UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

or

☐ TRANSITION REPORT PURSUANT TO 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)

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

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

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

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

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

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

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

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

As of November 12, 2019, the registrant had 93,274,159 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 September 30, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	2
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	7
	Notes to the Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	42
ITEM 4.	Controls and Procedures	42
PART II	OTHER INFORMATION	43
ITEM 1.	Legal Proceedings	43
ITEM 1A.	Risk Factors	43
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
ITEM 3	Defaults upon Senior Securities	43
ITEM 4.	Mine Safety Disclosures	43
ITEM 5.	Other Information	43
ITEM 6.	Exhibits	44
SIGNATURES		45

i

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

HELIX TCS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	September 30,			December 31,
	2019			2018
ASSETS
Current assets:
Cash	$	655,280		$	285,761
Accounts receivable, net		1,496,137			1,184,923
Prepaid expenses and other current assets		644,763			409,800
Costs & earnings in excess of billings		30,468			42,869
Total current assets		2,826,648			1,923,353
Property and equipment, net		573,792			349,518
Intangible assets, net		15,594,869			18,604,078
Goodwill		53,716,207			39,913,559
Deposits and other assets		1,296,504			146,990
Promissory note receivable		75,000			-
Total assets	$	74,083,020		$	60,937,498
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		2,916,998			1,702,713
Advances from related parties		-			45,250
Billings in excess of costs		126,505			155,192
Deferred rent		-			2,937
Notes payable, current portion		24,805			24,805
Obligation pursuant to acquisition		50,000			201,667
Convertible notes payable, net of discount		862,426			187,177
Convertible notes payable, net of discount - related party		1,209,458			-
Due to related party		-			32,489
Contingent consideration		-			908,604
Warrant liability		1,010,890			896,171
Promissory note		300,000
Total current liabilities		6,501,082			4,157,005
Long-term liabilities:
Notes payable, net of current portion		436,153			51,554
Other long-term liabilities		878,929			-
Total long-term liabilities		1,315,082			51,554
Total liabilities		7,816,164			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 September 30, 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 September 30, 2019 and December 31, 2018		13,784			13,784
Common stock; par value $0.001; 200,000,000 shares authorized; 92,530,013 shares issued and outstanding as of September 30, 2019; 72,660,825 shares issued and outstanding as of December 31, 2018		92,531			72,660
Additional paid-in capital		99,748,368			82,831,014
Accumulated other comprehensive (loss) income		(96,355	)		17,991
Accumulated deficit		(33,492,472	)		(26,207,510	)
Total shareholders’ equity		66,266,856			56,728,939
Total liabilities and shareholders’ equity		74,083,020			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 September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue:
Security and guarding	$	1,138,934		$	1,141,676		$	3,691,174		$	3,432,651
Systems installation		245,272			318,850			447,880			454,113
Software		2,357,078			1,653,195			6,872,210			2,229,337
Total revenues	$	3,741,284		$	3,113,721		$	11,011,264		$	6,116,101
Cost of revenue		2,224,795			1,880,061			6,146,713			3,892,716
Gross margin		1,516,489			1,233,660			4,864,551			2,223,385
Operating expenses:
Selling, general and administrative		1,114,419			802,724			3,221,788			1,678,603
Salaries and wages		1,392,522			1,888,155			3,859,068			4,308,994
Professional and legal fees		674,172			473,651			2,154,728			1,362,205
Depreciation and amortization		1,198,752			806,611			3,554,729			1,869,889
Loss on impairment of Goodwill		-			-			-			664,329
Total operating expenses		4,379,865			3,971,141			12,790,313			9,884,020
Loss from operations		(2,863,376	)		(2,737,481	)		(7,925,762	)		(7,660,635	)
Other income (expenses):
Change in fair value of convertible note		430,766			(17,880	)		288,425			679,766
Change in fair value of convertible note - related party		491,442			-			(213,828	)		118,506
Change in fair value of warrant liability		1,224,601			136,920			3,462,746			1,434,760
Change in fair value of contingent consideration		-			(131,994	)		(880,050	)		(131,994	)
Loss on issuance of warrants		-			-			(787,209	)		-
Gain on reduction of obligation pursuant to acquisition		-			50,361			-			607,415
Interest (expense) income		(539,002	)		21,622			(1,229,284	)		6,705
Other income		1,607,807			59,029			640,800			2,715,158
Net loss	$	(1,255,569	)	$	(2,678,452	)	$	(7,284,962	)	$	(4,945,477	)
Other comprehensive income:
Changes in foreign currency translation adjustment		(118,003	)		17,538			(114,346	)		17,538
Total other comprehensive (loss) income		(118,003	)		17,538			(114,346	)		17,538
Total comprehensive loss		(1,373,572	)		(2,660,914	)		(7,399,308	)		(4,927,939	)
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend		-			-			-			(22,202,194	)
Net loss attributable to common shareholders	$	(1,373,572	)	$	(2,660,914	)	$	(7,399,308	)	$	(27,130,133	)
Net loss per share attributable to common shareholders:
Basic	$	(0.02	)	$	(0.04	)	$	(0.10	)	$	(0.57	)
Diluted	$	(0.02	)	$	(0.04	)	$	(0.10	)	$	(0.57	)
Weighted average common shares outstanding:
Basic		79,295,278			70,420,857			76,038,782			47,598,820
Diluted		79,295,278			70,420,857			76,038,782			47,598,820

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

3

	Common Stock				Preferred Stock (Class A)				Preferred Stock (Class B)				Additional Paid-In			Accumulated Other Comprehensive		Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Income		Deficit			Equity
Balance at June 30, 2018		69,133,410	$	69,134		1,000,000	$	1,000		13,784,201	$	13,784	$	79,066,909		$	-	$	(20,508,733	)	$	58,642,094
Beneficial conversion feature of Series B convertible preferred stock																						-
Deemed dividend on conversion of Series B convertible preferred stock to common stock																						-
Issuance of common stock per stock subscription agreements		1,416,665		1,416										1,273,582								1,274,998
Restricted common stock issued as part of Engeni acquisition		366,700		367										388,335								388,702
Share-based compensation expense		443,195		443										523,352								523,795
Reduction in Additional Paid-In Capital due to Security Grade acquisition settlement agreement														(39,199	)							(39,199	)
Issuance of common stock resulting from exercise of stock options		3,983		4																		4
Foreign currency translation																	17,538					17,538
Net loss																			(2,678,452	)		(2,678,452	)
Balance at September 30, 2018		71,363,953	$	71,364		1,000,000	$	1,000		13,784,201	$	13,784	$	81,212,979		$	17,538	$	(23,187,185	)	$	58,129,480

4

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

5

	Common Stock				Preferred Stock (Class A)				Preferred Stock (Class B)				Additional Paid-In			Accumulated Other Comprehensive		Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Income		Deficit			Equity
Balance at December 31, 2017		28,771,402	$	28,771		1,000,000	$	1,000		13,784,201	$	13,784	$	18,741,114		$	-	$	(18,241,708	)	$	542,961
Beneficial conversion feature of Series B convertible preferred stock														22,202,194								22,202194
Deemed dividend on conversion of Series B convertible preferred stock to common stock														(22,202,194	)							(22,202,194	)
Issuance of common stock per stock subscription agreements		2,883,331		2,883										2,592,114								2,594,997
Issuance of common stock resulting from convertible note conversion		205,974		206										174,794								175,000
Issuance of restricted common stock		157,850		158										452,821								452,979
Reduction in Additional Paid-In Capital due to Security Grade acquisition settlement agreement														(340,039	)							(340,039	)
Restricted common stock issued as part of BioTrack acquisition		38,184,985		38,185										57,513,848								57,552,033
Restricted common stock issued as part of Engeni acquisition		366,700		367										388,335								388,702
Issuance of common stock to employees under Stock Incentive Plan		227,095		227										308,842								309,069
Issuance of common stock resulting from inducement of consulting agreement		250,000		250										336,250								336,500
Issuance of restricted common stock resulting from an investor relation consulting agreement		100,000		100										101,900								102,000
Issuance of warrants pursuant to consulting agreement														943,000								943,000
Issuance of common stock resulting from exercise of stock options		216,616		217																		217
Foreign currency translation																	17,538					17,538
Net loss																			(4,945,477	)		(4,945,477	)
Balance at September 30, 2018		71,363,953	$	71,364		1,000,000	$	1,000		13,784,201	$	13,784	$	81,212,979		$	17,538	$	(23,187,185	)	$	58,129,480

See accompanying notes to the unaudited condensed consolidated financial statements.

6

HELIX TCS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(7,284,962	)	$	(4,945,477	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,554,729			1,869,889
Accretion of debt discounts		922,965			-
Loss on issuance of warrants		787,209			-
Provision for doubtful accounts		199,215			-
Share-based compensation expense		1,241,741			2,143,548
Change in fair value of convertible notes, net of discount		(288,425	)		(504,768	)
Change in fair value of warrant liability		(3,462,746	)		(1,434,760	)
Change in fair value of convertible notes, net of discount - related party		213,828			(93,506	)
Change in fair value of contingent consideration		880,050			131,994
Loss on impairment of goodwill		-			664,329
Gain on reduction of obligation pursuant to acquisition		-			(607,415	)
Gain on reduction of contingent consideration		(100,000	)		-
Change in operating assets and liabilities:
Accounts receivable		(458,461	)		(373,314	)
Prepaid expenses and other current assets		(239,374	)		-
Deposits and other assets		40,259			(87,161	)
Due to related party		(32,489	)		-
Costs in excess of billings		12,401			16,055
Accounts payable and accrued expenses		1,108,266			26,044
Deferred rent		(2,937	)		(6,403	)
Billings in excess of costs		(28,687	)		(16,405	)
Right of use assets and liabilities		72,940			-
Other long-term liabilities		2,000			-
Net cash used in operating activities		(2,862,478	)		(3,217,350	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(620,594	)		(85,665	)
Purchase of domain names		(21,856	)		-
Payments for business combination, net of cash acquired		(148,727	)		(79,664	)
Cash acquired as part of business combination		-			454,306
Payments for asset acquisition		-			(58,729	)
Net cash (used in) provided by investing activities		(791,177	)		230,248
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments pursuant to convertible notes payable - related party		-			(150,000	)
Promissory note receivable		(75,000	)		-
Payments pursuant to advances from related parties		(45,250	)		(69,500)
Payments pursuant to notes payable		(15,401	)		-
Payments pursuant to a promissory note		(280,000)			-
Proceeds from notes payable		-			16,271
Proceeds from the issuance of a promissory note		580,000			250,000
Proceeds from the issuance of convertible notes payable		2,732,500			-
Proceeds from the issuance of common stock		1,306,313			2,595,214
Net cash provided by financing activities		4,203,162			2,641,985
Effect of foreign exchange rate changes on cash		(179,988	)		(58,445	)
Net change in cash		369,519			(403,562	)
Cash, beginning of period		285,761			868,554
Cash, end of period		655,280			464,992
Supplemental disclosure of cash and non-cash transactions:
Cash paid for interest	$	40,625		$	-
Common stock issued pursuant to convertible notes payable	$	117,937		$	-
Debt discount for warrant liability	$	(1,578,225	)	$	-
Equity issued pursuant to acquisition	$	13,619,611		$	58,718,033
Security Grade acquisition consideration settlement	$	-		$	-
Cash payable pursuant to acquisition	$	50,000		$	-
PIK interest payment of common stock	$	75,000		$	-
Common stock issued pursuant to contingent consideration as part of acquisition	$	1,788,654		$	-
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets	$	1,485,511		$	-
Partial conversion of convertible note into common stock	$	-		$	175,000

See accompanying notes to the unaudited condensed consolidated financial statements.

7

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

On the Engeni Closing Date, in connection with closing the Engeni Merger Agreement, the Company issued 366,700 shares of Company common stock to Engeni US members. Furthermore, the Company subsequently issued Engeni US members 733,300 shares of Company common stock on April 2, 2019.

On April 1, 2019 (“Tan Security Closing Date”), the Company entered into a Membership Interest and Stock Purchase Agreement (the “Tan Security Acquisition Agreement”) with Tan’s International Security and Tan’s International LLC (collectively, “Tan Security”). Pursuant to the Tan Security Acquisition Agreement, the Company purchased all membership interests and capital stock of Tan Security and collectively holds 100% of the interests of Tan Security (the “Tan Security Acquisition”).

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

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

8

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

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

At September 30, 2019, the Company had a working capital deficit of $3,674,434, as compared to a working capital deficit of $2,233,652 at December 31, 2018. The increase of $1,440,782 in the Company’s working capital deficit from December 31, 2018 to September 30, 2019 was primarily the result of a non-cash increase in the fair market value of the Company’s convertible notes payable, net of discount – related party and an increase in accounts payable and accrued liabilities, partially offset by a decrease in contingent consideration.

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

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

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3. Summary of Significant Accounting Policies

Principles of Consolidation 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Helix TCS, LLC (“Helix TCS”), Security Consultants Group, LLC (“Security Consultants”), Boss Security Solutions, Inc. (“Boss Security”), Security Consultants Group Oregon, LLC (“Security Oregon”), Security Grade, BioTrackTHC (since June 1, 2018), Engeni US (since August 3, 2018), Tan Security (since April 1, 2019) and Green Tree International, Inc. (since September 10, 2019). These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2018. 

Accounts Receivable and Allowance for Doubtful Accounts

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

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

Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Allowance for doubtful accounts was $241,896 and $76,156 at September 30, 2019 and December 31, 2018, respectively.

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 $104,785 and $12,671 for the three months ended September 30, 2019 and 2018, respectively, and $352,275 and $74,408 for the nine months ended September 30, 2019 and 2018, respectively.

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.

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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.

Earnings (Loss) per Share

The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options and warrants, using the treasury stock method, and convertible debt and convertible securities, using the if-converted method.

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For the three and nine months ended September 30, 2019 and 2018, potential common shares includable in the computation of fully-diluted per share results are not presented in the condensed consolidated financial statements as their effect would be anti-dilutive.

The anti-dilutive shares of common stock outstanding for the three and nine months ended September 30, 2019 and 2018 were as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Potentially dilutive securities:
Convertible notes payable		3,649,021		106,957		3,649,021		106,957
Convertible Preferred A Stock		1,000,000		1,000,000		1,000,000		1,000,000
Convertible Preferred B Stock		13,784,201		13,784,201		13,784,201		13,784,201
Warrants		4,975,558		3,307,073		4,975,558		3,307,073
Stock options		9,787,381		8,739,669		9,787,381		8,739,669

Reclassifications

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

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-.02, Leases (Topic 842) (“Topic 842”) which requires the recognition of right-of-use assets and lease liabilities on the balance sheet. The most prominent of the changes in the standard is the recognition of right-of-use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases.

The Company adopted the new standard on January 1, 2019 and used the modified retrospective approach with the effective date as the date of initial application. Consequently, prior period balances and disclosures have not been restated. The Company elected certain practical expedients, which among other things, allowed us to carry forward prior conclusions about lease identification and classification.

Adoption of the standard resulted in the balance sheet recognition of additional lease assets and lease liabilities of approximately $1,500,000. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently has elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in separate lease and non-lease components for all our leases. For additional information regarding the Company’s leases, see Note 18 in the notes to condensed consolidated financial statements.

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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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4. Revenue Recognition

Disaggregation of revenue 

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Types of Revenues:
Security and Guarding	$	1,138,934	$	1,141,676	$	3,691,174	$	3,432,651
Systems Installation		245,272		318,850		447,880		454,113
Software		2,357,078		1,653,195		6,872,210		2,229,337
Total revenues	$	3,741,284	$	3,113,721	$	11,011,264	$	6,116,101

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

Security and Guarding Revenue

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

Systems Installation Revenue

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

Software

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

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 September 30, 2019 and December 31, 2018. The Company also incurs legal costs relating to the drafting and negotiating of contracts with select customers. Because legal costs are not incremental in nature and are incurred regardless of whether a contract is ultimately obtained, there were no legal costs capitalized as of September 30, 2019 and December 31, 2018. The Company did not record amortization of costs incurred to obtain the contract or any impairment losses for the period ending September 30, 2019 and 2018.

5. Business Combinations

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.

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

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

	As Adjusted
Base Price - Common Stock	$	388,702
Contingent Consideration - Common Stock		777,298
Contingent Consideration - Cash		-
Total Purchase Price	$	1,166,000

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

The Company determined the fair value of the contingent consideration to be $777,298 at August 3, 2018 and recorded it as a liability in its unaudited condensed consolidated balance sheets. On April 2, 2019, the Company satisfied their contingent consideration liability and issued 733,300 shares of the Company’s common stock to Engeni US members.

Tan’s International Security

On the Tan Security Closing Date, the Company entered into the Tan Security Acquisition Agreement. Pursuant to the Tan Security Acquisition Agreement, Helix purchased all membership interests and capital stock of Tan Security and collectively holds 100% of the interests of Tan Security. The purchase price of $100,000 in cash plus 250,000 shares of the Company’s restricted common stock will be paid to Rocky Tan as follows:

● 250,000 shares of Helix Stock at closing.

● $25,000 at closing

● $25,000 on the 4-month anniversary of the Tan Security Closing Date

● $25,000 on the 8-month anniversary of the Tan Security Closing Date

● $25,000 on the 12-month anniversary of the Tan Security Closing Date

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

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

Base Price – Cash at closing	$	25,000
Base Price – Deferred cash payment (including $25,000 to be made on the 4,8 and 12-month anniversaries of closing)		75,000
Base Price – Common Stock		710,000
Total Purchase Price	$	810,000

Description	Fair Value
Assets acquired:
Cash	$	2,940
Accounts receivable		7,635
Goodwill		821,807
Total assets acquired	$	832,382
Liabilities assumed:
Accounts payable	$	12,526
Other liabilities		9,856
Total liabilities assumed		22,382
Estimated fair value of net assets acquired	$	810,000

Green Tree International, Inc.

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

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

To secure the indemnification obligations of the GTI shareholders to the Company under the Merger Agreement, 4,140,274 of the Company shares to be issued to the GTI shareholders will be held back and the Company will be entitled to retain such number of the holdback shares as necessary to satisfy those indemnification obligations. 50% of the holdback shares that remain after satisfaction of any indemnification obligations will be released 12 months after the closing date of the merger, and the remainder 24 months after the closing date of the merger. Additionally, if in the first 12 months following the closing GTI generates less than $1.5 million of revenues, 100% of the holdback shares shall be returned to the Company.

In connection with closing the Merger on September 10, 2019, the Company will issue 16,765,727 unregistered shares of its common stock to GTI stockholders. In connection with the Merger, Steve Janjic joined the board of directors of the Company.

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

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

Base Price - Common Stock	$	12,909,611
Total Purchase Price	$	12,909,611

Description	Fair Value		Weighted Average Useful Life (Years)
Assets acquired:
Note Receivable, net	$	135,000
Property, Plant and Equipment, Net		12,142
Software		452,002	4.5
Goodwill		12,980,840
Total assets acquired	$	13,579,984
Liabilities assumed:
Accounts Payable		43,717
Notes Payable		400,000
Other Liabilities		226,656
Total liabilities assumed:		670,373
Estimated fair value of net assets acquired:	$	12,909,611

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

Total acquisition costs for the GTI merger incurred during the nine months ended September 30, 2019 was $83,324, and is included in selling, general and administrative expense in the Company’s Statements of Operations.

Unaudited Pro Forma Results

GTI contributed revenues of $0 and a net loss of $22,144 for the period September 10, 2019 through September 30, 2019, included in the Company’s consolidated condensed statements of operations.

6. Property and Equipment, Net

At September 30, 2019 and December 31, 2018, property and equipment consisted of the following:

	September 30, 2019			December 31, 2018
Furniture and equipment	$	149,738		$	264,659
Software equipment		402,297			-
Vehicles		201,400			202,700
Total		753,435			467,359
Less: Accumulated depreciation		(179,643	)		(117,841	)
Property and equipment, net	$	573,792		$	349,518

Depreciation expense for the three months ended September 30, 2019 and 2018 was $24,440 and $27,528, respectively, and $71,662 and $63,421 for the nine months ended September 30, 2019 and 2018, respectively.

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7. Intangible Assets, Net and Goodwill

The following table summarizes the Company’s intangible assets as of September 30, 2019 and December 31, 2018:

		September 30, 2019
	Estimated Useful Life (Years)	Gross Carrying Amount		Assets Acquired Pursuant to Business Combination (2)		Assets Acquired		Accumulated Amortization			Net Book Value
Database	5	$	93,427	$	-		-	$	(64,826	)	$	28,601
Trade names and trademarks	5 - 10		591,081		-		-		(178,294	)		412,787
Web addresses	5		130,000		-		-		(89,061	)		40,939
Customer list	5		11,459,027		-		-		(3,678,726	)		7,780,301
Software	4.5		9,771,195		452,002		1,625		(2,911,794	)		7,313,028
Domain Name	5		-		-		20,231		(1,018	)		19,213
		$	22,044,730	$	452,002	$	21,856	$	(6,923,719	)	$	15,594,869

				December 31, 2018
	Estimated Useful Life (Years)	Gross Carrying Amount at December 31, 2017		Assets Acquired Pursuant to Business Combination (1)		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 August 3, 2018, the Company acquired various assets of Engeni (See Note 5)

(2) On September 10, 2019 the Company acquired various assets of GTI (see Note 5)

The Company uses the straight-line method to determine the amortization expense for its definite lived intangible assets. Amortization expense related to the purchased intangible assets was $1,174,312 and $1,160,889 for the three months ended September 30, 2019 and 2018, respectively, and $3,483,067 and $1,806,468 for the nine months ended September 30, 2019 and 2018, respectively.

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The following table summarizes the Company’s Goodwill as of September 30, 2019 and December 31, 2018:

	Total Goodwill
Balance at December 31, 2017	$	664,329
Impairment of goodwill		(664,329	)
Goodwill attributable to Biotrack acquisition		39,135,008
Goodwill attributable to Engeni acquisition		778,552
Balance at December 31, 2018	$	39,913,560
Goodwill attributable to Tan Security acquisition		821,807
Goodwill attributable to Green Tree acquisition		12,980,840
Balance at September 30, 2019	$	53,716,207

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

8. Costs, Estimated Earnings and Billings

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows as of September 30, 2019 and December 31, 2018:

	September 30, 2019			December 31, 2018
Costs incurred on uncompleted contracts	$	171,486		$	89,700
Estimated earnings		71,321			50,512
Cost and estimated earnings earned on uncompleted contracts		242,807			140,212
Billings to date		338,844			252,535
Billings in excess of costs on uncompleted contracts		(96,037	)		(112,323	)
Costs in excess of billings	$	30,468		$	42,869
Billings in excess of cost		(126,505	)		(155,192	)
	$	(96,037	)	$	(112,323	)

9. Accounts Payable and Accrued Liabilities

As of September 30, 2019 and December 31, 2018, accounts payable and accrued liabilities consisted of the following:

	September 30, 2019		December 31, 2018
Accounts payable	$	734,090	$	842,389
Accrued compensation and related expenses		341,832		33,869
Accrued expenses		1,455,292		826,455
Lease obligation - current		385,784		-
Total	$	2,916,998	$	1,702,713

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10. Convertible Notes Payable, net of discount

	September 30, 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		365,960			-
Note Eleven, 10% convertible promissory note, fixed secured, maturing May 15, 2020, net of debt discount for warrants and legal fees		234,595			-
Note Twelve, 10% convertible promissory note, fixed secured, maturing June 16, 2020, net of debt discount for warrants and legal fees		261,871			-
		862,426			187,177
Less: Current portion		(862,426	)		(187,177	)
Long-term portion	$	-		$	-

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

The Company evaluated Note Ten in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Ten will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2019, the fair value of Note Ten was $514,148. Accordingly, the Company recorded a change in fair value of ($147,433) and $64,148 related to Note Ten for the three and nine months ended September 30, 2019, respectively.

In addition, the company recorded a debt discount relating to the warrants issued in the amount of $355,847 based on the relative fair value of the warrants at inception of Note Ten. Debt discounts amortized to interest expense were $89,693 and $207,659 for the three and nine months ended September 30, 2019, respectively. The unamortized discount balance at September 30, 2019 was $148,188. On May 31, 2019 and September 3, 2019, the Company issued 15,625 and 16,568 restricted shares of common stock as paid-in-kind (“PIK”) interest payments in the amount of $14,062 and $14,063, respectively. Accrued interest expense associated with Note Ten was $9,247 as of September 30, 2019, which includes PIK interest payable.

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

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The Company evaluated Note Eleven in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Eleven will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2019, the fair value of Note Eleven was $266,667. Accordingly, the Company recorded a change in fair value of ($133,333) related to Note Eleven for the three and nine months ended September 30, 2019, respectively.

In addition, the company recorded a debt discount of $38,543 relating to the warrants issued in the amount of $18,543 based on the relative fair value of the warrants themselves at inception of Note Eleven and $20,000 relating to legal fees. Debt discounts amortized to interest expense were $6,471 for the three and nine months ended September 30, 2019, respectively. The unamortized discount balance at September 30, 2019 was $32,072. Accrued interest expense associated with Note Eleven was $6,715 as of September 30, 2019.

On September 16, 2019, the Company entered into a $450,000 Fixed Convertible Promissory Note (“Note Twelve”) with the investor. The investor provided the Company with $427,500 in cash proceeds, which was received by the Company during the period ended September 30, 2019. The additional $22,500 was retained by the investor for due diligence and legal bills for the transaction and was recorded as a debt discount. Note Twelve will mature on June 16, 2020 and bear interest at a rate of 10% per annum, payable by the Company in cash. The principal balance of Note Twelve is convertible at the election of the investor, in whole or in part, at any time or from time to time, into the Company’s common stock at $0.90 per share for the first 6 months and thereafter at the lower of $0.90 per share or at 70% of the average of the five lowest daily VWAPs of the Company’s common stock during the 15 consecutive trading days prior to the date on which the investor elects to convert all or part of Note Twelve. In conjunction with Note Twelve, the Company issued a warrant to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share.

The Company evaluated Note Twelve in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Twelve will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2019, the fair value of Note Twelve was $300,000. Accordingly, the Company recorded a change in fair value of ($150,000) related to Note Twelve for the three and nine months ended September 30, 2019, respectively.

In addition, the company recorded a debt discount of $40,183 relating to the warrants issued in the amount of $17,683 based on the residual fair value of the warrants themselves at inception of Note Twelve and $22,500 relating to legal fees. Debt discounts amortized to interest expense were $2,054 for the three and nine months ended September 30, 2019, respectively. The unamortized discount balance at September 30, 2019 was $38,129. Accrued interest expense associated with Note Twelve was $2,299 as of September 30, 2019.

11. Related Party Transactions

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

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The Company evaluated Note Nine in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Nine will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2019, the fair value of Note Nine was $1,713,828. Accordingly, the Company recorded a change in fair value of ($491,442) and $213,828 related to Note Nine for the three and nine months ended September 30, 2019, respectively.

In addition, the company recorded a debt discount relating to the warrants issued in the amount of $1,186,153 based on the relative fair value of the warrants at inception of Note Nine. The additional $25,000 retained by the fourth investor for legal bills for the transaction will be recorded as a debt discount. Debt discounts amortized to interest expense were $305,276 and $706,782 for the three and nine months ended September 30, 2019, respectively. The unamortized discount balance at September 30, 2019 was $504,371. On May 31, 2019, the Company issued 52,083 restricted shares of common stock as PIK interest payments in the amount of $46,875. Accrued interest expense associated with Note Nine was $29,795 as of September 30, 2019, which includes PIK interest payable. As of September 30, 2019, the balance of Note Nine, net of debt discount for warrants and legal bills was $1,209,458.

Warrants

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

The Company determined that the warrants associated with Note Nine are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, March 1, 2019, the fair value of the warrant liability was $1,186,153 while as of September 30, 2019, the fair value of the warrant liability was $259,215. Accordingly, the Company recorded a change in fair value of $212,131 and $926,938 during the three and nine months ended September 30, 2019, respectively, which is reflected in the unaudited condensed consolidated statements of operations. 

Promissory Note

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

On July 29, 2019, the Company entered into an unsecured promissory note with the Related Party Holder in the amount of $300,000. The unsecured promissory note has a fixed interest rate of 12% and is due and payable on January 29, 2020.

12. Notes Payable

As of September 30, 2019 and December 31, 2018 Notes payable consisted of the following:

	September 30, 2019			December 31, 2018
Vehicle financing loans payable, between 4.7% and 7.0% interest and maturing between June 2022 and July 2022	$	55,127		$	71,284
Loans Payable - Credit Union		5,831			5,075
Convertible Note Payable		400,000			-
Less: Current portion of loans payable		(24,805	)		(24,805	)
Long-term portion of loans payable	$	436,153		$	51,554

The interest expense associated with the notes payable was $7,065 and $2,901 for the three months ended September 30, 2019 and 2018, respectively, and $9,746 and $4,321 for the nine months ended September 30, 2019 and 2018, respectively.

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

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

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13. Shareholders’ Equity

Common Stock

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 shared based compensation expense of $27,400.

In March and June 2019, the Company issued 1,255,222 and 166,667 shares of common stock as part of investment unit purchase agreements (see Note 15).

In March and June 2019, certain option holders exercised their rights under the BioTrackTHC Stock Plan and were issued 62,847 and 47,084 shares of common stock, respectively, for no cash proceeds.

In March and April 2019, certain option holders exercised their rights under the BioTrackTHC Stock Plan and were issued 6,082 and 57,461 shares of common stock for total proceeds of $4,805 and $21,808, respectively.

In April 2019, the Company issued 250,000 shares of common stock as part of the Tan Security acquisition.

In April 2019, a selling shareholder of Security Grade exercised their right to purchase 15,101 shares of the Company’s common stock.

In April 2019, the Company issued 733,300 shares of common stock in satisfaction of the Engeni contingent consideration (see Note 5).

In May 2019, the Company issued 15,625 and 52,083 restricted shares of common stock as PIK interest payments in the amount of $14,062 and $46,875, respectively (see Notes 10 and 11).

In August 2019, the Company issued 16,765,727 shares of common stock as part of the GTI acquisition.

In September 2019, the Company issued 16,568 restricted shares of common stock as PIK interest payments in the amount of $14,063 (see Note 10).

Conversion of Convertible Note to Common Stock

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

2017 Omnibus Incentive Plan

The table below reflects shares issued under the 2017 Omnibus Incentive Plan during the nine months period ended September 30, 2019:

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

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Series A convertible preferred stock

In October 2015, the Company issued a total of 1,000,000 shares of its Class A Preferred Stock. The Class A Preferred Stock included super majority voting rights and were convertible into 60% of the Company’s common stock. During the third quarter of 2017, the Company modified the conversion rate on the Class A Preferred Stock to a 1:1 ratio. This modification reduced the amount of potentially dilutive Convertible Series A Stock by 15,746,127 shares to a total of 1,000,000 at September 30, 2017.

Series B convertible preferred stock

Series B Preferred Stock Purchase Agreement

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

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

In accordance with the Certificate of Incorporation, there were 9,000,000 authorized Series B Preferred Stock at a par value of $ 0.001. On August 23, 2017 the Certificate of Designations was amended and restated to increase the number of shares of Series B Preferred Stock authorized to be 17,000,000.

Conversion:

Each Series B Preferred Share is convertible at the option of the holder into such number of shares of the Company’s common stock equal to the number of Series B Preferred Shares to be converted, multiplied by the Preferred Conversation Rate. The Preferred Conversion Rate shall be the quotient obtained by dividing the Preferred Stock Original Issue Price ($0.3253815) by the Preferred Stock Conversation Price in effect at the time of the conversion (the initial conversion price will be equal to the Preferred Stock Original Issue Price, subject to adjustment in the event of stock splits, stock dividends, and fundamental transactions). Based on the current conversion price, the Series B Preferred Shares are convertible into 13,784,201 shares of common stock. A fundamental transaction means: (i) our merger or consolidation with or into another entity, (ii) any sale of all or substantially all of our assets in one transaction or a series of related transactions, (iii) any reclassification of our Common Stock or any compulsory share exchange by which Common Stock is effectively converted into or exchanged for other securities, cash or property; or (iv) sale of shares below the preferred stock conversion price. Each Series B Preferred Share will automatically convert into common stock upon the earlier of (i) notice by the Company to the holders that the Company has elected to convert all outstanding Series B Preferred Shares at any time on or after May 12, 2018; or (ii) immediately prior to the closing of a firmly underwritten initial public offering (involving the listing of the Company’s Common Stock on an Approved Stock Exchange) pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Common Stock for the account of the Company in which the net cash proceeds to the Company (before underwriting discounts, commissions and fees) are at least fifty million dollars ($50,000,000).

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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.

14. Stock Options

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

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

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

On May 2, 2019, the Company awarded an investor an option to purchase a total of 125,000 shares of the Company’s common stock at an exercise price of $2.03 per share. 62,500 of the options shall vest immediately and 62,500 of the options shall vest on August 2, 2019 provided the marketing agreement between the Company and grantee has not been terminated. These options shall expire on May 1, 2024.

In May and June 2019, the Company awarded five employees, an option to purchase a total of 50,000, 40,000, 50,000, 50,000, and 30,000 shares of the Company’s common stock at prices ranging from $1.05 to $2.03 per share. These options shall vest over a period ranging from September 2019 to June 2020 and have expiration dates ranging from May 2024 to June 2024.

Stock option activity for the period ended September 30, 2019 is as follows:

	Shares Underlying Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)
Outstanding at January 1, 2019		8,730,956		$	0.671		2.44
Granted		1,245,000		$	2.106		6.81
Exercised		(188,575	)	$	0.261		0.83
Forfeited and expired		-			-		-
Outstanding at September 30, 2019		9,787,381		$	0.862		2.94
Vested options at September 30, 2019		8,900,021		$	0.749		1.88

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15. 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 September 30, 2019, the fair value of the warrant liability was $77,765. Accordingly, the Company recorded a change in fair value of the warrant liability of $63,639 and $278,082 related to Note Ten for the three and nine months ended September 30, 2019, respectively.

On January 10, 2019, the Company entered into an Investment Unit Purchase Agreement (the “First Investment Agreement”) to issue and sell investment units to an investor, in which the investment units consist of one share of the common stock of the Company, and a warrant exercisable for one half share of common stock of the Company at an Exercise Price of $1.25 per share for cash at a price per investment unit of $0.90.

On March 5, 2019, the Company sold an aggregate of 1,255,222 units of the Company’s securities to an investor at a purchase price of $0.90 per unit for total proceeds of $1,129,700. In connection with the First Investment Agreement, the investor is entitled to purchase from the Company, at the Exercise Price, at any time on or after 90 days from the issuance date, 627,611 shares of the Company’s common stock (the “March Warrant Shares”).

The Company determined that the warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations.

The fair value of the March Warrant Shares at issuance on January 10, 2019 is in excess of the proceeds received, the warrant liability is required to be recorded at fair value with the excess of the fair value over the proceeds received recognized as a loss in earnings. The gross proceeds from the 1,255,222 investment units at $0.90 was $1,129,700.  The fair value of the March Warrant Shares at issuance was $1,717,506. The amount to be recognized as a loss in earnings is calculated as follows:

Proceeds from January investment units	$	1,129,700
Par value of common stock issues	$	(1,255	)
Fair value of warrants	$	(1,717,506	)
Loss on issuance of warrants (January 10, 2019 issuance)	$	(589,061	)
Loss on issuance of warrants (March 11, 2019 issuance)	$	(198,148	)
Total loss on issuance of warrants	$	(787,209	)

As of September 30, 2019, the fair value of the warrant liability was $283,696 and the Company recorded a change in fair value of the warrant liability of $255,151 and $1,433,810 for the three and nine months ended September 30, 2019, respectively.

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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 nine 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 September 30, 2019, the fair value of the warrant liability was $37,125. Accordingly, the Company recorded a change in fair value of the warrant liability of $45,037 and $161,023 related to the warrants for the three and nine months ended September 30, 2019, respectively.

On June 14, 2019, the Company entered into another Investment Unit Purchase Agreement (the “Second Investment Agreement”) to issue and sell investment units to an investor (the “investor”), in which the investment units consist of one share of the common stock of the Company, and a warrant exercisable for one half share of common stock of the Company at an exercise price of $1.25 per share for cash at a price per investment unit of $0.90.

On June 24, 2019, the Company sold an aggregate of 166,667 units of the Company’s securities to an investor at a purchase price of $0.90 per unit for total proceeds of $150,000. In connection with the Second Investment Agreement, the investor is entitled to purchase from the Company, at the exercise price, at any time on or after 90 days from the issuance date, 83,333 shares of the Company’s common stock (the “June Warrant Shares”).

The gross proceeds from the 166,667 investment units at $0.90 was $150,000.  The fair value of the June Warrant Shares at issuance was $83,586 while as of September 30, 2019, the fair value of the warrant liability was $38,832. Accordingly, the Company recorded a change in fair value of the warrant liability of $34,241 and $44,754 related to the warrants for the three and nine months ended September 30, 2019.

On August 15, 2019, in connection with the issuance of Note Eleven, the Company issued warrants, of which the value was derived and based off the fair value of Note Eleven, to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share. Exercise of the purchase rights represented by the warrant may be made, in whole or in part, at any time or times on or after August 15, 2019 and on or before August 15, 2024, by delivery to the Company of the Notice of Exercise.

The Company determined that the warrants associated with Note Eleven are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with ASC 480, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, August 15, 2019, the fair value of the warrant liability was $18,542 while as of September 30, 2019, the fair value of the warrant liability was $12,739. Accordingly, the Company recorded a change in fair value of the warrant liability of $5,803 related to Note Eleven for the three and nine months ended September 30, 2019, respectively.

On September 16, 2019, in connection with the issuance of Note Twelve, the Company issued warrants, of which the value was derived and based off the fair value of Note Twelve, to the investor to purchase 25,000 shares of the Company’s common stock at $1.00 per share. Exercise of the purchase rights represented by the warrant may be made, in whole or in part, at any time or times on or after September 16, 2019 and on or before September 16, 2024, by delivery to the Company of the Notice of Exercise.

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The Company determined that the warrants associated with Note Twelve are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480, Distinguishing Liabilities from Equity. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with ASC 480, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. At inception, September 16, 2019, the fair value of the warrant liability was $17,683 while as of September 30, 2019, the fair value of the warrant liability was $12,803. Accordingly, the Company recorded a change in fair value of the warrant liability of $4,880 related to Note Twelve for the three and nine months ended September 30, 2019, respectively.

A summary of warrant activity is as follows:

For the Nine Months Ended September 30, 2019
	Warrant Shares		Weighted Average Exercise Price
Balance at January 1, 2019		3,418,184	$	0.23
Warrants granted		1,557,374	$	1.22
Balance at June 30, 2019		4,975,558	$	0.55

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

	As of September 30, 2019			As of December 31, 2018
Fair value of company’s common stock	$	0.60		$	0.90
Dividend yield		0	%		0	%
Expected volatility		45% - 140%			175.0	%
Risk Free interest rate		1.55% - 1.79%			2.49	%
Expected life (years)		2.92			1.65
Fair value of financial instruments - warrants	$	1,010,890		$	896,171

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

	Amount
Balance as of January 1, 2019	$	896,171
Fair value of warrants issued	$	3,577,465
Change in fair value of liability to issue warrants	$	(3,462,746	)
Balance as of September 30, 2019	$	1,010,890

	Amount
Balance as of July 1, 2019	$	2,199,266
Fair value of warrants issued	$	36,225
Change in fair value of liability to issue warrants	$	(1,224,601	)
Balance as of September 30, 2019	$	1,010,890

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16. Stock-Based Compensation

2017 Omnibus Incentive Plan

The Company’s 2017 Omnibus Incentive Plan (the “2017 Plan”) was adopted by our Board of Directors and a majority of our voting securities on October 17, 2017. The 2017 Plan permits the granting of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and dividend equivalent rights to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the 2017 Plan at no less than the fair value of the underlying common stock as of the date of grant. Options granted under the Plan have a maximum term of ten years. Under the Plan, a total of 5,000,000 shares of common stock are reserved for issuance, of which options to purchase 2,499,945 and 1,004,945 shares of common stock were granted as of September 30, 2019 and December 31, 2018, respectively.

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

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

BioTrackTHC Management Awards

On September 1, 2015 and November 1, 2015, BioTrackTHC’s Board approved individual employee option grants (the “Executive Grants”) for three executives (the “Executives”). Pursuant to the Executive Grants, the Executives were each granted stock options to purchase 146,507 shares (totaling 439,521 shares) of BioTrackTHC’s common stock (the “Option”) at an exercise price equal to approximately $7.67. The options vest as to 25% of the shares subject to the Options, one year after the date of grant and then in equal quarterly installments for the three years thereafter, subject to the Executive’s continued employment with BioTrackTHC (see Notes 1 and 5).

17. Income Taxes

No provision for U.S. federal or state income taxes has been recorded as the Company has incurred net operating losses since inception. Significant components of the Company’s net deferred income tax assets for the nine months ended September 30, 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. 

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For the nine months ended September 30, 2019 and 2018, the Company has a net operating loss carry forward of approximately $16,952,000 and $9,825,000, respectively. Utilization of these net loss carry forwards is subject to the limitations of Internal Revenue Code Section 382. The Company applied a 100% valuation reserve against the deferred tax benefit as the realization of the benefit is not certain.

18. Commitments and Contingencies

Under Topic 842, operating lease expense is generally recognized evenly on a straight-line basis. The Company has operating leases primarily consisting of facilities with remaining lease terms of one year to five years. The lease term represents the period up to the early termination date unless it is reasonably certain that the Company will not exercise the early termination option. Certain leases include rental payments that are adjusted periodically based on changes in consumer price and other indices.

Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company combines the lease and non-lease components in determining the lease liabilities and ROU assets.

Activity related to the Company’s leases was as follows:

	Nine Months Ended September 30, 2019
Operating lease expense	$	417,287
Cash paid for amounts included in the measurement of operating lease liabilities	$	273,398
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 September 30, 2019
Other assets	$	1,189,773
Accounts payable and accrued liabilities	$	385,784
Other long-term liabilities		876,929
Total lease liabilities	$	1,262,713
Weighted average remaining lease term (in years)		2.91
Weighted average discount rate		6.00	%

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Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of September 30, 2019, for the following five fiscal years and thereafter were as follows:

	As of September 30, 2019
2019 - Remaining		115,982
2020		393,413
2021		248,223
2022		195,144
2023		200,944
Thereafter		205,438
Total future minimum lease payments	$	1,359,144
Less imputed interest		(96,431	)
Total	$	1,262,713

As of September 30, 2019, the Company had additional operating lease obligations for a lease with a future effective date of approximately $600,000. This operating lease will commence during the first quarter of fiscal 2022 with a lease term of three years.

19. 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.

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Security and guarding
Revenue	$	1,138,934		$	1,141,676		$	3,691,174		$	3,432,651
Cost of revenue		1,236,572			917,620			2,975,102			2,458,548
Gross profit		(97,638	)		224,056			716,072			974,103
Total operating expenses		1,789,627			2,536,916			5,426,705			7,943,815
Loss from operations		(1,887,265	)		(2,312,860	)		(4,710,633	)		(6,969,712	)
Total other (expense) income		1,619,474			58,716			640,064			2,714,438
Total net loss	$	(267,791	)	$	(2,254,144	)	$	(4,070,569	)	$	(4,255,274	)
Systems installation
Revenue	$	245,272		$	318,850		$	447,880		$	454,113
Cost of revenue		149,431			194,013			649,041			379,046
Gross profit		95,841			124,837			(201,161	)		75,067
Total operating expenses		179,641			49,683			367,094			134,097
Loss from operations		(83,800	)		75,154			(568,255	)		(59,030	)
Total other expense		280			406			713			804
Total net (loss) income	$	(83,520	)	$	75,560		$	(567,542	)	$	(58,226	)
Software
Revenue	$	2,357,078		$	1,653,195		$	6,872,210		$	2,229,337
Cost of revenue		838,792			768,428			2,522,570			1,055,122
Gross profit		1,518,286			884,767			4,349,640			1,174,215
Total operating expenses		2,410,597			1,384,542			6,996,514			1,806,108
Loss from operations		(892,311	)		(499,775	)		(2,646,874	)		(631,893	)
Total other expense		(11,947	)		(93	)		23			(84	)
Total net loss	$	(904,258	)	$	(499,868	)	$	(2,646,851	)	$	(631,977	)

20. Subsequent Events

On October 11, 2019, the Company entered into a securities purchase agreement pursuant to which the Company agreed to sell a secured convertible promissory note (the “Convertible Note”) and common stock purchase warrant (the “Warrant”). The Convertible Note, which expires on July 11, 2020, has an initial aggregate principal balance of $450,000 and bears interest at a rate of 10% per annum. The Warrant is exercisable for five years to purchase up to 25,000 shares of the Company’s common stock at a price of $1.00 per share.

On October 18, 2019, November 5, 2019, November 7, 2019 and November 11, 2019, the holder of a 25% fixed secured convertible promissory note issued by the Company elected its option to partially convert $20,000, $20,000, $40,000 and $100,000 in principal of the convertible note into 56,738, 63,012, 126,024 and 315,060 shares of the Company’s common stock.

On November 1, 2019, the Company entered into an Advisory Services Agreement (the “Agreement”) with Electrum Partners, LLC (“Electrum”). The Agreement provides for the issuance of 100,000 shares of restricted common stock to Electrum upon the commencement of the Agreement, the issuance of 50,000 stock options each month the Agreement is effective, and 100,000 warrants each month the agreement is effective. The stock options are exercisable for three years from issuance and vest immediately upon grant. The warrants are exercisable for five years from issuance and vest immediately upon grant.

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

Forward-Looking Statements

The following discussion of our financial condition and results of operations for the three and nine months ended September 30, 2019 and 2018 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed on April 1, 2019 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

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

Overview

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

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

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

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

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

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Results of Operations for the three months ended September 30, 2019 and 2018

The following table shows our results of operations for the three months ended September 30, 2019 and 2018. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

	For the Three Months Ended September 30,						Change
	2019			2018			Dollars			Percentage
Revenue	$	3,741,284		$	3,113,721		$	627,563			20	%
Cost of revenue		2,224,795			1,880,061			344,734			18	%
Gross margin		1,516,489			1,233,660			282,829			23	%
Operating expenses		4,379,865			3,971,141			408,724			10	%
Loss from operations		(2,863,376	)		(2,737,481	)		(125,895	)		5	%
Other income, net		1,607,807			59,029			1,548,778			2624	%
Net loss	$	(1,255,569	)	$	(2,678,452	)	$	1,422,883			-53	%
Changes in foreign currency translation adjustment	$	(118,003	)	$	17,538		$	(135,541	)		100	%
Net loss attributable to common shareholders	$	(1,373,572	)	$	(2,660,914	)	$	1,287,342			-48	%

Revenue

Total revenue for the three-month period ended September 30, 2019 was $3,741,284, which represented an increase of $627,563 compared to total revenue of $3,113,721 for the three months ended September 30, 2018. The increase resulted from additional revenue resulting from growth in the client base of BioTrackTHC.

Cost of Revenues

Cost of revenues for the three months ended September 30, 2019 and 2018 primarily consisted of hourly compensation for security personnel and employees involved in the creation and development of licensing software. Cost of revenues increased by $344,734 for the three months ended September 30, 2019, to $2,224,795 as compared to $1,880,061 for the three months ended September 30, 2018. The increase resulted from the cost of servicing additional clients of BioTrackTHC and the timing of purchases for the installation of security equipment.

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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 September 30, 2019 and 2018 were $4,379,865 and $3,971,141, respectively. The overall $408,724 increase in operating expenses was attributable to the following increases/(decreases) in operating expenses of:

● Selling, general and administrative – $311,695

● Salaries and wages – ($495,633)

● Professional and legal fees – $200,521

● Depreciation and amortization – $392,141

The $311,695 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 $(495,663) decrease in salaries and wages resulted from a decrease in stock compensation expense. The $200,521 increase in professional and legal fees primarily resulted from an increase in legal fees and costs associated with fundraising. The $392,141 increase in depreciation and amortization was due to amortization of intangible assets acquired in the BioTrackTHC, Engeni and GTI acquisitions.

Other Income, net

Other income, net consisted of a change in the fair value of convertible notes, change in the fair value of convertible notes – related party, change in fair value of warrant liability, change in fair value of contingent consideration, gain on reduction of obligation pursuant to acquisition and interest (expense) income. Other income, net during the three months ended September 30, 2019 and 2018 was $1,607,807 and $59,029, respectively. The $1,548,778 increase in other income, net was primarily attributable to a gain on the change in fair value of convertible notes of $430,766, gain on the change in fair value of convertible notes – related party of $491,442, gain on the change in fair value of warrant liability of $1,224,601, partially offset by interest expense of ($539,002) during the three months ended September 30, 2019.

Net loss

For the foregoing reasons, we had net loss of $(1,255,569) for the three months ended September 30, 2019, or $0.02 per basic share, compared to a net loss of $(2,678,452) for the three months ended September 30, 2018, or $0.04 net loss per common share – basic and diluted.

Net loss attributable to common shareholders

For the foregoing reasons, we had a net loss attributable to common shareholders of $(1,373,572) for the three months ended September 30, 2019, or $0.02 per basic share attributable to common shareholders, compared to net loss attributable to common shareholders of $(2,660,914) for the three months ended September 30, 2018, or $0.04 net loss per share attributable to common shareholders – basic and diluted.

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Results of Operations for the nine months ended September 30, 2019 and 2018

The following table shows our results of operations for the nine months ended September 30, 2019 and 2018. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

	For the Nine Months Ended September 30,						Change
	2019			2018			Dollars			Percentage
Revenue	$	11,011,264		$	6,116,101		$	4,895,163			80	%
Cost of revenue		6,146,713			3,892,716			2,253,997			58	%
Gross margin		4,864,551			2,223,385			2,641,166			119	%
Operating expenses		12,790,313			9,884,020			2,906,293			29	%
Loss from operations		(7,925,762	)		(7,660,635	)		(265,127	)		3	%
Other income, net		640,800			2,715,158			(2,074,358	)		-76	%
Net loss	$	(7,284,962	)	$	(4,945,477	)	$	(2,339,485	)		47	%
Changes in foreign currency translation adjustment	$	(114,346	)	$	17,538		$	(131,884	)		100	%
Convertible preferred stock beneficial conversion feature accreted as a deemed dividend		-			(22,202,194	)		22,202,194			-100	%
Net loss attributable to common shareholders	$	(7,399,308	)	$	(27,130,133	)	$	19,730,825			-73	%

Revenue

Total revenue for the nine-month period ended September 30, 2019 was $11,011,264, which represented an increase of $4,895,163 compared to total revenue of $6,116,101 for the nine months ended September 30, 2018. The increase primarily resulted from additional revenue resulting from the BioTrackTHC acquisition and an increase in the number of clients serviced by our security operations.

Cost of Revenues

Cost of revenues for the nine months ended September 30, 2019 and 2018 primarily consisted of hourly compensation for security personnel and employees involved in the creation and development of licensing software. Cost of revenues increased by $2,253,997 for the nine months ended September 30, 2019, to $6,146,713 as compared to $3,892,716 for the nine months ended September 30, 2018. The increase primarily resulted from the acquisition of BioTrackTHC and an 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 nine months ended September 30, 2019 and 2018 were $12,790,313 and $9,884,020, respectively. The overall $2,906,293 increase in operating expenses was primarily attributable to the following increases/(decreases) in operating expenses of:

● Selling, general and administrative – $1,543,185

● Salaries and wages – $(449,926)

● Professional and legal fees – $792,523

● Depreciation and amortization – $1,684,840

The $1,543,185 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 $(449,926) decrease in salaries and wages resulted from a decrease in stock compensation expense. The $792,523 increase in professional and legal fees primarily resulted from an increase in legal fees and costs associated with fundraising. The $1,684,840 increase in depreciation and amortization was due to amortization of intangible assets acquired in the BioTrackTHC, Engeni and GTI acquisitions.

Other Income, net

Other 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, gain on reduction of obligation pursuant to acquisition and interest (expense) income. Other income, net during the nine months ended September 30, 2019 and 2018 was $640,800 and $2,715,158, respectively. The $2,074,358 decrease in other income, net was primarily attributable to a loss on issuance of warrants of $787,209, and interest expense of $1,229,284 during the nine months ended September 30, 2019.

Net loss

For the foregoing reasons, we had a net loss of $(7,284,962) for the nine months ended September 30, 2019, or $0.10 net loss per common share – basic and diluted, compared to a net loss of $(4,945,477) for the nine months ended September 30, 2018, or $0.10 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 nine months ended September 30, 2019 compared to $22,202,194 for the nine months ended September 30, 2018.

Net loss attributable to common shareholders

For the foregoing reasons, we had a net loss attributable to common shareholders of $(7,399,308) for the nine months ended September 30, 2019, or $0.10 net loss per share attributable to common shareholders - basic and diluted, compared to net loss attributable to common shareholders of $(27,130,133) for the nine months ended September 30, 2018, or $0.57 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 nine months ended September 30, 2019, we have generated revenue and are trying to achieve positive cash flows from operations.

As of September 30, 2019, we had a cash balance of $655,280, accounts receivable, net of $1,496,137 and $6,501,082 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: 

	September 30, 2019			December 31, 2018			Change
Current assets	$	2,826,648		$	1,923,353		$	903,295
Current liabilities		6,501,082			4,157,005			2,344,077
Working capital deficit	$	(3,674,434	)	$	(2,233,652	)	$	(1,440,782	)

As of September 30, 2019, and December 31, 2018, we had a cash balance of $655,280 and $285,761, respectively.

Summary of Cash Flows

	For the Nine Months Ended September 30,
	2019			2018
Net cash used in operating activities	$	(2,862,478	)	$	(3,217,350	)
Net cash (used in) provided by investing activities		(791,177	)		230,248
Net cash provided by financing activities		4,203,162			2,641,985

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Net cash used in operating activities. Net cash used in operating activities for the nine months ended September 30, 2019 was $(2,862,478). This included a net loss of $(7,284,962), non-cash charge related to depreciation and amortization of $3,554,729, non-cash charge related to amortization of debt discounts of $922,965, non-cash charge from loss on issuance of warrants of $787,209, non-cash charge related to provision for doubtful accounts of $199,215, non-cash charge related to share-based compensation of $1,241,741, non-cash (gains) losses due to changes in fair value of convertible notes, fair value of warrant liability, fair value of convertible notes – related party, fair value of contingent consideration of $(288,425), $(3,462,746), $213,828 and $880,050, respectively, non-cash gains on reduction of contingent consideration of $100,000, and changes in accounts receivable, deposits and other assets, costs in excess of billings, billings in excess of costs, deferred rent, accounts payable and accrued expenses, prepaid expenses and other current assets, due to related party, other long-term liabilities, and right of use assets and liabilities of $473,918. Net cash used in operating activities for the nine months ended September 30, 2018 was $(3,217,350). This included a net loss of $(4,945,477), non-cash charge related to depreciation and amortization of $1,869,889, non-cash charge related to share-based compensation of $2,143,548, non-cash (gains) losses due to changes in fair value of convertible notes, fair value of warrant liability, fair value of convertible notes – related party and fair value of contingent consideration of $(504,768), $(1,434,760), $(93,506), and $131,994, respectively, non-cash charge from loss on impairment of goodwill of $664,329, non-cash gain on reduction of obligation pursuant to acquisition of $607,415, and changes in accounts receivable, deposits and other assets, costs in excess of billings, billings in excess of costs, deferred rent, and accounts payable and accrued expenses of $(441,184).

Net cash (used in) provided by investing activities. Net cash used in investing activities for the nine months ended September 30, 2019 was $(791,177), which consisted of capital expenditures of $(620,594), purchase of domain names of $(21,856) and payments pursuant to the Tan Security business acquisition and Security Grade business acquisition of $(148,727). Net cash provided by investing activities for the nine months ended September 30, 2018 was $230,248, which consisted of capital expenditures of $(85,665), cash payment pursuant to the Revolutionary asset acquisition of $(58,729), payments pursuant to the Security Grade business acquisition of $(79,664) and cash acquired as part of the BioTrackTHC business acquisition and Engeni business acquisition in the amount of $454,306.

Net cash provided by financing activities. Net cash provided by financing activities for the nine months ended September 30, 2019 was $4,203,162, which resulted from issuance of a promissory note receivable of $(75,000), repayment of notes payable of $(15,401), payments pursuant to a promissory note of $(280,000), proceeds from the issuance of a promissory note of $580,000, proceeds from the issuance of common stock of $1,306,313, proceeds from the issuance of convertible note payable of $2,732,500 and repayment of advances from related parties of $(45,250). Net cash provided by financing activities for the nine months ended September 30, 2018 was $2,641,985, which resulted from payments pursuant to convertible notes payable – related party of $(150,000), proceeds from notes payable of $16,271, proceeds from the issuance of a promissory note of $250,000, proceeds from the issuance of common stock of $2,595,214 and repayment of advances from related parties of $(69,500).

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

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

The Company evaluated Note Nine in accordance with ASC 480, Distinguishing Liabilities from Equity and determined Note Nine will be accounted for as a liability initially measured at fair value and subsequently at fair value with changes in fair value recognized in earnings. As of September 30, 2019, the fair value of Note Nine was $1,713,828. Accordingly, the Company recorded a change in fair value of $(491,442) and $213,828 related to Note Nine for the three and nine months ended September 30, 2019, respectively.

In addition, the company recorded a debt discount relating to the warrants issued in the amount of $1,186,153 based on the residual fair value of the warrants at inception of Note Nine. The additional $25,000 retained by the fourth investor for legal bills for the transaction will be recorded as a debt discount. Debt discounts amortized to interest expense were $305,276 and $706,782 for the three and nine months ended September 30, 2019, respectively. The unamortized discount balance at September 30, 2019 was $504,371. On May 31, 2019, the Company issued 52,083 restricted shares of common stock as PIK interest payments in the amount of $46,875. Accrued interest expense associated with Note Nine was $29,795 as of September 30, 2019, which includes PIK interest payable. As of September 30, 2019, the balance of Note Nine, net of debt discount for warrants and legal bills was $1,209,458.

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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 September 30, 2019, the fair value of the warrant liability was $259,215. Accordingly, the Company recorded a change in fair value of $212,131 and $926,938 during the three and nine months ended September 30, 2019, respectively, which is reflected in the unaudited condensed consolidated statements of operations. 

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.

On July 29, 2019, the Company entered into an unsecured promissory note in the amount of $300,000. The unsecured promissory note has a fixed interest rate of 12% and is due and payable on January 29, 2020.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable for a smaller reporting company.

ITEM 4. Controls and Procedures 

Disclosure Controls and Procedures

 
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (who is our Principal Executive Officer) and our Chief Financial Officer (who is our Principal Financial Officer), to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control problems or acts of fraud, if any, within the Company have been detected.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that as of September 30, 2019, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

During the nine months ended September 30, 2019, there was no change in our internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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 September 30, 2019, the claim is currently pending the outcome of certain matters in the Kenney, et al v. Helix TCS, Inc. case.

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

On July 20, 2017 one former employee filed a lawsuit in the United States District Court for the District of Colorado alleging violations of the Fair Labor Standards Act on behalf of themselves and other employees. The plaintiffs seek damages for our alleged failure to compensate them appropriately for the overtime hours they worked as purported “non-exempt” employees. As of September 30, 2019, the claim is currently in the process of discovery.

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

ITEM 1A. Risk Factors

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

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

During the nine months ended September 30, 2019, we issued 19,869,188 shares of common stock, of which 17,015,727 shares were in connection with the Green Tree and Tan acquisitions, with offering proceeds received totaling $1,306,313.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Mine Safety Disclosure

Not applicable.

ITEM 5. Other Information

None. 

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ITEM 6. Exhibits

Exhibit No.	Description
2.3	Agreement and Plan of Merger, dated February 5, 2019, by and among Helix TCS, Inc., Helix Acquisition Sub, Inc., Green Tree International, Inc. and the Securityholder Representative (incorporated by reference to Exhibit 2.3 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on September 16, 2019).
2.4	Addendum No. 1, dated as of September 10, 2019, to the Agreement and Plan of Merger, dated February 5, 2019, by and among Helix TCS, Inc., Helix Acquisition Sub, Inc., Green Tree International, Inc. and the Securityholder Representative (incorporated by reference to Exhibit 2.4 of the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on September 16, 2019).
10.44	Form of Securities Purchase Agreement, dated August 15, 2019, by and between Helix TCS, Inc. and RedDiamond Partners, LLC.*
10.45	Form of 10% Fixed Convertible Promissory Note, dated August 15, 2019, for $400,000 payable to RedDiamond Partners, LLC.*
10.46	Form of Common Stock Purchase Warrant of Helix TCS, Inc., dated August 15, 2019.*
10.47	Form of Securities Purchase Agreement, dated September 16, 2019, by and between Helix TCS, Inc. and RedDiamond Partners, LLC.*
10.48	Form of 10% Fixed Convertible Promissory Note, dated September 16, 2019, for $450,000 payable to RedDiamond Partners, LLC.*
10.49	Form of Common Stock Purchase Warrant of Helix TCS, Inc., dated September 16, 2019.*
10.50	Form of Securities Purchase Agreement, dated October 11, 2019, by and between Helix TCS, Inc. and RedDiamond Partners, LLC.*
10.51	Form of 10% Fixed Convertible Promissory Note, dated October 11, 2019, for $450,000 payable to RedDiamond Partners, LLC.*
10.52	Form of Common Stock Purchase Warrant of Helix TCS, Inc., dated October 11, 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.

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SIGNATURES

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

Date: November 14,2019	By:	/s/ Zachary L. Venegas
		Zachary L. Venegas
		Chief Executive Officer (Principal Executive Officer

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

Signature	Title	Date
/s/ Zachary L. Venegas	Chief Executive Officer	November  14, 2019
Zachary L. Venegas*	(Principal Executive Officer)
/s/ Scott Ogur	Chief Financial Officer	November  14, 2019
Scott Ogur	(Principal Financial Officer)
/s/ Paul Hodges	Director	November  14, 2019
Paul Hodges*
/s/ Steve Janjic	Director	November  14, 2019
Steve Janjic*
/s/ Terence Ferraro	Director	November  14, 2019
Terence Ferraro*
/s/ Andrew Schweibold	Director	November  14, 2019
Andrew Schweibold*
/s/ Satyavrat Joshi	Director	November  14, 2019
Satyavrat Joshi*

* By: Scott Ogur, as Attorney in Fact, pursuant to the Power of Attorney dated November 14, 2019 and filed herewith.

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