2019, or $.06
per basic share attributable to common shareholders, compared to net loss attributable to common shareholders of $9,032,037 for
the three months ended June 30, 2018, or $0.21 net loss per share attributable to common shareholders – basic and diluted.
Results of Operations for the six months ended June 30,
2019 and 2018
The following table shows our results
of operations for the six months ended June 30, 2019 and 2018. The historical results presented below are not necessarily indicative
of the results that may be expected for any future period.
|
|
|
For the Six Months Ended June
30,
|
|
|
Change
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollars
|
|
|
Percentage
|
|
|
Revenue
|
|
$
|
7,269,980
|
|
|
$
|
3,002,380
|
|
|
$
|
4,267,600
|
|
|
|
142
|
%
|
|
Cost of revenue
|
|
|
3,921,918
|
|
|
|
2,351,092
|
|
|
|
1,570,826
|
|
|
|
67
|
%
|
|
Gross margin
|
|
|
3,348,062
|
|
|
|
651,288
|
|
|
|
2,696,774
|
|
|
|
414
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
8,410,448
|
|
|
|
5,574,442
|
|
|
|
2,836,006
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,062,386
|
)
|
|
|
(4,923,154
|
)
|
|
|
(139,232
|
)
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(967,007
|
)
|
|
|
2,656,129
|
|
|
|
(3,623,136
|
)
|
|
|
-136
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,029,393
|
)
|
|
$
|
(2,267,025
|
)
|
|
$
|
(3,762,368
|
)
|
|
|
166
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign currency translation adjustment
|
|
$
|
3,657
|
|
|
$
|
-
|
|
|
$
|
3,657
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock beneficial
conversion feature accreted as a deemed dividend
|
|
|
-
|
|
|
|
(22,202,194
|
)
|
|
|
22,202,194
|
|
|
|
-100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(6,025,736
|
)
|
|
$
|
(24,469,219
|
)
|
|
$
|
18,443,483
|
|
|
|
-75
|
%
|
Revenue
Total revenue for the six-month period
ended June 30, 2019 was $7,269,980, which represented an increase of $4,267,600 compared to total revenue of $3,002,380 for the
six months ended June 30, 2018. The increase primarily resulted from additional revenue resulting from the BioTrackTHC acquisition
and an increase in the number of clients serviced by our security operations.
Cost of Revenues
Cost of revenues for the six months ended
June 30, 2019 and 2018 primarily consisted of hourly compensation for security personnel and employees involved in the creation
and development of licensing software. Cost of revenues increased by $1,570,826 for the six months ended June 30, 2019, to $3,921,918
as compared to $2,351,092 for the six months ended June 30, 2018. The increase primarily resulted from the acquisition of BioTrackTHC
and a substantial increase in the number of clients serviced by Helix security, which required the hiring of additional employees.
Operating Expenses
Our operating expenses encompass selling,
general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative
expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue
generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting,
marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during
the six months ended June 30, 2019 and 2018 were $8,410,448 and $5,574,442, respectively. The overall $2,836,006 increase in operating
expenses was attributable to the following increases in operating expenses of:
|
|
●
|
Selling, general and administrative – $1,231,490
|
|
|
|
|
|
|
●
|
Salaries and wages – $384,144
|
|
|
|
|
|
|
●
|
Professional and legal fees – $592,002
|
|
|
|
|
|
|
●
|
Depreciation and amortization – $1,292,699
|
The $1,231,490 increase in selling, general
and administrative expenses is a result of increases in rent expense, advertising and travel expenses resulting from an expansion
in our operations. The $384,144 increase in salaries and wages resulted from a significant increase in headcount, including BioTrackTHC
and Engeni personnel. The $592,002 increase in professional and legal fees primarily resulted from an increase in legal fees and
costs associated with fundraising. The $1,292,699 increase in depreciation and amortization was due to amortization of intangible
assets acquired in the BioTrackTHC and Engeni acquisitions.
Other Income (Expense), net
Other income (expense), net consisted
of a change in the fair value of convertible notes, change in the fair value of convertible notes – related party, change
in fair value of warrant liability, change in fair value of contingent consideration, loss on issuance of warrants, gain on reduction
of obligation pursuant to acquisition and interest (expense) income. Other income (expense), net during the six months ended June
30, 2019 and 2018 was ($967,007) and $2,656,129, respectively. The $3,623,136 decrease in other income (expense), net was primarily
attributable to a loss on the change in fair value of convertible notes of $142,341, loss on the change in fair value of convertible
notes – related party of $705,270, loss on the change in fair value of contingent consideration of $880,050, loss on issuance
of warrants of $787,209, and interest expense of $690,282, partially offset by a gain on the change in fair value of warrant liability
of $2,238,145, during the six months ended June 30, 2019.
Net income
(loss)
For the foregoing
reasons, we had a net loss of $6,029,393 for the six months ended June 30, 2019, or $0.08 net loss per common share – basic
and diluted, compared to a net loss of $2,267,025 for the six months ended June 30, 2018, or $0.06 net loss per common share –
basic and diluted.
Convertible preferred stock beneficial
conversion feature accreted as a deemed dividend
The convertible preferred stock beneficial
conversion feature accreted as a deemed dividend resulted from the effective conversion price of the Series B preferred shares
at issuance being less than the fair value of the common stock into which the preferred shares are convertible. The result was
a non-cash charge in the amount of $0 for the six months ended June 30, 2019 compared to $22,202,194 for the six months ended
June 30, 2018.
Net income
(loss) Attributable to common shareholders
For the foregoing
reasons, we had a net loss attributable to common shareholders of $6,025,736 for the six months ended June 30, 2019, or $.08 net
loss per share attributable to common shareholders - basic and diluted, compared to net loss attributable to common shareholders
of $24,469,219 for the six months ended June 30, 2018, or $0.68 net loss per share attributable to common shareholders –
basic and diluted.
Liquidity, Capital Resources and Cash Flows
Going Concern
Management believes that we will continue
to incur losses for the immediate future. Therefore, we may either need additional equity or debt financing until we can achieve
profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability
to continue as a going concern. Our condensed consolidated financial statements do not include any adjustments relating to the
recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern.
For the six months ended June 30, 2019, we have generated revenue and are trying to achieve positive cash flows from operations.
As of June 30,
2019, we had a cash balance of $800,015, accounts receivable, net of $1,640,996 and $6,708,392 in current liabilities. At the
current cash consumption rate, we may need to consider additional funding sources toward the end of fiscal 2019. We are taking
proactive measures to reduce operating expenses, drive growth in revenue and expeditiously resolve any remaining legal matters.
The successful
outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient
funds to execute our intended business plan or generate positive operating results.
The condensed
consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and
classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable
to continue as a going concern.
Capital Resources
The following
table summarizes total current assets, liabilities and working capital for the periods indicated:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
Change
|
|
|
Current assets
|
|
$
|
2,993,370
|
|
|
$
|
1,923,353
|
|
|
$
|
1,070,017
|
|
|
Current liabilities
|
|
|
6,708,392
|
|
|
|
4,157,005
|
|
|
|
2,551,387
|
|
|
Working capital
|
|
$
|
(3,715,022
|
)
|
|
$
|
(2,233,652
|
)
|
|
$
|
(1,481,370
|
)
|
As of June 30, 2019, and December 31,
2018, we had a cash balance of $800,015 and $285,761, respectively.
Summary of Cash Flows
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(1,889,854
|
)
|
|
$
|
(1,623,613
|
)
|
|
Net cash used in investing activities
|
|
|
(647,014
|
)
|
|
|
(94,871
|
)
|
|
Net cash provided by financing activities
|
|
|
3,099,741
|
|
|
|
1,294,457
|
|
Net cash used in operating activities.
Net cash used in operating activities for the six months ended June 30, 2019 was $(1,889,854). This included a net loss of
$6,029,393, non-cash charge related to depreciation and amortization of $2,355,977, non-cash charge related to amortization of
debt discounts of $519,472, non-cash charge from loss on issuance of warrants of $787,209, non-cash charge related to provision
for doubtful account $104,288, non-cash charge related to share-based compensation of $889,400, non-cash losses (gains) due to
changes in fair value of convertible notes, fair value of convertible notes – related party, fair value of warrant liability,
fair value of contingent consideration of $142,341, $705,270, $(2,238,145) and $880,050, non-cash gains on reduction of contingent
consideration of $100,000, and changes in accounts receivable, deposits, costs in excess of billings, billings in excess of costs,
deferred rent, accounts payable and accrued expenses, prepaid expenses, due from related party, and right of use assets and liabilities
of $93,677. Net cash used in operating activities for the six months ended June 30, 2018 was $(1,623,613). This included a net
loss of $(2,267,025), non-cash charge related to depreciation and amortization of $1,063,278, non-cash charge related to share-based
compensation of $1,619,753, non-cash gains due to changes in fair value of convertible notes, fair value of warrant obligations,
and fair value of a related party note of $(522,646), $(1,297,840), and $(118,506), respectively, non-cash charge from loss on
impairment of goodwill of $664,329, non-cash gain on reduction of obligation pursuant to acquisition of $(557,054), and changes
in accounts receivable, deposits, costs in excess of billings, billings in excess of costs, deferred rent, and accounts payable
and accrued expenses of $(207,902).
Net cash used in investing activities.
Net cash used in investing activities for the six months ended June 30, 2019 was $(647,014), which consisted of capital expenditures
of $(505,904), purchase of domain names of $(17,383) and payments pursuant to the Tan Security business acquisition and Security
Grade business acquisition of $(123,727). Net cash used in investing activities for the six months ended June 30, 2018 was $(94,871),
which consisted of capital expenditures of $(484,838), cash payment pursuant to the Revolutionary asset acquisition of $(58,730),
and payments as part of the BioTrackTHC business combination, net of cash acquired in the amount of $448,697.
Net cash provided by financing activities.
Net cash provided by financing activities for the six months ended June 30, 2019 was $3,099,741, which resulted from issuance
of a promissory note receivable of $(75,000), repayment of notes payable of $(11,322), proceeds and repayment of a promissory
note of $(280,000), proceeds from the issuance of common stock of $1,306,313, proceeds from the issuance of convertible note payable
of $1,925,000 and repayment of advances from related parties of $(45,250). Net cash provided by financing activities for the six
months ended June 30, 2018 was $1,294,457, which resulted from proceeds from the issuance of common stock of $1,320,212, proceeds
from notes payable of $33,745, and repayment of advances from related parties of $(59,500).
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and
Estimates
Critical accounting policies and estimates
are further discussed in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on April 1, 2019.
Related Party Transactions
The Company had
a loan outstanding from a former Company executive. The loan balance was $0 and $45,250 as of June 30, 2019 and December 31, 2018,
respectively.
In March 2016, the Company issued 960,000
shares of restricted common stock to the Related Party Holder per a subscription agreement for total proceeds of $150,000. In
conjunction with the subscription agreement, the Company issued a warrant to the Related Party Holder to purchase 1,920,000 restricted
shares of the Company’s common stock at $0.16 per share. The Warrant Exercise Date is the later of the following to occur
(i) March 9, 2017, (ii) ten (10) days after the Company’s notice to the holder of the warrant that the Company shall have
an effective S-1 registration with the SEC; or (iii) ten (10) days after Company’s notice to the holder of the warrants
that the Company has entered into an agreement for the sale of substantially all the assets or Common Stock of the Company. As
of June 30, 2019, the warrants granted are not exercisable.
On March 11, 2016, the Company entered
into an Unsecured Convertible Promissory Note (“Note Eight”) with Paul Hodges, a Director of the Company (the “Related
Party Holder”). The Related Party Holder provided the Company with $150,000 in cash, and the Company promised to pay the
principal amount, together with interest at an annual rate of 7%, with principal and accrued interest on Note Eight due and payable
on December 31, 2017 (unless converted under terms and provisions as set forth below). The principal balance of Note Eight was
convertible at the election of the Related Party Holder, in whole or in part, at any time or from time to time, into the Company’s
common stock at a forty percent (40%) discount to the average market closing price for the previous five (5) trading days, preceding
the date of conversion election. The Company evaluated Note Eight in accordance with ASC 480,
Distinguishing Liabilities from
Equity
and determined that Note Eight will be accounted for as a liability initially measured at fair value and subsequently
at fair value with changes in fair value recognized in earnings.
On February 20, 2018, the Company entered
into an agreement to amend Note Eight (the “Amendment”) with the Related Party Holder. The Company and Holder desired
to extend the maturity date of Note Eight to August 20, 2018 (the “Maturity Date”). Note Eight was amended as follows.
The Company promises to pay (i) all accrued interest on the unpaid principal amount through December 31, 2017 and (ii) $25,000
in principal within 5 business days of the date of the Amendment. The Company agrees to issue 15,000 shares of restricted Company
common stock as an inducement for the Amendment within 10 business days of the date of the Amendment. The principal amount of
the Note Eight will be reduced to $125,000. Unless extended by the Company, converted or prepaid earlier, all unpaid principal
and unpaid accrued interest on Note shall be due and payable on the Maturity Date. All provisions related to conversion of Note
Eight into equity securities of the Company were terminated as part of the Amendment.
As of February
20, 2018, the fair value of the liability was $239,343, however due to termination of the conversion of the note into equity securities,
Note Eight will be valued in its principal amount of $125,000 and accordingly the Company recorded a credit regarding the
change in fair value of $0 for the three months ended June 30, 2019 and 2018, respectively, and $0 and $118,506 for the six months
ended June 30, 2019 and 2018, respectively. The interest expense associated with Note Eight was $0 for the three months ended
June 30, 2019 and 2018, respectively, and $0 and $2,402 for the six months ended June 30, 2019 and 2018, respectively. Note Eight
was paid in full on the Maturity Date.
On March 1, 2019, the Company entered
into a $1,500,000 Secured Convertible Promissory Note (“Note Nine”) with a related party entity (the Second Related
Party Holder”). A Managing Member of the Second Related Party Holder is also a Director of the Company. The Second Related
Party Holder provided the Company with $1,475,000 in cash proceeds, which was received by the Company during the period ended
June 30, 2019. The additional $25,000 was retained by the fourth investor for legal bills for the transaction. Note Nine will
mature on March 1, 2020 and bear interest at a rate of 25% per annum, payable by the Company half in cash and half in kind on
a quarterly basis. The principal balance of Note Nine is convertible at the election of the fourth investor, in whole or in part,
at any time or from time to time, into the Company’s common stock at the lower of $0.90 per share or a 30% discount to the
Company’s 30-day weighted average listed price per share immediately before the date of conversion. In conjunction with
Note Nine, the Company issued a warrant to the fourth investor to purchase 535,715 shares of the Company’s common stock
at $1.40 per share.
The Company evaluated Note Nine in accordance
with ASC 480,
Distinguishing Liabilities from Equity
and determined Note Nine will be accounted for as a liability
initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of June
30, 2019, the fair value of Note Nine was $2,205,270. Accordingly, the Company recorded a change in fair value of ($2,818,739)
and $705,270 related to Note Nine for the three and six months ended June 30, 2019, respectively.
In addition, the company recorded a debt
discount relating to the warrants issued in the amount of $1,186,153 based on the residual fair value of the warrants at inception
of Note Nine. The additional $25,000 retained by the fourth investor for legal bills for the transaction will be recorded as a
debt discount. Debt discounts amortized to interest expense were $301,959 and $401,506 for the three and six months ended June
30, 2019, respectively. The unamortized discount balance at June 30, 2019 was $809,647. On May 31, 2019, the Company issued 52,083
restricted shares of common stock as PIK interest payments in the amount of $46,875. Accrued interest expense associated with
Note Nine was $30,822 as of June 30, 2019, which includes PIK interest payable. As of June 30, 2019, the balance of Note Nine,
net of debt discount for warrants and legal bills was $1,395,623.
On March 1, 2019, in connection with the
issuance of Note Nine, the Company issued warrants, of which the value was derived and based off the fair value of Note Nine,
to the investor to purchase 535,715 shares of the Company’s common stock at $1.40 per share. Exercise of the purchase rights
represented by the warrant may be made, in whole or in part, at any time or times on or after March 1, 2019 and on or before March
1, 2024, by delivery to the Company of the Notice of Exercise.
The Company determined that the warrants
associated with Note Nine are puttable for cash upon a fundamental transaction at the option of the holder and as such required
classification as a liability pursuant to ASC 480,
Distinguishing Liabilities from Equity
. The Company has no plans
to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining
term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant
liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting
period with changes being recorded as a component of other income in the statement of operations. At inception, March 1, 2019,
the fair value of the warrant liability was $1,186,153 while as of June 30, 2019, the fair value of the warrant liability was
$471,346. Accordingly, the Company recorded a change in fair value of $(857,730) and $(714,807) during the three and six months
ended June 30, 2019, respectively, which is reflected in the unaudited condensed consolidated statements of operations.
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk
Not applicable for a smaller reporting company.
ITEM 4. Controls and Procedures
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed
to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive Officer (who is our Principal Executive Officer)
and our Chief Financial Officer (who is our Principal Financial Officer), to allow timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls
or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control problems or acts of fraud, if any, within the Company have been detected.
These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override
of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not
be detected. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that as of June 30,
2019, our disclosure controls and procedures were effective.
Management’s Report on Internal
Controls Over Financial Reporting
We carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our internal controls over financial reporting as of June 30, 2019, the end of
the interim period covered by this report established in
Internal Control – Integrated Framework
, issued by
the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The evaluation of our internal controls over financial
reporting included a review of the internal control objectives, design, implementation and the effect of the controls and procedures
on the information generated for use in this report.
In the course of our evaluation, we sought
to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements,
were being undertaken. Based on that evaluation, management, including our Chief Executive Officer and Chief Financial Officer,
concluded that the Company did not maintain effective internal control over financial reporting as of the six months ended June
30, 2019 due to the existence of material weaknesses in the internal control over financial reporting described below.
A material weakness is a deficiency, or
a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that
a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management has determined that we did
not maintain effective internal controls over financial reporting as of June 30, 2019 due to the existence of the following material
weaknesses identified by management:
|
|
●
|
The
Company did not maintain effective controls over certain aspects of the financial reporting
process because we lacked personnel with accounting expertise and an adequate supervisory
review structure that is commensurate with our financial reporting requirements.
|
|
|
●
|
Inadequate
segregation of duties.
|
This quarterly report does not include
an attestation report of our independent registered public accounting firm regarding internal control over financial reporting
because we are a “smaller reporting company.” Our management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report
in this quarterly report.
Changes in internal control over financial reporting
During the six months ended June 30, 2019,
there was no change in our internal control over financial reporting or in other factors that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II –
OTHER INFORMATION
ITEM 1. Legal Proceedings
Occasionally, we may be involved in claims
and legal proceedings arising from the ordinary course of our business. We record a provision for a liability when we believe
that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and
assumptions change or prove to be incorrect, it could have a material impact on our consolidated financial statements. Contingencies
are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and
can rely heavily on estimates and assumptions.
There is currently no action, suit, proceeding,
inquiry or investigation before or by any court, public board, government agency, self- regulatory organization or body pending
or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our
Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers
or directors in their capacities as such, in which an adverse decision could have a material effect on the Company, with the exception
of:
Baker, et al. v. Helix TCS, Inc.
On March 8, 2017, two former employees
filed a lawsuit in the United States District Court for the District of Colorado alleging violations of the Fair Labor Standards
Act and the Colorado Wage Act on behalf of themselves and other employees. The plaintiffs seek damages for our alleged failure
to compensate them appropriately for the overtime hours they worked as purported “non-exempt” employees. As of June
30, 2019, the claim is currently pending the outcome of certain matters in the Kenney, et al v. Helix TCS, Inc. case.
Kenney, et al. v. Helix TCS, Inc.
On July 20, 2017 one former employee filed
a lawsuit in the United States District Court for the District of Colorado alleging violations of the Fair Labor Standards Act
on behalf of themselves and other employees. The plaintiffs seek damages for our alleged failure to compensate them appropriately
for the overtime hours they worked as purported “non-exempt” employees. As of June 30, 2019, the claim is currently
in the process of discovery.
At this time, the Company is not able
to predict the outcome of the lawsuits, any possible loss or possible range of loss associated with the lawsuits or any potential
effect on the Company’s business, results of operations or financial condition. However, the Company believes the lawsuits
are wholly without merit and will defend itself from these claims vigorously.
ITEM 1A. Risk Factors
Smaller reporting companies such as us
are not required to provide the information required by this item.
ITEM 2. Unregistered Sales of Equity Securities and Use
of Proceeds.
During the six months ended June 30, 2019,
we issued 3,086,893 shares of common stock with proceeds received totaling $1,306,313.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Mine Safety Disclosure
Not applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
|
|
#
|
Management contract or compensatory plan.
|
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
Date:
|
By:
|
/s/
Zachary L. Venegas
|
|
|
|
Zachary L. Venegas
|
|
|
|
Chief Executive Officer
(Principal Executive Officer
|
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Zachary L. Venegas
|
|
Chief Executive Officer
|
|
August 14, 2019
|
|
Zachary L. Venegas*
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Scott Ogur
|
|
Chief Financial Officer
|
|
August 14, 2019
|
|
Scott Ogur
|
|
(Principal Financial Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Paul Hodges
|
|
Director
|
|
August 14, 2019
|
|
Paul Hodges*
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Patrick Vo
|
|
Director
|
|
August 14, 2019
|
|
Patrick Vo*
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Terence Ferraro
|
|
Director
|
|
August 14, 2019
|
|
Terence Ferraro*
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Andrew Schweibold
|
|
Director
|
|
August 14, 2019
|
|
Andrew Schweibold*
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Satyavrat Joshi
|
|
Director
|
|
August 14, 2019
|
|
Satyavrat Joshi*
|
|
|
|
|
|
* By:
|
Scott Ogur, as Attorney in Fact, pursuant to the
Power of Attorney dated August 14, 2019 and filed herewith.
|
53