• Filing Date: 2019-05-13
  • Form Type: 10-Q
  • Description: Quarterly report
v3.19.1
Commitments, Contingencies and Litigation
3 Months Ended
Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments, Contingencies and Litigation

7. Commitments, Contingencies and Litigation

 

Culpepper Travel Expenses and Related Collection Efforts

 

On December 27, 2016, the then-Board of Directors (the “then-Board”) unanimously voted to terminate then-interim Chief Executive Officer and Chief Operating Officer, and former Chief Financial Officer, Peter Culpepper (“Culpepper”), effective immediately, from all positions he held with the Company and each of its subsidiaries, “for cause”, in accordance with the terms of the Amended and Restated Executive Employment Agreement entered into by Culpepper and the Company on April 28, 2014 (the “Culpepper Employment Agreement”) based on the results of the investigation conducted by the Audit Committee of the then-Board regarding improper expense reimbursements to Culpepper.

 

The Audit Committee retained independent counsel and an advisory firm with forensic accounting expertise to assist the Audit Committee in conducting the investigation. The Audit Committee found that Culpepper received $294,255 in expense reimbursements that were unsubstantiated or otherwise improper. The Company seeks to recover from Culpepper the entire $294,255 in expense reimbursements, as well as all attorney’s fees and auditors’/experts’ fees incurred by the Company in connection with the examination of his expense reimbursements. On December 12, 2017, Culpepper agreed to an order by the SEC to pay disgorgement of $140,115, and prejudgment interest of $12,261, for a total of $152,376, to the Company within 30 days. The Company received the payment of $152,376 in January 2018.

  

The Company took the position that under the terms of the Culpepper Employment Agreement, Culpepper is owed no severance payments as a result of his termination “for cause” as that term is defined in the Culpepper Employment Agreement. Furthermore, Culpepper is no longer entitled to the 2:1 credit under the Stipulated Settlement Agreement and Mutual Release in the Derivative Lawsuit Settlement such that the total $2,240,000 owed by Culpepper pursuant to the Derivative Lawsuit Settlement plus Culpepper’s proportionate share of the litigation cost in the amount of $227,750, less the amount that he repaid as of December 31, 2016, is immediately due and payable. The Company sent Culpepper a notice of default in January 2017 for the total amount he owes the Company and is in the process of pursuing these claims in accordance with the alternative dispute resolution provision of the Culpepper Employment Agreement. The Company has established a reserve of $2,051,083 as of March 31, 2019 and December 31, 2018, which amount represents the amount the Company currently believes Culpepper owes to the Company under the Derivative Lawsuit Settlement (excluding the amount of attorneys’ fees incurred in enforcing the terms of the Derivative Lawsuit Settlement), while the Company pursues collection of this amount.

 

Culpepper disputed that he was terminated “for cause” under the Culpepper Employment Agreement. Pursuant to the alternative dispute resolution provisions of that agreement, the Company and Culpepper participated in a mediation of their dispute on June 28, 2017. Having reached no resolution during the mediation, the parties participated in arbitration under the commercial rules of the American Arbitration Association, arbitrating both Culpepper’s claim for severance against the Company and the Company’s claims against Culpepper for improper expense reimbursements and amounts Culpepper owes the Company under the Derivative Lawsuit Settlement (the “Culpepper Arbitration”). The Culpepper Arbitration hearing was held from May 15-18, 2018.

 

On July 12, 2018, the arbitrator issued an interim award in favor of the Company, the terms of which are confidential pursuant to the Culpepper Employment Agreement and instructed the parties that a final award was forthcoming. On September 12, 2018, the arbitrator issued his final award in favor of the Company. On October 4, 2018, the Company filed a petition with the Chancery Court for Davidson County, Tennessee to confirm the arbitration award. On November 7, 2018, the Company received Culpepper’s answer to the petition filed on October 4, 2018. This court entered an order confirming the arbitrator’s award on January 23, 2019. On February 20, 2019, Culpepper filed a motion to alter or amend this judgment. On March 22, 2019, the Chancery Court upheld the arbitration award in favor of the Company. On April 16, 2019, Culpepper filed a Notice of Appeal with the Tennessee Court of Appeals regarding the judgment confirming the arbitration award and the order denying Culpepper’s motion to alter or amend the judgment.

 

The Bible Harris Smith Lawsuit

 

On November 17, 2016, the Company filed a lawsuit in the Circuit Court for Knox County, Tennessee against Bible Harris Smith PC (“BHS”) for professional negligence, common law negligence, and breach of fiduciary duty arising from the accounting services provided by BHS to the Company. On January 28, 2019, this matter was resolved pursuant to a settlement between the parties, the terms of which are confidential. The proceeds from the settlement were received and recorded during the three months ended March 31, 2019.

 

The RSM USA LLP Lawsuit

 

On June 9, 2017, the Company filed a lawsuit in the Circuit Court for Mecklenburg County, North Carolina against RSM USA LLP (“RSM”) for professional negligence, common law negligence, gross negligence, intentional misrepresentation, negligent misrepresentation, and breach of fiduciary duty arising from accounting, internal auditing, and consulting services provided by RSM to the Company. On February 27, 2019, the matter was resolved pursuant to a settlement between the parties, the terms of which are confidential. The proceeds from the settlement were received and recorded during the three months ended March 31, 2019.

 

Employment of Chief Financial Officer

 

On March 25, 2019, the Company entered into a one-year employment agreement with its Chief Financial Officer (“CFO”) that will be renewed automatically for successive one-year periods, unless the Company or CFO provides a notice of non-renewal at least thirty (30) days prior to the end of the term. In the event that coincident with or following a Change in Control (as defined in the agreement), the CFO’s employment with the Company is terminated or the employment agreement is not extended (a) by action of the CFO coincident with or following a Change in Control including the CFO’s death, disability or retirement, or (b) by action of the Company not For Cause (as defined in the agreement) coincident with or following a Change in Control, the Company shall pay the CFO a severance payment equal to 50% of the base salary in the preceding calendar year, payable over six months, as well as certain other specified benefits. In connection with the employment agreement, the CFO was entitled to 50,000 shares of immediately-vested common stock. As of March 31, 2019, and through the date of filing, the Company has not issued the shares and, as a result, has accrued approximately $3,000 for this obligation on the condensed consolidated balance sheet as of March 31, 2019.