UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2019

or

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

Commission file number: 000-55722

HELIX TCS, INC.

(Exact name of registrant as specified in its charter)

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

10200 E. Girard Avenue, Suite B420

Denver, CO 80231

(Address of Principal Executive Offices) (Zip Code)

Telephone: (720) 328-5372

(Registrant’s telephone number)

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

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

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

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

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

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

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

As of May 15, 2019, the registrant had 75,412,519 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 (unaudited) as of March 31, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited)	2
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)	4
	Notes to the Condensed Consolidated Financial Statements	5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	50
ITEM 4.	Controls and Procedures	50
PART II	OTHER INFORMATION	52
ITEM 1.	Legal Proceedings	52
ITEM 1A.	Risk Factors	52
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
ITEM 3	Defaults upon Senior Securities	52
ITEM 4.	Mine Safety Disclosures	52
ITEM 5.	Other Information	52
ITEM 6.	Exhibits	53
SIGNATURES		54

i

 PART I – FINANCIAL INFORMATION 

ITEM 1. Financial Statements

HELIX TCS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED) 

	March 31,			December 31,
	2019			2018
ASSETS
Current assets:
Cash	$	2,120,784		$	285,761
Accounts receivable, net		1,186,224			1,184,923
Prepaid expenses and other current assets		315,143			409,800
Costs & earnings in excess of billings		20,167			42,869
Total current assets		3,642,318			1,923,353
Property and equipment, net		442,003			349,518
Intangible assets, net		17,456,150			18,604,078
Goodwill		39,913,559			39,913,559
Deposits and other assets		1,544,451			146,990
Total assets	$	62,998,481		$	60,937,498
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	2,088,832		$	1,702,713
Advances from related parties		3,250			45,250
Billings in excess of costs		156,998			155,192
Deferred rent		-			2,937
Notes payable, current portion		24,805			24,805
Obligation pursuant to acquisition		75,000			201,667
Convertible notes payable, net of discount		1,180,604			187,177
Convertible notes payable, net of discount - related party		3,912,403			-
Due to related party		-			32,489
Contingent consideration		2,045,304			908,604
Warrant liability		5,986,781			896,171
Total current liabilities		15,473,977			4,157,005
Long-term liabilities
Notes payable, net of current portion		44,494			51,554
Other long-term liabilities		1,060,398			-
Total long-term liabilities		1,104,892			51,554
Total liabilities		16,578,869			4,208,559
Shareholders’ equity:
Preferred stock (Class A), $0.001 par value, 3,000,000 shares authorized; 1,000,000 issued and outstanding as of March 31, 2019 and December 31, 2018		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 March 31, 2019 and December 31, 2018		13,784			13,784
Common stock; par value $0.001; 200,000,000 shares authorized; 74,410,397 shares issued and outstanding as of March 31, 2019; 72,660,825 shares issued and outstanding as of December 31, 2018		74,410			72,660
Additional paid-in capital		84,937,724			82,831,014
Accumulated other comprehensive income		22,238			17,991
Accumulated deficit		(38,629,544	)		(26,207,510	)
Total shareholders’ equity		46,419,612			56,728,939
Total liabilities and shareholders’ equity	$	62,998,481		$	60,937,498

See accompanying notes to the unaudited condensed consolidated financial statements

1

HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended March 31,
	2019			2018
Security and guarding	$	1,204,711		$	1,093,774
Systems installation		28,541			34,564
Software		2,137,855			-
Total revenues	$	3,371,107		$	1,128,338
Cost of revenue		1,925,219			790,705
Gross margin		1,445,888			337,633
Operating expenses:
Selling, general and administrative		936,878			347,880
Salaries and wages		2,831,910			1,495,520
Professional and legal fees		688,455			619,759
Depreciation and amortization		1,165,641			198,903
Loss on impairment of Goodwill		-			664,329
Total operating expenses		5,622,884			3,326,391
Loss from operations		(4,176,996	)		(2,988,758	)
Other (expense) income:
Change in fair value of convertible note		(987,963	)		577,016
Change in fair value of convertible note - related party		(3,524,009	)		118,506
Change in fair value of warrant liability		(1,632,956	)		976,679
Change in fair value of contingent consideration		(1,136,700	)		-
Loss on issuance of warrants		(787,209	)		-
Gain on reduction of obligation pursuant to acquisition		-			266,613
Interest expense		(176,201	)		(17,933	)
Other (expense) income		(8,245,038	)		1,920,881
Net loss	$	(12,422,034	)	$	(1,067,877	)
Other comprehensive income:
Changes in foreign currency translation adjustment		4,247			-
Total other comprehensive income		4,247			-
Total comprehensive loss		(12,417,787	)		(1,067,877	)
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend		-			(14,998,505	)
Net loss attributable to common shareholders	$	(12,417,787	)	$	(16,066,382	)
Net loss per share attributable to common shareholders:
Basic	$	(0.17	)	$	(0.55	)
Diluted	$	(0.17	)	$	(0.55	)
Weighted average common shares outstanding:
Basic		73,163,893			29,076,641
Diluted		73,163,893			29,076,641

 See accompanying notes to the unaudited condensed consolidated financial statements.

2

HELIX TCS, 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 December 31, 2018		72,660,825	$	72,660		1,000,000		1000		13,784,201	$	13,784	$	82,831,014	$	17,991	$	(26,207,510	)	$	56,728,939
Issuance of common stock per stock subscription agreements		1,255,222		1,255																	1,255
Issuance of common stock resulting from convertible note conversion		155,421		156										117,781							117,937
Issuance of common stock to employees under Stock Incentive Plan		250,000		250										319,750							320,000
Issuance of common stock resulting from inducement of consulting agreement		20,000		20										27,380							27,400
Grant of an option to purchase common stock														1,637,000							1,637,000
Issuance of common stock resulting from exercise of stock options		6,082		6										4,799							4,805
Issuance of common stock resulting from cashless exercise of stock options		62,847		63																	63
Foreign currency translation																4,247					4,247
Net loss																		(12,422,034	)		(12,422,034	)
Balance at March 31, 2019		74,410,397	$	74,410		1,000,000	$	1,000		13,784,201	$	13,784	$	84,937,724	$	22,238	$	(38,629,544	)	$	46,419,612

	Common Stock				Preferred Stock (Class A)				Preferred Stock (Class B)				Additional Paid-In			Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Deficit			Equity
Balance at December 31, 2017		28,771,402	$	28,771		1,000,000	$	1,000		13,784,201	$	13,784	$	18,741,114		$	(18,241,708	)	$	542,961
Beneficial conversion feature of Series B convertible preferred stock														14,998,505						14,998,505
Deemed dividend on conversion of Series B convertible preferred stock to common stock														(14,998,505	)					(14,998,505	)
Issuance of common stock per stock subscription agreement		722,222		722										649,278						650,000
Issuance of common stock resulting from convertible note conversion		205,974		206										174,794						175,000
Grant of an option to purchase common stock														629,200						629,200
Issuance of restricted common stock		15,000		15										29,950						29,965
Issuance of common stock to employees under Stock Incentive Plan		142,850		143										422,871						423,014
Reduction in Additional Paid-In Capital due to acquisition settlement agreement														(90,318	)					(90,318	)
Net loss																	(1,067,877	)		(1,067,877	)
Balance at March 31, 2018		29,857,448	$	29,857		1,000,000	$	1,000		13,784,201	$	13,784	$	20,556,889		$	(19,309,585	)	$	1,291,945

 See accompanying notes to the unaudited condensed consolidated financial statements.

3

HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Three Months Ended March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(12,422,034	)	$	(1,067,877	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,165,641			198,903
Amortization of debt discounts		128,794			-
Loss on issuance of warrants		787,209
Provision for doubtful accounts		69,896			-
Share-based compensation expense		1,989,268			1,082,179
Change in fair value of convertible notes, net of discount		987,963			(402,016	)
Change in fair value of warrant liability		1,632,956			(976,679	)
Change in fair value of convertible notes, net of discount - related party		3,524,009			(118,506	)
Change in fair value of contingent consideration		1,136,700			-
Loss on impairment of goodwill		-			664,329
Gain on reduction of obligation pursuant to acquisition		-			(266,613	)
Gain on reduction of contingent consideration		(100,000	)		-
Change in operating assets and liabilities:
Accounts receivable		(73,040	)		(63,595	)
Prepaid expenses		99,205			-
Deposits		-			(14,729	)
Due from related party		(32,489	)		-
Costs in excess of billings		22,702			40,847
Accounts payable and accrued expenses		(139,956	)		(119,442	)
Deferred rent		(2,937	)		(3,580	)
Billings in excess of costs		1,806			33,407
Right of use assets and liabilities		48,432			-
Net cash used in operating activities		(1,175,875	)		(1,013,372	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(9,195	)		(84,144	)
Payments for business combination, net of cash acquired		(26,667	)		-
Payments for asset acquisition		-			(31,248	)
Net cash used in investing activities		(35,862	)		(115,392	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments pursuant to advances from related parties		(42,000	)		(44,500	)
Payments pursuant to notes payable		(7,060	)		-
Payments pursuant to a promissory note		(280,000	)		-
Proceeds from notes payable		-			33,248
Proceeds from the issuance of a promissory note		280,000			-
Proceeds from the issuance of convertible notes payable		1,925,000			-
Proceeds from the issuance of common stock		1,129,700			650,000
Net cash provided by financing activities		3,005,640			638,748
Effect of foreign exchange rate changes on cash		41,120			-
Net change in cash		1,835,023			(490,016	)
Cash, beginning of period		285,761			868,554
Cash, end of period	$	2,120,784		$	378,538
Supplemental disclosure of cash and non-cash transactions:
Conversion of convertible note into common stock	$	117,936		$	-
Debt discount for warrant liability	$	(1,542,001	)	$	-
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets	$	1,485,511		$	-

See accompanying notes to the unaudited condensed consolidated financial statements. 

4

HELIX TCS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Description of Business  

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

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

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

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

On June 2, 2017 (the “Closing”), the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) in which the Company purchased all issued and outstanding Units of Security Grade Protective Services, Ltd. (“Security Grade”), which consisted of 800,000 Class A Units and 200,000 Class B Units. At closing, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”). Furthermore, provided that, within the first 60 days following the Closing, no material customer identified in the Agreement terminates its contractual relationship with the Company and that all contracts with such material customers are in full force and effect without default or cancellation as of the 60th day following the Closing, on the 61st day following the Closing, the Company shall issue 207,427 additional stock options (the “Additional Stock Options”). The Company subsequently issued the 207,427 additional stock options on August 1, 2017 as well as a second cash payment of $800,000 pursuant to the original terms of the Agreement.

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

On March 3, 2018, Helix, Inc. and its wholly owned subsidiary, Helix Acquisition Sub, Inc. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bio-Tech Medical Software, Inc. (“BioTrackTHC”) and Terence J. Ferraro, as the representative of the BioTrackTHC shareholders, pursuant to which Merger Sub merged with and into BioTrackTHC (the “Merger”).

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

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

On the Engeni Closing Date, in connection with closing the Engeni Merger Agreement, the Company issued 366,700 shares of Company common stock to Engeni US members. Furthermore, the Company will also issue Engeni US members 366,700 and 366,600 shares of Company common stock upon achievement of specific objectives.

On February 5, 2019, the Company and its wholly owned subsidiary, Merger Sub, entered into an Agreement and Plan of Merger (the “Amercanex Merger Agreement”) with Green Tree International, Inc., a corporation incorporated under the laws of the state of Colorado operating under the tradename “Amercanex International Exchange” (“Amercanex”). Pursuant to the Amercanex Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into Amercanex, with Amercanex surviving the merger as a wholly-owned subsidiary of the Company. The Merger is expected to close during the second quarter of 2019.

5

2. Revision of Prior Period Financial Statements

The Company corrected certain immaterial errors in its 2018 financial statements. In accordance with ASC 50-10-S99 and S55 (formerly Staff Accounting Bulletins (“SAB”) No. 99 and No. 108), Accounting Changes and Error Corrections, the Company concluded that these errors were, individually, and in the aggregate, not material, quantitatively or qualitatively, to the financial statements in these periods. 

On March 15, 2018, the Company awarded Zachary Venegas two options to purchase a total of 490,000 shares of the Company’s common stock at prices ranging from $1.90 to $2.09 per share. These options vested on June 28, 2018 and have expiration dates ranging from March 2023 to March 2028.

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

	Previously Reported			Adjustments			As revised
Condensed Consolidation Balance Sheet as of March 31, 2018
Additional paid-in capital	$	19,927,689			629,200		$	20,556,889
Accumulated Deficit		(18,680,385	)		(629,200	)		(19,309,585	)
Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2018
Salaries and wages	$	866,320		$	629,200		$	1,495,520
Total operating expenses		2,032,862			629,200			2,662,062
Loss from operations		(1,695,229	)		(629,200	)		(2,324,429	)
Net loss		(438,677	)		(629,200	)		(1,067,877	)
Net loss attributable to common shareholders		(15,437,182	)		(629,200	)		(16,066,382	)
Net loss per share attributable to common shareholders:
Basic		(0.53	)		(0.02	)		(0.55	)
Diluted		(0.53	)		(0.02	)		(0.55	)

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

6

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

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

On December 12, 2018, the Company sold an aggregate of 222,222 units of the Company’s securities to an investor at a purchase price of $0.90 per unit for total proceeds of $200,000.  Each unit consists of one share of the Company’s common stock and a warrant exercisable to purchase one half of one share of common stock of the Company.

Each warrant is exercisable at any time on or after 90 days from the issuance date until the four-year anniversary issuance date.  Each warrant is exercisable at a price of $1.25 per share.

Upon further review it was noted, during the year ended December 31, 2018, the Company erroneously recorded the warrants as a component of shareholders’ equity. The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the common stock included in the agreement. Management also 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.

As a result, for the year-ended December 31, 2018, the Company recorded an increase to liabilities of $92,000, a reduction to additional paid-in capital of $307,778 and a reduction to accumulated deficit of $215,778.

	Previously Reported			Adjustments			Revised
Consolidated Balance Sheet as of December 31, 2018
Warrant liability	$	804,171		$	92,000		$	896,171
Total current liabilities		4,065,005			92,000			4,157,005
Total liabilities		4,116,559			92,000			4,208,559
Additional paid-in capital		83,138,792			(307,778	)		82,831,014
Accumulated deficit		(26,423,288	)		215,778			(26,207,510	)
Total shareholders’ equity		56,820,939			(92,000	)		56,728,939
Consolidated Statement of Operations for the Year Ended December 31, 2018
Salaries and wages	$	5,918,594		$	(108,000	)	$	5,810,594
Total operating expenses		13,759,855			(108,000	)		13,651,855
Loss from operations		(10,165,321	)		108,000			(10,057,321	)
Change in fair value of obligation to issue warrants		1,625,398			16,000			1,641,398
Gain on issuance of warrants		-			91,778			91,778
Other income (expenses)		1,983,741			107,778			2,091,519
Net loss		(8,181,580	)		215,778			(7,965,802	)
Total comprehensive loss		(8,163,589	)		215,778			(7,947,811	)
Net loss attributable to common shareholders		(30,365,783	)		215,778			(30,150,005	)

7

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

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

At March 31, 2019, the Company had a working capital deficit of $11,831,659, as compared to a working capital deficit of $2,233,652 at December 31, 2018. The increase of $9,598,007 in the Company’s working capital deficit from December 31, 2018 to March 31, 2019 was primarily the result of a non-cash increase in the fair market value of Company’s convertible notes payable, net of discount.

The Company’s future capital requirements for its operations will depend on many factors, including the profitability of its businesses, the number and cash requirements of other acquisition candidates that the Company pursues, and the costs of operations. The Company has been investing in expanding its operation in new states, its security service in Colorado, and upgrading the capabilities of BioTrackTHC. The Company’s management has taken several actions to ensure that it will have sufficient liquidity to meet its obligations for the next twelve months, including growing and diversifying its revenue streams, selectively reducing expenses, and considering additional funding. Additionally, if the Company’s actual revenues are less than forecasted, the Company anticipates that variable expenses will also decline, and the Company’s management can implement expense reduction as necessary. The Company is evaluating other measures to further improve its liquidity, including the sale of equity or debt securities. Lastly, the Company may elect to reduce certain related-party and third-party debt by converting such debt into common shares. The Company’s management believes that these actions will enable the Company to meet its liquidity requirements through May 16, 2020. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during 2019 and beyond.  

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

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4. Summary of Significant Accounting Policies

Principles of Consolidation 

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

Use of Estimates  

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

Cash  

Cash consists of checking accounts. The Company considers all highly liquid investments purchased with a maturity of three months or less at the time of purchase to be cash equivalents. The Company has no cash equivalents as of March 31, 2019 or December 31, 2018.

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Accounts Receivable and Allowance for Doubtful Accounts

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

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

Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Allowance for doubtful accounts was $85,067 and $76,156 at March 31, 2019 and December 31, 2018, respectively.

Long-Lived Assets, Including Definite Lived Intangible Assets

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

Goodwill

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

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

Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash flows and the current fair value of the asset. It was determined that during the first quarter of 2018, the Company’s entire amount of goodwill attributable to the Security Grade acquisition was impaired. See Note 8 for a further discussion on the impairment.

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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. 

Business Combinations

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

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Revenue Recognition

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

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

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

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

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

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

Segment Information

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

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

Expenses

Cost of Revenues

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

Operating Expenses

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

Other (Expense) Income, net

Other (expense) income, net consisted of change in fair value of convertible note, change in fair value of convertible note – related party, change in fair value of contingent consideration, change in fair value of warrant liability, loss on issuance of warrants and interest expense.

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Property and Equipment

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

Contingencies

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

Advertising

Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $69,271 and $26,774 for the three months ended March 31, 2019 and 2018, respectively.

Foreign Currency

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

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the three months ended March 31, 2019 and 2018.

Comprehensive Loss

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

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Distinguishing Liabilities from Equity

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

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

Initial Measurement

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

Subsequent Measurement – Financial instruments classified as liabilities

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

Beneficial Conversion Feature

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

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

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

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

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Share-based Compensation

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

The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which services are received.

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

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

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Fair Value of Financial Instruments

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

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

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

● Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

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

● Level 3 – Inputs that are unobservable for the asset or liability.

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

Convertible notes payable

The fair value of the Company’s convertible notes payable, approximated the carrying value as of March 31, 2019 and December 31, 2018. Factors that the Company considered when estimating the fair value of its debt included market conditions and the term of the debt. The level of the debt would be considered as Level 2.

Additional Disclosures Regarding Fair Value Measurements

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

Earnings (Loss) per Share

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

Basic net loss per share is based on the weighted average number of common and common-equivalent shares outstanding. Potential common shares includable in the computation of fully-diluted per share results are not presented in the consolidated financial statements for the three months ended March 31, 2019 and 2018 as their effect would be anti-dilutive.

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

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The anti-dilutive shares of common stock outstanding for the three months ended March 31, 2019 and 2018 were as follows:

	For the Three Months Ended March 31,
	2019		2018
Potentially dilutive securities:
Convertible notes payable		2,340,936		130,765
Convertible Preferred A Stock		1,000,000		1,000,000
Convertible Preferred B Stock		13,784,201		13,784,201
Warrants		4,842,225		2,732,073
Stock options		9,560,534		-

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 $1,390,000. 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 20 in the notes to condensed consolidated financial statements.

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In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company adopted this ASU as of January 1, 2019. The amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the ASU. The Company adopted this ASU as of January 1, 2019. The amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASC 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. This update is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted this ASU as of January 1, 2019. The amendments in this ASU did not have a material impact on the Company’s consolidated financial statements.

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

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

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5. Revenue Recognition

Disaggregation of revenue 

	For the Three Months Ended March 31,
	2019		2018
Types of Revenues:
Security and Guarding	$	1,204,711	$	1,093,774
Systems Installation		28,541		34,564
Software		2,137,855		-
Total revenues	$	3,371,107	$	1,128,338

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

Security and Guarding Revenue

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

Systems Installation Revenue

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

Software

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

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

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

Performance Obligations

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

Significant Judgments

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

Costs to Obtain or Fulfill Contract

The Company’s costs to fulfill or obtain contracts with customers primarily consist of commissions and legal costs. The Company provides sales team members with commissions at 0-6%. Although sales commissions are incremental in nature and are only incurred when a contract is obtained, there is no up-front commission paid on the satisfactory obtainment of a contract, resulting in no sales commissions being capitalized at March 31, 2019 and December 31, 2018. The Company also incurs legal costs relating to the drafting and negotiating of contracts with select customers. Because legal costs are not incremental in nature and are incurred regardless of whether a contract is ultimately obtained, there were no legal costs capitalized as of March 31, 2019 and December 31, 2018. The Company did not record amortization of costs incurred to obtain the contract or any impairment losses for the period ending March 31, 2019 and 2018.

6. Business Combinations

Security Grade Acquisition

On June 2, 2017, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) in which the Company purchased all issued and outstanding Units of Security Grade, which comprised of 800,000 Class A Units and 200,000 Class B Units. At closing, the Company delivered $800,000 in cash and 207,427 non-qualified stock options (the “Initial Stock Options”). Furthermore, provided that, within the first 60 days following the closing, no material customer identified in the Agreement terminates its contractual relationship with the Company and that all contracts with such material customers are in full force and effect without default or cancellation as of the 60th day following the closing, on the 61st day following the closing, the Company shall deliver an additional $800,000 in cash and issue 207,427 additional stock options (the “Additional Stock Options”). In the event of termination, cancellation or default of any contract with one or more material customer identified in the Agreement within the first 60 days following the closing, the stock options received by the acquiree shall be reduced and/or forfeited to the extent necessary (pro rata based upon their ownership interest in the Company immediately preceding the closing) by a percentage equal to the revenue received by the Company from the terminating customer(s) in the 180 days immediately preceding such termination divided by the revenue received by the Company from all material customers identified in the Agreement in the 180 days immediately preceding such termination. As of March 31, 2019 and December 31, 2018, the Company has a liability pursuant to the Agreement of $75,000 and $201,667, respectively, payable following the closing.

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

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

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

The initial stock options are included as part of the purchase price. The Company determined the fair value of the contingent consideration to be $916,643 at June 2, 2017 and recorded it as a liability in its unaudited condensed consolidated balance sheets. The Company satisfied their contingent consideration liability during the third quarter of 2017. During the year ended December 31, 2018, the Company reached settlement agreements with all six selling members. As a result of these settlements, 80,979 options previously issued as part of the acquisition were cancelled (see Note 16).

BioTrack Acquisition

On March 3, 2018, the Company and its wholly owned subsidiary, Merger Sub, entered into the Merger Agreement with BioTrackTHC and Terence J. Ferraro, as the representative of the BioTrackTHC shareholders, pursuant to which Merger Sub merged with and into BioTrackTHC. On June 1, 2018, the Company closed the Merger. In connection with closing the Merger, the Company issued 38,184,985 unregistered shares of Company common stock to BioTrackTHC stockholders, of which 1,852,677 shares were held back to satisfy indemnification obligations in the Merger Agreement, if necessary. The Company also assumed the BioTrackTHC Stock Plan, pursuant to which options exercisable for 8,132,410 shares of Company common stock are outstanding so that the BioTrackTHC stockholders will own 48% of the Company on a fully diluted basis at closing.

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

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

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

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Engeni SA Acquisition

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

The 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 Merger. These values are subject to change as we perform additional reviews of our assumptions utilized.

During the first quarter of 2019, it was determined Engeni SA did not reach financial breakeven and therefore the contingent consideration of $100,000 was deemed by the Company not to be payable and was reduced to zero. In accordance with ASC 805-30-35-1, the Company recognized the change in the fair value of contingent consideration subsequent to the acquisition date in general and administrative expenses.

	At March 31, 2019 (adjusted)
Base Price - Common Stock	$	388,702
Contingent Consideration - Common Stock		777,298
Contingent Consideration - Cash		-
Total Purchase Price	$	1,166,000

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

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7. Property and Equipment, Net

At March 31, 2019 and December 31, 2018, property and equipment consisted of the following:

	March 31, 2019			December 31, 2018
Furniture and equipment	$	154,748		$	264,659
Software equipment		210,132			-
Vehicles		202,700			202,700
Total		567,580			467,359
Less: Accumulated depreciation		(125,577	)		(117,841	)
Property and equipment, net	$	442,003		$	349,518

Depreciation expense for the three months ended March 31, 2019 and 2018 was $17,713 and $3,558, respectively.

8. Intangible Assets, Net and Goodwill

The following table summarizes the Company’s intangible assets as of March 31, 2019 and December 31, 2018:

				March 31, 2019
	Estimated Useful Life (Years)	Gross Carrying Amount at December 31, 2018		Assets Acquired Pursuant to Business Combination		Accumulated Amortization			Net Book Value
Database	5	$	93,427	$	-	$	(55,463	)	$	37,964
Trade names and trademarks	5 - 10		591,081		-		(120,150	)		470,931
Web addresses	5		130,000		-		(76,032	)		53,968
Customer list	5		11,459,027		-		(2,530,313	)		8,928,714
Software	4.5		9,771,195		-		(1,806,622	)		7,964,573
		$	22,044,730	$	-	$	(4,588,580	)	$	17,456,150

				December 31, 2018
	Estimated Useful Life (Years)	Gross Carrying Amount at December 31, 2017		Assets Acquired Pursuant to Business Combination (1) (2)		Accumulated Amortization			Net Book Value
Database	5	$	93,427	$	-	$	(50,858	)	$	42,569
Trade names and trademarks	5 - 10		125,000		466,081		(91,554	)		499,527
Web addresses	5		130,000		-		(69,625	)		60,375
Customer list	5		3,154,578		8,304,449		(1,965,520	)		9,493,507
Software	4.5		-		9,771,195		(1,263,095	)		8,508,100
		$	3,503,005	$	18,541,725	$	(3,440,652	)	$	18,604,078

(1)	On June 1, 2018, the Company acquired various assets of BioTrackTHC (See Note 6)
(2)	On August 3, 2018, the Company acquired various assets of Engeni (See Note 6)

The Company uses the straight-line method to determine the amortization expense for its definite lived intangible assets. Amortization expense related to the purchased intangible assets was $1,147,928 and $169,576 for the three months ended March 31, 2019 and 2018, respectively.

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The following table summarizes the Company’s Goodwill as of March 31, 2019 and December 31, 2018:

	Total Goodwill
Balance at December 31, 2017	$	664,329
Impairment of goodwill		(664,329	)
Goodwill attributable to Biotrack acquisition		39,135,007
Goodwill attributable to Engeni acquisition		778,552
Balance at March 31, 2019	$	39,913,559

During the period ended March 31, 2018, the Company came to a settlement agreement with multiple Security Grade employees resulting from a misrepresentation of revenue and customer list information provided as part of the acquisition. Therefore, the Company considers the settlement to be an indicator for goodwill impairment testing. Accordingly, at March 31, 2018, goodwill was tested for potential impairment. As a result of the goodwill impairment test performed, it was determined that the carrying value for each reporting unit was higher than its fair value and therefore goodwill was fully impaired, which resulted in a write-off of $664,329 for the three months ended March 31, 2018. As part of the BioTrackTHC Merger, Goodwill in the amount of $39,135,007 was recognized on the Company’s Condensed Consolidated Balance Sheet. As part of the Engeni US acquisition, Goodwill in the amount of $778,552 was recognized on the Company’s Condensed Consolidated Balance Sheet.

9. Costs, Estimated Earnings and Billings

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows as of March 31, 2019 and December 31, 2018:

	March 31, 2019			December 31, 2018
Costs incurred on uncompleted contracts	$	66,822		$	89,700
Estimated earnings		28,252			50,512
Cost and estimated earnings earned on uncompleted contracts		95,074			140,212
Billings to date		231,905			252,535
Costs and estimated earnings in excess of billings on uncompleted contracts		(136,831	)		(112,323	)
Costs in excess of billings	$	20,167		$	42,869
Billings in excess of cost		(156,998	)		(155,192	)
	$	(136,831	)	$	(112,323	)

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10. Accounts Payable and Accrued Liabilities

As of March 31, 2019 and December 31, 2018, accounts payable and accrued liabilities consisted of the following:

	March 31, 2019		December 31, 2018
Accounts payable	$	435,691	$	842,389
Accrued compensation and related expenses		141,692		33,869
Accrued expenses		1,125,954		826,455
Lease obligation - current		385,495		-
Total	$	2,088,832	$	1,702,713

11. Convertible Note Payable

	March 31, 2019			December 31, 2018
Note Five, 5% convertible promissory note, fixed secured, maturing November 16, 2019	$	-		$	187,177
Note Ten, 25% convertible promissory note, fixed secured, maturing March 1, 2020, net of debt discount for warrants		1,180,604			-
		1,180,604			187,177
Less: Current portion		(1,180,604	)		(187,177	)
Long-term portion	$	-		$	-

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

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

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

On November 16, 2017, the Company amended Note Five (the “First Amendment”) with the First Investor. The First Amendment has a maturity date that is six months from November 16, 2017, converts at a 40% discount to the lowest one-day Volume Average Weighted Price (“VWAP”) during the 30 trading days preceding such conversion, incurs interest at an annual rate of 5%, and is prepayable at any time at 110% of the unpaid principal and accrued interest balance. At November 16, 2017, the principal amount of Note Five was $281,900.

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

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In November 2018, the Company amended Note Five (“Third Amendment”) with a second investor. The Third Amendment state that Note Five shall have a maturity of November 16, 2019. The principal amount as of the date of the Third Amendment was $115,136. During March 2019, the remaining principal of $112,305 was converted into 155,421 shares of common stock. The interest expense associated with Note Five was $0 and $2,402 for the three months ended March 31, 2019 and 2018, respectively.

On March 1, 2019, the Company entered into a $450,000 Secured Convertible Promissory Note (“Note Ten”) with a third investor. The third investor provided the Company with $450,000 in cash proceeds, which was received by the Company during the period ended March 31, 2019. Note Ten will mature on March 1, 2020 and bear interest at a rate of 25% per annum, payable by the Company half in cash and half in kind on a quarterly basis. The principal balance of Note Ten is convertible at the election of the third investor, in whole or in part, at any time or from time to time, into the Company’s common stock at the lower of $0.90 per share or a 30% discount to the Company’s 30-day weighted average listed price per share immediately before the date of conversion. In conjunction with Note Ten, the Company issued a warrant to the third investor to purchase 160,715 shares of the Company’s common stock at $1.40 per share.

The Company evaluated Note Ten in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Ten will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. On March 31, 2019, the fair value of Note Ten was $1,507,203. Accordingly, the Company recorded a change in fair value of ($1,057,203) related to Note Ten for the three months ended March 31, 2019.

In addition, the company recorded a debt discount relating to the warrants issued in the amount of $355,847 based on the residual fair value of the warrants themselves at inception of Note Ten. Debt discounts amortized to interest expense was $29,248 for the three months ended March 31, 2019. The unamortized discount balance at March 31, 2019 was $326,599. Accrued interest expense associated with Note Ten was $9,247 for the three months ended March 31, 2019.

12. Related Party Transactions

Advances from Related Parties

The Company has a loan outstanding from a former Company executive. The loan balance was $3,250 and $45,250 as of March 31, 2019 and December 31, 2018, respectively.

Convertible Note Payable

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

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

As of February 20, 2018, the fair value of the liability was $239,343, however due to termination of the conversion of the note into equity securities, Note Eight will be valued in its principal amount of $125,000 and accordingly the Company recorded a credit regarding the change in fair value of $0 and charge of $118,506 for the three months ended March 31, 2019 and 2018, respectively. The interest expense associated with Note Eight was $0 and $2,402 for the three months ended March 31, 2019 and 2018, respectively. Note Eight was paid in full on the Maturity Date.

On March 1, 2019, the Company entered into a $1,500,000 Secured Convertible Promissory Note (“Note Nine”) with a related party entity (the Second Related Party Holder”). A Managing Member of the Second Related Party Holder is also a Director of the Company. The Second Related Party Holder provided the Company with $1,475,000 in cash proceeds, which was received by the Company during the period ended March 31, 2019. The additional $25,000 was retained by the fourth investor for legal bills for the transaction. Note Nine will mature on March 1, 2020 and bear interest at a rate of 25% per annum, payable by the Company half in cash and half in kind on a quarterly basis. The principal balance of Note Nine is convertible at the election of the fourth investor, in whole or in part, at any time or from time to time, into the Company’s common stock at the lower of $0.90 per share or a 30% discount to the Company’s 30-day weighted average listed price per share immediately before the date of conversion. In conjunction with Note Nine, the Company issued a warrant to the fourth investor to purchase 535,715 shares of the Company’s common stock at $1.40 per share.

The Company evaluated Note Nine in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Nine will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. On March 31, 2019, the fair value of Note Nine was $5,024,010. Accordingly, the Company recorded a change in fair value of ($3,524,010) related to Note Nine for the three months ended March 31, 2019.

In addition, the company recorded a debt discount relating to the warrants issued in the amount of $1,186,153 based on the residual fair value of the warrants at inception of Note Nine. The additional $25,000 retained by the fourth investor for legal bills for the transaction will be recorded as a debt discount. Debt discounts amortized to interest expense was $99,547 for the three months ended March 31, 2019. The unamortized discount balance at March 31, 2019 was $1,111,606. Accrued interest expense associated with Note Nine was $30,822 for the three ended March 31, 2019

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Warrants

In March 2016, the Company issued 960,000 shares of restricted common stock to the Related Party Holder per a subscription agreement for total proceeds of $150,000. In conjunction with the subscription agreement, the Company issued a warrant to the Related Party Holder to purchase 1,920,000 restricted shares of the Company’s common stock at $0.16 per share. The Warrant Exercise Date is the later of the following to occur (i) March 9, 2017, (ii) ten (10) days after the Company’s notice to the holder of the warrant that the Company shall have an effective S-1 registration with the SEC; or (iii) ten (10) days after Company’s notice to the holder of the warrants that the Company has entered into an agreement for the sale of substantially all the assets or Common Stock of the Company. As of March 31, 2019, the warrants granted are not exercisable. 

On March 1, 2019, in connection with the issuance of Note Nine, the Company issued warrants, of which the value was derived and based off the fair value of Note Nine, to the investor to purchase 535,715 shares of the Company’s common stock at $1.40 per share. Exercise of the purchase rights represented by the warrant may be made, in whole or in part, at any time or times on or after March 1, 2019 and on or before March 1, 2024, by delivery to the Company of the Notice of Exercise.

The Company determined that the warrants associated with Note Nine are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, March 1, 2019, the fair value of the warrant liability was $1,186,153 while as of March 31, 2019, the fair value of the warrant liability was $1,329,076. As of March 31, 2019 and 2018, the change in fair value of the warrant liability of $142,923 and $0, respectively is reflected in the unaudited condensed consolidated statements of operations. 

Promissory Note

On August 29, 2018 and January 3, 2019, the Company entered into unsecured promissory notes with an affiliate of an investor of the Company. Refer to Note 13 for additional details regarding the unsecured promissory note.

13. Promissory Notes

On January 3, 2019, the Company entered into an unsecured promissory note in the amount of $280,000. The unsecured promissory note has a fixed interest rate of 10% and is due and payable on March 31, 2019. On March 2, 2019, the unsecured promissory note was paid off in full.

14. Notes Payable

Notes payable consisted of the following: 

	March 31, 2019			December 31, 2018
Vehicle financing loans payable, between 4.7% and 7.0% interest and maturing between June 2022 and July 2022	$	62,732		$	71,284
Loans Payable - Credit Union		6,567			5,075
Less: Current portion of loans payable		(24,805	)		(24,805	)
Long-term portion of loans payable	$	44,494		$	51,554

The interest expense associated with the notes payable was $1,791 and $1,334 for the three months ended March 31, 2019 and 2018, respectively.

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15. Shareholders’ Equity

Common Stock

Subscription Agreements

The table below reflects shares of restricted common stock issued in relation to subscription agreement during the period ended March 31, 2018:

Date of Sale	Number of Shares Sold		Total Proceeds
February 2018		222,222	$	200,000
March 2018		500,000		450,000
		722,222	$	650,000

Other Common Stock Issuances

In January 2019, the Company issued 20,000 shares of restricted common stock to a consultant per a consulting agreement and recorded a charge of $27,400.

In March 2019, certain option holders exercised their rights under the BioTrackTHC Stock Plan and were issued 62,847 shares of common stock for no cash proceeds.

Conversion of Convertible Note to Common Stock

On February 15, 2018, March 12, 2018 and March 21, 2018, the holder of a 10% fixed secured convertible promissory note issued by the Company elected its option to partially convert $50,000, $50,000 and $75,000 in principal of the convertible note into 46,066, 63,963, and 95,945 shares of the Company’s common stock.

On March 7, 2019 and March 28, 2019, the holder of a 10% fixed secured convertible promissory note issued by the Company elected its option to fully convert $75,882 and $42,055 in principal of the convertible note into 100,000 and 55,421 shares of the Company’s common stock.

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2017 Omnibus Incentive Plan

The table below reflects shares issued under the 2017 Omnibus Incentive Plan during the period ended March 31, 2019:

Date of Issuance	Number of Shares Issued		Total Compensation
March 2019		250,000	$	320,000
		250,000	$	320,000

The table below reflects shares issued under the 2017 Omnibus Incentive Plan during the period ended March 31, 2018:

Date of Issuance	Number of Shares Issued		Total Compensation
January 2018		42,850	$	173,014
March 2018		100,000		250,000
		142,850	$	423,014

Series B convertible preferred stock

Series B Preferred Stock Purchase Agreement

On May 17, 2017, the Company sold to accredited investors an aggregate of 5,781,426 Series B Preferred Shares for gross proceeds of $1,875,000 and converted a $500,000 Unsecured Convertible Promissory Note into 1,536,658 Series B Preferred Shares. This tranche of Series B Preferred Shares are convertible into 7,318,084 shares of common stock based on the current conversion price, at a purchase price of $0.325 per share. Net proceeds were approximately $1,772,500 after legal and placement agent fees listed below and the satisfaction of the promissory notes discussed in Note 13.

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

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The table below reflects the shares issued under the Series B Preferred Purchase Agreement of the initial tranche, Second Series B Purchase Agreement and the various issuances under the Third Series B Purchase Agreement during the year-end December 31, 2017:

Date of Sale	Number of Shares Sold		Total Proceeds
Initial
May 2017		7,318,084	$	1,875,000
Second
July 2017		1,680,000		840,000
Third
August 2017		369,756		120,000
September 2017		462,195		150,000
October 2017		462,195		150,000
October 2017		1,042,337		557,500
December 2017		2,449,634		795,000
Ending Balance		13,784,201	$	4,487,500

In accordance with the Certificate of Incorporation, there were 9,000,000 authorized Series B Preferred Stock at a par value of $ 0.001. In connection with the Series B Preferred Stock Purchase Agreement, on May 12, 2017, the Company filed a Certificate of Designation (the “Certificate of Designations”) with the Secretary of State of the State of Delaware to designate the preferences, rights and limitations of the Series B Preferred Shares. On August 23, 2017 the Certificate of Designations was amended and restated to increase the number of shares of Series B Preferred Stock authorized to be 17,000,000.

Conversion:

Each Series B Preferred Share is convertible at the option of the holder at any time on or after May 12, 2018 into such number of shares of the Company’s common stock equal to the number of Series B Preferred Shares to be converted, multiplied by the Preferred Conversation Rate. The Preferred Conversion Rate shall be the quotient obtained by dividing the Preferred Stock Original Issue Price ($0.3253815) by the Preferred Stock Conversation Price in effect at the time of the conversion (the initial conversion price will be equal to the Preferred Stock Original Issue Price, subject to adjustment in the event of stock splits, stock dividends, and fundamental transactions). Based on the current conversion price, the Series B Preferred Shares are convertible into 13,306,599 shares of common stock. A fundamental transaction means: (i) our merger or consolidation with or into another entity, (ii) any sale of all or substantially all of our assets in one transaction or a series of related transactions, (iii) any reclassification of our Common Stock or any compulsory share exchange by which Common Stock is effectively converted into or exchanged for other securities, cash or property; or (iv) sale of shares below the preferred stock conversion price. Each Series B Preferred Share will automatically convert into common stock upon the earlier of (i) notice by the Company to the holders that the Company has elected to convert all outstanding Series B Preferred Shares at any time on or after May 12, 2018; or (ii) immediately prior to the closing of a firmly underwritten initial public offering (involving the listing of the Company’s Common Stock on an Approved Stock Exchange) pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Common Stock for the account of the Company in which the net cash proceeds to the Company (before underwriting discounts, commissions and fees) are at least fifty million dollars ($50,000,000).

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

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

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Based on the guidance in ASC 470-20-20, the Company determined that a beneficial conversion feature exists, as the effective conversion price for the Series B preferred shares at issuance was less than the fair value of the common stock into which the preferred shares are convertible. A beneficial conversion feature based on the intrinsic value at the date of issuances for the Series B preferred shares is scheduled below. For the three months ended March 31, 2019 and 2018, the beneficial conversion amount of $0 and $14,998,505, respectively was accreted back to the preferred stock as a deemed dividend and charged to additional paid in capital in the absence of earning as the beneficial conversion feature is amortized over time through the earliest conversion date, May 12, 2018. Provided below is a schedule of the issuances of Series B preferred shares and the amount accredited to deemed dividend at March 31, 2018. As of March 31, 2019, the beneficial conversion feature was fully amortized.

For the Three Months Ended March 31, 2018
Issuance Date	Beneficial Conversion Feature Term (months)	Number of shares		Fair Value of Beneficial Conversion Feature		Amount accreted as a deemed dividend at December 31, 2017			Amount accreted as a deemed dividend for the Three Months Ended March 31, 2018			Unamortized Beneficial Conversion Feature
May 17, 2017	12		7,318,084	$	25,247,098	$	(15,779,436	)	$	(6,311,775	)	$	3,155,887
July 29, 2017	9.5		1,680,000		6,804,000		(3,674,634	)		(2,133,659	)		995,707
August 29, 2017	8.5		369,756		1,148,263		(556,190	)		(403,686	)		188,387
September 15, 2017	8		462,195		1,435,329		(648,601	)		(540,500	)		246,228
October 11, 2017	7		462,195		1,121,036		(426,309	)		(473,677	)		221,050
October 31, 2017	6.5		1,042,337		1,735,641		(548,570	)		(809,366	)		377,705
December 19, 2017	5		2,449,634		6,921,347		(576,779	)		(4,325,842	)		2,018,726
Total			13,784,201	$	44,412,714	$	(22,210,519	)	$	(14,998,505	)	$	7,203,690

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Dividends, Voting Rights and Liquidity Value:

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

Classification:

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

16. Stock Options

On March 15, 2018 the Company awarded Zachary Venegas two options to purchase a total of 490,000 shares of the Company’s common stock at prices ranging from $1.90 to $2.09 per share. These options vested on June 28, 2018 and have expiration dates ranging from March 2023 to March 2028.

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

On March 6, 2018, the Company filed a lawsuit in the United States Court for the District of Colorado alleging violations in previously disclosed representations and warranties by the plaintiff as part of the Acquisition. Following the appointment of a registered Public Company Accounting Oversight Board (“PCAOB”) auditor, certain misrepresentations, primarily surrounding the misclassification of certain revenues as being recurring, were discovered, artificially inflating the price of the membership interest in Security Grade. As a result of certain settlements with the selling shareholder, as of March 31, 2018, 21,509 options previously issued as part of the acquisition were cancelled. Subsequently, as of December 31, 2018, the remaining settlements with the selling shareholders were settled and a total of 80,979 options previously issued as part of the acquisition were cancelled.

On February 6, 2019 the Company awarded an executive an option to purchase a total of 100,000 shares of the Company’s common stock at an exercise price $1.51 per share. These options vested on May 6, 2019 and have an expiration date of February 6, 2024.

On March 19, 2019 the Company awarded the Chief Financial Officer, two options to purchase a total of 300,000 shares of the Company’s common stock at prices ranging from $2.35 to $2.59 per share. These options shall vest over a three-year period from March 2020 to March 2022 and have expiration dates ranging from March 2024 to March 2029.

On March 19, 2019 the Company awarded the Chief Executive Officer, two options to purchase a total of 500,000 shares of the Company’s common stock at prices ranging from $2.35 to $2.59 per share. These options shall vest over a three-year period from March 2020 to March 2022 and have expiration dates ranging from March 2024 to March 2029.

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Stock option activity for the period ended March 31, 2019 is as follows:

	Shares Underlying Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)
Outstanding at January 1, 2019		8,729,463		$	0.671		2.44
Granted		900,000		$	2.317		8.14
Exercised		(68,929	)	$	0.359		1.48
Forfeited and expired		-
Outstanding at March 31, 2019		9,560,534		$	0.828		2.96
Vested options at March 31, 2019		8,729,463		$	0.671		2.44

17. 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 inception, March 1, 2019, the fair value of the warrant liability was $355,847 while as of March 31, 2019, the fair value of the warrant liability was $398,724. Accordingly, the Company recorded a change in fair value of the warrant liability of $42,877 related to Note Ten for the three months ended March 31, 2019.

On January 10, 2019, the Company entered into an Investment Unit Purchase Agreement (the “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 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 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 “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 warrants 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 warrants 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	)

On March 31, 2019, the fair value of the warrant liability was $1,585,453 and the Company recorded a change in fair value of the warrant liability of $132,053.

On March 11, 2019, the Company issued warrants to an investment bank to purchase a total of 100,000 restricted shares of the Company’s common stock at a per share purchase price of $0.90. The warrants are exercisable at any time six months after the issuance date within three years of issuance.

The Company determined that the warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the condensed consolidated balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the condensed consolidated statement of operations. At inception, March 11, 2019, the fair value of the warrant liability was $198,148 while as of March 31, 2019, the fair value of the warrant liability was $250,542. Accordingly, the Company recorded a change in fair value of the warrant liability of $52,394 related to the warrants for the three months ended March 31, 2019.

A summary of warrant activity is as follows:

For the three months ended March 31, 2019
	Warrant Shares		Weighted Average Exercise Price
Balance at January 1, 2019		3,418,184	$	0.23
Warrants granted		1,424,041	$	1.23
Balance at March 31, 2019		4,842,225	$	0.54

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

	As of March 31, 2019			As of December 31, 2018
Fair value of company’s common stock	$	2.79		$	0.90
Dividend yield		0	%		0	%
Expected volatility		222.8	%		175.0	%
Risk Free interest rate		2.88	%		2.49	%
Expected life (years)		1.47 – 4.95			1.65
Fair value of financial instruments - warrants	$	5,986,781		$	896,171

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

	Amount
Balance as of January 1, 2019	$	896,171
Change in fair value of warrant liability	$	5,090,610
Balance as of March 31, 2019	$	5,986,781

18. Stock-Based Compensation

2017 Omnibus Incentive Plan

The Company’s 2017 Omnibus Incentive Plan (the “2017 Plan”) was adopted by our Board of Directors and a majority of our voting securities on October 17, 2017. The 2017 Plan permits the granting of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and dividend equivalent rights to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the 2017 Plan at no less than the fair value of the underlying common stock as of the date of grant. Options granted under the Plan have a maximum term of ten years. Under the Plan, a total of 5,000,000 shares of common stock are reserved for issuance, of which options to purchase 1,390,000 and 490,000 shares of common stock and 664,945 and 514,945 shares of common stock were granted as of March 31, 2019 and December 31, 2018, respectively.

Bio-Tech Medical Software, Inc. 2014 Stock Incentive Plan

On October 22, 2014, BioTrackTHC approved and adopted the BioTrackTHC Stock Plan. The BioTrackTHC Stock Plan set aside and reserved 600,000 shares of BioTrackTHC’s common stock for grant and issuance in accordance with its terms and conditions. Persons eligible to receive awards from the BioTrackTHC Stock Plan include employees (including officers and directors) of BioTrackTHC or its affiliates and consultants who provide significant services to BioTrackTHC or its affiliates (the “Grantees”). The BioTrackTHC Stock Plan permits BioTrackTHC to issue to Grantees qualified and/or non-qualified options to purchase BioTrackTHC’s common stock, restricted common stock, performance units, and performance shares. The term of each award under the BioTrackTHC Stock Plan shall be no more than ten years from the date of grant thereof. BioTrackTHC’s Board of Directors or a committee designated by the Board of Directors is responsible for administration of the BioTrackTHC Stock Plan and has the sole discretion to determine which Grantees will be granted awards and the terms and conditions of the awards granted.

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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 6).

19. Income Taxes

No provision for U.S. federal or state income taxes has been recorded as the Company has incurred net operating losses since inception. Significant components of the Company’s net deferred income tax assets for the three months ended March 31, 2019 and 2018 consist of income tax loss carryforwards. These amounts are available for carryforward for use in offsetting taxable income of future years through 2035. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carry-forward period. Utilization of the net operating loss carry-forwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Due to the Company’s history of operating losses, these deferred tax assets arising from the future tax benefits are currently not likely to be realized and are thus reduced to zero by an offsetting valuation allowance. As a result, there is no provision for income taxes. 

For the three months ended March 31, 2019 and 2018, the Company has a net operating loss carry forward of approximately $13,900,000 and $7,828,000, respectively. Utilization of these net loss carry forwards is subject to the limitations of Internal Revenue Code Section 382. The Company applied a 100% valuation reserve against the deferred tax benefit as the realization of the benefit is not certain.

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20. 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:

	Three Months Ended March 31, 2019
Operating lease expense	$	161,145
Cash paid for amounts included in the measurement of operating lease liabilities	$	65,059
ROU assets obtained in exchange for operating lease obligations	$	1,499,752

The Company’s lease agreements generally do not provide an implicit borrowing rate, therefore an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. The Company used the incremental borrowing rate on December 31, 2018 for all leases that commenced prior to that date.

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

	As of March 31, 2019
Other assets	$	1,397,461
Accounts payable and accrued liabilities	$	385,486
Other long-term liabilities		1,060,398
Total lease liabilities	$	1,445,894
Weighted average remaining lease term (in years)		2.55
Weighted average discount rate		6.00	%

Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of March 31, 2019, for the following five fiscal years and thereafter were as follows:

	As of March 31, 2019
2019 - Remaining	$	324,321
2020		393,413
2021		248,223
2022		195,144
2023		200,944
Thereafter		205,436
Total future minimum lease payments	$	1,567,480
Less imputed interest		(121,587	)
Total	$	1,445,894

As of March 31, 2019, the Company had additional operating lease obligations for a lease with a future effective date of approximately $600,000. This operating lease will commence during the first quarter of fiscal 2022 with a lease term of three years.

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As of December 31, 2018, future minimum lease payments, as defined under the previous lease accounting guidance of ASC Topic 840, under noncancelable operating leases for the following five fiscal years and thereafter were as follows:

	Operating leases
2019	$	473,495
2020		420,291
2021		275,223
2022		198,144
2023		199,144
Thereafter		205,135
Total lease payments	$	1,771,432

21. Segment Results

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

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

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

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

	For the Three Months Ended March 31,
	2019			2018
Security and guarding
Revenue	$	1,204,711		$	1,093,774
Cost of revenue		940,586			790,705
Gross profit		264,125			303,069
Total operating expenses		3,314,040			3,326,391
Loss from operations		(3,049,915	)		(3,023,322	)
Total other (expense) income		(8,244,950	)		1,920,881
Total net loss	$	(11,294,865	)	$	(1,102,441	)
Systems installation
Revenue	$	28,541		$	34,564
Cost of revenue		161,758			-
Gross profit		(133,217	)		34,564
Total operating expenses		32,631			-
Loss from operations		(165,848	)		34,564
Total other expense		(80	)		-
Total net (loss) income	$	(165,928	)	$	34,564
Software
Revenue	$	2,137,855		$	-
Cost of revenue		822,875			-
Gross profit		1,314,980			-
Total operating expenses		2,276,213			-
Loss from operations		(961,233	)		-
Total other expense		(8	)		-
Total net loss	$	(961,241	)	$	-

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22. Subsequent Events

In April 2019 the Company issued 733,300 shares of restricted common stock at $2.84 per share to three Engeni US members satisfying the remaining contingent consideration referenced in note six.

On April 12, 2019, the Board of Directors (the “Board”) of the Company”) approved the Company’s entry into a management consulting services agreement (the “MSA”) with Rose Management Group LLC (“Consultant”). Under the terms of the MSA, the Company engaged Consultant for certain management and consulting services related to the Company’s business. These services include, but are not limited to, capital and operational advisory services, merger and acquisition services, management consulting services, strategic advisory services, financial strategy services, and data analysis advisory services.

The Company will pay Consultant $20,830 per month (the “Monthly Fee”) during the term of the MSA; provided, that, if the Company reasonably determines in its good faith judgment that paying the Monthly Fee for a particular month would have an adverse impact on the Company’s ability to operate due to a cash shortage, then the Monthly Fee for such month shall be waived but shall accrue as a liability of the Company to be paid to the Consultant as agreed in good faith by the Company and the Consultant. Consultant will be entitled to its full annual fee, paid in the agreed monthly installments, if Consultant is directly responsible for sourcing at least $1,250,000 in capital for the Company in any given twelve-month period.

In April 2019, the Company acquired Tan’s International Security (“Tan’s”), a California-based, veteran-owned security business that is licensed to provide physical security guards and perform digital security system installs in the state of California. The terms of the transaction provide for Helix to pay to the shareholders of Tan’s cash and stock consideration of over $800,000.

In May 2019 the Company granted 50,000 stock options to an employee of the Company pursuant to the 2017 Omnibus Stock Incentive Plan.

In May 2019 the Company granted 125,000 stock options to a consultant of the Company pursuant to the 2017 Omnibus Stock Incentive Plan.

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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 months ended March 31, 2019 and 2018 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed on April 1, 2019 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

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

Overview

Helix TCS, Inc. provides critical infrastructure solutions to the legal cannabis industry. Our mission is to provide clients with the best-in-class critical infrastructure services through a single integrated platform which enables them to run their businesses more safely, efficiently, and profitably. As we increase our platform’s scale and scope, clients will be able to realize greater cost savings and operating advantages.

Our team is composed of former military, law enforcement, and technology professionals with deep experience in security and law enforcement, intelligence, technology design and development, partner relations, data aggregation, venture capital, private equity, risk-management, banking, and finance.

Technology is a cornerstone of Helix’s service offering. Our technology platform allows clients to manage their business in a compliant manner with BioTrackTHC’s seed-to-sale software, as well as managing inventory and supply costs through Cannabase. We also provide bespoke monitoring and transport solutions. We focus on utilizing technology as an operations multiplier, bringing in and managing unique partnerships across the tech spectrum to tailor and guarantee desired outcomes for our clients.

Within the cannabis industry, no other activity carries as much potential for unforeseen negative impact as a lapse in compliance operations. Helix brings a broad range of compliance services to firms in the cannabis industry, safeguarding their ability to operate while increasing their access to services that offer them a competitive edge.

We have greatly enhanced our core operations with the acquisitions of Security Grade, BioTrackTHC and Engeni. Security Grade is a market leader in the security profession and provides a broad range of services, from security consulting to installation of surveillance technology. Consistent with our team of professionals, Security Grade employs specialists with extensive experience and exposure to all areas of security related services. BioTrackTHC specializes in providing cannabis software services, ranging from monitoring of plant inventory to point-of-sale solutions. BioTrackTHC’s software is used by 9 government entities and more than 2,000 commercial client locations across 34 U.S. states and 6 countries. Engeni provides a turnkey and comprehensive digital presence solution for small businesses. The Engeni Growth solution includes an optimized web page, a fully-paid Google pay-per-click campaign, lead capture & lead delivery and ubiquitous directory/map listings. Engeni has also become the Company’s offshore software development platform, and is currently working on the second generation of the BioTrackTHC software. These strategic acquisitions will help field the growing demand in the Legal Cannabis Industry.

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Results of Operations for the three months ended March 31, 2019 and 2018

The following table shows our results of operations for the three months ended March 31, 2019 and 2018. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

	For the Three Months Ended March 31,						Change
	2019			2018			Dollars			Percentage
Revenue	$	3,371,107		$	1,128,338		$	2,242,769			199	%
Cost of revenue		1,925,219			790,705			1,134,514			143	%
Gross margin		1,445,888			337,633			1,108,225			328	%
Operating expenses		5,622,883			3,326,391			2,296,493			69	%
Loss from operations		(4,276,995	)		(2,988,758	)		(1,188,238	)		40	%
Other (expenses) income, net		(8,245,038	)		1,920,881			(10,165,919	)		-529	%
Net loss	$	(12,422,034	)	$	(1,067,877	)	$	(11,354,157	)		1063	%
Changes in foreign currency translation adjustment	$	4,247		$	-		$	4,247			100	%
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend		-			(14,998,505	)		14,998,505			-100	%
Net loss attributable to common shareholders	$	(12,417,787	)	$	(16,066,382	)	$	3,648,595			-23	%

Revenue

Total revenue for the three-month period ended March 31, 2019 was $3,371,107, which represented an increase of $2,242,769 compared to total revenue of $1,128,338 for the three months ended March 31, 2018. The increase primarily resulted from additional revenue resulting from the BioTrackTHC acquisition and an increase in the number of clients serviced by our security operations.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2019 and 2018 primarily consisted of hourly compensation for security personnel and employees involved in the creation and development of licensing software. Cost of revenues increased by $1,134,514 for the three months ended March 31, 2019, to $1,925,219 as compared to $790,705 for the three months ended March 31, 2018. The increase primarily resulted from the acquisition of BioTrackTHC and a substantial increase in the number of clients serviced by Helix security, which required the hiring of additional employees.

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Operating Expenses

Our operating expenses encompass selling, general and administrative expenses, salaries and wages, professional and legal fees and depreciation. Selling, general and administrative expenses consist primarily of rent/moving expenses, advertising and travel expenses. Salaries and wages is composed of non-revenue generating employees. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publicly traded company. Our operating expenses during the three months ended March 31, 2019 and 2018 were $5,622,884 and $3,326,391, respectively. The overall $2,296,493 increase in operating expenses was attributable to the following increases in operating expenses of:

● Selling, general and administrative – $588,998

● Salaries and wages – $1,336,390

● Professional and legal fees – $68,696

● Depreciation and amortization – $966,738

The $588,998 increase in selling, general and administrative expenses is a result of increases in rent expense, advertising and travel expenses resulting from an expansion in our operations. The $1,336,390 increase in salaries and wages resulted from a significant increase in headcount, including BioTrack and Engeni personnel. The $68,696 increase in professional and legal fees primarily resulted from an increase in legal fees and costs associated with fundraising. The $966,738 increase in depreciation and amortization was due to amortization of intangible assets acquired in the BioTrack and Engeni acquisitions.

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, loss on issuance of warrants and interest expense. Other (expense) income, net during the three months ended March 31, 2019 and 2018 was $8,245,038 and $1,920,881, respectively. The $10,165,919 decrease in other (expense) income, net was primarily attributable to a loss on the change in fair value of convertible notes of $987,963, loss on the change in fair value of convertible notes – fair value of $3,524,009, loss on the change in fair value of warrant liability of $1,632,956, loss on the change in fair value of contingent consideration of $1,136,700, loss on issuance of warrants of $787,209 and interest expense of $176,201 in the three months ended March 31, 2019.

Net loss

For the foregoing reasons, we had a net loss of $12,422,034 for the three months ended March 31, 2019, or $0.17 net loss per common share – basic and diluted, compared to a net loss of $1,067,877 for the three months ended March 31, 2018, or $0.04 net loss per common share – basic and diluted.

Convertible preferred stock beneficial conversion feature accreted as a deemed dividend

The convertible preferred stock beneficial conversion feature accreted as a deemed dividend resulted from the effective conversion price of the Series B preferred shares at issuance being less than the fair value of the common stock into which the preferred shares are convertible. The result was a non-cash charge in the amount of $0 for the three months ended March 31, 2019 compared to $14,998,505 for the three months ended March 31, 2018

Net Loss Attributable to common shareholders

For the foregoing reasons, we had a net loss attributable to common shareholders of $12,417,787 for the three months ended March 31, 2019, or $0.17 net loss per share attributable to common shareholders - basic and diluted, compared to net loss attributable to common shareholders of $16,066,382 for the three months ended March 31, 2018, or $0.55 net loss per share attributable to common shareholders – basic and diluted.

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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 three months ended March 31, 2019, we have generated revenue and are trying to achieve positive cash flows from operations.

As of March 31, 2019, we had a cash balance of $2,120,784, accounts receivable, net of $1,186,224 and $15,473,977 in current liabilities. At the current cash consumption rate, we may need to consider additional funding sources toward the end of fiscal 2019. We are taking proactive measures to reduce operating expenses, drive growth in revenue and expeditiously resolve any remaining legal matters.

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

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

Capital Resources 

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

	March 31, 2019			December 31, 2018			Change
Current assets	$	3,642,318		$	1,923,353		$	1,718,965
Current liabilities		15,473,977			4,157,005			11,316,972
Working capital	$	(11,831,659	)	$	(2,233,652	)	$	(9,598,007	)

As of March 31, 2019, and December 31, 2018, we had a cash balance of $2,120,784 and $285,761, respectively.

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Summary of Cash Flows

	For the Three Months Ended March 31,
	2019			2018
Net cash used in operating activities	$	(1,175,875	)	$	(1,013,372	)
Net cash used in investing activities		(35,862	)		(115,392	)
Net cash provided by financing activities		3,005,640			638,748

Net cash used in operating activities. Net cash used in operating activities for the three months ended March 31, 2019 was $(1,175,875). This included a net loss of $12,422,034, non-cash charge related to depreciation and amortization of $1,165,641, non-cash charge related to amortization of debt discounts of $128,794,  non-cash charge from loss on issuance of warrants of $787,209, non-cash charge related to provision for doubtful account $69,896, non-cash charge related to share-based compensation of $1,989,268, non-cash 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 $987,963, $3,524,009, $1,632,956 and $1,136,700, non-cash gain on reduction of contingent consideration of $(100,000), and changes in accounts receivable, deposits, costs in excess of billings, billings in excess of costs, deferred rent, and accounts payable and accrued expenses of $76,277. Net cash used in operating activities for the three months ended March 31, 2018 was $(1,013,372). This included a net loss of $(1,067,877), non-cash charge related to depreciation and amortization of $198,903, non-cash charge related to share-based compensation of $1,082,179, non-cash gains due to changes in fair value of convertible notes, fair value of warrant obligations, and fair value of a related party note of $(402,016), $(976,679), and $(118,506), respectively, non-cash charge from loss on impairment of goodwill of $664,329, non-cash gain on reduction of obligation pursuant to acquisition of $(266,613), and changes in accounts receivable, deposits, costs in excess of billings, deferred rent, billings in excess of costs, and accounts payable and accrued expenses of $(127,092).

Net cash used in investing activities. Net cash used in investing activities for the three months ended March 31, 2019 was $(35,862), which consisted of capital expenditures of $9,195 and payments pursuant to the Security Grade business acquisition of $26,667. Net cash used in investing activities for the three months ended March 31, 2018 was $(115,392), which consisted of capital expenditures of $84,144 and cash payments pursuant to the Revolutionary asset acquisition of $31,248.

Net cash provided by financing activities. Net cash provided by financing activities for the three months ended March 31, 2019 was $3,005,640, which resulted from payments pursuant to convertible notes payable of $1,925,000, repayment of notes payable of $7,060, proceeds and repayment of a promissory note of $280,000, proceeds from the issuance of common stock of $1,129,700 and repayment of advances from related parties of $42,000. Net cash provided by financing activities for the three months ended March 31, 2018 was $638,748, which resulted from proceeds from the issuance of common stock of $650,000, proceeds from the issuance of notes payable of $33,248, and repayments to related parties of $44,500.

Off-Balance Sheet Arrangements

None. 

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on April 1, 2019.

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Related Party Transactions

The Company had a loan outstanding from a former Company executive. The loan balance was $3,250 and $45,250 as of March 31, 2019 and December 31, 2018, respectively.

In March 2016, the Company issued 960,000 shares of restricted common stock to the Related Party Holder per a subscription agreement for total proceeds of $150,000. In conjunction with the subscription agreement, the Company issued a warrant to the Related Party Holder to purchase 1,920,000 restricted shares of the Company’s common stock at $0.16 per share. The Warrant Exercise Date is the later of the following to occur (i) March 9, 2017, (ii) ten (10) days after the Company’s notice to the holder of the warrant that the Company shall have an effective S-1 registration with the SEC; or (iii) ten (10) days after Company’s notice to the holder of the warrants that the Company has entered into an agreement for the sale of substantially all the assets or Common Stock of the Company. As of March 31, 2019, the warrants granted are not exercisable. 

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

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

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

As of February 20, 2018, the fair value of the liability was $239,343, however due to termination of the conversion of the note into equity securities, Note Eight will be valued in its principal amount of $125,000 and accordingly the Company recorded a credit regarding the change in fair value of $0 and charge of $118,506 for the three months ended March 31, 2019 and 2018, respectively. The interest expense associated with Note Eight was $0 and $2,402 for the three months ended March 31, 2019 and 2018, respectively. Note Eight was paid in full on the Maturity Date.

On March 1, 2019, the Company entered into a $1,500,000 Secured Convertible Promissory Note (“Note Nine”) with a related party entity (the Second Related Party Holder”). A Managing Member of the Second Related Party Holder is also a Director of the Company. The Second Related Party Holder provided the Company with $1,475,000 in cash proceeds, which was received by the Company during the period ended March 31, 2019. The additional $25,000 was retained by the fourth investor for legal bills for the transaction. Note Nine will mature on March 1, 2020 and bear interest at a rate of 25% per annum, payable by the Company half in cash and half in kind on a quarterly basis. The principal balance of Note Nine is convertible at the election of the fourth investor, in whole or in part, at any time or from time to time, into the Company’s common stock at the lower of $0.90 per share or a 30% discount to the Company’s 30-day weighted average listed price per share immediately before the date of conversion. In conjunction with Note Nine, the Company issued a warrant to the fourth investor to purchase 535,715 shares of the Company’s common stock at $1.40 per share.

The Company evaluated Note Nine in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Nine will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. On March 31, 2019, the fair value of Note Nine was $5,024,010. Accordingly, the Company recorded a change in fair value of ($3,524,010) related to Note Nine for the three months ended March 31, 2019.

In addition, the company recorded a debt discount relating to the warrants issued in the amount of $1,186,153 based on the residual fair value of the warrants at inception of Note Nine. The additional $25,000 retained by the fourth investor for legal bills for the transaction will be recorded as a debt discount. Debt discounts amortized to interest expense was $99,547 for the three months ended March 31, 2019. The unamortized discount balance at March 31, 2019 was $1,111,606. Accrued interest expense associated with Note Nine was $30,822 for the three ended March 31, 2019.

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On March 1, 2019, in connection with the issuance of Note Nine, the Company issued warrants, of which the value was derived and based off the fair value of Note Nine, to the investor to purchase 535,715 shares of the Company’s common stock at $1.40 per share. Exercise of the purchase rights represented by the warrant may be made, in whole or in part, at any time or times on or after March 1, 2019 and on or before March 1, 2024, by delivery to the Company of the Notice of Exercise.

The Company determined that the warrants associated with Note Nine are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, March 1, 2019, the fair value of the warrant liability was $1,186,153 while as of March 31, 2019, the fair value of the warrant liability was $1,329,076. As of March 31, 2019 and 2018, the change in fair value of the warrant liability of $142,923 and $0, respectively is reflected in the unaudited condensed consolidated statements of operations. 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable for a smaller reporting company.

ITEM 4. Controls and Procedures 

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-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 March 31, 2019, our disclosure controls and procedures were effective.

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Management’s Report on Internal Controls Over Financial Reporting

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our internal controls over financial reporting as of March 31, 2019, the end of the interim period covered by this report established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The evaluation of our internal controls over financial reporting included a review of the internal control objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report.

In the course of our evaluation, we sought to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Based on that evaluation, management, including our Chief Executive Officer and Chief Financial Officer, concluded that the Company did not maintain effective internal control over financial reporting as of the three months ended March 31, 2019 due to the existence of material weaknesses in the internal control over financial reporting described below.

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

Management has determined that we did not maintain effective internal controls over financial reporting as of March 31, 2019 due to the existence of the following material weaknesses identified by management:

● The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked personnel with accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting requirements.

● Inadequate segregation of duties.

We expect to be materially dependent on a third party that can provide us with accounting consulting services for the foreseeable future. We believe that we are in the process of addressing the deficiencies that affected our internal control over financial reporting and we are developing specific action plans for each of the above material weaknesses. Because the remedial actions require hiring of additional personnel, upgrading certain of our information technology systems and relying extensively on manual review and approval, the successful operation of these controls for at least several quarters may be required before management may be able to conclude that the material weaknesses have been remediated. We intend to continue to evaluate and strengthen our internal control over financial reporting. These efforts require significant time and resources. If we are unable to establish adequate internal control over financial reporting, we may encounter difficulties in the audit or review of our financial statements by our independent registered public accounting firm, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with GAAP and to comply with our SEC reporting obligations.

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

Changes in internal control over financial reporting

During the three months ended March 31, 2019, there was no change in our internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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, 2019, the claim is currently pending the outcome of certain matters in the Kenney, et al v. Helix TCS, Inc. case.

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

On July 20, 2017 one former employee filed a lawsuit in the United States District Court for the District of Colorado alleging violations of the Fair Labor Standards Act on behalf of themselves and other employees. The plaintiffs seek damages for our alleged failure to compensate them appropriately for the overtime hours they worked as purported “non-exempt” employees. As of March 31, 2019, the claim is currently in the process of discovery.

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

ITEM 1A. Risk Factors

Smaller reporting companies such as us are not required to provide the information required by this item.

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

During the three months ended March 31, 2019, we issued 1,749,572 shares of common stock with proceeds received totaling $1,129,700.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Mine Safety Disclosure

Not applicable.

ITEM 5. Other Information

None. 

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ITEM 6. Exhibits

Exhibit No.	Description
10.34#	Employment Agreement, dated March 19, 2019, by and between Helix TCS, Inc. and Zachary L. Venegas (incorporated by reference to Exhibit 10.34 of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.35#	Employment Agreement, dated March 19, 2019, by and between Helix TCS, Inc. and Scott M. Ogur (incorporated by reference to Exhibit 10.35 of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.36	Form Securities Purchase Agreement, dated March 1, 2019, by and between Helix TCS, Inc. and each purchaser identified therein (incorporated by reference to Exhibit 10.36 of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.37(a)	Form Secured Convertible Promissory Note (incorporated by reference to Exhibit 10.37(a) of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.37(b)	Form Secured Convertible Promissory Note (incorporated by reference to Exhibit 10.37(b) of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.38(a)	Form of Common Stock Purchase Warrant of Helix TCS, Inc. (incorporated by reference to Exhibit 10.38(a) of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.38(b)	Form of Common Stock Purchase Warrant of Helix TCS, Inc. (incorporated by reference to Exhibit 10.38(b) of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.39	Form of Security Agreement, dated March 1, 2019, by and between Helix TCS, Inc., the subsidiaries of Helix TCS, Inc. and DiamondRock LLC (incorporated by reference to Exhibit 10.39 of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.40	Form of Subsidiary Guarantee, dated March 1, 2019 by each of the signatories thereto (incorporated by reference to Exhibit 10.40 of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.41	Pledge Agreement, dated March 1, 2019, by Helix TCS, Inc. Helix TCS LLC and Engeni, LLC for the benefit of Rose Capital Fund I, LP (incorporated by reference to Exhibit 10.41 of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.42	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 10.42 of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019).
10.43	Form of Management Consulting Services Agreement by and between the Company and Rose Management Group LLC (incorporated by reference to Exhibit 10.43 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on April 18, 2019).
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.

53

SIGNATURES

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

Date:	By:	/s/ Zachary L. Venegas
		Zachary L. Venegas
		Chief Executive Officer (Principal Executive Officer

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

Signature	Title	Date
/s/ Zachary L. Venegas	Chief Executive Officer	May 15, 2019
Zachary L. Venegas*	(Principal Executive Officer)
/s/ Scott Ogur	Chief Financial Officer	May 15, 2019
Scott Ogur	(Principal Financial Officer)
/s/ Paul Hodges	Director	May 15, 2019
Paul Hodges*
/s/ Patrick Vo	Director	May 15, 2019
Patrick Vo*
/s/ Terence Ferraro	Director	May 15, 2019
Terence Ferraro*
/s/ Andrew Schweibold	Director	May 15, 2019
Andrew Schweibold*
/s/ Satyavrat Joshi	Director	May 15, 2019
Satyavrat Joshi*

* By: Scott Ogur, as Attorney in Fact, pursuant to the
Power of Attorney dated May 15, 2019 and filed herewith.

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