Restatement of Consolidated Financial Statements
|12 Months Ended|
Dec. 31, 2018
|Accounting Changes and Error Corrections [Abstract]|
|Restatement of Consolidated Financial Statements||
NOTE 2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
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.
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:
The effect of the restatement on the previously filed consolidated statement of operations for the year ended December 31, 2017 is as follows:
The effect of the restatement on the previously filed consolidated statement of cash flows for the year ended December 31, 2017 is as follows:
The entire disclosure for reporting accounting changes and error corrections. It includes the conveyance of information necessary for a user of the Company's financial information to understand all aspects and required disclosure information concerning all changes and error corrections reported in the Company's financial statements for the period.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef