Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 1. Description of Business
Nature of Business
SCWorx, LLC (n/k/a SCW FL Corp.) (“SCW LLC”)
was a privately held limited liability company which was organized in Florida on November 17, 2016. On December 31, 2017, SCW
LLC acquired Primrose Solutions, LLC (“Primrose”), a Delaware limited liability company, which became its
wholly-owned subsidiary and focused on developing functionality for the software now used and sold by SCWorx Corp. (the
“Company” or “SCWorx”). The majority shareholders of Primrose were shareholders of SCW LLC and based
upon Staff Accounting Bulletin (“SAB”) Topic 5G, the technology acquired has been accounted for at predecessor
cost of $0. To facilitate the planned acquisition by Alliance MMA, Inc., a Delaware corporation (“Alliance”), on
June 27, 2018, SCW LLC merged with and into a newly-formed entity, SCWorx Acquisition Corp., a Delaware corporation
(“SCW Acquisition”), with SCW Acquisition being the surviving entity. Subsequently, on August 17, 2018, SCW
Acquisition changed its name to SCWorx Corp. On November 30, 2018, the Company and certain shareholders agreed to cancel
6,510 common shares. In June 2018, the Company began to collect subscriptions for common stock. From June to November 2018,
the Company collected $1.25 million in subscriptions and issued 3,125 shares of common stock to new third-party investors. In
addition, on February 1, 2019, (i) SCWorx Corp. (f/k/a SCWorx Acquisition Corp.) changed its name to SCW FL Corp. (to allow
Alliance to change its name to SCWorx Corp.) and (ii) Alliance acquired SCWorx Corp. (n/k/a SCW FL Corp.) in a stock- for-
stock exchange transaction and changed Alliance’s name to SCWorx Corp., which is the Company’s current name,
with SCW FL Corp. becoming the Company’s subsidiary.
Business Combination and Related Transactions
In June 2018, SCWorx Acquisition Corp. entered into a Securities
Purchase Agreement (“SPA”) with Alliance, as amended December 18, 2018, under which the SCWorx Acquisition Corp. agreed
to purchase up to $1.25 million in principal amount of Alliance’s convertible notes and warrants to purchase up to 1,128,356
[59,387 shares reflective of one for nineteen stock split] [bracketed amounts disclosed represent post-split adjusted shares or
per share amounts] shares of Alliance common stock. The initial $750,000 tranche of the notes was convertible into shares of Alliance
common stock at an initial conversion price of $0.3725 [$7.0775 post-split] and the related 503,356 [26,492 post-split] warrants
have an exercise price of $0.3725 [$7.0775 post-split]. The conversion price on the $750,000 convertible note was reduced to $0.215
[$4.085 post-split] per share in January 2019. The remaining $500,000 tranche of the notes was convertible into shares of Alliance
common stock at a conversion price of $0.20 [$3.80 post-split] and the related 625,000 [32,895 post-split] warrants had an exercise
price of $0.30 [$5.70 post-split]. All of these notes (an aggregate of $1.25 million in principal amount) converted automatically
into Alliance common stock upon the closing of the Company’s acquisition on February 1, 2019 and were distributed to certain
of the Company’s common shareholders.
Pursuant to the SPA, between June 29, 2018 and October 16, 2018,
Alliance sold SCWorx Acquisition Corp. convertible notes in the aggregate principal amount of $750,000 and warrants to purchase
503,356 [26,492 post-split] shares of Alliance common stock, for an aggregate purchase price of $750,000. Each of the notes bore
interest at 10% annually and had a one year term. The warrants had an exercise price of $0.3725, [$7.0775 post-split] a term of
five years and were vested upon grant. As noted above, these notes automatically converted into Alliance common stock upon the
closing of the Company’s acquisition on February 1, 2019.
On August 20, 2018, the Company and its stockholders entered
into a Stock Exchange Agreement with Alliance, as amended December 18, 2018 (“SEA”). Under the SEA, the Company’s
shareholders agreed to sell all of the issued and outstanding common stock of the Company, in exchange for which Alliance agreed
to issue at the closing
100,000,000
shares of Alliance common stock to the Company’s
stockholders.
Pursuant to the SPA, between November 16, 2018
and December 31, 2018, the Company purchased additional Alliance convertible notes in the aggregate principal amount of $275,000
and warrants to purchase 356,250 [18,750 post-split] shares of Alliance common stock, for an aggregate purchase price of $275,000.
Each of the Notes bore interest at 10% annually and matured one year from the issue date. These warrants had an exercise price
of $0.30 [$5.70 post-split], a term of five years and were vested upon grant. This brought the total amount funded by the Company
to $1,035,000 as of December 31, 2018. In January 2019, SCWorx purchased $215,000 of additional Alliance convertible notes under
the aggregate $1,250,000 SPA. These notes automatically converted into Alliance common stock upon the closing of the Company’s
acquisition on February 1, 2019 and were purchased under the aggregate $1.25 million terms of the SPA.
In anticipation of the acquisition of the Company,
Alliance filed an original listing application with the Nasdaq Capital Market to list the common stock of the combined company.
On February 1, 2019, Nasdaq approved the listing of Alliance’s common stock (on a combined basis with the Company), with
the result being that the newly combined company’s common stock is now newly listed on the Nasdaq Capital Market.
On February 1, 2019, SCWorx Corp. changed its name to SCW FL
Corp. to allow Alliance to change its name to SCWorx Corp. Alliance completed the acquisition of SCWorx Corp. (n/k/a SCW FL Corp.),
at which point Alliance changed its name to SCWorx Corp., changed its ticker symbol to “WORX”, and effected a one-for-nineteen
reverse stock split of its common stock
,
which combined the 100,000,000 Alliance shares of
common stock issued to the Company’s shareholders into 5,263,158 shares of common stock of the newly combined company.
From a legal perspective, Alliance acquired SCW FL
Corp., and as a result, historical equity awards including stock options and warrants are carried forward at their historical
basis.
From an accounting perspective, Alliance was acquired
by SCW FL Corp. in a reverse merger and as a result, the Company has completed preliminary purchase accounting for the transaction.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Operations of the Business
SCWorx is a leading provider of data content and services related
to the repair, normalization and interoperability of information for healthcare providers and big data analytics for the healthcare
industry.
SCWorx has developed and markets health information technology
solutions and associated services that improve healthcare processes and information flow within hospitals. SCWorx’s software
platform enables healthcare providers to simplify, repair, and organize its data (“data normalization”), allows the
data to be utilized across multiple internal software applications (“interoperability”) and provides the basis for
sophisticated data analytics (“big data”). SCWorx’s solutions are designed to quickly and accurately improve
the flow of information between the existing supply chain, electronic medical records, clinical systems, and patient billing functions.
The software is designed to achieve multiple operational benefits such as supply chain cost reductions, decreased accounts receivables
aging, accelerated and more accurate billing, contract optimization, increased supply chain management and cost visibility, synchronous
Charge Description Master (“CDM”) and control of vendor rebates and contract administration fees.
SCWorx empowers healthcare providers to maintain comprehensive
access and visibility to an advanced business intelligence that enables better decision-making and reductions in product costs
and utilization, ultimately leading to accelerated and accurate patient billing. SCWorx’s software modules perform separate
functions as follows:
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Virtualized Item Master File repair, expansion and automation
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Request for Proposal Automation
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Big Data Analytics Model
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Data Integration and Warehousing
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SCWorx continues to provide transformational
data-driven solutions to some of the finest, most well-respected healthcare providers in the United States. Clients are geographically
dispersed throughout the country. The Company’s focus is to assist healthcare providers with issues they have pertaining
to data interoperability. SCWorx provides these solutions through a combination of direct sales and relationships with strategic
partners.
SCWorx’s software solutions are delivered to clients within
a fixed term period, typically a three-to-five-year contracted term, where such software is hosted in SCWorx data centers (Amazon
Web Service’s “AWS” or RackSpace) and accessed by the client through a secure connection in a software as a service
(“SaaS”) delivery method.
SCWorx currently sells its solutions and services in the United
States to hospitals and health systems through its direct sales force and its distribution and reseller partnerships.
SCWorx, as part of the acquisition of Alliance MMA, operates
an online event ticketing platform focused on serving regional MMA (“mixed martial arts”) promotions.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note
2. Liquidity
The Company’s
primary need for liquidity is to fund the working capital needs of the business and general corporate purposes. The Company
has historically incurred losses and has relied on borrowings from members to fund the operations and growth of the business.
As of June 30, 2019, the Company had cash of approximately $1.3 million, negative working capital of approximately $0.6
million and an accumulated deficit of approximately $9.7 million.
During 2018, the
Company began to gain traction with more hospitals and witnessed customer renewals of expiring agreements with existing
customers. During the first quarter of 2019, the Company signed four contracts with new customers and during the second
quarter completed a number of data consulting projects as proof of concept for potentially new customers. The Company’s
target is to sign on average, a contract a month, with new customers during 2019. Management expects increases in revenue to
provide sufficient cash flow to fund the operations for at least the one-year period following the release of these
condensed consolidated financial statements.
On November 30, 2018, the Company completed a common stock
private place of $1.25 million. In February 2019, the transactions related to the purchase of Alliance MMA resulted in a
gross increase of cash of $5.4 million which the Company has utilized a significant portion to operate the business. Management believes the remaining cash balance
of $1.3 million along with anticipated increases in sales is expected to fund operations for at
least the next 12 months; however, the Company will thereafter need to raise additional funding through strategic
relationships, public or private equity or debt financings. If such funding is not available or not available on terms
acceptable to the Company, the Company’s current plans for expansion, including new product development, may be
curtailed or cancelled.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 3. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying interim unaudited condensed consolidated financial
statements as of June 30, 2019 and 2018, and for the three and six months then ended, have been prepared by the Company in accordance
with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial
information. The amounts as of December 31, 2018 have been derived from the Company’s annual audited financial statements.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have
been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state
fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented.
These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and
for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2018.
The results of operations for the three month and six months ended June 30, 2019 are not necessarily indicative
of the results that may be expected for the full year ended December 31, 2019 or any future period and the Company makes no
representations related thereto.
Reclassification
A reclassification has been made to the
Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Changes in Stockholders’ Equity/(Deficit) to
break out the Series A Convertible Preferred stock par value of $819 and additional paid in capital of $7,980,126. Previously,
for the quarter ended March 31, 2019, the entire balance was disclosed as Preferred Stock. This change in classification does not
affect the previously reported total stockholders’ equity balance. In addition, the authorized common stock has been restated
to reflect the correct amount of 45,000,000 authorized common shares.
In addition, certain prior quarter amounts
have been reclassified for consistency with the current quarter presentation. These reclassifications had no effect on reported
results of operations or cash flows.
Cash
Cash is maintained with various financial institutions. Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000.
Fair Value of Financial Instruments
Management applies fair value accounting for significant
financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in
the consolidated financial statements on a recurring basis. Management defines fair value as the price that would be received
from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded
at fair value, management considers the principal or most advantageous market in which we would transact and the market-based
risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent
in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy,
which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy
upon the lowest level of input that is available and significant to the fair value measurement: Level 1 - Quoted prices in
active markets for identical assets or liabilities. Level 2 - Observable inputs other than quoted prices in active markets
for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or
other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities. Level 3 - Inputs that are generally unobservable and typically reflect management's estimate of
assumptions that market participants would use in pricing the asset or liability.
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company
to significant concentrations of credit risk consist principally of accounts receivable, due from shareholder and convertible
notes receivable. The Company believes that any concentration of credit risk in its accounts receivable is substantially
mitigated by the Company’s evaluation process, relatively short collection terms and the high level of credit
worthiness of its customers. The Company performs ongoing internal credit evaluations of its customers’ financial
condition, obtains deposits and limits the amount of credit extended when deemed necessary but generally requires no
collateral. The Company believes that any concentration of credit risk in its due from shareholder and convertible notes
receivable was substantially mitigated by the shareholder’s material interest in the Company, ability to sell off
portions of the interest, if necessary, and the closing of the acquisition of SCWorx by Alliance and conversion of the notes
payable - related party into Series A Convertible Preferred share and the settlement of the due from stockholder balance with
the surrender of 1,401 SCWorx common shares in January 2019.
For the quarter ended June 30, 2019,
the Company had 3 customers representing 23%, 19% and 11% of aggregate revenues. For the quarter ended June 30, 2018,
the Company had 3 customers representing 23%, 21% and 12% of aggregate revenues. At June 30, 2019, the Company had 4
customers representing 18%, 16% and 13% and 12% of aggregate accounts receivable. At December 31, 2018, the Company had 3
customers representing 39%, 21% and 13% of aggregate accounts receivable.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Allowance
for Doubtful Accounts
The Company continually monitors customer payments and maintains
a reserve for estimated losses resulting from its customers' inability to make required payments. In determining the reserve, the
Company evaluates the collectability of its accounts receivable based upon a variety of factors. In cases where the Company becomes
aware of circumstances that may impair a specific customer's ability to meet its financial obligations, the Company records a specific
allowance against amounts due. For all other customers, the Company recognizes allowances for doubtful accounts based on its historical
write-off experience in conjunction with the length of time the receivables are past due, customer creditworthiness, geographic
risk and the current business environment. Actual future losses from uncollectible accounts may differ from the Company's estimates.
The Company deemed no allowance for doubtful accounts necessary as of June 30, 2019 and December 31, 2018.
Leases
We determine if an arrangement is a lease at
inception. Operating leases are included in the lease right-of-use (“ROU”) assets, current portion and long-term
portion of lease obligations on our consolidated balance sheet. ROU assets represent our right to use an underlying asset for
the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease
ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease
term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments. The operating lease ROU asset
also includes any lease payments to be made and excludes lease incentives. Our lease terms may include options to extend or
terminate the lease, which are included in the lease ROU asset when it is reasonably certain that we will exercise that
option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements
with lease components only, none with non-lease components, which are generally accounted for separately.
Business Combinations
The
Company includes the results of operations of a business it acquires in its consolidated results as of the date of
acquisition. The Company allocates the fair value of the purchase consideration of its acquisition to the tangible assets,
liabilities and intangible assets acquired, based on their estimated fair values. The excess of the fair value of purchase
consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The primary items
that generate goodwill include the value of the synergies between the acquired businesses and the Company. Intangible assets
are amortized over their estimated useful lives. The fair value of contingent consideration (earn out) associated with
acquisitions is remeasured each reporting period and adjusted accordingly. Acquisition and integration related costs are
recognized separately from the business combination and are expensed as incurred. For additional information regarding the
Company’s acquisitions, refer to “Note 4 – Business Combinations.”
Goodwill and Identified
Intangible Assets
Goodwill
. Goodwill is recorded as the difference, if
any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible
assets acquired under a business combination. Goodwill also includes acquired assembled workforce, which does not qualify as an
identifiable intangible asset. The Company reviews impairment of goodwill annually in the third quarter, or more frequently if
events or circumstances indicate that the goodwill might be impaired. The Company first assesses qualitative factors to determine
whether it is necessary to perform the quantitative goodwill impairment test. If, after assessing the totality of events or circumstances,
the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount,
then the quantitative goodwill impairment test is unnecessary.
Identified intangible assets
. Identified
finite-lived intangible assets consist of ticketing software and promoter relationships resulting from the February 1, 2019
business combination. The Company’s identified intangible assets are amortized on a straight-line basis over
their estimated useful lives, ranging from 5 to 7 years. The Company makes judgments about the recoverability of
finite-lived intangible assets whenever facts and circumstances indicate that the useful life is shorter than originally
estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, the Company
assesses recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of
assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of
the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the
Company would accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful
life.
For further discussion of goodwill and identified intangible
assets, see “Note 4 – Business Combinations.”
Property and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over the related assets’ estimated useful lives.
Equipment, furniture and fixtures are being amortized over a period of three years.
Expenditures that materially increase asset life are capitalized,
while ordinary maintenance and repairs are expensed as incurred.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Revenue Recognition
The Company
recognizes revenue in accordance with Topic 606 to depict the transfer of promised goods or services in an amount that
reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. To determine
revenue recognition for arrangements within the scope of Topic 606 the Company performs the following steps:
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Step 1: Identify the contract(s) with a customer
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Step 2: Identify the performance obligations in the contract
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Step 3: Determine the transaction price
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Step 4: Allocate the transaction price to the performance obligations in the contract
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Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
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The Company follows the
accounting revenue guidance under Topic 606 to determine whether contracts contain more than one performance obligation.
Performance obligations are the unit of accounting for revenue recognition and generally represent the distinct goods or services
that are promised to the customer.
The Company has identified the following performance
obligations in its contracts with customers:
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1)
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Data Normalization: which includes data preparation, product and vendor mapping, product categorization, data enrichment and other data related services,
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2)
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Software-as-a-service (“SaaS”): which
is generated from clients’ access of and usage of the Company’s hosted software solutions on a subscription basis for a specified contract term, which is usually annually. In SaaS arrangements, the client cannot take possession of the software during the term of the contract and generally has the right to access and use the software and receive any software upgrades published during the subscription period,
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Maintenance: which includes ongoing data cleansing and normalization, content enrichment, and optimization, and
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4)
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Professional Services: mainly related to specific customer projects to manage and/or analyze data and review for cost reduction opportunities.
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A contract will typically
include Data Normalization, SaaS and Maintenance, which are distinct performance obligations and are accounted for separately.
The transaction price is allocated to each separate performance obligation on a relative stand-alone selling price basis. Significant
judgement is required to determine the stand-alone selling price for each distinct performance obligation and is typically estimated
based on observable transactions when these services are sold on a stand-alone basis. At contract inception, an assessment of the
goods and services promised in the contracts with customers is performed and a performance obligation is identified for
each distinct promise to transfer to the customer a good or service (or bundle of goods or services). To identify the performance
obligations, the Company considers all the goods or services promised in the contract regardless of whether they are explicitly
stated or are implied by customary business practices. Revenue is recognized when the performance obligation has been met.
The Company considers control to have transferred upon delivery because the Company has a present right to payment at that time,
the Company has transferred use of the good or service, and the customer is able to direct the use of, and obtain substantially all the remaining
benefits from, the good or service.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Company’s
SaaS and Maintenance contracts typically have termination for convenience without penalty clauses and accordingly, are
generally accounted for as month-to-month agreements. If it is determined that the Company has not satisfied a performance
obligation, revenue recognition will be deferred until the performance obligation is deemed to be satisfied.
Revenue recognition
for the Company’s performance obligations are as follows:
Data Normalization and Professional Services
The Company’s Data Normalization and Professional
Services are typically fixed fee. When these services are not combined with SaaS or Maintenance revenues as a single unit of accounting,
these revenues are recognized as the services are rendered and when contractual milestones are achieved and accepted by the customer.
Software-as-a-Service and Maintenance
Software-as-a-service and maintenance revenues are
recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date on which
the Company’s service is made available to customers.
The Company
does have some contracts that have payment terms that differ from the timing of revenue recognition, which requires the Company to
assess whether the transaction price for those contracts include a significant financing component. The Company has elected
the practical expedient that permits an entity to not adjust for the effects of a significant financing component if it
expects that at the contract inception, the period between when the entity transfers a promised good or service to a customer
and when the customer pays for that good or service will be one year or less. The Company does not maintain contracts in
which the period between when the entity transfers a promised good or service to a customer and when the customer pays for
that good or service exceeds the one-year threshold.
In periods prior to
the adoption of ASC 606, the Company recognized revenues when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and the collectability of the resulting receivable is reasonably assured. The adoption of Topic 606 did not result in a cumulative effect adjustment to our
opening retained earnings since there was no significant impact upon adoption of Topic 606. There was also no material
impact to revenues, or any other financial statement line items for the year ended December 31, 2018 as a result of
applying ASC 606.
The Company has one revenue stream, from the
SaaS business, and has not presented any varying factors that affect the nature, timing and uncertainty of revenues and cash
flows.
There were no revenues that were recognized from
performance obligations that were partially satisfied prior to January 1, 2018.
Costs to Fulfill a Contract
Costs to fulfill a contract typically include costs related to satisfying performance obligations as well as general and
administrative costs that are not explicitly chargeable to customer contracts. These expenses are recognized and expensed when
incurred in accordance with ASC 340-40.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Cost of Revenue
Cost of revenues primarily represents data center hosting costs,
consulting services and maintenance of the Company’s large data array that were incurred in delivering professional services
and maintenance of the Company’s large data array during the periods presented.
Contract Balances
Contract assets arise when the revenue associated prior to
the Company’s unconditional right to receive a payment under a contract with a customer (
i.e
., unbilled revenue)
and are derecognized when either it becomes a receivable or the cash is received. There were no contract assets as of June 30,
2019 and December 31, 2018.
Contract liabilities arise when customers remit
contractual cash payments in advance of the Company satisfying its performance obligations under the contract and are
derecognized when the revenue associated with the contract is recognized when the performance obligation is satisfied.
Contract liabilities were approximately $912,000 and $817,000 as of June 30, 2019 and December 31, 2018, respectively.
Research and Development Costs
The Company expenses all research and development
related costs as incurred. Research and development cost for the quarters ended June 30, 2019 and 2018 was approximately
$478,000 and $0, respectively. Research and development cost for the six months ended June 30, 2019 and 2018 was
approximately $660,000 and $0, respectively. These research and development cost relate to a new product development and
programming expenses expected to be released during 2019.
Advertising Costs
The Company expenses advertising costs as incurred. There were
no advertising costs for the quarters or six months ended June 30, 2019 and 2018.
Income Taxes
The Company converted to a corporation from a limited liability
company during 2018.
The Company uses the asset and liability method of accounting for
income taxes in accordance with Accounting Standard Codification (“ASC”) Topic 740, “Income Taxes.” Under
this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii)
deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial
statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment
date.
Valuation allowances are provided if, based upon the
weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
As of June 30, 2019, the Company has evaluated available evidence and concluded that the Company may
not realize all the benefit of its deferred tax assets; therefore, a valuation allowance has been established for its
deferred tax assets.
ASC Topic 740-10-30 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
ASC Topic 740-10-40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The Company has no material uncertain tax positions for any of the reporting periods presented.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017,
(“the Tax Act”) was enacted. The Tax Act significantly revised the U.S. corporate income tax regime by, including
but not limited to, lowering the U.S. corporate income tax rate from 34% to 21% effective January 1, 2018, implementing a
territorial tax system, imposing a one-time transition tax on previously untaxed accumulated earnings and profits of foreign
subsidiaries, and creating new taxes on foreign sourced earnings. As of June 30, 2019, we completed the accounting for
tax effects of the Tax Act under ASC 740. There were no impacts to the reporting period ended June 30, 2019.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The income tax expense for the quarters ended June 30, 2019 and 2018 was $195,000 and $0, respectively,
and was $0 and $0 for the six months ended June 30, 2019 and 2018, respectively, and are included in prepaid assets and accounts
payable and accrued liabilities on the condensed consolidated balance sheet.
Stock-based Compensation Expense
The Company accounts for stock-based compensation expense in
accordance with the authoritative guidance on share-based payments. Under the provisions of the guidance, stock-based compensation
expense is measured at the grant date based on the fair value of the option using a Black-Scholes option pricing model and is recognized
as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The fair value of
the Company’s stock awards for non-employees is estimated based on the fair market value on each vesting date, accounted
for under the variable-accounting method.
The authoritative guidance also requires that the Company measure
and recognize stock-based compensation expense upon modification of the term of stock award. The stock-based compensation expense
for such modification is accounted for as a repurchase of the original award and the issuance of a new award.
Calculating stock-based compensation expense requires
the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility,
and the pre-vesting option forfeiture rate. The Company estimates the expected life of options granted based on
historical exercise patterns, which are believed to be representative of future behavior. The Company estimates the
volatility of the Company’s common stock on the date of grant based on historical volatility. The assumptions used in
calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses
different assumptions, its stock-based compensation expense could be materially different in the future. In addition, the
Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest.
The Company estimates the forfeiture rate based on historical experience of its stock-based awards that are granted,
exercised and cancelled. If the actual forfeiture rate is materially different from the estimate, stock-based compensation
expense could be significantly different from what was recorded in the current period. The Company also grants performance
based restricted stock awards to employees and consultants. These awards will vest if certain employeeconsultant-specific
or company-designated performance targets are achieved. If minimum performance thresholds are achieved, each award will
convert into a designated number of the Company’s common stock. If minimum performance thresholds are not
achieved, then no shares will be issued. Based upon the expected levels of achievement, stock-based compensation is
recognized on a straight-line basis over the requisite service period. The expected levels of achievement are reassessed over
the requisite service periods and, to the extent that the expected levels of achievement change, stock-based compensation is
adjusted in the period of change and recorded on the statements of operations and the remaining unrecognized stock-based
compensation is recorded over the remaining requisite service period. See “Note 10 – Stockholders’ Equity”
for additional detail.
Indemnification
The Company provides indemnification of varying scope to certain
customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s
software. In accordance with authoritative guidance for accounting for guarantees, the Company evaluates estimated losses for such
indemnification. The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make
a reasonable estimate of the amount of loss. To date, no such claims have been filed against the Company and no liability has been
recorded in the Company’s financial statements.
As permitted under Delaware law, the Company has agreements
whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving
at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required
to make under these indemnification agreements is unlimited; however, the Company believes, given the absence of any such payments
in the Company’s history, and the estimated low probability of such payments in the future, that the estimated fair value
of these indemnification agreements is immaterial. In addition, the Company has directors’ and officers’ liability
insurance coverage that is intended to reduce its financial exposure and may enable the Company to recover any payments, should
they occur.
Contingencies
From time to time, the Company may be involved in legal and
administrative proceedings and claims of various types. The Company records a liability in its consolidated financial statements
for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Management reviews these
estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If
the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements.
If a loss is probable but the amount of loss cannot be reasonably estimated, the Company discloses the loss contingency and an
estimate of possible loss or range of loss (unless such an estimate cannot be made). The Company does not recognize gain contingencies
until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred. See “Note
9 – Commitments and Contingencies,” for further information.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Use of Estimates
The preparation of consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The accounting estimates and assumptions that require
management’s most significant, difficult, and subjective judgment include the accounting for the business combination,
the recognition of revenue, collectability of accounts receivable, valuation of convertible notes receivable and related
warrants, the assessment of recoverability of goodwill and intangible assets, the assessment of useful lives and
the recoverability of property and equipment, the valuation and recognition of stock-based compensation expense, loss
contingencies, and income taxes. Actual results could differ materially from those estimates.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Recently Issued
Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards
Update No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 requires a lessee to record a
right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the
balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing
arrangements. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. A
modified retrospective transition approach is provided for lessees of capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical
expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11,
Leases (Topic
842) Targeted Improvements
(“ASU 2018-11”). ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an
additional (and optional) transition method of adoption, under which an entity initially applies the new leases standard at
the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption. ASU 2018-11 also allows lessors to not separate non-lease components from the associated lease component if certain
conditions are met. The Company adopted the provisions of ASU 2016-02 and ASU 2018-11 in the quarter beginning January
1, 2019. The adoption resulted in the recognition of additional disclosures and a right of use asset of approximately $53,000
included as a component of prepaid expenses and other assets and a lease liability of approximately $53,000, which is
included as a component of accounts payable and accrued liabilities.
In October 2018, the FASB issued ASU No. 2018-17,
Consolidation
(Topic 810):
Targeted Improvements to Related Party Guidance for Variable Interest Entities
(“ASU 2018-17”).
ASU 2018-17 provides that indirect interests held through related parties in common control arrangements should be considered on
a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. ASU 2018-17
is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We do not expect
the standard to have a material impact on our condensed consolidated financial statements.
In February 2018, the FASB issued new guidance (“ASU 2018-02”)
to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting
from the Tax Cuts & Jobs Act. We have adopted the new standard effective January 1, 2019, and the standard did not have
a material impact on our condensed consolidated financial statements.
In August 2018, the
FASB issued ASU 2018-13,
Fair Value Measurement
(Topic 820):
Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement
(“ASU 2018-13”), which modifies the disclosure
requirements on fair value measurements. ASU 2018-13 is effective in the first quarter of fiscal 2020, and earlier adoption
is permitted.
We do not expect the standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update
No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”),
which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge
for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated
to that reporting unit. This guidance will be effective for us in the first quarter of 2020 on a prospective basis, and early
adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, “
Stock-based
Compensation: Improvements to Nonemployee Share-based Payment Accounting,
” which amends the existing accounting standards
for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards
with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date.
The effective date for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption
permitted, but no earlier than the Company’s adoption date of Topic 606. The new guidance is required to be applied retrospectively
with the cumulative effect recognized at the date of initial application. The Company has adopted this new standard in the first
quarter of fiscal 2019 and the adoption of the standard did not have a material impact on its consolidated financial statements.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4. Business Combinations
Preliminary purchase accounting
On
February 1, 2019, the Company’s shareholders exchanged all of its outstanding shares in exchange for
5,263,158 shares of Alliance common stock. Due to the Company’s shareholders acquiring a controlling interest in Alliance
after acquisition, the transaction was treated as a reverse merger for accounting purposes, with SCWorx being the reporting
company. In accordance with purchase accounting rules under ASC 805, the purchase consideration
was $11,865,306.
The acquisition was accounted for under the
acquisition method of accounting. The assets acquired, liabilities assumed and preliminary purchase allocation, which is based
on estimates and valuations of management, is as follows:
|
|
Estimated
Useful
Life (years)
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$
|
5,441,437
|
|
Goodwill
|
|
|
|
|
|
|
8,466,282
|
|
Identifiable intangible assets:
|
|
|
|
|
|
|
|
|
Ticketing software
|
|
|
5
|
|
|
|
64,000
|
|
Promoter relationships
|
|
|
7
|
|
|
|
176,000
|
|
Total identifiable intangible assets
|
|
|
|
|
|
|
240,000
|
|
Accounts payable
|
|
|
|
|
|
|
(1,901,624
|
)
|
Current liabilities - discontinued operations
|
|
|
|
|
|
|
(380,789
|
)
|
Aggregate purchase price
|
|
|
|
|
|
$
|
11,865,306
|
|
The allocation of consideration to the assets acquired and
liabilities assumed at their estimated acquisition date fair values are considered preliminary and may change within the permissible
measurement period, not to exceed one year.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Identified intangible assets consist of the following:
|
|
|
|
June
30, 2019
|
|
Intangible
assets
|
|
Useful Life
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Ticketing
software
|
|
5
years
|
|
$
|
64,000
|
|
|
$
|
(5,334
|
)
|
|
$
|
58,666
|
|
Promoter
relationships
|
|
7
years
|
|
|
176,000
|
|
|
|
(10,476
|
)
|
|
|
165,524
|
|
Total
intangible assets, gross
|
|
|
|
$
|
240,000
|
|
|
$
|
(15,810
|
)
|
|
$
|
224,190
|
|
Amortization expense for the quarter ended June 30,
2019 and 2018, was $9,486 and $0, respectively.
Amortization expense for the six months ended June 30,
2019 and 2018, was $15,810 and $0, respectively.
As of June 30, 2019, the estimated future amortization expense
of amortizable intangible assets is as follows:
2019 (remaining 6 months)
|
|
$
|
18,971
|
|
2020
|
|
|
37,943
|
|
2021
|
|
|
37,943
|
|
2022
|
|
|
37,943
|
|
2023
|
|
|
37,943
|
|
Thereafter
|
|
|
53,447
|
|
|
|
$
|
224,190
|
|
Goodwill
The changes to the carrying value of goodwill from January 1,
2019 through June 30, 2019 are reflected below:
December 31, 2018
|
|
|
|
|
Goodwill related to the acquisition of Alliance MMA
|
|
$
|
8,466,282
|
|
June 30, 2019
|
|
$
|
8,466,282
|
|
Note 5. Related Party Transactions
Due from Shareholder
The Company’s founder and majority stockholder had
provided cash advances on an unsecured and non-interest-bearing basis, during the first few years of operation. Beginning in
2016, the founder began receiving distributions from the Company. The amounts owed to, and due from, the shareholder have been
netted in the accompanying consolidated balance sheets. In January 2019, this shareholder surrendered 1,401 common shares to
the Company as settlement of the balance due. As of June 30, 2019, and December 31, 2018, the net balance due from the
founder was approximately $0 and $1.4 million, respectively. The balance did not carry a maturity date and there were no
repayment terms.
Due to Shareholder
In October 2016, the Company entered into an
unsecured loan agreement with a minority shareholder for up to $1 million of borrowings for operating expenses. In November
2016 and January 2018, the Company entered into additional note agreements to provide up to an additional $2 million of
aggregate borrowings for which the Company has guaranteed payment from its subsidiary. The interest rate for the notes is 10%
per annum and the notes mature in January 2021. One of the notes bore interest at 10% for the first 90 days and was then
adjusted to 18% per annum.
As previously mentioned, on August 20, 2018, the
Company entered into a Stock Exchange Agreement with Alliance MMA, as amended December 18, 2018, in connection therewith this
minority shareholder agreed to accept Series A Convertible Preferred Stock units having a face value equal to the total
amount owed to him of $2.1 million in full satisfaction of such indebtedness (including principal and accrued interest).
As of June 30, 2019, and December 31, 2018, the notes
payable - related party totaled $192,446 and $1,591,491 respectively.
The Company incurred interest expense of approximately
$0 and $48,434 for the quarter ended June 30, 2019 and 2018, respectively, and $23,720 and $90,057, for the six months
ended June 30, 2019 and 2018, respectively. The Company incurred no interest expense on the notes payable - related
party since February 1, 2019 as the holder agreed to settle the principal and interest balance with Series A Convertible
Preferred Stock.
As of June
30, 2019 and 2018, the accrued interest balance was $0 and $282,000, respectively.
In addition, this shareholder also provided office space to
the Company at no cost through January 2019.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6. Convertible Notes Receivable
On June 28, 2018, SCWorx Acquisition Corp. entered into a
SPA with Alliance MMA, under which SCW LLC agreed to buy up to $1.0 million in principal amount of convertible notes and
warrants to purchase up to 671,142 [35,323] shares of common stock. The notes were originally convertible into shares of
common stock at a conversion price of $0.3725 [$7.0775] and bore interest at 10% annually. The warrants were originally
exercisable for shares of common stock at an exercise price of $0.3725 [$7.0775].
Under the SPA, SCWorx Acquisition Corp. agreed to fund (i)
$500,000 at the initial closing, (ii) a second tranche of $250,000 upon the signing of a business combination agreement with
the Company and (iii) a third tranche of $250,000 upon mutual agreement of Alliance MMA and SCWorx.
On December 18, 2018, SCWorx agreed to increase the total
amount of principal from $1.0 million to $1.25 million and to reduce the conversion price of the final $500,000 installment
of the aggregate $1,250,000 note purchase to $0.20 [$3.80] per share. The warrant exercise price for the related warrants to
purchase 625,000 [32,895,] shares was reduced to $0.30 [$5.70] per share.
Pursuant to the SPA, during 2018, SCWorx purchased
convertible notes from Alliance MMA in the principal amount of $1,035,000 and warrants to purchase an aggregate of
859,606 [45,242] shares of common stock, for an aggregate purchase price of $1,035,000. The note for $750,000 bears interest
at 10% annually and matures on July 31, 2019. This note was amended in January 2019 to reduce the conversion price to $0.215
[$4.09] per share. The related warrant to acquire 503,356 [26,492] common shares has an exercise price of $0.3725 [$7.0775],
a term of five years and was vested upon grant. The note for $275,000 has a conversion price of $0.20 [$3.80], bore interest
at 10% annually and matured on June 22, 2019. The warrant to acquire 356,250 [18,750] common shares has an exercise price of
$0.30 [$5.70], a term of five years and was vested upon grant.
During the first quarter of 2019, SCWorx
purchased additional convertible notes from Alliance MMA in the principal amount of $215,000 and warrants to purchase
an aggregate of 268,750 [14,145] shares of common stock, for an aggregate purchase price of $215,000. The note for $215,000
had a conversion price of $0.20 [$3.80], bore interest at 10% annually and matured on June 22, 2019. The warrant to
acquire 268,750 [14,145] common shares had an exercise price of $0.30 [$5.70], a term of five years and was vested upon
grant.
The Alliance acquisition closed on February 1, 2019 and the
principal, commitment costs and accrued interest related to the purchased Alliance convertible notes automatically converted into
6,883,319 [362,280] shares of Alliance common stock. In January 2019, the SCWorx board of directors declared a dividend of the
6,883,319 [362,280] when-converted shares of Alliance common stock, and related warrants, to the SCWorx shareholders, two of whom
waived their rights to the dividend, resulting in the shares being distributed to shareholders who participated in the November
2018 stock offering by SCWorx Corp. (f/k/a SCWorx Acquisition Corp.) of $1.25 million.
As of December 31, 2018, the Company held a convertible
note receivable from Alliance MMA with a balance of $837,317. The Company also received warrants from the transaction which
were valued at $67,000.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 7. Fair value of financial instruments
FASB ASC 820-10 defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a
framework for measuring the fair value of assets and liabilities according to a hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices
in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The
hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability
based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that are derived from assumptions
based on management’s estimate of assumptions that market participants would use in pricing the asset or liability based
on the best information available under the circumstances.
The hierarchy is broken down into the following three levels,
based on the reliability of inputs:
Level 1: Unadjusted quoted prices in active markets
for identical assets or liabilities that are accessible at the measurement date.
Level 2: Significant other observable inputs other
than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other
inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs for assets
or liabilities that are derived from assumptions based on management’s estimate of assumptions that market participants would
use in pricing the assets or liabilities.
Fair value was determined on a recurring basis based on appraisals
by qualified licensed appraisers and was adjusted for management’s estimates of costs to sell and holding period discounts.
The following table presents information as of December 31, 2018 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a
recurring basis:
Financial Instrument
|
|
Fair Value
|
|
|
Valuation technique
|
|
Significant Unobservable inputs
|
Convertible notes receivable
|
|
$
|
837,817
|
|
|
Monte Carlo Simulation
|
|
Probability of conversion and interest rates on comparable financial instruments
|
Investment in warrants
|
|
$
|
67,000
|
|
|
Black-Scholes Option Pricing Model
|
|
Common stock volatility and discount
|
The fair value of the convertible notes receivable
(and related discount) at the date of issuance was determined using the Monte Carlo simulation, probability of conversion
and comparable interest rates. In conjunction with the acquisition, the Company did not have any of these financial
instruments at June 30, 2019.
The assumptions used to measure the fair value of the
convertible notes receivable as of original issuance date and as of December 31, 2018 were as follows:
|
|
Issuance
Dates
|
|
|
December 31,
2018
|
|
Risk-Free Interest Rate
|
|
|
2.41%-2.47
|
%
|
|
|
2.41
|
%
|
Probability of conversion into equity
|
|
|
50%-90
|
%
|
|
|
90
|
%
|
Expected Volatility
|
|
|
91.95
|
%
|
|
|
91.95
|
%
|
Term
|
|
|
.09-.59 years
|
|
|
|
.09
year
|
|
The Company held warrants to purchase common shares of
Alliance MMA. The fair value of the warrant asset (and related discount) at the date of issuance was determined using
the Black-Scholes option pricing model. The Black-Scholes model uses a combination of
observable inputs (Level 2) and unobservable inputs (Level 3) in calculating fair value.
The assumptions used to measure the fair value of the warrants
as of original issuance date and as of December 31, 2018 were as follows:
|
|
Issuance
Date
|
|
|
December 31,
2018
|
|
Risk-Free Interest Rate
|
|
|
2.47
|
%
|
|
|
2.41
|
%
|
Expected Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected Volatility
|
|
|
91.95
|
%
|
|
|
91.95
|
%
|
Term
|
|
|
5 years
|
|
|
|
5 years
|
|
Fair Market Value of Common Stock
|
|
$
|
0.3275
|
|
|
$
|
0.16
|
|
The balances and levels of the assets measured at fair value
on a recurring basis at December 31, 2018 are presented in the following table:
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
prices
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
(level 1)
|
|
|
(level 2)
|
|
|
(level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes receivable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
837,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
67,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
904,317
|
|
In relation
to the acquisition, the Company no
longer held these investments at June 30, 2019, thus there is no impact to the Condensed Consolidated Statement of
Operations for the three months ended June 30, 2019 and as a result the three month results are not included in
the table below.
A summary of the changes
in the Company’s convertible notes receivable at fair value using significant unobservable inputs (Level 3) as of and for the
six months ended June 30, 2019 is as follows:
|
|
2019
|
|
Convertible notes receivable, December 31, 2018
|
|
$
|
837,317
|
|
Notes issued (face value $215,000), at fair value
|
|
|
196,000
|
|
Increase in fair value
|
|
|
531,405
|
|
Conversion of notes into common stock
|
|
|
(1,564,722
|
)
|
Investment in notes receivable, June 30,
2019
|
|
$
|
-
|
|
A summary of the changes
in the Company’s investment in warrants measured at fair value using significant unobservable inputs (Level 3) as of and for
the six months ended June 30, 2019 is as follows:
|
|
2019
|
|
Investment in warrants, December 31, 2018
|
|
$
|
67,00
0
|
|
Warrants issued to the Company
|
|
|
19,000
|
|
Increase in fair value
|
|
|
55,000
|
|
Conversion of warrants into common stock
|
|
|
(141,000
|
)
|
Investment in warrants, June 30, 2019
|
|
$
|
-
|
|
The values of the investment in warrants at issuance and
as of June 30, 2019 were $152,000 and $0, respectively, with a gain from the change in fair value of $55,000 for the
six months ended June 30, 2019 and is component of other income in the accompanying condensed consolidated statement of
operations.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 8. Leases
Operating Leases
Under Topic 842, a contract is a lease, or contains a lease,
if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period
of time in exchange for consideration. To determine whether a contract conveys the right to control the use of an identified asset
for a period of time, an entity shall assess whether, throughout the period of use, the entity has both of the following: (a) the
right to obtain substantially all of the economic benefits from use of the identified asset; and (b) the right to direct the use
of the identified asset.
The
Company leases office facilities under operating leases. Our principle executive office in New York City is under a month to
month arrangement. The Company’s office lease has a remaining lease of less than one year. Leases with a
probable
term
of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a
straight-line basis over the lease term. As a practical expedient, the Company elected, for all office and facility leases,
not to separate nonlease components (e.g., common-area maintenance costs) from lease components (e.g., fixed payments
including rent) and instead to account for each separate lease component and its associated non-lease components as a single
lease component. The Company uses its incremental borrowing rate for purposes of discounting lease payments.
Lease expense for the quarters
ended June 30, 2019 and 2018 was approximately $11,000 and $26,000, respectively.
Lease expense for the six months ended June 30, 2019
and 2018 was approximately $16,000 and $31,000, respectively.
On
January 1, 2019, the Company adopted Topic 842 using the modified retrospective approach. The Company recorded operating
lease assets (right-of-use assets) of approximately $53,000 and operating lease liabilities of approximately $53,000. There
was no impact to the accumulated deficit upon adoption of Topic 842.
We have
operating leases for corporate, business and technician offices. Leases with a probable term of 12 months or less, including
month-to-month agreements, are not recorded on the consolidated balance sheet, unless the arrangement includes an option to purchase
the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases). Our
leases have remaining lease terms of one to 15 months, none of which include options to extend the leases without a new arrangement.
As
of June 30, 2019, assets recorded under operating leases were approximately $32,000, which is included as a component of
prepaid expenses and other assets. Operating lease right of use assets and lease liabilities are recognized at the lease
commencement date based on the present value of lease payments over the lease term. The discount rate used to determine the
commencement date present value of lease payment is our incremental borrowing rate, which is the rate incurred to borrow on a
collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain
adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives
received.
The following table presents supplemental
consolidated balance sheet information related to our operating leases:
|
|
As of
June 30, 2019
|
|
Right-of-use Assets
|
|
$
|
32,000
|
|
Short-term operating lease liabilities
|
|
$
|
32,000
|
|
For the three and six months ended
June 30, 2019, the components of lease expense were as follows:
|
|
Three Months Ended
June 30, 2019
|
|
|
Six Months
Ended
June 30, 2019
|
|
Operating lease cost
|
|
$
|
5,000
|
|
|
$
|
11,000
|
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
5,000
|
|
|
$
|
11,000
|
|
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Other information related to leases was
as follows:
|
|
Three Months Ended
June 30, 2019
|
|
Supplemental Cash Flows Information
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of
operating lease liabilities:
|
|
|
|
|
Operating cash
flows for operating leases
|
|
$
|
11,250
|
|
|
|
|
|
|
Weighted Average Remaining Lease term (months) – operating leases
|
|
|
9
|
|
|
|
|
|
|
Weighted Average Discount Rate – operating leases
|
|
|
10
|
%
|
The maturity analysis of the Company’s annual
undiscounted cash flows of operating lease liabilities as of June 30, 2019 are as follows:
|
|
Operating
Lease
|
|
Year Ending December 31, :
|
|
|
|
2019 (excluding the quarters ended June 30, 2019)
|
|
$
|
22,500
|
|
2020
|
|
|
11,250
|
|
Total minimum lease payments
|
|
|
33,750
|
|
Lease amount representing interest
|
|
|
(1,400
|
)
|
Total lease liabilities
|
|
$
|
32,350
|
|
There were no commitments for non-cancelable
operating leases as of December 31, 2018 or June 30, 2019.
As of June 30, 2019, we
have no additional operating
leases, than that noted above, and no financing leases.
Note 9. Commitments and Contingencies
Legal Proceedings
In the normal course of business or otherwise, we may become involved
in legal proceedings. We will accrue a liability for such matters when it is probable that a liability has been incurred and the
amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range
is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the
range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside
legal fees and other directly related costs expected to be incurred.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On March 29, 2019, Network 1 Financial Securities Inc. (“Network
One”) served a complaint against Alliance. Network One alleges that Alliance breached its obligation under its
agreements with Alliance to indemnify Network One for certain costs that Network One incurred in connection with the defense
and settlement of the class action litigation previously instituted against Alliance and Network One. This class action litigation
has since been resolved, as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2019, filed with the U.S. Securities and Exchange Commission on April 1, 2019. Network One has demanded approximately $135,000
in payment of alleged damages. The Company does not believe that it owes the amount demanded and intends to vigorously defend
against these claims.
On December 19, 2018, the Company’s former CEO, Robert
L. Mazzeo, who resigned on May 25, 2018, served a complaint against Alliance in the United States District Court for the Southern
District of NY. Mr. Mazzeo alleges that he (i) was fraudulently induced to become the CEO of the Company and (ii) entered into
an employment contract with the Company and that the Company breached such contract. Mr. Mazzeo seeks damages in excess of $500,000.
The Company believes that the lawsuit is frivolous and violative of Rule 11 of the Federal Rules of Civil Procedure. The Company
filed an answer to the complaint on February 5, 2019, and in addition to mounting a vigorous defense, filed counter claims against
Mr. Mazzeo alleging breach of fiduciary duty. The Company does not believe that it owes the amount demanded and intends to vigorously
defend against these claims.
In August 2018, SCWorx settled a dispute with a former employee
for $260,000, of which approximately $132,000 was paid in 2018 and the balance of $128,000 was accrued at December 31, 2018. The
remaining balance was paid in January 2019. The employee had sued the Company in Massachusetts Superior Court for compensation
under an employment agreement.
Disputed Contract Claim
As part of Alliance’s public offering of shares of its
common stock and warrants in January 2018, Alliance issued warrants with a provision requiring Alliance to pay the warrant holder
the Black-Scholes value of the warrant upon a fundamental transaction as defined in the SPA. On August 20, 2018, Alliance entered
into a Stock Exchange Agreement with SCWorx which upon the closing in February 2019, qualified as a fundamental transaction. The
holders of the warrants had thirty days to notify SCWorx of the exercise of their rights under this provision, and two holders
did so in the allotted time. The Company negotiated settlements with the warrant holders aggregating approximately $175,000 in
fair value. During the second quarter 2019, the Company issued 19,801 shares of common stock and approximately $55,000 in cash
in full settlement of the claims.
Preferred Stock Penalty
On December 18, 2018, Alliance closed the placement of the first
round of Series A Convertible Preferred securities purchase agreements pursuant to which such Series A Convertible Preferred Stock
was issued. The terms of the convertible preferred stock agreements required SCWorx to register the underlying common shares under
a Form S-1 within a prescribed period or pay the holders a penalty. The Company did not file a registration statement on
Form S-1 within the required timeframe and has accrued the total penalty of approximately $205,000 as of June 30, 2019. The
Company is negotiating with certain holders of the Series A Convertible Preferred Stock to accept Series A Convertible Preferred
Stock instead of cash as settlement of the penalty.
Consultant Termination
On June 28, 2019, the Company terminated a consulting arrangement
with a contractor providing investor relation services. The Company and contractor have been in discussions regarding the settlement
of contract terms and services provided through June 28, 2019. The Company has accrued $195,000 as the best estimate of the cost
to settle any potential dispute regarding the contract terms.
Note 10. Stockholders’ Equity
The December 31, 2018 common share and additional paid-in
capital amounts have been restated to reflect the share exchange in connection with the Alliance acquisition of SCW FL Corp. and
subsequent one-for-nineteen reverse stock split.
Transfer of Common Shares to Consultants
On or about February 1, 2019, the Company’s founder and
CEO as well as the President, transferred an aggregate of approximately 1,379,000 and 144,000 common shares, respectively to certain
consultants of the Company, of which approximately 983,000 and 144,000 common shares were sold to consultants in exchange
for promissory notes. The Company accounted for these share transfers as stock-based compensation expense based upon the
Black-Scholes model as if these were stock option grants made by the Company. The Company used the following inputs in the
Black-Scholes option pricing model, expected life of 5 years, risk-free interest rate of 2.51%, volatility 92% and dividend yield
of 0%. As a result, the Company recognized approximately $3.6 million of stock-based compensation expense during the first
quarter of 2019 related to these share transfers. Additionally, approximately 396,000 shares of common stock were transferred
by the founder and CEO to contractors for no consideration. The Company accounted for these share transfers as stock-based
compensation based upon the underlying common share price of $0.23 as of the date of transfer. The Company recognized $1.7
million of stock-based compensation expense related to these transfers during the first quarter 2019.
Stock Incentive Plan
In connection with Alliance’s acquisition of SCW FL Corp.,
the Company adopted Alliance’s Second Amended and Restated 2016 Equity Incentive Plan (“2016 Plan”). The 2016
Plan allows the Company to grant shares of the Company’s common stock to the Company’s directors, officers, employees
and consultants. On January 30, 2019, the Alliance shareholders approved the amendment of the 2016 Plan to increase the number
of shares of common stock available for issuance thereunder to 3,000,000 shares of common stock, on a post-split basis.
On February 13, 2019,
the Board of Directors of the Company granted an aggregate of 425,000 restricted stock units (“RSUs”) under the 2016
Plan, of which an aggregate of 325,000 were granted to management and vest quarterly over the next three years, and of which 100,000
were issued to a consultant and vest quarterly over one year. U
pon the effectiveness under the Securities Act of a registration
statement on Form S-8 with respect to the shares covered by the 2016 Plan, t
hese RSUs
vest
in twelve equal quarterly installments, commencing on the grant date of February 13, 2019 and had a grant date fair value of $2.7
million.
The Company also granted an additional 525,000 RSUs which are subject to performance
vesting, of which an aggregate of 225,000 were issued to our management and of which 300,000 were issued to a consultant.
Additionally,
the board of directors awarded stock options under the 2016 Plan to each of the four independent board members to acquire an aggregate
of 53,572 shares of the Company’s common stock and to an employee to acquire 25,000 shares. The stock options have a term
of five years, an exercise price of $6.49 per share, vest quarterly over four quarters beginning on the grant date of February
13, 2019 and had a grant date fair value of $431,000. The Company determined the fair value of the stock options using the Black-Scholes
model with the following inputs, expected life 10 years, risk-free interest rate 0.25%, dividend yield 0%, expected volatility
90%.
On June 28, 2019, the Company terminated the aforementioned
consultant and reversed the stock-based compensation expense recognized during the first quarter 2019 totaling $162,250 as the
consultant had not vested in any of the restricted stock units.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The number of shares of the Company’s common stock that
are issuable pursuant to warrant and stock option grants with time-based vesting as of June 30, 2019 and for the six months ended
are:
Reflective of one-for-nineteen reverse
stock split
|
|
Warrant Grants
|
|
|
Stock Option Grants
|
|
|
|
Number of
Shares
Subject to
Warrants
|
|
|
Weighted-Average
Exercise Price Per
Share
|
|
|
Number of
Shares
Subject
to Options
|
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Balance at December 31, 2018
|
|
|
236,825
|
|
|
$
|
27.84
|
|
|
|
135,023
|
|
|
$
|
7.70
|
|
Granted
|
|
|
1,112,220
|
|
|
$
|
5.67
|
|
|
|
53,572
|
|
|
|
6.49
|
|
Exercised
|
|
|
(11,075
|
)
|
|
|
5.51
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
(26,054
|
)
|
|
|
5.51
|
|
|
|
-
|
|
|
|
-
|
|
Balance at June 30, 2019
|
|
|
1,311,916
|
|
|
$
|
9.88
|
|
|
|
188,595
|
|
|
$
|
7.35
|
|
Exercisable at June 30, 2019
|
|
|
1,311,916
|
|
|
$
|
9.88
|
|
|
|
188,595
|
|
|
$
|
7.35
|
|
As of June 30, 2019 and December 31, 2018, the
total unrecognized expense for unvested stock options and restricted stock awards, net of actual forfeitures, was
approximately $4.1 million and $0, respectively, to be recognized over a three-year period for restricted stock awards and one
year for option grants from the date of grant.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Stock-based compensation expense is as follows:
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock-based compensation expense
|
|
$
|
220,540
|
|
|
$
|
-
|
|
|
$
|
5,850,373
|
|
|
$
|
-
|
|
Stock-based compensation expense categorized by the equity components
is as follows:
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock option awards
|
|
$
|
73,528
|
|
|
$
|
-
|
|
|
$
|
122,547
|
|
|
$
|
-
|
|
Common stock
|
|
|
147,012
|
|
|
|
-
|
|
|
|
404,896
|
|
|
|
-
|
|
Transfer of common stock by founders to contractors
|
|
|
-
|
|
|
|
-
|
|
|
|
5,322,930
|
|
|
|
-
|
|
|
|
$
|
220,540
|
|
|
$
|
-
|
|
|
$
|
5,850,373
|
|
|
$
|
-
|
|
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 11. Net Loss per Share
Basic net loss per share is computed by dividing net loss for the
period by the weighted average shares of common stock outstanding during each period. Diluted net loss per share is computed by
dividing net loss for the period by the weighted average shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period. The Company uses the treasury stock method to determine whether there is a dilutive
effect of outstanding option grants.
SCWorx Corp.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The following securities were excluded from the computation of diluted
net loss per share for the periods presented because including them would have been anti-dilutive:
|
|
Three
Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
188,595
|
|
|
|
—
|
|
Warrants
|
|
|
1,261,968
|
|
|
|
—
|
|
Total common stock equivalents
|
|
|
1,450,563
|
|
|
|
—
|
|
|
|
Six
Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
188,595
|
|
|
|
—
|
|
Warrants
|
|
|
1,261,968
|
|
|
|
—
|
|
Total common stock equivalents
|
|
|
1,450,563
|
|
|
|
—
|
|