Annual report pursuant to Section 13 and 15(d)

Restatement of Consolidated Financial Statements

v3.20.1
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

 

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