This
filing also describes actions following from preliminary findings of the independent investigation previously announced by the
Company, as well as the Company’s ongoing and planned remediation efforts.
On
March 11, 2019, the Company announced that it had entered into certain securities purchase agreements with certain investors,
pursuant to which the Company agreed to sell convertible notes, convertible into shares of common stock of the Company. These
issuances were not supported by a listing application with the New York Stock Exchange (the “
Exchange
”). On
March 22, 2019, the Company announced the initiation of an independent investigation to review and determine,
inter alia
,
whether Company management had the proper authorization to issue the convertible notes and the related shares issuable upon conversion
of the convertible notes, as well as certain other debt instruments and equity transactions.
Under
the Company’s bylaws, equity issuances require authorization from the Board. The investigation team informed the Company
that it had found that proper Board authorization was lacking for certain equity issuances. Specifically, the investigation found
issuances that were supported by resolutions that did not comport with Nevada state law and the Company’s bylaws, issuances
for which no Board authorization existed, and issuances that were supported by falsified Board authorizations under which a former
Company officer copied previous electronic signatures of Board members onto new documents.
|
|
A.
|
Review
of Past Issuances
|
In
order to remedy these deficiencies, the Board held three special meetings to review equity issuances which were made between September
28, 2015 and March 5, 2019. On May 23, 2019, the Company sent a letter to shareholders, pursuant to Nevada Revised Statutes Section
78.0296, which is filed as Exhibit 99.1 to this current report and incorporated herein by reference, to notify them of noncompliant
issuances that were approved and validated during the review. Issuances were also nullified during the review, including shares
related to convertible note issuances, and other equity issued to Company personnel and related parties.
The
Company also acted to prevent the conversion of unauthorized convertible securities by obtaining a temporary restraining order
on March 29, 2019 and a preliminary injunction on April 11, 2019 in the Second Judicial District Court for the State of Nevada.
This action enjoins the Company’s transfer agent from issuing the unauthorized convertible securities.
|
|
B.
|
2018
Shareholders Meeting
|
Due
to the nullification of certain share issuances, the Company concluded that a quorum was not achieved for the December 26, 2018
shareholders meeting, at which votes were taken to elect nominees for director, to ratify the appointment of Marcum as the Company’s
independent registered public accountants, and to approve an amendment to the Company’s Articles of Incorporation to provide
for a classified Board of Directors. As a result, those actions are not valid.
The
Company has determined that: (a) the lack of a vote for director nominees did not change the governance of the Company as the
nominee directors were incumbents, and under the Company’s bylaws, a director remains in place until he or she resigns or
is replaced by shareholder vote; (b) as the vote on the ratification of Marcum is a non-binding advisory vote, its invalidity
has no effect on the Company’s auditors; and (c) the Company should amend its Articles of Incorporation with the State of
Nevada to return them to the form they were in prior to such invalid amendment.
As
stated above, on April 2, 2019 the Company announced that its Audit Committee, following a communication by Marcum, concluded
that the Company’s 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
Company has since been engaged in a thorough review of its financial statements to determine what items need to be restated. The
restatement will include adjustments to expenses and liabilities in addition to those associated with the convertible notes, as
well as adjustments to write down revenue items improperly recognized in 2016 and 2017. Those items involved instances in which
revenue was recognized and either maintained as due to the Company or as a receivable, but for which the Company has not been
able to find support and now intends to reverse as part of the restatement. The Company is actively working to verify the anticipated
restatement by amount and period.
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.
|
III.
|
Self-Reporting,
Mitigation and Cooperation
|
The
Company has self-reported the above events to the Securities and Exchange Commission (“
SEC
”). The SEC has opened
an investigation into the matter, and the Company is cooperating with the SEC. It is also keeping the SEC apprised of its restatement
efforts.
The
Company has also engaged, and will continue to engage, in efforts to mitigate the issues identified above.
First,
the Company filed additional listing applications with the Exchange on April 2, 2019 to ensure that all prior issuances are properly
covered under the Exchange’s rules.
Second,
as noted above, the Company acted to prevent the conversion of unauthorized convertible securities to ensure that these improperly
authorized convertible securities are not converted into common shares that could then enter into the marketplace. The Company
has obtained the return of some nullified shares, and it intends to take actions to retrieve outstanding nullified issuances.
Third,
the Board is vetting new candidates for Board membership, and will announce new appointments as they are made. On June 11, 2019,
the Company announced the appointments of Jeanne Kingsley and Stephen Berini as directors. On June 3, 2019, the Company announced
that four directors – Christopher Ferguson, Luisa Ingargiola, Brad Mitchell and Patrick O’Hare – resigned from
the Board.
Fourth,
the Company is undertaking a thorough review of its internal controls and will determine and implement – in consultation
with the independent investigation team and the SEC – any improvements to internal controls determined to be necessary.
Forward-Looking
Statements
Some
of the statements contained in this Form 8-K are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements relate to future events or our future performance and include statements
about the adequacy, timing and structure of the proposed financing and the Company’s ability to consummate it, our ability
to restructure our existing debt and execute our strategic business plan, as well as other statements that can be identified by
the use of the forward-looking terminology such as “may,” “will,” “believe,” “anticipate,”
“would,” or similar terms, variations of such terms, or the negative of such terms. These forward-looking statements
are based on the Company’s current expectations and inherently involve significant risks and uncertainties.
Further
description of risks that could cause actual events to differ from the outcomes predicted by the Company’s forward-looking
statements is set forth under the caption “Risk Factors” in the Company’s annual and quarterly reports and other
filings with the SEC, and you should consider each of those factors when evaluating the forward-looking statements. These forward-looking
statements speak only as of the date of this Form 8-K and the Company undertakes no duty or obligation to update any forward-looking
statements contained in this letter as a result of new information, future events or changes in its expec
tations.