| Restatement of Consolidated Financial Statements |
NOTE 2. RESTATEMENT OF CONSOLIDATED FINANCIAL
STATEMENTS
Overview
This Annual Report on Form 10-K for the year
ended December 31, 2018 contains our audited consolidated financial statements for the years ended December 31, 2018 and 2017,
of which the audited consolidated financial statements from December 31, 2018 have not previously been filed, as well as restatements
of the following previously filed consolidated financial statements: (i) our audited consolidated financial statements for the
year ended December 31, 2017; and (ii) our unaudited consolidated financial statements for the quarters ended March 31, 2018 and
2017, June 30, 2018 and 2017 and September 30, 2018 and 2017, in Note 25.
We have not filed and do not intend to file
amendments to any of our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected
by the restatements of our consolidated financial statements. We have not timely filed our Annual Report on Form 10-K for the year
ended December 31, 2018 and the Fiscal Year 2019 Form 10-Qs as a result of the internal investigation of the Audit Committee of
the Company’s Board of Directors (the “Audit Committee”) and the subsequent restatement of certain of our prior
period financial statements as more fully described below.
Background
On April 2, 2019, the Company announced that
the Audit Committee following a communication with the Company’s former independent registered public
accounting firm concluded that previously issued audited financial statements as of and for the year ended December 31, 2017, and
interim reviews of the financial statements for the periods ended March 31, June 30, and September 30, 2018 and 2017, should no
longer be relied upon. The conclusion to prevent future reliance on the aforementioned financial statements resulted from the determination
that such financial statements failed to properly account for certain convertible notes and other potentially dilutive securities.
Specifically, the Company identified a potential issue related to the accounting related to certain convertible notes and other
potentially dilutive securities the Company issued in 2017, 2018, and 2019.
Further, the independent investigation announced
on March 22, 2019 is also focused on issues related to the accounting for and disclosure of certain expenses incurred by management,
as well as the appropriateness and disclosure of certain related party transactions. To date, the investigation team has found
what it believes are significant personal expenses incurred by former officers that were charged to the Company, including: multiple
trips on chartered jets to vacation destinations in the U.S., South America and Europe, as well as to a family home; the use of
Company vehicles largely if not solely for personal purposes; incidental personal charges on Company credit cards; and Company
payments for credit card bills in the names of former officers. The investigation also found at least one large share issuance
to a related party that was not reported timely. Further, the investigation team also found instances in which cash transfers were
made to former officers with little or no support. However, this work is ongoing, and further findings may change our preliminary
assessments described above. The investigation team is working with the Company to ensure that its findings are appropriately reflected
in the Company’s restatement and in its next Form 10-K.
On June 11, 2019, the Audit Committee, following
a communication by its former independent auditors, Marcum, concluded that the Company’s previously issued audited
financial statements as of and for the years ended December 31, 2017 and 2016 and completed interim reviews for the periods ended
March 31, June 30 and September 30, 2018, 2017 and 2016 should no longer be relied upon. The conclusion on June 11, 2019 to add
the aforementioned 2016 financial statements to those statements which should no longer be relied upon resulted from determinations
made as part of the Company’s ongoing restatement effort that certain items, including revenues originally recognized in
2016, should no longer be recognized.
In addition to the Audit Committee investigation
matter described above, the Company also corrected for (i) out of period adjustments and errors related to the Company’s
acquisition and revenue and costs and (ii) out of period adjustments and errors identified during management’s review of
significant accounts and transactions.
The significant account and transaction review
adjustments referred to in (ii) above were made in the restatement and relate to revenue recognition (Note 4), accounts receivable
(Note 6), merchant account agreements (Note 11), convertible notes payable (Note 12), notes payable (Note 13) debt derivative liabilities
(Note 16), warrant liabilities (Note 16), stockholders’ equity (Note 20), stock awards (Note 21) and various other matters.
Effect of Restatement on Previously Filed
December 31, 2017 Form 10-K
The restatement adjustments related to the
year ended December 31, 2016 are reflected in the beginning accumulated deficit balance in the consolidated financial statements
for 2017. The cumulative impact of these adjustments increased accumulated deficit by approximately $16,906 at the beginning of
2017. The 2016 adjustments principally related to $6,840 of unbilled revenue that was unsubstantiated and subsequently
reversed during 2017 and 2018, $8,767 of compensation expense for executive management and certain employees, $614 for
interest, fines and penalties for prior period unpaid payroll taxes, $476 of selling, general and administration expenses
for professional fees and $165 for directors fees. The restatement adjustments were tax effected and any tax
adjustments reflected in the consolidated financial statements for 2017 relate entirely to the tax effect on the restatement adjustments.
The tables below present the effect of the
financial statement adjustments related to the restatement discussed above of the Company’s previously reported financial
statements as of and for the year ended December 31, 2017.
The effect of the restatement on the previously
filed consolidated balance sheet as of December 31, 2017 is as follows:
| |
|
As of December 31, 2017 |
|
| (dollars in thousands, except per share data) |
|
As Previously Reported |
|
|
Adjustments |
|
|
As Restated |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
| ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
15,642 |
|
|
$ |
— |
|
|
$ |
15,642 |
|
| Accounts receivable, net |
|
|
62,199 |
|
|
|
(500 |
) |
|
|
61,699 |
|
| Costs and estimated earnings in excess of billings on uncompleted contract |
|
|
11,226 |
|
|
|
(5,940 |
) |
|
|
5,286 |
|
| Other current assets |
|
|
7,256 |
|
|
|
(973 |
) |
|
|
6,283 |
|
| Total current assets |
|
|
96,323 |
|
|
|
(7,413 |
) |
|
|
88,910 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
|
|
7,955 |
|
|
|
(873 |
) |
|
|
7,082 |
|
| Intangible assets, net |
|
|
27,696 |
|
|
|
— |
|
|
|
27,696 |
|
| Goodwill |
|
|
35,672 |
|
|
|
9,335 |
|
|
|
45,007 |
|
| Total assets |
|
$ |
167,646 |
|
|
$ |
1,049 |
|
|
$ |
168,695 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
| Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
35,134 |
|
|
$ |
8,760 |
|
|
$ |
43,894 |
|
| Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
30,304 |
|
|
|
7,227 |
|
|
|
37,531 |
|
| Accrued expenses and other current liabilities |
|
|
9,973 |
|
|
|
215 |
|
|
|
10,188 |
|
| Convertible notes payable, net of original issue discount and deferred financing cost |
|
|
— |
|
|
|
2,391 |
|
|
|
2,391 |
|
| Merchant credit agreements |
|
|
— |
|
|
|
4,239 |
|
|
|
4,239 |
|
| Notes payable, current portion, net of original issue discount and deferred financing costs |
|
|
10,488 |
|
|
|
(6,819 |
) |
|
|
3,669 |
|
| Notes payable, related parties, current portion |
|
|
8,526 |
|
|
|
50 |
|
|
|
8,576 |
|
| Debt derivative liabilities |
|
|
— |
|
|
|
48,195 |
|
|
|
48,195 |
|
| Warrant derivative liabilities |
|
|
— |
|
|
|
16,492 |
|
|
|
16,492 |
|
| Total current liabilities |
|
|
94,425 |
|
|
|
80,750 |
|
|
|
175,175 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Notes payable, non-current portion |
|
|
1,955 |
|
|
|
(125 |
) |
|
|
1,830 |
|
| Notes payable, related parties, non-current, net of debt discount |
|
|
38,530 |
|
|
|
— |
|
|
|
38,530 |
|
| Senior note payable, non-current portion, net of original issue discount and deferred financing costs |
|
|
24,143 |
|
|
|
(738 |
) |
|
|
23,405 |
|
| Deferred tax liability |
|
|
560 |
|
|
|
— |
|
|
|
560 |
|
| Total liabilities |
|
|
159,613 |
|
|
|
79,887 |
|
|
|
239,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies (Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Stockholders’ Equity (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred stock; $0.01 par value, 5,000,000 shares authorized: |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Series A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at December 31, 2017 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Series A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at December 31, 2017 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Series G convertible preferred stock, $0.001 stated value, 1,780 shares designated and 1,780 shares issued and outstanding at December 31, 2017 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Common stock, $0.001 par value, 100,000,000 shares authorized and 5,620,281 shares issued and outstanding at December 31, 2017 |
|
|
6 |
|
|
|
— |
|
|
|
6 |
|
| Additional paid-in capital |
|
|
49,381 |
|
|
|
7,598 |
|
|
|
56,979 |
|
| Shares to be issued |
|
|
625 |
|
|
|
(375 |
) |
|
|
250 |
|
| Subscriptions receivable |
|
|
(3,675 |
) |
|
|
3,675 |
|
|
|
— |
|
| Accumulated deficit |
|
|
(38,304 |
) |
|
|
(89,736 |
) |
|
|
(128,040 |
) |
| Total stockholders’ equity (deficit) |
|
|
8,033 |
|
|
|
(78,838 |
) |
|
|
(70,805 |
) |
| Total liabilities and stockholders’ equity (deficit) |
|
$ |
167,646 |
|
|
$ |
1,049 |
|
|
$ |
168,695 |
|
The effect of the restatement on the previously
filed consolidated statement of operations for the year ended December 31, 2017 is as follows:
| |
|
Year ended December 31, 2017 |
|
| (dollars in thousands, except per share data) |
|
As Previously Reported |
|
|
Adjustments |
|
|
As Restated |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
| Revenues, net of discounts |
|
$ |
243,409 |
|
|
$ |
(27,900 |
) |
|
$ |
215,509 |
|
| Cost of revenues |
|
|
206,394 |
|
|
|
(21,242 |
) |
|
|
185,152 |
|
| Gross profit |
|
|
37,015 |
|
|
|
(6,658 |
) |
|
|
30,357 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
| Compensation expense |
|
|
19,413 |
|
|
|
4,560 |
|
|
|
23,973 |
|
| Selling, general and administrative expenses |
|
|
14,934 |
|
|
|
(1,416 |
) |
|
|
13,518 |
|
| Amortization of intangible assets |
|
|
2,597 |
|
|
|
— |
|
|
|
2,597 |
|
| Loss on sale of asset |
|
|
31 |
|
|
|
— |
|
|
|
31 |
|
| Transaction expenses |
|
|
1,666 |
|
|
|
(965 |
) |
|
|
701 |
|
| Total operating expenses |
|
|
38,641 |
|
|
|
2,179 |
|
|
|
40,820 |
|
| Operating loss |
|
|
(1,626 |
) |
|
|
(8,837 |
) |
|
|
(10,463 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Other expenses |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest expense |
|
|
(5,819 |
) |
|
|
(490 |
) |
|
|
(6,309 |
) |
| Amortization of deferred financing costs and debt discount |
|
|
(6,349 |
) |
|
|
(8,730 |
) |
|
|
(15,079 |
) |
| Loss on conversion derivative liability |
|
|
— |
|
|
|
(35,012 |
) |
|
|
(35,012 |
) |
| Loss on warrant derivative liability |
|
|
— |
|
|
|
(357 |
) |
|
|
(357 |
) |
| Other expense, net |
|
|
(123 |
) |
|
|
(584 |
) |
|
|
(707 |
) |
| Loss on issuance of notes |
|
|
— |
|
|
|
(24,262 |
) |
|
|
(24,262 |
) |
| Extinguishment gain |
|
|
— |
|
|
|
666 |
|
|
|
666 |
|
| Financing costs |
|
|
(5,552 |
) |
|
|
5,552 |
|
|
|
— |
|
| Total other expenses, net |
|
|
(17,843 |
) |
|
|
(63,217 |
) |
|
|
(81,060 |
) |
| Loss before provision for income taxes |
|
|
(19,469 |
) |
|
|
(72,054 |
) |
|
|
(91,523 |
) |
| Provision for income taxes |
|
|
560 |
|
|
|
— |
|
|
|
560 |
|
| Net loss |
|
|
(20,029 |
) |
|
|
(72,054 |
) |
|
|
(92,083 |
) |
| Preferred stock dividends |
|
|
(80 |
) |
|
|
— |
|
|
|
(80 |
) |
| Net loss attributable to common shareholders |
|
$ |
(20,109 |
) |
|
$ |
(72,054 |
) |
|
$ |
(92,163 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and diluted |
|
$ |
(4.23 |
) |
|
$ |
(15.15 |
) |
|
$ |
(19.38 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and diluted |
|
|
4,748,563 |
|
|
|
4,756,049 |
|
|
|
4,756,049 |
|
The effect of the restatement on the previously
filed consolidated statement of cash flows for the year ended December 31, 2017 is as follows:
| |
|
Year ended December 31, 2017 |
|
| (dollars in thousands) |
|
As Previously Reported |
|
|
Adjustments |
|
|
As Restated |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(20,029 |
) |
|
$ |
(72,054 |
) |
|
$ |
(92,083 |
) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation |
|
|
870 |
|
|
|
(110 |
) |
|
|
760 |
|
| Amortization of intangible assets |
|
|
8,976 |
|
|
|
— |
|
|
|
8,976 |
|
| Amortization of debt discount and deferred financing costs |
|
|
8,010 |
|
|
|
4,904 |
|
|
|
12,914 |
|
| Provision for bad debts |
|
|
551 |
|
|
|
— |
|
|
|
551 |
|
| Loss (gain) on sale of asset |
|
|
31 |
|
|
|
(62 |
) |
|
|
(31 |
) |
| Late fee on senior debt |
|
|
541 |
|
|
|
— |
|
|
|
541 |
|
| Payment in kind interest-debt on notes payable |
|
|
934 |
|
|
|
661 |
|
|
|
1,595 |
|
| Payment in kind interest on related party notes payable |
|
|
1,310 |
|
|
|
— |
|
|
|
1,310 |
|
| Share-based compensation |
|
|
1,681 |
|
|
|
2,662 |
|
|
|
4,343 |
|
| Common shares issued for convertible notes modifications, amendments, redemption agreements and settlements |
|
|
— |
|
|
|
103 |
|
|
|
103 |
|
| Convertible note issued for consulting expenses |
|
|
— |
|
|
|
400 |
|
|
|
400 |
|
| Loss on issuance of convertible debt |
|
|
— |
|
|
|
24,262 |
|
|
|
24,262 |
|
| Gain on extinguishment of debt |
|
|
— |
|
|
|
(666 |
) |
|
|
(666 |
) |
| Loss on warrant derivative liabilities |
|
|
— |
|
|
|
357 |
|
|
|
357 |
|
| Loss on convertible derivative liabilities |
|
|
— |
|
|
|
35,012 |
|
|
|
35,012 |
|
| Debt financing expense |
|
|
531 |
|
|
|
(531 |
) |
|
|
— |
|
| Accrued dividends, preferred stock |
|
|
— |
|
|
|
(80 |
) |
|
|
(80 |
) |
| Benefit from deferred income taxes |
|
|
(599 |
) |
|
|
1,159 |
|
|
|
560 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
(41,106 |
) |
|
|
(5,302 |
) |
|
|
(46,408 |
) |
| Cost and estimated earnings in excess of billings on uncompleted contracts |
|
|
19,078 |
|
|
|
1,982 |
|
|
|
21,060 |
|
| Other current assets |
|
|
5,888 |
|
|
|
(6,356 |
) |
|
|
(468 |
) |
| Accounts payable and accrued liabilities |
|
|
17,463 |
|
|
|
13,598 |
|
|
|
31,061 |
|
| Due to related party |
|
|
— |
|
|
|
(109 |
) |
|
|
(109 |
) |
| Net cash provided by (used in) operating activities |
|
|
4,130 |
|
|
|
(170 |
) |
|
|
3,960 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities : |
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash paid for Benchmark Builders, Inc. acquisition |
|
|
(14,834 |
) |
|
|
— |
|
|
|
(14,834 |
) |
| Purchase of property and equipment |
|
|
(5,208 |
) |
|
|
1,472 |
|
|
|
(3,736 |
) |
| Net cash (used in) provided by investing activities |
|
|
(20,042 |
) |
|
|
1,472 |
|
|
|
(18,570 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities : |
|
|
|
|
|
|
|
|
|
|
|
|
| Proceeds from issuance of convertible notes |
|
|
— |
|
|
|
4,095 |
|
|
|
4,095 |
|
| Payments on convertible notes |
|
|
— |
|
|
|
(1,426 |
) |
|
|
(1,426 |
) |
| Proceeds from issuance of merchant credit agreements |
|
|
— |
|
|
|
5,718 |
|
|
|
5,718 |
|
| Payments on merchant credit agreements |
|
|
— |
|
|
|
(2,624 |
) |
|
|
(2,624 |
) |
| Proceeds from issuance of notes payable, net |
|
|
12,158 |
|
|
|
(10,758 |
) |
|
|
1,400 |
|
| Payments on notes payable |
|
|
(5,342 |
) |
|
|
4,007 |
|
|
|
(1,335 |
) |
| Proceeds from issuance of senior note payable, net |
|
|
13,210 |
|
|
|
(515 |
) |
|
|
12,695 |
|
| Proceeds from issuance of Series C notes |
|
|
7,500 |
|
|
|
— |
|
|
|
7,500 |
|
| Payments on notes payable – related parties |
|
|
(112 |
) |
|
|
112 |
|
|
|
— |
|
| Proceeds from sale of common stock |
|
|
3,338 |
|
|
|
— |
|
|
|
3,338 |
|
| Payment of deferred financing costs |
|
|
(610 |
) |
|
|
89 |
|
|
|
(521 |
) |
| Net cash provided by (used in) financing activities |
|
|
30,142 |
|
|
|
(1,302 |
) |
|
|
28,840 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net change in cash |
|
|
14,230 |
|
|
|
— |
|
|
|
14,230 |
|
| Cash, beginning of period |
|
|
1,412 |
|
|
|
— |
|
|
|
1,412 |
|
| Cash, end of period |
|
$ |
15,642 |
|
|
$ |
— |
|
|
$ |
15,642 |
|
|