UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2020

 

or

 

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

  

Commission file number: 000-55722

 

HELIX TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   81-4046024
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

 

5300 DTC Parkway, Suite 300

Greenwood Village, CO 80111

(Address of Principal Executive Offices) (Zip Code)

 

Telephone: (720) 328-5372

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   HLIX   OTCQB

 

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

 

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

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒

 

As of November 12, 2020, the registrant had 126,959,884 shares of its common stock, par value $0.001 per share, outstanding.

 

 

 

 

 

Table of Contents

 

    PAGE
PART I FINANCIAL INFORMATION 1
     
ITEM 1. Financial Statements 1
  Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (unaudited) 1
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 2
  Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 3
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited) 7
  Notes to the Condensed Consolidated Financial Statements 8
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 49
ITEM 4. Controls and Procedures 49
     
PART II OTHER INFORMATION 50
     
ITEM 1. Legal Proceedings 50
ITEM 1A. Risk Factors 50
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 50
ITEM 3 Defaults upon Senior Securities 50
ITEM 4. Mine Safety Disclosures 50
ITEM 5. Other Information 50
ITEM 6. Exhibits 51
     
SIGNATURES 53

 

i

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

HELIX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    September 30,     December 31,  
    2020     2019  
    (Unaudited)     (Audited)  
ASSETS            
Current assets:            
Cash   $ 1,677,041     $ 556,858  
Accounts receivable, net     744,906       909,503  
Prepaid expenses and other current assets     1,271,273       737,159  
Costs & earnings in excess of billings     280,464       257,819  
Other receivable     600,000       -  
Current assets held for sale     -       1,056,885  
Total current assets     4,573,684       3,518,224  
                 
Property and equipment, net     1,359,351       771,228  
Intangible assets, net     9,768,319       14,395,287  
Goodwill     9,743,281       52,894,399  
Deposits and other assets     903,809       1,066,930  
Promissory note receivable     75,000       75,000  
Non-current assets held for sale     -       961,929  
Total assets   $ 26,423,444     $ 73,682,997  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable and accrued liabilities     2,848,988       2,810,854  
Billings in excess of costs     68,542       164,663  
Notes payable, current portion     496,671       10,814  
Obligation pursuant to acquisition     -       50,000  
Convertible notes payable, net of discount     1,125,983       832,492  
Convertible notes payable, net of discount - related party     1,285,220       1,584,360  
Warrant liability     88,750       715,259  
Promissory notes     -       300,000  
Current liabilities held for sale     -       466,283  
Total current liabilities     5,914,154       6,934,725  
                 
Long-term liabilities:                
Notes payable and financing arrangements, net of current portion     31,700       422,059  
Convertible notes payable, net of discount     385,000       385,000  
Other long-term liabilities     621,781       776,512  
Non-current liabilities held for sale     -       17,746  
Total long-term liabilities     1,038,481       1,601,317  
                 
Total liabilities     6,952,635       8,536,042  
                 
Shareholders’ equity:                
Preferred stock (Class A), $0.001 par value, 3,000,000 shares authorized; 1,000,000 issued and outstanding as of September 30, 2020 and December 31, 2019     1,000       1,000  
Preferred stock (Class B), $0.001 par value, 17,000,000 shares authorized; 13,784,201 issued and outstanding as of September 30, 2020 and December 31, 2019     13,784       13,784  
Common stock; par value $0.001; 200,000,000 shares authorized; 116,413,095 shares issued and outstanding as of September 30, 2020; 93,608,619 shares issued and outstanding as of December 31, 2019     116,413       93,608  
Additional paid-in capital     103,477,098       100,906,143  
Accumulated other comprehensive income (loss)     30,363       (79,901 )
Accumulated deficit     (84,167,849 )     (35,787,679 )
Total shareholders’ equity     19,470,809       65,146,955  
                 
Total liabilities and shareholders’ equity   $ 26,423,444     $ 73,682,997  

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

1

 

 

HELIX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
Security monitoring   $ 84,147     $ 135,218     $ 279,042     $ 436,976  
Systems installation     30,555       245,272       346,460       447,880  
Software     2,778,356       2,357,078       8,174,850       6,872,210  
Total revenues   $ 2,893,058     $ 2,737,568     $ 8,800,352     $ 7,757,066  
Cost of revenue     918,150       1,318,825       2,848,674       3,594,491  
Gross margin     1,974,908       1,418,743       5,951,678       4,162,575  
                                 
Operating expenses:                                
Selling, general and administrative     549,770       1,020,819       1,759,196       2,825,765  
Salaries and wages     1,583,413       1,275,745       4,405,203       3,505,165  
Professional and legal fees     465,503       665,093       1,237,705       2,082,204  
Depreciation and amortization     1,049,235       1,179,597       3,320,641       3,516,418  
Loss on impairment of intangible assets     39,963,107       -       41,333,085       -  
Total operating expenses     43,611,028       4,141,254       52,055,830       11,929,552  
                                 
Loss from continuing operations     (41,636,120 )     (2,722,511 )     (46,104,152 )     (7,766,977 )
                                 
Other (expense) income:                                
Change in fair value of convertible note     (321,915 )     430,766       (1,104,856 )     288,425  
Change in fair value of convertible note - related party     -       491,442       498,233       (213,828 )
Change in fair value of warrant liability     67,039       1,224,601       682,717       3,462,746  
Change in fair value of contingent consideration     -       -       -       (880,050 )
Gain on asset disposal     239,825       -       239,825       -  
Loss on conversion of convertible note     (111,902 )     -       (1,536,324 )     -  
Loss on issuance of warrants     -       -       -       (787,209 )
Gain on reduction of obligation pursuant to acquisition     -       -       2,000       -  
Interest expense     (355,469 )     (538,591 )     (1,029,979 )     (1,227,271 )
Other income     -       -       37,507       -  
Other (expense) income, net     (482,422 )     1,608,218       (2,210,877 )     642,813  
                                 
Loss from continuing operations   $ (42,118,542 )   $ (1,114,293 )   $ (48,315,029 )   $ (7,124,164 )
                                 
Loss from discontinued operations   $ (70,259 )   $ (141,276 )   $ (65,141 )   $ (160,798 )
                                 
Net Loss   $ (42,188,801 )   $ (1,255,569 )   $ (48,380,170 )   $ (7,284,962 )
                                 
Other comprehensive income (loss):                                
Changes in foreign currency translation adjustment     62,069       (118,003 )     110,264       (114,346 )
Total other comprehensive income (loss)     62,069       (118,003 )     110,264       (114,346 )
Total comprehensive loss     (42,126,732 )     (1,373,572 )     (48,269,906 )     (7,399,308 )
                                 
Net loss attributable to common shareholders   $ (42,126,732 )   $ (1,373,572 )   $ (48,269,906 )   $ (7,399,308 )
                                 
Loss from continuing operations:                                
Basic   $ (0.36 )   $ (0.01 )   $ (0.46 )   $ (0.09 )
Diluted   $ (0.36 )   $ (0.01 )   $ (0.46 )   $ (0.09 )
                                 
Income (loss) from discontinued operations:                                
Basic   $ 0.00     $ (0.00 )   $ 0.00     $ (0.00 )
Diluted   $ 0.00     $ (0.00 )   $ 0.00     $ (0.00 )
                                 
Loss attributable to common shareholders:                                
Basic   $ (0.36 )   $ (0.02 )   $ (0.46 )   $ (0.10 )
Diluted   $ (0.36 )   $ (0.02 )   $ (0.46 )   $ (0.10 )
                                 
Weighted average common shares outstanding:                                
Basic     116,068,876       79,295,278       105,402,831       76,038,782  
Diluted     116,068,876       79,295,278       105,402,831       76,038,782  

 

See accompanying notes to the unaudited condensed consolidated financial statements.


2

 

 

HELIX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

    Common Stock     Preferred Stock
(Class A)
    Preferred Stock
(Class B)
    Additional
Paid-In
    Accumulated Other Comprehensive     Accumulated     Total Shareholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Income     Deficit     Equity  
Balance at June 30, 2020     115,323,931     $ 115,324       1,000,000     $ 1,000       13,784,201     $ 13,784     $ 105,755,784     $ (31,706 )   $ (41,979,048 )   $ 63,875,138  
Issuance of common stock resulting from convertible note conversion     2,269,438       2,269                                       287,633                       289,902  
Share-based compensation expense     1,810,000       1,810                                       547,202                       549,012  
Issuance of common stock resulting from exercise of stock options     650,000       650                                       70,850                       71,500  
Issuance of common stock resulting from cashless exercise of stock options     500,000       500                                       (500 )                     -  
Issuance of common stock resulting from convertible note PIK interest (paid)                                                                             -  
Holdback of common stock resulting from finalized allocation of purchase price as part of Green Tree acquisition     (4,140,274 )     (4,140 )                                     (3,183,871 )                     (3,188,011 )
Foreign currency translation                                                             62,069               62,069  
Net loss                                                                    

(42,188,801

)    

(42,188,801

)
Balance at September 30, 2020     116,413,095     $ 116,413       1,000,000     $ 1,000       13,784,201     $ 13,784     $ 103,477,098     $ 30,363     $

(84,167,849

)   $

19,470,809

 

 

3

 

 

    Common Stock     Preferred Stock
(Class A)
    Preferred Stock
(Class B)
    Additional
Paid-In
    Accumulated Other Comprehensive     Accumulated     Total Shareholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Income     Deficit     Equity  
Balance at June 30, 2019     75,747,718     $ 75,748       1,000,000     $ 1,000       13,784,201     $ 13,784     $ 86,489,136       21,648     $ (32,236,903 )   $ 54,364,413  
Share-based compensation expense                                                     352,341                       352,341  
Restricted common stock issued as part of Green Tree acquisition     16,765,727       16,766                                       12,892,845                       12,909,611  
Issuance of common stock resulting from convertible note PIK interest (paid)     16,568       17                                       14,046                       14,063  
Foreign currency translation                                                             (118,003 )             (118,003 )
Net loss                                                                     (1,255,569 )     (1,255,569 )
Balance at September 30, 2019     92,530,013     $ 92,531       1,000,000     $ 1,000       13,784,201     $ 13,784     $ 99,748,368     $ (96,355 )   $ (33,492,472 )   $ 66,266,856  

 

4

 

 

    Common Stock     Preferred Stock
(Class A)
    Preferred Stock
(Class B)
    Additional
Paid-In
    Accumulated Other Comprehensive     Accumulated     Total Shareholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Income     Deficit     Equity  
Balance at December 31, 2019     93,608,619     $ 93,608       1,000,000     $ 1,000       13,784,201     $ 13,784     $ 100,906,143     $ (79,901 )   $ (35,787,679 )   $ 65,146,955  
Issuance of common stock per investment unit agreements     11,433,790       11,434                                       1,260,345                       1,271,779  
Issuance of common stock resulting from convertible note conversion     11,179,269       11,179                                       2,659,453                       2,670,632  
Share-based compensation expense     2,313,800       2,314                                       1,618,302                       1,620,616  
Issuance of common stock resulting from exercise of stock options     1,350,000       1,350                                       161,150                       162,500  
Issuance of common stock resulting from cashless exercise of warrants     500,000       500                                       (500 )                     -  
Issuance of common stock resulting from convertible note PIK interest (paid)     167,891       168                                       56,076                       56,244  
Holdback of common stock resulting from finalized allocation of purchase price as part of Green Tree acquisition     (4,140,274 )     (4,140 )                                     (3,183,871 )                     (3,188,011 )
Foreign currency translation                                                             110,264               110,264  
Net loss                                                                    

(48,380,170

)    

(48,380,170

)
Balance at September 30, 2020     116,413,095     $ 116,413       1,000,000     $ 1,000       13,784,201     $ 13,784     $ 103,477,098     $ 30,363     $

(84,167,849

)   $

19,470,809

 

 

5

 

 

    Common Stock     Preferred Stock
(Class A)
    Preferred Stock
(Class B)
    Additional
Paid-In
    Accumulated Other Comprehensive     Accumulated     Total Shareholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Income     Deficit     Equity  
Balance at December 31, 2018     72,660,825     $ 72,660       1,000,000     $ 1,000       13,784,201     $ 13,784     $ 82,831,014       17,991     $ (26,207,510 )   $ 56,728,939  
Issuance of common stock per investment unit agreements     1,421,889       1,422                                       66,247                       67,669  
Issuance of common stock resulting from convertible note conversion     155,421       156                                       117,781                       117,937  
Share-based compensation expense     270,000       270                                       1,241,471                       1,241,741  
Issuance of common stock resulting from exercise of stock options     78,644       79                                       26,534                       26,613  
Issuance of common stock resulting from cashless exercise of stock options     109,931       110                                       (110 )                     -  
Restricted common stock issued as part of the Tan Security acquisition     250,000       250                                       709,750                       710,000  
Issuance of common stock in satisfaction of contingent consideration     733,300       733                                       1,787,921                       1,788,654  
Issuance of common stock resulting from convertible note PIK interest (paid)     84,276       85                                       74,915                       75,000  
Restricted common stock issued as part of Green Tree acquisition     16,765,727       16,766                                       12,892,845                       12,909,611  
Foreign currency translation                                                             (114,346 )             (114,346 )
Net loss                                                                     (7,284,962 )     (7,284,962 )
Balance at September 30, 2019     92,530,013     $ 92,531       1,000,000     $ 1,000       13,784,201     $ 13,784     $ 99,748,368     $ (96,355 )   $ (33,492,472 )   $ 66,266,856  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6

 

 

HELIX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    For the Nine Months Ended
September 30,
 
    2020     2019  
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss   $ (48,380,170 )   $ (7,284,962 )
Income (loss) from discontinued operations     (65,141 )     (160,798 )
Loss from continuing operations   $ (48,315,029 )   $ (7,124,164 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     3,320,641       3,516,418  
Accretion of debt discounts     340,772       922,965  
Loss on issuance of warrants     -       787,209  
Provision for doubtful accounts     395,995       199,215  
Share-based compensation expense     1,620,616       1,241,741  
Change in fair value of convertible notes, net of discount     1,104,856       (288,425 )
Change in fair value of warrant liability     (682,717 )     (3,462,746 )
Change in fair value of convertible notes, net of discount - related party     (498,233 )     213,828  
Change in fair value of contingent consideration     -       880,050  
Loss on conversion of convertible note     1,536,324       -  
Loss on impairment of intangible assets     41,333,085       -  
Gain on asset disposal     (239,825 )     -  
Gain on reduction of obligation pursuant to acquisition     (2,000 )     -  
Gain on reduction of contingent consideration     -       (100,000 )
Change in operating assets and liabilities:                
Accounts receivable     620,859       (86,398 )
Prepaid expenses     (536,692 )     (239,374 )
Deposits     19,146       144,488  
Due from related party     -       (32,489 )
Costs in excess of billings     (22,645 )     12,401  
Other receivable     (600,000 )     -  
Accounts payable and accrued expenses     40,674       832,690  
Billings in excess of costs     (96,121 )     (28,687 )
Right of use assets and liabilities     (27,561 )     37,848  
Other long-term liabilities     -       2,000  
Net cash used in continued operations     (769,203 )     (2,571,430 )
Net cash provided by (used in) discontinued operations     30,525       (197,618 )
Net cash used in operating activities     (738,678 )     (2,769,048 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property and equipment     (619,483 )     (657,765 )
Purchase of domain names     -       (21,856 )
Payments for business combination, net of cash acquired     -       (126,667 )
Payments for asset acquisition     (48,000 )     -  
Proceeds from sale of security and guarding business     1,150,000       -  
Net cash provided by (used in) continued operations     482,517       (806,288 )
Net cash used in discontinued operations     -       (89,118 )
Net cash provided by (used in) investing activities     482,517       (895,406 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Promissory note receivable     -       (75,000 )
Payments pursuant to advances from related parties     -       (45,250 )
Payments pursuant to notes payable     (429,521 )     (15,401 )
Payments pursuant to a promissory note     (300,000 )     (280,000 )
Proceeds from notes payable and financing arrangements     500,000       9,363  
Proceeds from the issuance of a promissory note     -       580,000  
Proceeds from the issuance of convertible notes payable     -       2,732,500  
Proceeds from the issuance of common stock and warrants     1,490,487       1,306,313  
Net cash provided by financing activities     1,260,966       4,212,525  
                 
Effect of foreign exchange rate changes on cash     115,378       (179,988 )
                 
Net change in cash     1,120,183       368,083  
                 
Cash, beginning of period     556,858       208,945  
                 
Cash, end of period   $ 1,677,041     $ 577,028  
                 
Supplemental disclosure of cash and non-cash transactions:                
Cash paid for interest   $ 128,475     $ 40,625  
Common stock issued pursuant to convertible notes payable   $ 2,670,632     $ 117,937  
Debt discount for warrant liability   $ -     $ (1,578,225 )
Equity issued pursuant to acquisition   $ -     $ 13,619,611  
Security Grade acquisition consideration settlement   $ -     $ -  
Cash payable pursuant to acquisition   $ -     $ 50,000  
PIK interest payment of common stock   $ 56,244     $ 75,000  
Common stock issued pursuant to contingent consideration as part of acquisition   $ -     $ 1,788,654  
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets   $ 301,396     $ 1,485,511  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

7

 

 

HELIX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Description of Business

 

Helix Technologies, 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 June 5, 2020, the Company changed its name from Helix TCS, Inc. to Helix Technologies, Inc.

 

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 Technologies, Inc. and its wholly owned subsidiary, Helix Acquisition Sub, Inc. (“BioTrackTHC Merger Sub”), entered into an Agreement and Plan of Merger (the “BioTrackTHC Merger Agreement”) with Bio-Tech Medical Software, Inc. (“BioTrackTHC”) and Terence J. Ferraro, as the representative of the BioTrackTHC stockholders, pursuant to which BioTrackTHC Merger Sub merged with and into BioTrackTHC (the “BioTrackTHC Merger”).

 

On June 1, 2018 (the “BioTrackTHC Closing Date”), in connection with closing the BioTrackTHC 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 BioTrackTHC Merger Agreement, if necessary. The Company also assumed the Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan (“BioTrackTHC Stock Plan”), pursuant to which options exercisable in the amount of 8,132,410 shares of common stock are outstanding. As a result, BioTrackTHC stockholders owned approximately 48% of the Company on a fully diluted basis as of the BioTrackTHC Closing Date.

 

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

 

On the Engeni Closing Date, in connection with closing the Engeni Merger Agreement, the Company issued 366,700 shares of Company common stock to Engeni US members. Furthermore, the Company subsequently issued Engeni US members 733,300 shares of Company common stock on April 2, 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”).

 

8

 

 

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. (“GTI”) and Steve Janjic, as the representative of the GTI shareholders, pursuant to which Merger Sub merged with and into GTI (the “GTI Merger”).

 

On September 10, 2019 (the “GTI Closing Date”), the Company closed the GTI Merger and entered into an Addendum No. 1 to the Amercanex Merger Agreement acknowledging and approving certain events that occurred since signing as well as implementing various related amendments to the Amercanex Merger Agreement. In connection with closing the GTI Merger, the Company issued 16,765,727 unregistered shares of Company common stock to GTI shareholders, of which 4,140,274 shares were held back to satisfy indemnification obligations in the Amercanex Merger Agreement, if necessary.

  

On July 31, 2020, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Invicta Security CA Corporation, a Delaware corporation (“Buyer”), Invicta Services LLC, a Delaware limited liability company (“Invicta”), Boss Security Solutions, Inc., a Colorado corporation (“Boss”), Security Consultants Group, LLC, a Colorado limited liability company (“SCG”), Tan’s International LLC, a California limited liability company (“Tan LLC”), and Tan’s International Security, Inc., a California corporation (“Tan Security”, collectively with Boss, SCG and Tan LLC, the “Sellers” or the “discontinued entities” or individually a “Seller”). Pursuant to the terms and conditions of the Agreement, the Sellers sold, assigned, transferred, and delivered to Buyer the Assets (as defined in the Agreement) and Buyer paid aggregate consideration of $1,750,000 and assumed the Assumed Liabilities (as defined in the Agreement). The Assets included but were not limited to the right, title and interest in and to all assets and property, tangible and intangible, of every kind and description, used in, related to or necessary for the security guarding and protective guarding services business conducted by the Sellers. The Agreement contained certain customary representations and warranties made by the parties. The Sellers and Helix agreed to various customary covenants, including, among others, covenants regarding non-competition, the use and disclosure of confidential information, and the non-solicitation of business relationships. As collateral for Sellers’ indemnification obligations, Buyer held back $600,000 of the consideration pursuant to the Agreement. See Note 6 for additional details.

 

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 September 30, 2020, the Company had a working capital deficit of $1,340,470 as compared to a working capital deficit of $3,416,501 at December 31, 2019. The decrease of $2,076,031 in the Company’s working capital deficit from December 31, 2019 to September 30, 2020 was primarily the result of proceeds received from the sale of common stock, a reduction in accounts receivable, and non-cash decreases in the fair market value of the Company’s convertible notes and warrant liability.

 

On March 11, 2020, the World Health Organization (“WHO”) recognized COVID-19 as a global pandemic, prompting many national, regional, and local governments, including in the markets that the Company operates in, to implement preventative or protective measures, such as travel and business restrictions, wide-sweeping quarantines and stay-at-home orders. While the Company is actively working to successfully navigate the financial, operational, and personnel challenges presented by the COVID-19 pandemic, the full extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain, out of the Company’s control and cannot be predicted at this time.

 

9

 

 

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 upgrading the capabilities of its software business. 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 for the next twelve months. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during 2020 and beyond.  

 

The Company plans to generate positive cash flow from BioTrackTHC 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 Grade, BioTrackTHC (since June 1, 2018), Engeni US (since August 3, 2018), and Green Tree International, Inc. (since September 10, 2019). As of July 31, 2020, the date of the consummation of the sale of the Guarding segment, formerly owned subsidiaries Security Consultants Group, LLC (“Security Consultants”), Boss Security Solutions, Inc. (“Boss Security”), and Tan Security are presented as part of discontinued operations. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 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. Use of estimates includes the following: 1) allowance for doubtful accounts, 2) estimated useful lives of property, equipment and intangible assets, 3) intangibles impairment, 4) valuation of convertible notes payable and 5) revenue recognition. Actual results could differ from estimates.

 

Discontinued Operations

 

In the third quarter of 2020, the Company determined that the Security and Guarding segment met the criteria to be classified as a discontinued operation as a result of the combined sale of the assets of Security Consultants, Boss Security, and Tan Security. These businesses represented the majority of the Company’s Security and Guarding segment. 

 

10

 

 

As the combined sale of the Security and Guarding segment represented a strategic shift that will have a major effect on our operations and financial results, these businesses were presented in discontinued operations separate from continuing operations for the three and nine months ended September 30, 2020 and 2019, as applicable.

 

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 September 30, 2020 or December 31, 2019.

 

From time to time, the Company’s cash balances may exceed FDIC-insured limits. As of September 30, 2020, and December 31, 2019, the Company’s cash balances exceeded FDIC-insured limits by approximately $1,078,000 and $120,000, respectively. The Company’s cash accounts have been placed with high credit quality financial institutions. The Company has not experienced, nor does it anticipate, any losses with respect to such accounts.

 

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 $362,631 and $273,138 at September 30, 2020 and December 31, 2019, 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.

  

11

 

 

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.

 

Business Combinations

 

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

 

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

 

12

 

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

The Company 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 monthly recurring revenues from Cannalytics, its business intelligence and data tool for commercial customers. Revenue is recognized monthly. 

 

Segment Information

 

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

 

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

 

13

 

 

Expenses

 

Cost of Revenue

 

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

 

Operating Expenses

 

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

 

Other Income

 

Other income consisted of a gain on the change in fair value of convertible notes, gain on the change in the fair value of warrant liability, loss on the change in fair value of convertible notes – related party, loss on the change in fair value of contingent consideration, loss on issuance of warrants and interest expense.

 

Property and Equipment

 

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

 

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 $2,174 and $104,785 for the three months ended September 30, 2020 and 2019, respectively, and $9,581 and $350,840 for the nine months ended September 30, 2020 and 2019, respectively.

  

Foreign Currency

 

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

 

14

 

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the nine months ended September 30, 2020 and 2019.

 

Comprehensive Loss

 

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

 

Distinguishing Liabilities from Equity

 

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

 

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

  

Initial Measurement

 

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

 

Subsequent Measurement – Financial instruments classified as liabilities

 

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

   

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 option grants and restricted shares that are recognized in the statement of operations based on their fair values at the date of grant.

  

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC Topic 718, based upon the fair-value of the underlying instrument. The equity instruments are valued using the Black-Scholes valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which services are received.

 

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

 

15

 

 

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

 

Fair Value of Financial Instruments

 

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

 

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

  

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

 

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

 

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

 

Convertible notes payable

 

The fair value of the Company’s convertible notes payable, approximated the carrying value as of September 30, 2020 and December 31, 2019. 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 September 30, 2020 and December 31, 2019. 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. 

 

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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 and nine months ended September 30, 2020 and 2019, 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.

 

Earnings per share for the three and nine months ended September 30, 2020 and 2019 were calculated as follows:

 

    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
Net loss attributable to common shareholders   $ (42,126,732 )   $ (1,373,572 )   $ (48,269,906 )   $ (7,399,308 )
                                 
Loss from continuing operations:                                
Basic   $ (0.36 )   $ (0.01 )   $ (0.46 )   $ (0.09 )
Diluted   $ (0.36 )   $ (0.01 )   $ (0.46 )   $ (0.09 )
                                 
Income (loss) from discontinued operations:                                
Basic   $ 0.00     $ (0.00 )   $ 0.00     $ (0.00 )
Diluted   $ 0.00     $ (0.00 )   $ 0.00     $ (0.00 )
                                 
Loss attributable to common shareholders:                                
Basic   $ (0.36 )   $ (0.02 )   $ (0.46 )   $ (0.10 )
Diluted   $ (0.36 )   $ (0.02 )   $ (0.46 )   $ (0.10 )
                                 
Weighted average common shares outstanding:                                
Basic     116,068,876       79,295,278       105,402,831       76,038,782  
Diluted     116,068,876       79,295,278       105,402,831       76,038,782  

  

The anti-dilutive shares of common stock outstanding for the three and nine months ended September 30, 2020 and 2019 were as follows:

 

    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
Potentially dilutive securities:                        
 Convertible notes payable     15,520,651       3,649,021       15,520,651       3,649,021  
 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     4,985,998       4,975,558       4,985,998       4,975,558  
 Stock options     10,944,266       9,787,381       10,944,266       9,787,381  

 

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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.

 

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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. The Company adopted this ASU as of January 1, 2020. The amendments in this ASU did not have a material impact on the Company’s consolidated 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.

   

4. Revenue Recognition

 

Disaggregation of revenue 

 

    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
Types of Revenues:                        
Security Monitoring   $ 84,147     $ 135,218     $ 279,042     $ 436,976  
Systems Installation     30,555       245,272       346,460       447,880  
Software     2,778,356       2,357,078       8,174,850       6,872,210  
Total revenues   $ 2,893,058     $ 2,737,568     $ 8,800,352     $ 7,757,066  

 

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

 

Security Monitoring Revenue

 

Helix provides monitoring of security alarms and cameras, which are charged out at an hourly rate, with invoices typically sent to clients shortly after each month-end for the previous month, with revenue being recognized over time. The customer simultaneously receives and consumes benefits provided by the Helix performance.

 

Systems Installation Revenue

 

Security systems, including Internet Protocol cameras, 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 is short-term in nature and 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.

 

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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 obligations. 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 September 30, 2020 and December 31, 2019. The Company also incurs legal costs relating to the drafting and negotiating of contracts with select customers. Because legal costs are not incremental in nature and are incurred regardless of whether a contract is ultimately obtained, there were no legal costs capitalized as of September 30, 2020 and December 31, 2019. The Company did not record amortization of costs incurred to obtain the contract or any impairment losses for the period ending September 30, 2020 and 2019.

 

5. Business Combinations

  

Tan’s International Security

 

On April 1, 2019, 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

 

20

 

 

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 following table summarizes the 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  

 

On July 31, 2020, the Company determined that the Security and Guarding segment met the criteria to be classified as a discontinued operation as a result of the combined sale of the assets of Security Consultants, Boss Security, and Tan Security. Please refer to note six for additional details on discontinued operations.

 

Green Tree International, Inc.

 

On February 5, 2019, the Company and its wholly owned subsidiary, Merger Sub, entered into the Amercanex Merger Agreement with GTI and Steve Janjic, as the representative of the GTI shareholders, pursuant to which Merger Sub merged with and into GTI (the “Merger”).

 

Pursuant to the Amercanex Merger Agreement, at the effective time of the Merger (the “Effective Time”), the Company will issue to the GTI stockholders an amount of unregistered shares of the Company’s common stock equal to $15 million, based on the average closing price of the Company’s common stock over the forty-five (45) trading day period ending three (3) trading days prior to the Closing Date. If the Closing occurs and revenues of GTI in the second 12 month period following the Closing Date exceed $5,000,000 and are less than or equal to $10,000,000, Parent shall issue to the Company Shareholders a number of unregistered Parent Shares (whether issued or reserved for issuance) equal to the quotient of (a) $5,000,000 divided by (b) the Parent Share Price multiplied by the quotient of (c) the revenues of the Company in the second 12 month period following the Closing Date less $5,000,000 divided by (d) $5,000,000.

 

To secure the indemnification obligations of the GTI shareholders to the Company under the Merger Agreement, 4,140,274 of the Company shares to be issued to the GTI shareholders will be held back and the Company will be entitled to retain such number of the holdback shares as necessary to satisfy those indemnification obligations. 50% of the holdback shares that remain after satisfaction of any indemnification obligations will be released 12 months after the closing date of the merger, and the remainder 24 months after the closing date of the merger. Additionally, the Amercanex Merger Agreement stated that if in the first 12 months following the closing GTI generates less than $1,500,000 of revenues, 100% of the holdback shares shall be returned to the Company. In connection with closing the Merger on September 10, 2019, the Company issued 16,765,727 unregistered shares of its common stock to GTI stockholders. In connection with the Merger, Steve Janjic joined the board of directors of the Company. As the $1,500,000 revenue threshold was not reached within the first 12 months, all 4,140,274 holdback shares were returned to the Company and the final purchase price allocation included the 12,625,453 unregistered shares of common stock issued to GTI.

 

The 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 GTI merger.

 

21

 

 

The following table summarizes the purchase price allocations relating to the GTI transaction:

 

Base Price - Common Stock   $ 9,721,600  
Total Purchase Price   $ 9,721,600  

 

Description   Fair Value     Weighted
Average
Useful Life
(Years)
 
Assets acquired:              
Note Receivable, net   $ 135,000        
Property, Plant and Equipment, Net     12,142        
Software     452,002     4.5  
Goodwill     9,792,829        
Total assets acquired   $ 10,391,973        
               
Liabilities assumed:              
Accounts Payable     43,717        
Notes Payable     400,000        
Other Liabilities     226,656        
Total liabilities assumed:     670,373        
               
Estimated fair value of net assets acquired:   $ 9,721,600        

 

6. Discontinued Operations

 

On July 31, 2020, the Company entered into the Agreement to sell, assign, transfer, and deliver to Buyer the Assets and Buyer paid aggregate consideration of $1,750,000 and assumed the Assumed Liabilities. The Assets included but were not limited to the right, title and interest in and to all assets and property, tangible and intangible, of every kind and description, used in, related to or necessary for the security guarding and protective guarding services business conducted by the Sellers (the Company’s Security and Guarding segment). As collateral for Sellers’ indemnification obligations, Buyer held back $600,000 of the consideration pursuant to the Agreement. The $600,000 is reflected as an other receivable on the condensed consolidation balance sheet as of September 30, 2020.

 

The components of pretax profit and loss of the discontinued segment through the disposal date are set forth below:

 

    For the Three Months
Ended
September 30,
    For the Nine Months
Ended
September 30,
 
    2020     2019     2020     2019  
Revenues   $ 635,398     $ 1,003,716     $ 4,043,246     $ 3,254,198  
Cost of revenue     555,817       905,970       3,277,640       2,552,222  
Gross margin     79,581       97,746       765,606       701,976  
                                 
Operating expenses:                                
Selling, general and administrative     58,060       93,600       470,568       396,023  
Salaries and wages     45,370       116,777       242,454       353,903  
Professional and legal fees     47,990       9,079       110,424       72,524  
Depreciation and amortization     -       19,155       7,301       38,311  
Total operating expenses     151,420       238,611       830,747       860,761  
                                 
Other income (expense)                                
Interest income (expense)     1,580       (411 )     -       (2,013 )
Other income (expenses)     1,580       (411 )     -       (2,013 )
                                 
Loss from discontinued operations   $ (70,529 )   $ (141,276 )   $ (65,141 )   $ (160,798 )

 

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The calculation of the Company’s gain on asset disposal, recognized on the disposal date, is set forth below:

 

Adjusted purchase price   $ 1,750,000  
         
Less net assets sold:        
Accounts receivable, net     686,208  
Property and equipment, net     2,160  
Goodwill     821,807  
      1,510,175  
Gain on disposal   $ 239,825  

 

7. Property and Equipment, Net

 

At September 30, 2020 and December 31, 2019, property and equipment consisted of the following:

 

    September 30,
2020
    December 31,
2019
 
Furniture and equipment   $ 171,013     $ 238,547  
Software development costs     1,260,906       561,964  
Vehicles     157,572       73,380  
Total     1,589,491       873,891  
Less: Accumulated depreciation and amortization     (230,140 )     (102,663 )
Property and equipment, net   $ 1,359,351     $ 771,228  

 

Depreciation and amortization expense for the three months ended September 30, 2020 and 2019 was $15,972 and $5,709, respectively, and $63,649 and $32,528 for the nine months ended September 30, 2020 and 2019, respectively.

 

8. Intangible Assets, Net and Goodwill

 

The following table summarizes the Company’s intangible assets as of September 30, 2020 and December 31, 2019:

 

              September 30,
2020(1)
 
    Estimated
Useful Life
(Years)
  Gross
Carrying
Amount
    Assets
Acquired
Pursuant to
Business
Combination
    Accumulated
Amortization
    Net Book
Value
 
Database   5   $ 93,427     $       -     $ (83,501 )   $ 9,926  
Trade names and trademarks   5 - 10     591,081       -       (294,582 )     296,499  
Web addresses   5     130,000       -       (115,047 )     14,953  
Customer list   5     8,304,449       -       (3,874,569 )     4,429,880  
Software   4.5     10,224,822       -       (5,222,933 )     5,001,889  
Domain Name   5     20,231               (5,059 )     15,172  
        $ 19,364,010     $ -     $ (9,595,691 )   $ 9,768,319  

 

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              December 31,
2019
 
    Estimated
Useful Life
(Years)
  Gross
Carrying
Amount at
December 31,
2018
    Assets
Acquired
Pursuant to
Business
Combination (2)
    Accumulated
Amortization
    Net Book
Value
 
Database   5   $ 93,427     $    -     $ (69,533 )   $ 23,894  
Trade names and trademarks   5 - 10     591,081       -       (207,525 )     383,556  
Web addresses   5     130,000       -       (95,611 )     34,389  
Customer list   5     11,459,027       -       (4,256,070 )     7,202,957  
Software   4.5     9,771,195       453,627       (3,492,525 )     6,732,297  
Domain Name   5     -       20,231       (2,037 )     18,194  
        $ 22,044,730     $ 473,858     $ (8,123,301 )   $ 14,395,287  

 

(1) The Company wrote off the remaining unamortized balance of $1,369,978 related to the customer list intangible asset from the Security Grade Protective Services transaction as of March 31, 2020.
   
(2) On September 10, 2019 the Company acquired various assets of GTI (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 $1,033,263 and $1,173,888 for the three months ended September 30, 2020 and 2019, respectively, and $3,256,992 and $3,483,890 for the nine months ended September 30, 2020 and 2019, respectively.

  

The following table summarizes the Company’s Goodwill as of September 30, 2020 and December 31, 2019:

 

    Total Goodwill  
Balance at December 31, 2018   $ 39,913,559  
Goodwill attributable to Tan Security acquisition     821,807  
Goodwill attributable to Green Tree acquisition     9,792,829  
Balance at December 31, 2019     50,528,195  
Goodwill disposed pursuant to sale of security and guarding business     (821,807 )
Impairment of goodwill     (39,963,107 )
Balance at September 30, 2020   $ 9,743,281  

 

9. Costs, Estimated Earnings and Billings

 

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows as of September 30, 2020 and December 31, 2019:

 

    September 30,
2020
    December 31,
2019
 
Costs incurred on uncompleted contracts   $ 469,495     $ 444,344  
Estimated earnings     167,123       150,355  
Cost and estimated earnings earned on uncompleted contracts     636,618       594,699  
Billings to date     424,696       501,543  
Costs and estimated earnings in excess of billings on uncompleted contracts     211,922       93,156  
                 
Costs in excess of billings   $ 280,464     $ 257,819  
Billings in excess of cost     (68,542 )     (164,663 )
    $ 211,922     $ 93,156  

   

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10. Accounts Payable and Accrued Liabilities

 

As of September 30, 2020 and December 31, 2019, accounts payable and accrued liabilities consisted of the following:

 

    September 30,
2020
    December 31,
2019
 
Accounts payable   $ 358,766     $ 542,617  
Accrued compensation and related expenses     710,086       260,280  
Accrued expenses     1,522,183       1,717,796  
Lease obligation - current     257,953       290,161  
Total   $ 2,848,988     $ 2,810,854  

 

11. Convertible Notes Payable, net of discount

 

On March 1, 2019, the Company entered into a $450,000 Secured Convertible Promissory Note (“Note Ten”) with an independent investor (the “investor”). The 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 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 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. During 2019, the investor elected their option to partially convert $280,000 in principal of Note Ten into 875,894 shares of the Company’s common stock. As of December 31, 2019, the fair value of Note Ten was $202,125. Accordingly, the Company recorded a change in fair value of $32,125 related to Note Ten for the year ended December 31, 2019. During the three months ended March 31, 2020 the investor converted the remaining $170,000 in principal of Note ten into 564,420 shares of the Company’s common stock. As of September 30, 2020, Note Ten had been fully repaid via the conversion into shares of the Company’s common stock.

 

In addition, the company recorded a debt discount relating to the warrants issued in the amount of $355,847 based on the relative fair value of the warrants at inception of Note Ten. Debt discounts amortized to interest expense was $297,352 for the year ended December 31, 2019. The unamortized discount balance at December 31, 2019 was $58,495. In May, September, and December 2019, the Company issued 15,625, 16,568 and 19,401 restricted shares of common stock as paid-in-kind (“PIK”) interest payments in the amount of $14,062, $14,063, and $12,029, respectively. Accrued interest expense associated with Note Ten was $3,542 as of December 31, 2019, which includes PIK interest payable. Debt discount amortized to interest expense was $58,495 for the nine months ended September 30, 2020.

 

On August 15, 2019, the Company entered into a $400,000 Fixed Convertible Promissory Note (“Note Eleven”) with the investor. The investor provided the Company with $380,000 in cash proceeds, which was received by the Company during the period ended September 30, 2019. The additional $20,000 was retained by the investor for due diligence and legal bills for the transaction and recorded as a debt discount. Note Eleven will mature on May 15, 2020 and bear interest at a rate of 10% per annum, payable by the Company in cash. The principal balance of Note Eleven is convertible at the election of the investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $0.90 per share for the first 6 months and thereafter at the lower of $0.90 per share or at 70% of the average of the five lowest daily VWAPs of the Company’s common stock during the 15 consecutive trading days prior to the date on which the investor elects to convert all or part of Note Eleven. In conjunction with Note Eleven, the Company issued a warrant to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share.

  

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The Company evaluated Note Eleven in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Eleven will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of December 31, 2019, the fair value of Note Eleven was $204,444. Accordingly, the Company recorded a change in fair value of $195,556 related to Note Eleven for the year ended December 31, 2019. During the three months ended March 31, 2020, the investor elected their option to partially convert $120,000 in principal of Note Eleven into 1,084,186 shares of the Company’s common stock. During the three months ended March 31, 2020, the investor elected their option to convert the remaining $280,000 in principal of Note Eleven into 3,336,225 shares of the Company’s common stock.

 

In addition, the company recorded a debt discount of $38,543 relating to the warrants issued in the amount of $18,543 based on the relative fair value of the warrants themselves at inception of Note Eleven and $20,000 relating to legal fees. Debt discounts amortized to interest expense were $19,412 for the year ended December 31, 2019. The unamortized discount balance at December 31, 2019 was $19,131. Accrued interest expense associated with Note Eleven was $17,460 as of December 31, 2019. Debt discounts amortized to interest expense were $19,131 for the nine months ended September 30, 2020 fully amortizing the remaining debt discount.

 

On September 16, 2019, the Company entered into a $450,000 Fixed Convertible Promissory Note (“Note Twelve”) with the investor. The investor provided the Company with $427,500 in cash proceeds, which was received by the Company during the period ended December 31, 2019. The additional $22,500 was retained by the investor for due diligence and legal bills for the transaction and was recorded as a debt discount. Note Twelve will mature on June 16, 2020 and bear interest at a rate of 10% per annum, payable by the Company in cash. The principal balance of Note Twelve is convertible at the election of the investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $0.90 per share for the first 6 months and thereafter at the lower of $0.90 per share or at 70% of the average of the five lowest daily VWAPs of the Company’s common stock during the 15 consecutive trading days prior to the date on which the investor elects to convert all or part of Note Twelve. In conjunction with Note Twelve, the Company issued a warrant to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share.

 

The Company evaluated Note Twelve in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Twelve will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of December 31, 2019, the fair value of Note Twelve was $230,000. Accordingly, the Company recorded a change in fair value of ($220,000) related to Note Twelve for the year ended December 31, 2019. During the six months ended June 30, 2020, the investor elected their option to partially convert $350,110 in principal of Note Twelve into 3,925,000 shares of the Company’s common stock. As of September 30, 2020, the fair value of the remaining principal of Note Twelve was $23,890. Accordingly, the Company recorded a change in fair value of $(231,334) related to Note Twelve for the nine months ended September 30, 2020.

 

In addition, the company recorded a debt discount of $40,183 relating to the warrants issued in the amount of $17,683 based on the residual fair value of the warrants themselves at inception of Note Twelve and $22,500 relating to legal fees. Debt discounts amortized to interest expense were $15,545 for the year ended December 31, 2019. The unamortized discount balance at December 31, 2019 was $24,638. Accrued interest expense associated with Note Twelve was $18,285 as of December 31, 2019. Debt discounts amortized to interest expense were $24,638 for the nine months ended September 30, 2020. The unamortized discount balance at September 30, 2020 was $0. Accrued interest expense associated with Note Twelve was $49,805 as of September 30, 2020.

 

On October 11, 2019, the Company entered into a $450,000 Fixed Convertible Promissory Note (“Note Thirteen”) with the investor. The investor provided the Company with $427,500 in cash proceeds, which was received by the Company during the period ended December 31, 2019. The additional $22,500 was retained by the investor for due diligence and legal bills for the transaction and was recorded as a debt discount. Note Thirteen will mature on July 11, 2020 and bear interest at a rate of 10% per annum, payable by the Company in cash. The principal balance of Note Thirteen is convertible at the election of the investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $0.90 per share for the first 6 months and thereafter at the lower of $0.90 per share or at 70% of the average of the five lowest daily VWAPs of the Company’s common stock during the 15 consecutive trading days prior to the date on which the investor elects to convert all or part of Note Thirteen. In conjunction with Note Thirteen, the Company issued a warrant to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share.

 

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The Company evaluated Note Thirteen in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Thirteen will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of December 31, 2019, the fair value of Note Thirteen was $230,000. Accordingly, the Company recorded a change in fair value of ($220,000) related to Note Thirteen for the year ended December 31, 2019. As of September 30, 2020, the fair value of Note Thirteen was $743,106. Accordingly, the Company recorded a change in fair value of $459,106 related to Note Thirteen for the nine months ended September 30, 2020.

  

In addition, the company recorded a debt discount of $33,943 relating to the warrants issued in the amount of $11,443 based on the residual fair value of the warrants themselves at inception of Note Thirteen and $22,500 relating to legal fees. Debt discounts amortized to interest expense were $10,034 for the year ended December 31, 2019. The unamortized discount balance at December 31, 2019 was $23,909. Accrued interest expense associated with Note Thirteen was $16,022 as of December 31, 2019. Debt discounts amortized to interest expense were $23,908 for the nine months ended September 30, 2020. The unamortized discount balance at September 30, 2020 was $0. Accrued interest expense associated with Note Thirteen was $40,260 as of September 30, 2020.

 

On December 26, 2019, the Company entered into a $210,526 Fixed Convertible Promissory Note (“Note Fourteen”) with the investor. The investor provided the Company with $200,000 in cash proceeds, which was received by the Company during the period ended December 31, 2019. The additional $10,526 was retained by the investor for due diligence and legal bills for the transaction and was recorded as a debt discount. Note Fourteen will mature on September 26, 2020 and bear interest at a rate of 12% per annum, payable by the Company in cash. The principal balance of Note Fourteen is convertible at the election of the investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $0.90 per share for the first 6 months and thereafter at the lower of $0.90 per share or at 70% of the average of the five lowest daily VWAPs of the Company’s common stock during the 15 consecutive trading days prior to the date on which the investor elects to convert all or part of Note Fourteen. In conjunction with Note Fourteen, the Company issued a warrant to the investor to purchase 12,500 shares of the Company’s common stock at $1.00 per share.

 

The Company evaluated Note Fourteen in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Fourteen will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of December 31, 2019, the fair value of Note Fourteen was $107,602. Accordingly, the Company recorded a change in fair value of $102,924 related to Note Fourteen for the year ended December 31, 2019. As of September 30, 2020, the fair value of Note Fourteen was $347,652. Accordingly, the Company recorded a change in fair value of $214,787 related to Note Fourteen for the nine months ended September 30, 2020.

 

In addition, the company recorded a debt discount of $15,794 relating to the warrants issued in the amount of $5,268 based on the residual fair value of the warrants themselves at inception of Note Fourteen and $10,526 relating to legal fees. Debt discounts amortized to interest expense were $287 for the year ended December 31, 2019. The unamortized discount balance at December 31, 2019 was $15,507. Accrued interest expense associated with Note Fourteen was $463 as of December 31, 2019. Debt discounts amortized to interest expense were $15,507 for the nine months ended September 30, 2020. The unamortized discount balance at September 30, 2020 was $0. Accrued interest expense associated with Note Fourteen was $18,835 as of September 30, 2020.

 

On November 15, 2019, the Company entered into a $5,000,000 Unsecured Convertible Promissory Note (“Note Fifteen”) with the investor. The investor provided the Company with $385,000 in cash proceeds, which was received by the Company during the period ended December 31, 2019. Note Fifteen will mature on November 15, 2021 and bear interest at a rate of 12% per annum, payable by the Company in cash. The principal balance of Note Fifteen is convertible at the election of the investor, in whole or in part, at any time or from time to time, into the Company’s common stock at 70% of the average of the five lowest daily VWAPs of the Company’s common stock during the 15 consecutive trading days prior to the date on which the investor elects to convert all or part of Note Fifteen. As of September 30, 2020, and December 31, 2019, the balance of Note Fifteen was $385,000. Accrued interest expense associated with Note Fifteen was $11,806 and $5,239 as of September 30, 2020 and December 31, 2019, respectively.

  

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12. Related Party Transactions

 

On March 1, 2019, the Company entered into a $1,500,000 Secured Convertible Promissory Note (“Note Nine”) with Rose Capital Fund I, LP (the Related Party Holder”). A Managing Member of the Related Party Holder is also a Director of the Company. The Related Party Holder provided the Company with $1,475,000 in cash proceeds, which was received by the Company during the period ended September 30, 2019. The additional $25,000 was retained by the Related Party Holder 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 Related Party Holder, 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 Related Party Holder 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 December 31, 2019 and September 30, 2020, the fair value of Note Nine was $1,783,454 and $1,285,220, respectively. Accordingly, the Company recorded a change in fair value of $498,234 related to Note Nine for the nine months ended September 30, 2020.

 

In addition, the company recorded a debt discount relating to the warrants issued in the amount of $1,186,153 based on the relative 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 discount amortized to interest expense was $199,094 for the nine months ended September 30, 2020. The unamortized discount balance at September 30, 2020 was $0. On May 31, 2019, the Company issued 52,083 restricted shares of common stock as PIK interest payments in the amount of $46,875. On February 24, 2020, the Company issued 167,891 restricted shares of common stock as PIK interest payments in the amount of $93,750. Accrued interest expense associated with Note Nine was $29,795 as of September 30, 2020, which includes PIK interest payable. As of September 30, 2020, the balance of Note Nine, net of debt discount for warrants and legal bills was $1,285,220. The Company and the Related Party Holder are negotiating a potential extension of Note Nine.

  

Warrants

  

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. As of December 31, 2019, the fair value of the warrant liability was $182,065 while as of September 30, 2020, the fair value of the warrant liability was $28,417. Accordingly, the Company recorded a change in fair value of $153,648 during the nine months ended September 30, 2020, 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 with the Related Party Holder 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.

 

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On July 29, 2019, the Company entered into an unsecured promissory note with the Related Party Holder in the amount of $300,000. The unsecured promissory note has a fixed interest rate of 12% and is due and payable on January 29, 2020. The Company and the Related Party Holder mutually agreed to defer payment of interest and repayment of principal until July 29, 2020, at which time the note and interest were paid off in full.

   

13. Notes Payable

 

As of September 30, 2020 and December 31, 2019 notes payable consisted of the following: 

 

    September 30,
2020
    December 31,
2019
 
Vehicle financing loans payable, between 4.7% and 7.0% interest and maturing between June 2022 and July 2022   $ 40,415     $ 27,488  
Loans Payable - Credit Union     2,099       5,385  
Notes Payable and financing arrangements     485,857       400,000  
Less: Current portion of loans payable     (496,671 )     (10,814 )
Long-term portion of loans payable   $ 31,700     $ 422,059  

 

The interest expense associated with the notes payable was $68,703 and $7,065 for the three months ended September 30, 2020 and 2019, respectively, and $197,178 and $9,746 for the nine months ended September 30, 2020 and 2019, respectively.

 

In connection with the GTI Merger, the Company assumed a $400,000 Senior Secured Convertible Debenture (the “Convertible Debenture”) (See Note 5). The Convertible Debenture will mature on July 31, 2021 and bears interest at a rate of 10% per annum, payable by the Company to the Lender. In the event that Lender elects to convert the Convertible Debenture into Helix Common Stock or in the event Helix required the Lender to convert the Convertible Debenture into its Common Stock, the number of shares that shall be issuable upon full Conversion of the Convertible Debenture at any time shall be equal to the outstanding principal of the Convertible Debenture divided by $1.00. Pursuant to the terms of the Convertible Debenture, Helix Common Stock can be transferred to the Lender from Steve Janjic, as a shareholder of the Company who receives shares of Helix Common Stock at the Closing, instead of via a new issuance of shares of Helix Common Stock by Helix to Lender, and Lender agrees to accept such transfer of shares from Mr. Janjic as the issuance of Helix Common Stock.

 

In addition, the Company shall have the right to require the Lender to convert the Convertible Debenture into Helix Common Stock at any time provided its Common Stock is listed on a stock exchange other than the U.S. OTCQB, the Common Stock would be fully traded up on conversion and the trading price of its Common Stock closes above $1.15 for 20 consecutive trading days on such exchange. The Convertible Debenture will be secured by a general security interest over all of the assets of the GTI, however does not apply to those assets owned by Helix or Merger Sub prior to the closing of the Merger.

 

On February 7, 2020, the Company and its subsidiary Bio-Tech Medical Software Inc. entered into an agreement for the purchase and sale of future receipts with Advantage Capital Funding. $485,000 was actually funded to the Company with a promise to pay $15,000 per week for 8 weeks and $20,000 per week for the next 27 weeks until a total of $660,000 is paid. $85,857 of principal remained outstanding as of September 30, 2020.

  

14. Shareholders’ Equity

 

Common Stock

 

Other Common Stock Issuances

  

In January 2020, the Company issued 270,270 shares of common stock as part of an investment unit purchase agreement.

 

During the three months ended March 31, 2020, the Company issued 167,891 restricted shares of common stock as PIK interest payment in the amount of $93,750 (see Note 10).

 

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In May and June 2020, the Company issued 11,163,520 shares of common stock as part of subscription purchase agreements.

 

In May 2020 an option holder exercised 700,000 options and was issued 700,000 shares of common stock for total proceeds of $91,000.

 

During the six months ended June 30, 2020 the Company issued 503,800 restricted shares to employees and former employees and recorded stock-based compensation expense of $1,071,604.

 

In August 2020, the Company issued 1,810,000 shares of common stock under the Stock Incentive Plan and recorded $339,850 in share-based payment expense.

 

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 16).

 

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 11 and 12).

 

Conversion of Convertible Note to Common Stock

 

During the nine months ended September 30, 2020, the holders of Note Ten, Note Eleven and Note Twelve elected to convert $170,000, $400,000, $350,110, $50,000, $50,000, $48,000 and $30,000 in principal of the respective convertible notes into 564,420, 4,420,411, 3,925,000, 744,048, 554,324, 536,913 and 434,153 shares of the Company’s common stock, respectively (See Note 10).

  

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, respectively.

 

Series A convertible preferred stock

 

In October 2015, the Company issued a total of 1,000,000 shares of its Class A Preferred Stock. 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.

 

As a result of the Company’s financing at $.11 per share during May and June 2020 the number of shares of common stock the Series A Preferred Stock is convertible into increased from 1,000,000 to 1,045,970.

 

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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.

 

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

 

In accordance with the Certificate of Incorporation, there were 9,000,000 authorized Series B Preferred Stock at a par value of $ 0.001. 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 Adjusted Issue Price ($0.3110812) 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 14,417,856 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).

 

As a result of the Company’s financing at $.11 per share during May and June 2020 the number of shares of common stock the Series B Preferred Stock is convertible into increased from 13,784,201 to 14,417,856.

  

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.

 

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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.

 

15. Stock Options

 

On February 21, 2020 the Company awarded the Chief Financial Officer, an option to purchase a total of 200,000 shares of the Company’s common stock at a price of $0.385 per share. These options vested immediately upon grant and expire on February 21, 2025.

 

On March 31, 2020 the Company awarded an employee (who is also a board member), two options to purchase a total of 800,000 shares of the Company’s common stock at a price of $0.115 per share. Out of the 800,000 total, 100,000 options vested immediately upon grant, 100,000 vest on 8/15/2020 and the remaining 600,000 vest based on achievement of certain milestones through December 31 2020. As of September 30, 2020, none of the milestone performance awards had vested. These options expire on March 31, 2025.

 

During the three months ended March 31, 2020 the Company awarded certain consultants options to purchase 165,000 shares of the Company’s common stock at prices ranging from $0.20 to $0.46 per share. These options vested immediately and expire three years from issuance.

 

On April 1, 2020 the Company awarded a consultant an option to purchase a total of 65,000 shares of the Company’s common stock at a price of $0.115 per share. The options vested immediately upon grant and expire April 1, 2023.

 

In May 2020 the Company awarded a consultant an option to purchase 700,000 shares of the Company’s common stock at a price of $.13 per share. The options vested immediately and were fully exercised shortly after grant.

 

On June 8, 2020 the Company awarded certain employees an option to purchase a total of 200,000 shares of the Company’s common stock at a price of $0.23 per share. 50% of these options vest on December 8, 2020 and 50% vest on 6/8/2020 and all expire June 8, 2025.

 

On June 19, 2020 the Company awarded the Chief Executive Officer, an option to purchase a total of 500,000 shares of the Company’s common stock at a price of $0.167 per share. These options vest over a three-year period from June 19, 2021 to June 19, 2023 and expire June 19, 2025. 

 

On September 14, 2020, the Company awarded an employee an option to purchase a total of 250,000 shares of the Company’s common stock at a price of $0.10 per share. 20% of these options vest on the grant and date another 20% of the shares vest every six months then after. All shares expire June 8, 2025.

  

On February 29, 2020, the former President of the Company’s BioTrackTHC subsidiary forfeited 1,430,306 BioTrackTHC Management Awards and 204,364 Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan stock options as a result of his termination (See Note 16).

 

During the three months ended March 31, 2020, 75,000 employee options grants were forfeited as they had not yet vested prior to the employees’ separation from the Company.

 

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.

 

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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.

 

Stock option activity for the period ended September 30, 2020 is as follows:

 

    Shares Underlying Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Term
(in years)
 
Outstanding at January 1, 2020     11,617,381     $ 0.807       3.21  
Granted     2,880,000     $ 0.163       3.96  
Exercised     (1,350,000 )   $ 0.120       3  
Forfeited and expired     (2,203,115 )   $ 0.675       1.61  
Outstanding at September 30, 2020     10,944,266     $ 0.749       3.65  
Vested options at September 30, 2020     8,945,932     $ 0.714       1.68  

 

16. Warrant Liability

 

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 December 31, 2019, the fair value of the warrant liability was $54,620 while as of September 30, 2020, the fair value of the warrant liability was $8,525. Accordingly, the Company recorded a change in fair value of the warrant liability of $(46,095) related to Note Ten for the nine months ended September 30, 2020.

 

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.

 

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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 September 30, 2020, the fair value of the warrant liability was $88,750 and the Company recorded a change in fair value of the warrant liability of $(682,717) for the nine months ended September 30, 2020.

 

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 December 31, 2019, the fair value of the warrant liability was $24,504 while as of September 30, 2020, the fair value of the warrant liability was $85. Accordingly, the Company recorded a change in fair value of the warrant liability of $24,419 related to the warrants for the nine months ended September 30, 2020.

 

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 September 30, 2020, the fair value of the warrant liability was $3,574. Accordingly, the Company recorded a change in fair value of the warrant liability of $(80,012) related to the warrants for the nine months ended September 30, 2020.

 

On August 15, 2019, in connection with the issuance of Note Eleven, the Company issued warrants, of which the value was derived and based off the fair value of Note Eleven, to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 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 August 15, 2019 and on or before August 15, 2024, by delivery to the Company of the Notice of Exercise.

 

The Company determined that the warrants associated with Note Eleven 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 December 31, 2019, the fair value of the warrant liability was $9,130 while as of September 30, 2020, the fair value of the warrant liability was $1,658. Accordingly, the Company recorded a change in fair value of the warrant liability of $(7,472) related to Note Eleven for the nine months ended September 30, 2020.

 

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On September 16, 2019, in connection with the issuance of Note Twelve, the Company issued warrants, of which the value was derived and based off the fair value of Note Twelve, to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 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 September 16, 2019 and on or before September 16, 2024, by delivery to the Company of the Notice of Exercise.

  

The Company determined that the warrants associated with Note Twelve 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 December 31, 2019, the fair value of the warrant liability was $9,194 while as of September 30, 2020, the fair value of the warrant liability was $1,684. Accordingly, the Company recorded a change in fair value of the warrant liability of $(7,510) related to Note Twelve for the nine months ended September 30, 2020.

 

On October 11, 2019, in connection with the issuance of Note Thirteen, the Company issued warrants, of which the value was derived and based off the fair value of Note Thirteen, to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 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 October 11, 2019 and on or before October 11, 2024, by delivery to the Company of the Notice of Exercise.

 

The Company determined that the warrants associated with Note Thirteen 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 December 31, 2019, the fair value of the warrant liability was $9,236 while as of September 30, 2020, the fair value of the warrant liability was $1,703. Accordingly, the Company recorded a change in fair value of the warrant liability of $(7,533) related to Note Thirteen for the nine months ended September 30, 2020. 

 

On November 1, 2019, the Company issued warrants to an institution to purchase a total of 100,000 restricted shares of the Company’s common stock at a per share purchase price of $0.435. The warrants are exercisable at any time after the issuance date within five 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 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 consolidated statement of operations. At December 31, 2019, the fair value of the warrant liability was $40,063. As of September 30, 2020, the fair value of the warrant liability was $7,735 and the Company recorded a change in fair value of the warrant liability of $(32,328) related to the warrants for the nine months ended September 30, 2020.

 

On December 26, 2019, in connection with the issuance of Note Fourteen, the Company issued warrants, of which the value was derived and based off the fair value of Note Fourteen, to the investor to purchase 12,500 shares of the Company’s common stock at $1.00 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 December 26, 2019 and on or before December 26, 2024, by delivery to the Company of the Notice of Exercise.

 

The Company determined that the warrants associated with Note Fourteen 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 December 31, 2019, the fair value of the warrant liability was $4,687 while as of September 30, 2020, the fair value of the warrant liability was $880. Accordingly, the Company recorded a change in fair value of the warrant liability of $(3,807) related to Note Fourteen for the nine months ended September 30, 2020.

 

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On January 28, 2020, the Company entered into a subscription agreement with an investor for the purchase of 270,270 shares of the Company’s common stock and 135,135 warrants to purchase shares of the Company’s common stock at $0.40 per share for total gross proceeds of $100,000.

  

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, January 28, 2020, the fair value of the warrant liability was $56,208 while as of September 30, 2020, the fair value of the warrant liability was $9,920. Accordingly, the Company recorded a change in fair value of the warrant liability of $(46,288) and related to the warrants for the nine months ended September 30, 2020.

 

A summary of warrant activity is as follows:

 

    For the Nine Months Ended
September 30,
2020
 
    Warrant Shares     Weighted Average Exercise Price  
Balance at January 1, 2020     5,113,058     $ 0.23  
                 
Warrants expired     (462,195 )   $ 0.32  
                 
Warrants granted     335,135     $ 0.16  
                 
Balance at September 30, 2020     4,985,998     $ 0.52  

  

The fair value of the Company’s warrant liability was calculated using the Black-Scholes model and the following assumptions:

 

    As of
September 30,
2020
    As of
December 31,
2019
 
Fair value of company's common stock   $ 0.101     $ 0.60  
                 
Dividend yield     0 %     0 %
                 
Expected volatility     37% - 163 %     45% - 140 %
                 
Risk Free interest rate     0.16% - 0.26 %     1.55% - 1.79 %
                 
Expected life (years)     2.64       2.83  
                 
Fair value of financial instruments - warrants   $ 88,750     $ 715,259  

 

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

 

Nine Months Ended September 30, 2020      
    Amount  
Balance as of January 1, 2020   $ 715,259  
Fair value of warrants issued   $ 56,208  
Change in fair value of liability to issue warrants   $ (682,717 )
Balance as of September 30, 2020   $ 88,750  

 

 

Three Months Ended September 30, 2020      
    Amount  
Balance as of July 1, 2020   $ 155,789  
Fair value of warrants issued   $ -  
Change in fair value of liability to issue warrants   $ (67,039 )
Balance as of September 30, 2020   $ 88,750  

 

17. 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. On April 13, 2020 our Board of Directors approved an amendment to the 2017 Plan and a majority of our voting securityholders approved the amendment on April 22, 2020. 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 11,000,000 shares of common stock are reserved for issuance. Options to purchase 4,715,000 and 1,835,000 shares of common stock and were granted as of September 30, 2020 and December 31, 2019, respectively. 2,943,745 and 764,945 shares of common stock had been granted as of September 30, 2020 and December 31, 2019, 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. On February 29, 2020, the former Chief Executive Officer of the Company’s BioTrackTHC subsidiary forfeited 204,364 Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan stock options as a result of his termination (See Note 14).

  

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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). On February 29, 2020, the former President of the Company’s BioTrackTHC subsidiary forfeited 1,430,306 BioTrackTHC Management Awards (See Note 14).

  

18. Income Taxes

 

No provision for U.S. federal or state income taxes has been recorded as the Company has incurred net operating losses since inception. Significant components of the Company’s net deferred income tax assets for the nine months ended September 30, 2020 and 2019 consist of income tax loss carryforwards. These amounts are available for carryforward for use in offsetting taxable income of future years through 2035. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carry-forward period. Utilization of the net operating loss carry-forwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Due to the Company’s history of operating losses, these deferred tax assets arising from the future tax benefits are currently not likely to be realized and are thus reduced to zero by an offsetting valuation allowance. As a result, there is no provision for income taxes. 

 

For the nine months ended September 30, 2020 and 2019, the Company has a net operating loss carry forward of approximately $20,077,000 and $16,952,000, respectively. Utilization of these net loss carry forwards is subject to the limitations of Internal Revenue Code Section 382. The Company applied a 100% valuation reserve against the deferred tax benefit as the realization of the benefit is not certain.

 

19. Commitments and Contingencies

 

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:

 

    Nine Months Ended
September 30,
2020
 
Operating lease expense   $ 60,306  
Cash paid for amounts included in the measurement of operating lease liabilities   $ 67,233  
ROU assets obtained in exchange for operating lease obligations   $ 301,396  

 

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.

 

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ROU lease assets and lease liabilities for the Company’s operating leases were recorded in the condensed consolidated balance sheet as follows:

 

    As of
September 30,
2020
 
Other current assets   $ 841,419  
         
Accounts payable and accrued liabilities   $ 257,952  
Other long-term liabilities   $ 621,781  
Total lease liabilities   $ 879,733  
         
Weighted average remaining lease term (in years)     3.16  
Weighted average discount rate     6.37 %

   

Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of September 30, 2020, for the following five fiscal years and thereafter were as follows:

 

      As of
September 30,
2020
 
2020     $ 67,233  
2021       254,961  
2022       222,744  
2023       200,944  
2024       205,435  
Thereafter       -  
Total future minimum lease payments     $ 951,317  
Less imputed interest       (71,584 )
Total     $ 879,733  

 

As of September 30, 2020, 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.

 

20. Segment Results

 

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

 

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

 

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

 

    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2020     2019     2020     2019  
                         
Security monitoring                        
Revenue   $ 84,147     $ 135,218     $ 279,042     $ 436,976  
Cost of revenue     90,738       330,602       264,629       422,880  
Gross profit     (6,591 )     (195,384 )     14,413       14,096  
Total operating expenses     41,345,177       1,551,016       45,129,661       4,565,944  
Loss from operations     (41,351,768 )     (1,746,400 )     (45,115,248 )     (4,551,848 )
Total other (expense) income     (604,821 )     1,619,885       (2,208,937 )     642,077  
Total loss from continuing operations   $ (41,956,589 )   $ (126,515 )   $ (47,324,185 )   $ (3,909,771 )
Loss from discontinued operations     (70,529 )     (141,276 )     (65,141 )     (160,798 )
Net Loss   $ (42,026,848 )   $ (267,791 )   $ (47,389,326 )   $ (4,070,569 )
                                 
Adjusted EBITDA   $ (849,911 )   $ (1,515,464 )   $ (1,961,145 )   $ (3,437,766 )
                                 
Systems installation                                
Revenue   $ 30,555     $ 245,272     $ 346,460     $ 447,880  
Cost of revenue     97,161       149,431       361,260       649,041  
Gross profit     (66,606 )     95,841       (14,800 )     (201,161 )
Total operating expenses     25,209       179,641       294,216       367,094  
Loss from operations     (91,815 )     (83,800 )     (309,016 )     (568,255 )
Total other expense     560       280       277       713  
Total loss from continuing operations   $ (91,255 )   $ (83,520 )   $ (308,739 )   $ (567,542 )
Income (loss) from discontinued operations                                
Net Loss   $ (91,255 )   $ (83,520 )   $ (308,739 )   $ (567,542 )
                                 
Adjusted EBITDA   $ (91,255 )   $ 76,630   $ (308,456 )   $ (84,430 )
                                 
Software                                
Revenue   $ 2,778,356     $ 2,357,078     $ 8,174,850     $ 6,872,210  
Cost of revenue     730,251       838,792       2,222,785       2,522,570  
Gross profit     2,048,105       1,518,286       5,952,065       4,349,640  
Total operating expenses     2,240,642       2,410,597       6,631,953       6,996,514  
Loss from operations     (192,537 )     (892,311 )     (679,888 )     (2,646,874 )
Total other expense     121,839       (11,947 )     (2,217 )     23  
Total loss from continuing operations   $ (70,698 )   $ (904,258 )   $ (682,105 )   $ (2,646,851 )
Income (loss) from discontinued operations                                
Net Loss   $ (70,698 )   $ (904,258 )   $ (682,105 )   $ (2,646,851 )
                                 
Adjusted EBITDA   $ 1,035,966   $ 106,985   $ 2,614,475   $ 352,580

 

The chief operating decision making group uses net loss before interest, taxes and depreciation and amortization and adjusted for non-core or certain items that have a disproportionate impact on our results for a particular period (“Adjusted EBITDA”) as a non-GAAP measure to evaluate the Company’s operating performance. Adjusted EBITDA does not represent, and should not be considered an alternative to, net loss, loss from operations, or cash flow from operations as those terms are defined by GAAP, and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. From time to time, we may exclude from Adjusted EBITDA the impact of certain events, gains, losses or other charges that affect the period-to-period comparability of the Company’s operating performance. The Company believes that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our chief operating decision maker. Net loss is reconciled to Adjusted EBITDA as follows: 

 

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    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
Net Loss   $ (42,188,801 )   $ (1,255,569 )   $ (48,380,170 )   $ (7,284,962 )
Interest expense     355,469       538,591       1,029,979       1,227,271  
Depreciation & amortization     1,049,235       1,179,597       3,320,641       3,516,418  
Loss on impairment of intangible assets     39,963,107       -       41,333,085       -  
Share based compensation expense     549,012       352,341       1,620,616       1,241,741  
Change in fair value of convertible note     321,915       (430,766 )     1,104,856       (288,425 )
Change in fair value of convertible note - related party     -       (491,442 )     (498,233 )     213,828  
Change in fair value of warrant liability     (67,039 )     (1,224,601 )     (682,717 )     (3,462,746 )
Change in fair value of contingent consideration     111,902       -       1,536,324       880,050  
Loss (gain) on issuance of warrants     -       -       (2,000 )     787,209  
Other expense     -       -       (37,507 )     -  
Adjusted EBITDA (1)   $ 94,800     $ (1,331,849 )   $ 344,874     $ (3,169,616 )

 

(1) See “Non-GAAP Financial Measures” within Part I, Item 2, Management’s Discussion and Analysis.

 

21. Subsequent Events

 

On October 1, 2020, the holder of Note Twelve converted the remaining principal balance of $23,890 of the note into 353,402 shares of common stock of the Company.

 

On October 1, 2020, the Company issued 25,000 Non-Qualified Stock Options to a consultant, pursuant to a consulting agreement.

 

On October 12, 2020, the holder of Note Thirteen converted $30,000 of the principal balance of the note into 442,478 shares of common stock of the Company.

 

On October 13, 2020, the Company issued 15,000 restricted shares of common stock to a former employee.

 

On October 14, 2020, pursuant to a unanimous vote of the Board of Directors, the Company issued 300,000 Incentive Stock Options to the Chief Executive Officer (“CEO”) with an exercise price of $0.1045, a 10% premium to the closing price on the date of issuance. The Board of Directors also voted to grant the CEO a cash bonus of $75,000.

 

On October 16, 2020, the Company signed an agreement and plan of merger whereby the Company would combine with Medical Outcomes Research Analytics, with both companies becoming wholly owned subsidiaries of a newly formed company, Forian, Inc. Upon completion of the all-stock transaction, MOR Analytics members will own approximately 72 percent and Helix shareholders will own approximately 28 percent of the combined company on a fully diluted basis. Helix shareholders will receive .027 shares of Forian common stock for each share of Helix common stock. The transaction is subject to customary closing conditions, including regulatory approvals and approval by Helix’s shareholders, and is expected to close in the first quarter 2021. Forian expects to apply and be listed on the Nasdaq Stock Exchange.

 

On October 19, 2020, the holder of Note Thirteen converted $100,000 of the principal balance of the note into 1,468,429 shares of common stock of the Company.

 

On October 20, 2020, the holder of Note Thirteen converted the remaining principal balance of $374,000 of the note into 5,491,924 shares of common stock of the Company.

 

On November 2, 2020, the holder of Note Fourteen converted the entire principal balance of $235,789 of the note into 3,462,394 shares of common stock of the Company.

 

On November 2, 2020, the holder of Note Thirteen converted $12,893 of the accrued interest of the note into 189,325 shares of common stock of the Company.

 

 

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

 

Forward-Looking Statements

 

The following discussion of our financial condition and results of operations for the three and nine months ended September 30, 2020 and 2019 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, 2019, as filed on March 30, 2020 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 Technologies, Inc.

 

Overview

 

Helix Technologies, 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, financial services, and technology professionals with deep experience in technology design and development, strategic partnerships, data aggregation, venture capital, private equity, risk-management, security and law enforcement, intelligence, 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 focus on utilizing technology as an operations multiplier, bringing in and managing unique partnerships across the technology and operations spectrum to tailor and create 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 largely completed the financial and operational integrations of the previous 24 months, namely the acquisitions of BioTrackTHC, Engeni, Tan Security and Amercanex. 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 organic offshore software development platform, and has delivered the second generation of the BioTrackTHC software. These strategic acquisitions will help field the growing demand in the Legal Cannabis Industry. Amercanex is a business to business wholesale marketplace that leverages blockchain technology and is capable of facilitating wholesale cannabis transactions between licensed businesses on a global scale. The Company has integrated Amercanex’s technology with BioTrackTHC’s software platforms. Integration of the previously announced acquisitions has already yielded the operational and financial results that the management team sought, evidenced by strongly improved cash flows from operations, growing market share, and a greatly accelerated software development time with increased market responsiveness. These integrations still have room to yield more financial and operational leverage, which will be welcome in the unprecedented operating environment that now confronts the industry. Further, the turnaround of the BioTrackTHC unit is well advanced, with strategic restructuring in operations and personnel nearly complete, having been initiated in 2019. The transition of BioTrackTHC from an operation with negative $800,000 of Adjusted EBITDA in 2018 (while still better than competitors) into an operation that generated nearly $800,000 in Adjusted EBITDA in Q1 2020 and Q2 2020, over $1 million of Adjusted EBITDA in Q3 2020, and is a transformational success.

 

Today, the leadership team is focused on keeping our employees and clients as safe as possible as we continue to execute our strategy in the face of the emergence of the Covid-19 pandemic. As a former military officer with training in Nuclear, Biological, and Chemical operations, Helix’s CEO is focused on not only the Company’s strategic and operational results, but on the evolution of the pandemic threat to the business and our lives.

 

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On March 11, 2020, the World Health Organization (“WHO”) recognized COVID-19 as a global pandemic, prompting many national, regional, and local governments, including in the markets that the Company operates in, to implement preventative or protective measures, such as travel and business restrictions, wide-sweeping quarantines and stay-at-home orders. As a result, COVID-19 has significantly curtailed global economic activity, including in the industries in which the Company operates.

 

The COVID-19 pandemic has created significant disruption and volatility in the capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. If we need to raise additional capital to support operations in the future, we may be unable to access the capital markets.

 

In response to the health and safety risks and challenges presented by the COVID-19 pandemic, the Company has been proactively and regularly implementing measures to protect its employees. These measures include, but are not limited to, the following:

 

Abiding by national, state, and local recommendations to require the wearing of protective face masks and practicing of social distancing.

 

Adopting remote working protocols, systems, and processes.

 

While the Company is actively working to successfully navigate the financial, operational, and personnel challenges presented by the COVID-19 pandemic, the full extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain, out of our control and cannot be predicted at this time. We believe that the economic impacts of the pandemic are not well understood in terms of scope, scale and duration, and so we continue to focus on accelerating our execution timeline while using our technology and data resources to deliver greater reliability and profitability to our customers.

 

Results of Operations for the three months ended September 30, 2020 and 2019

 

The following table shows our results of operations for the three months ended September 30, 2020 and 2019. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

    For the Three Months Ended
September 30,
    Change  
    2020     2019     Dollars     Percentage  
Revenue   $ 2,893,058     $ 2,737,568     $ 155,490       6 %
Cost of revenue     918,150       1,318,825       (400,675 )     -30 %
Gross margin     1,974,908       1,418,743       556,165       39 %
                                 
Operating expenses     43,611,028       4,141,254       39,469,774       953 %
                                 
Loss from operations     (41,636,120 )     (2,722,511 )     (38,913,609 )     1,429 %
                                 
Other (expense) income, net     (482,422 )     1,608,218       (2,090,640 )     -130 %
                                 
Loss from discontinued operations   $ (70,259 )   $ (141,276 )   $ 71,017       -50 %
                                 
Net loss   $ (42,188,801 )   $ (1,255,569 )   $ (40,933,232 )     3,260 %
                                 
Changes in foreign currency translation adjustment   $ 62,069     $ (118,003 )   $ 180,072       -153 %
                                 
Net loss attributable to common shareholders   $ (42,126,732 )   $ (1,373,572 )   $ (40,753,160 )     2,967 %

 

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Revenue

 

Total revenue for the three-month period ended September 30, 2020 was $2,893,058, which represented an increase of $155,490 compared to total revenue of $2,737,568 for the three months ended September 30, 2019. The increase primarily resulted from additional revenue resulting from continued growth in our software client base and additional services accessed by them.

 

Cost of Revenues

 

Cost of revenues for the three months ended September 30, 2020 and 2019 primarily consisted of hourly compensation for security personnel and employees involved in the creation and development of licensing software. Cost of revenues decreased by $400,675 for the three months ended September 30, 2020, to $918,150 as compared to $1,318,825 for the three months ended September 30, 2019. The decrease resulted from cost containment measures we implemented and a reduction in purchases of installed security equipment. 

 

Operating Expenses

  

Our operating expenses encompass selling, general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during the three months ended September 30, 2020 and 2019 were $43,611,028 and $4,141,254, respectively. The overall $39,469,774 increase in operating expenses was attributable to intense cost management efforts, illustrated by the following increases/(decreases) in operating expenses of:

 

  Selling, general and administrative – $(471,049)
     
  Salaries and wages – $307,668
     
  Professional and legal fees – $(199,590)
     
  Depreciation and amortization – $(130,362)
     
  Loss on impairment of intangibles – $39,963,107

 

The $(471,049) decrease in selling, general and administrative expenses is a result of decreases in rent expense, advertising and travel expenses resulting from cost containment measures. The $307,668 increase in salaries and wages resulted from an increase in stock compensation expense. The $(199,590) decrease in professional and legal fees primarily resulted from a decrease in legal fees and costs associated with fundraising and acquisitions. The $(130,362) decrease in depreciation and amortization was due to reduced amortization of intangible assets acquired in the Security Grade acquisition as we fully impaired certain intangible assets in the first quarter of 2020. The $39,963,107 increase in loss on impairment of intangibles resulted from an impairment of goodwill required by the equity value of the Company pursuant to the merger agreement with MOR Analytics LLC. See the Note 21 Subsequent Events for additional information.

 

Other (Expense) Income, net

 

Other (expense) income, 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, gain on asset disposal, loss on the conversion of convertible notes and interest expense. Other (expense) income, net during the three months ended September 30, 2020 and 2019 was $(482,422) and $1,608,218, respectively. The $(2,090,640) decrease in other (expense) income, net was primarily attributable to a loss on the change in fair value of convertible notes of $(321,915), gain on the change in fair value of warrant liability of $67,039, gain on asset disposal of $239,825, loss on the conversion of convertible notes of $(111,902) and interest expense of $(355,469).

 

Loss from Continuing Operations

 

For the foregoing reasons, we had a loss from continuing operations of $(42,118,542) for the three months ended September 30, 2020, compared to a loss from continuing operations of $(1,114,293) for the three months ended September 30, 2019.

 

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Loss from Discontinued Operations

 

Loss from discontinued operations was $(70,259) and $(141,276) for the three months ended September 30, 2020 and 2019, respectively. These losses related to the guarding business of the Company, which was sold on July 31, 2020.

 

Net Loss

 

For the foregoing reasons, we had a net loss of $(42,188,801) for the three months ended September 30, 2020, or $(0.36) per basic share, compared to net loss of $(1,255,569) for the three months ended September 30, 2019, or $(0.02) per basic share.

 

Net Loss Attributable to Common Shareholders

 

For the foregoing reasons, we had a net loss attributable to common shareholders of $(42,126,732) for the three months ended September 30, 2020, or $(0.36) per basic share attributable to common shareholders, compared to net loss attributable to common shareholders of $(1,373,572) for the three months ended September 30, 2019, or $(0.02) net income per basic share attributable to common shareholders.

 

Results of Operations for the nine months ended September 30, 2020 and 2019

 

The following table shows our results of operations for the nine months ended September 30, 2020 and 2019. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

    For the Nine Months Ended
September 30,
    Change  
    2020     2019     Dollars     Percentage  
Revenue   $ 8,800,352     $ 7,757,066     $ 1,043,286       13 %
Cost of revenue     2,848,674       3,594,491       (745,817 )     -21 %
Gross margin     5,951,678       4,162,575       1,789,103       43 %
                                 
Operating expenses     52,055,830       11,929,552       40,126,277       336 %
                                 
Loss from operations     (46,104,152 )     (7,766,977 )     (38,337,174 )     493 %
                                 
Other (expense) income, net     (2,210,877 )     642,813       (2,938,043 )     -457 %
                                 
Loss from discontinued operations   $ (65,141 )   $ (160,798 )   $ 169,200       -105 %
                                 
Net loss   $ (48,380,170 )   $ (7,284,962 )   $ (41,106,017 )     564 %
                                 
Changes in foreign currency translation adjustment   $ 110,264     $ (114,346 )   $ 224,610       -196 %
                                 
Net loss attributable to common shareholders   $ (48,269,906 )   $ (7,399,308 )   $ (40,881,407 )     552 %

 

Revenue

 

Total revenue for the nine-month period ended September 30, 2020 was $8,800,352, which represented an increase of $1,043,286 compared to total revenue of $7,757,066 for the nine months ended September 30, 2019. The increase primarily resulted from additional revenue resulting from continued growth in our software client based, and additional services accessed by them.

 

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Cost of Revenues

 

Cost of revenues for the nine months ended September 30, 2020 and 2019 primarily consisted of hourly compensation for security personnel and employees involved in the creation and development of licensing software. Cost of revenues decreased by $(745,817) for the nine months ended September 30, 2020, to $2,848,674 as compared to $3,594,491 for the nine months ended September 30, 2019. The decrease resulted from cost containment measures we implemented and a reduction in purchases of installed security equipment.

 

Operating Expenses

 

Our operating expenses encompass selling, general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during the nine months ended September 30, 2020 and 2019 were $52,055,830 and $11,929,552, respectively. The overall $40,126,278 increase in operating expenses was attributable to the following increases/(decreases) in operating expenses of:

 

 

Selling, general and administrative – $(1,066,569)

     
  Salaries and wages – $900,038
     
  Professional and legal fees – $(844,499)
     
  Depreciation and amortization – $(195,777)
     
  Loss on impairment of intangible assets - $41,333,085

 

The $(1,066,569) decrease in selling, general and administrative expenses is a result of decreases in rent expense, advertising and travel expenses. The $900,038 increase in salaries and wages resulted from share-based compensation and separation payments to terminated employees. The $(844,499) decrease in professional and legal fees primarily resulted from a decrease in legal fees and costs associated with fundraising and acquisitions. The $(195,777) decrease in depreciation and amortization was due to the full impairment of the Security Grade customer list in the first quarter of 2020, which reduced subsequent amortization expense in 2020. The $41,333,085 increase in loss on impairment of intangibles resulted from an impairment of goodwill required by the equity value of the Company pursuant to the merger agreement with MOR Analytics LLC. See the Note 21 Subsequent Events for additional information.

 

Other (Expense) Income, net

 

Other (expense) income, 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 asset disposal, loss on conversion of convertible notes, loss on issuance of warrants, gain on reduction of obligation pursuant to acquisition, other income and interest expense. Other (expense) income, net during the nine months ended September 30, 2020 and 2019 was $(2,210,877) and $642,813, respectively. The $(2,853,690) decrease in other (expense) income, net was primarily attributable to a loss on the change in fair value of convertible notes of $(1,104,856), loss on conversion of convertible notes of $(1,536,324), and interest expense of $(1,029,979), partially offset by gain on the change in fair value of convertible notes – related party of $498,233, gain on the change in fair value of warrant liability of $682,717, other income of $37,507, gain on asset disposal of $239,825 and gain on reduction of obligation pursuant to acquisition of $2,000, during the nine months ended September 30, 2020.

  

Loss from Continuing Operations

 

For the foregoing reasons, we had a loss from continuing operations of $(48,315,029) for the nine months ended September 30, 2020, compared to a loss from continuing operations of $(7,124,164) for the nine months ended September 30, 2019.

 

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Loss from Discontinued Operations

 

Loss from discontinued operations was $(65,141) and $(160,798) for the nine months ended September 30, 2020 and 2019, respectively. These losses related to the guarding business of the Company, which was sold on July 31, 2020.

 

Net Loss

 

For the foregoing reasons, we had a net loss of $(48,380,170) for the nine months ended September 30, 2020, or $(0.46) net loss per common share – basic and diluted, compared to a net loss of $(7,284,962) for the nine months ended September 30, 2019, or $(0.10) net loss per common share – basic and diluted.

 

Net Loss Attributable to Common Shareholders

 

For the foregoing reasons, we had a net loss attributable to common shareholders of $(48,269,906) for the nine months ended September 30, 2020, or $(0.46) net loss per share attributable to common shareholders - basic and diluted, compared to net loss attributable to common shareholders of $(7,399,308) for the nine months ended September 30, 2019, or $(0.10) 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 nine months ended September 30, 2020, we have generated revenue and are trying to achieve positive cash flows from operations.

 

As of September 30, 2020, we had a cash balance of $1,677,041, accounts receivable, net of $744,906 and $5,914,154 in current liabilities. At the current cash consumption rate, we may need to consider additional funding sources toward the end of fiscal 2020. We’ve taken 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: 

 

    September 30,
2020
    December 31,
2019
    Change  
Current assets   $ 4,573,684     $ 3,518,224     $ 1,055,460  
Current liabilities     5,914,154       6,934,725       (1,020,571 )
Working capital   $ (1,340,470 )   $ (3,416,501 )   $ 2,076,031  

 

As of September 30, 2020, and December 31, 2019, we had a cash balance of $1,677,041 and $556,858, respectively.

 

Summary of Cash Flows

 

    For the Nine Months Ended
September 30,
 
    2020     2019  
Net cash used in operating activities   $ (738,678 )   $ (2,769,048 )
Net cash provided by (used in) investing activities     482,517       (895,406 )
Net cash provided by financing activities     1,260,966       4,212,525  

 

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Net cash used in operating activities. Net cash used in operating activities for the nine months ended September 30, 2020 was $738,678. This included a net loss of $48,380,170 ($65,141 of which was income from discontinued operations), non-cash charge related to depreciation and amortization of $3,320,641, non-cash charge related to amortization of debt discounts of $340,772, non-cash charge related to provision for doubtful account $395,995, non-cash charge related to share-based compensation of $1,620,616, 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 of $1,104,856, $(498,233), and $(682,717), respectively, loss on conversion of convertible notes of $1,536,324, loss on impairment of intangible assets of $41,333,085, gain on reduction of obligation pursuant to acquisition of $(2,000), gain on asset disposal of (239,825) and changes in accounts receivable, deposits, costs in excess of billings, billings in excess of costs, accounts payable and accrued expenses, prepaid expenses, and right of use assets and liabilities of $(683,688). Net cash used in operating activities for the nine months ended September 30, 2019 was $(2,769,048). This included a net loss of $7,284,962 ($160,798 of which was from discontinued operations), non-cash charge related to depreciation and amortization of $3,516,418, non-cash charge related to amortization of debt discounts of $922,965,  non-cash charge from loss on issuance of warrants of $787,209, non-cash charge related to provision for doubtful account $199,215, non-cash charge related to share-based compensation of $1,241,741, non-cash (gains) losses 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 $(288,425), $213,828, $(3,462,746) and $880,050, respectively, 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, accounts payable and accrued expenses, prepaid expenses, due from related party, right of use assets and liabilities, and other long-term liabilities of $642,479.

 

Net cash provided by (used in) investing activities. Net cash provided by investing activities for the nine months ended September 30, 2020 was $482,517, which consisted of capital expenditures of $(619,483), payments pursuant to the Tan Security business acquisition of $(48,000), and proceeds from the sale of the Company’s guarding business $1,150,000. Net cash used in investing activities for the nine months ended September 30, 2019 was $(895,406) ($(89,118) of which was from discontinued operations), which consisted of capital expenditures of $(657,765), purchase of domain names of $(21,856) and payments pursuant to the Tan Security business acquisition and Security Grade business acquisition of $(126,667).

 

Net cash provided by financing activities. Net cash provided by financing activities for the nine months ended September 30, 2020 was $1,260,966 which resulted from repayment of promissory notes of $(300,000), repayment of notes payable of $(429,521), proceeds from notes payable and financing arrangements of $500,000, and proceeds from the issuance of common stock of $1,490,487. Net cash provided by financing activities for the nine months ended September 30, 2019 was $4,212,525, which resulted from repayment of a promissory note receivable of $(75,000), repayment of notes payable of $(15,401), proceeds and repayment of a promissory note of $300,000, proceeds from the issuance of common stock of $1,306,313, proceeds from the issuance of convertible note payable of $2,732,500, proceeds from notes payable and financing arrangements of $9,363, and repayment of advances from related parties of $(45,250)

 

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, 2019 filed with the SEC on March 30, 2020.

 

Non-GAAP Financial Measures

 

Consolidated Adjusted EBITDA (“Adjusted EBITDA”) is a non-GAAP financial measure and is the primary basis used to measure the operational strength and performance of our businesses as well as to assist in the evaluation of underlying trends in our businesses. This measure eliminates the significant level of non-cash depreciation and amortization expense that results primarily from intangible assets recognized in business combinations and significant non-cash expense related to share-based compensation. It is also unaffected by our capital and tax structures. Our management and Board of Directors use this financial measure to evaluate our consolidated operating performance and the operating performance of our operating segments and to allocate resources and capital to our operating segments. Additionally, we believe that Adjusted EBITDA is useful to investors because it is one of the bases for comparing our operating performance with that of other companies in our industries, although our measure of Adjusted EBITDA may not be directly comparable to similar measures used by other companies. We define Adjusted EBITDA as net loss before income tax expense, other income (loss), interest expense, depreciation and amortization expense, share based compensation expense, other operating gains and losses (such as impairment charges related to fixed and intangible assets and gains or losses on the sale of long-lived assets), if any, and other gains and losses associated with the mark to market of our convertible notes, contingent liabilities and warrant liabilities. From time to time, we may exclude from Adjusted EBITDA the impact of certain events, gains, losses or other charges that affect the period-to-period comparability of our operating performance. We reconcile consolidated Adjusted EBITDA to net loss. This measure should not be considered a substitute for operating loss, net loss, or net cash provided by operating activities that we have reported in accordance with GAAP.

 

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    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
Net Loss   $ (42,188,801 )   $ (1,255,569 )   $ (48,380,170 )   $ (7,284,962 )
Interest expense     355,176       538,591       1,029,686       1,227,271  
Depreciation & amortization     1,049,235       1,179,597       3,320,641       3,516,418  
Loss on impairment of intangible assets     39,963,107       -       41,333,085       -  
Share based compensation expense     549,012       352,341       1,620,616       1,241,741  
Change in fair value of convertible note     321,915       (430,766 )     1,104,856       (288,425 )
Change in fair value of convertible note - related party     -       (491,442 )     (498,233 )     213,828  
Change in fair value of warrant liability     (67,039 )     (1,224,601 )     (682,717 )     (3,462,746 )
Change in fair value of contingent consideration     111,902       -       1,536,324       880,050  
Loss (gain) on issuance of warrants     -       -       (2,000 )     787,209  
Other expense     -       -       (37,507 )     -  
Adjusted EBITDA   $ 94,800     $ (1,331,849 )   $ 344,874     $ (3,169,616 )

 

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 September 30, 2020, our disclosure controls and procedures were effective.

 

Changes in internal control over financial reporting

 

During the nine months ended September 30, 2020, 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.

 

49

 

 

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 March 31, 2020, the parties have outlined a settlement agreement pending the outcome of the Kenney, et. al. case. The parties executed the settlement agreement in April 2020, received court approval in early August, and the Company funded the full cost of the settlement, plus the settlement administrator’s cost, from the proceeds of the sale of the Helix Guarding business. The total cost to the Company was $454,060.60. The Company had previously accrued a $440,000 liability related to this matter, and in Q3 2020 recorded an expense of $14,060.60.

 

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 September 30, 2020, the claim is currently in the process of appeal.

 

Audet v. Green Tree International, et. al.

 

On February 14, 2020 John Audet filed a complaint in 15th Judicial Circuit in and for Palm Beach County, Florida against multiple parties, including Green Tree International (“GTI”), claiming that he owned 10% of GTI. The Company believes the lawsuit is wholly without merit and will defend itself from these claims vigorously. As of September 30, 2020, the case is in the process of discovery.

 

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 nine months ended September 30, 2020, we issued 22,669,476 shares of common stock. 11,179,269 shares of common stock were issued upon the conversion of convertible notes, 2,178,800 shares were issued as stock compensation expense, 11,433,790 shares were issued under a subscription agreement for gross proceeds of $1,260,347, and 167,981 shares were issued as PIK interest of $93,750. Additionally, the 4,140,274 holdback shares defined in the Amercanex Merger Agreement were returned to the Company, as the $1,500,000 GTI revenue threshold was not reached within the first 12 months following the closing of the Merger.

 

ITEM 3. Defaults upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosure

 

Not applicable.

 

ITEM 5. Other Information

 

None. 

 

50

 

 

ITEM 6. Exhibits

 

Exhibit No.   Description
     
2.1   Reorganization Agreement dated as of December 21, 2015 by and between Helix Opportunities, LLC and its members and Helix TCS, Inc. (Incorporated by reference to Exhibit 2.1 of the Company’s Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission on December 9, 2016).
     
2.2   Agreement and Plan of Merger by and among Helix TCS, Inc., Helix Acquisition Sub, Inc., Bio-Tech Medical Software, Inc. and Terence J. Ferraro, as the Securityholder Representative, dated March 3, 2018 (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 5, 2018).
     
2.3   Agreement and Plan of Merger, dated February 5, 2019, by and among Helix TCS, Inc., Helix Acquisition Sub, Inc., Green Tree International, Inc. and the Securityholder Representative (Incorporated by reference to Exhibit 2.3 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on September 16, 2019).
     
2.4   Addendum No. 1, dated as of September 10, 2019, to the Agreement and Plan of Merger, dated February 5, 2019, by and among Helix TCS, Inc., Helix Acquisition Sub, Inc., Green Tree International, Inc. and the Securityholder Representative (Incorporated by reference to Exhibit 2.4 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on September 16, 2019).
     
3.1   Certificate of Incorporation of Jubilee4 Gold, Inc. (Incorporated by reference to Exhibit 3(i).1 of the Company’s Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission on December 9, 2016).
     
3.2   Certificate of Amendment to Articles of Incorporation of Helix TCS, Inc. (Incorporated by reference to Exhibit 3(i).2 of the Company’s Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission on December 9, 2016).
     
3.3   Certificate of Amendment to Articles of Incorporation of Helix TCS, Inc. - Designation of Rights and Privileges Class A Preferred Stock (Incorporated by reference to Exhibit 3(i).3 of the Company’s Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission on December 9, 2016).
     
3.4   Bylaws of Jubilee4 Gold, Inc. (Incorporated by reference to Exhibit 3(ii).1 of the Company’s Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission on December 9, 2016).
     
3.5   Certificate of Amendment No. 2 to the Articles of Incorporation of Helix Technologies, Inc. (Incorporated by reference to Exhibit 3.5 of the Company’s Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on August 14, 2020).
     
10.56   First Amendment to 10% Fixed Convertible Promissory Note to the note dated October 11, 2019 (Incorporated by reference to Exhibit 10.56 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on July 13, 2020).
     
10.57   First Amendment to 10% Fixed Convertible Promissory Note to the note dated December 26, 2019 (Incorporated by reference to Exhibit 10.57 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on July 13, 2020).
     
10.58   Second Amendment to September 16, 2019 Fixed Convertible Promissory Note (Incorporated by reference to Exhibit 10.58 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on July 13, 2020).
     
10.59   Second Amendment to August 15, 2019 Fixed Convertible Promissory Note (Incorporated by reference to Exhibit 10.59 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on July 13, 2020).
     
10.60   Asset Purchase Agreement by and between the Company and Invicta Security CA Corporation, Invicta Services LLC, Boss Security Solutions, Inc., Security Consultants Group, LLC, Tan’s International LLC, and Tan’s International Security, Inc. (Incorporated by reference to Exhibit 2.04 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on August 4, 2020).

 

51

 

 

Exhibit No.   Description
31.1   Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). *
     
31.2   Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). *
     
32.1   Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
     
32.2   Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
     
101.INS   XBRL Instance Document *
     
101.SCH   XBRL Taxonomy Extension Schema *
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase *
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase *
     
101.LAB   XBRL Taxonomy Extension Label Linkbase *
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase *

 

* Filed herewith

 

# Management contract or compensatory plan.

 

52

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: November 13, 2020 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   November 13, 2020
Zachary L. Venegas*   (Principal Executive Officer)    
         
/s/ Scott Ogur   Chief Financial Officer   November 13, 2020
Scott Ogur   (Principal Financial Officer)    
         
/s/ Paul Hodges   Director   November 13, 2020
Paul Hodges*        
         
/s/ Steve Janjic   Director   November 13, 2020
Steve Janjic*        
         
/s/ Garvis Toler III   Director   November 13, 2020
Garvis Toler III*        
         
/s/ Andrew Schweibold   Director   November 13, 2020
Andrew Schweibold*        
         
/s/ Satyavrat Joshi   Director   November 13, 2020
Satyavrat Joshi*        

 

* By: Scott Ogur, as Attorney in Fact, pursuant to the Power of Attorney dated November 13, 2020 and filed herewith.

 

 

53

 

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