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 interest holders of Primrose were interest
holders of SCW LLC and based upon Staff Accounting Bulletin 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 of its stockholders agreed to cancel 6,510 shares of common stock. In June
2018, the Company began to collect subscriptions for common stock. From June to November 2018, the Company collected $1,250,000
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. On
March 16, 2020, in response to the COVID-19 pandemic, SCWorx established a wholly-owned subsidiary, Direct-Worx, LLC.
Business
Combination and Related Transactions
On
February 1, 2019, Alliance MMA completed the acquisition of SCWorx, 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 [bracketed amounts represent post-split
adjusted shares or per share amounts], 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 MMA acquired SCWorx 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 MMA was acquired by SCWorx FL Corp in a reverse merger and as a result, the Company has completed
preliminary purchase accounting for the transaction.
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 improve
the flow of information quickly and accurately 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 modeling; and
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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.
The Company currently
hosts its solutions, serves its customers, and supports its operations in the United States through an agreement with a third party
hosting and infrastructure provider, RackSpace. The Company incorporates standard IT security measures, including but not limited
to; firewalls, disaster recovery, backup, etc. The Company’s operations are dependent upon the integrity, security and consistent
operation of various information technology systems and data centers that process transactions, communication systems and various
other software applications used throughout its operations. Disruptions in these systems could have an adverse impact on the Company’s
operations. The Company could encounter difficulties in developing new systems or maintaining and upgrading existing systems. Such
difficulties could lead to significant expenses or to losses due to disruption in the Company’s business operations.
In
addition, the Company’s information technology systems are subject to the risk of infiltration or data theft. The techniques
used to obtain unauthorized access, disable or degrade service, or sabotage information technology systems change frequently and
may be difficult to detect or prevent over long periods of time. Moreover, the hardware, software or applications the Company
develops or procures from third parties may contain defects in design or manufacture or other problems that could unexpectedly
compromise the security of the Company’s information systems. Unauthorized parties may also attempt to gain access to the
Company’s systems or facilities through fraud or deception aimed at its employees, contractors or temporary staff. In the
event that the security of the Company’s information systems is compromised, confidential information could be misappropriated,
and system disruptions could occur. Any such misappropriation or disruption could cause significant harm to the Company’s
reputation, lead to a loss of sales or profits or cause the Company to incur significant costs to reimburse third parties for
damages.
On
March 16, 2020, in response to the COVID-19 pandemic, SCWorx established a wholly-owned subsidiary, Direct-Worx, LLC to endeavor
to source and provide critical, difficult-to-find items for the healthcare industry. Items have become difficult to source due
to unexpected disruptions within the supply chain, such as the COVID-19 pandemic. These products the Company has sought to source
include:
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Test Kits — the Company has identified potential sources for Rapid Test Kits for COVID-19, but currently has no contracted supply of Rapid Test Kits.
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PPE — Personal Protective Equipment (PPE) includes items such as masks, gloves, gowns, shields, etc.
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The sale of PPE and rapid
test kits for COVID-19 represents a new business for the Company and is subject to the myriad risks associated with any new venture.
The Company has for example encountered great difficulty in attempting to secure reliable sources of supply for both COVID-19 Rapid
Test Kits and PPE including, 3M N95 masks, which are the preferred medical grade mask of US healthcare companies. Further, the
Company has encountered shipping delays with regard to masks and other PPE, and significant quality related issues regarding N95
masks. In addition, regarding the Company’s sourcing of COVID-19 Rapid Test Kits, the Company has encountered significant
shipping delays, as well as reduced quantities. In addition, the Company currently has no contracted supply of Rapid Test Kits.
Consequently, there is no assurance as to whether the Company will be able to source a reliable supply of COVID-19 test kits. For
the three and six months ended June 30, 2020, the Company did not complete the sale of any COVID-19 rapid test kits, and completed
minimal sales of PPE. As of June 30, 2020, the Company had approximately 47,000 test kits and approximately 40,000 sampling kits
in inventory. In addition, changes in FDA processes governing the sale of COVID-19 serology tests could have the effect of rendering
the COVID-19 serology tests to be sold by the Company not saleable in the United States, which could have a material adverse effect
on the Company. There can be no assurance that the Company will be able to generate any significant revenue from the sale of PPE
products or rapid test kits. As of the date of this report, the Company has not generated any material revenue from the sale of
PPE or rapid test kits.
Impact
of the COVID-19 Pandemic
The
Company’s operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19
pandemic spreading throughout the United States and the world. The New York and New Jersey area, where the Company is headquartered,
was at one of the early epicenters of the coronavirus outbreak in the United States. The outbreak has since spread to the rest
of the country and is impacting new customer acquisition. The Company has been following the recommendations of local health authorities
to minimize exposure risk for its team members since the outbreak.
In
addition, the Company’s customers (hospitals) have also experienced extraordinary disruptions to their businesses and supply
chains, while experiencing unprecedented demand for health care services related to COVID-19. As a result of these extraordinary
disruptions to the Company’s customers’ business, the Company’s customers are currently focused on meeting the
nation’s health care needs in response to the COVID-19 pandemic. As a result, there is a significant risk that the Company’s
customers will not be able to focus any resources on expanding the utilization of the Company’s services, which could adversely
impact its future growth prospects, at least until the adverse effects of the pandemic subside. In addition, the financial impact
of COVID-19 on the Company’s hospital customers could cause the hospitals to delay payments due to the Company for services,
which could negatively impact the Company’s cash flows.
The Company is endeavoring
to mitigate these risks to revenue through the sale of personal protective equipment (“PPE”) and COVID-19 rapid test
kits to the health care industry, including many of the Company’s hospital customers. The Company’s Chief Executive
Officer and employees have experience in the healthcare industry and industry contacts, and a database of items designed to assist
the healthcare industry in fulfilling its inventory demands.
On
March 16, 2020, in response to the COVID-19 pandemic, SCWorx established a wholly-owned subsidiary, Direct-Worx, LLC to endeavor
to source and provide critical, difficult-to-find items for the healthcare industry. Items have become difficult to source due
to unexpected disruptions within the supply chain, such as the COVID-19 pandemic.
Note
2. Liquidity and Going Concern
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(“U.S. GAAP”), which contemplates continuation of the Company as a going concern and the realization of assets and
satisfaction of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not
include any adjustments that might become necessary should the Company be unable to continue as a going concern.
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 and equity capital to fund the operations and growth of the business.
The Company has suffered recurring losses from operations and incurred a net loss of $4,899,453 for the six months ended June 30,
2020. As of June 30, 2020, the Company had cash of $334,500, a working capital deficit of $2,164,960, and an accumulated deficit
of $17,693,926. The Company has not yet achieved profitability and expects to continue to incur cash outflows from operations.
It is expected that its operating expenses will continue to increase and, as a result, the Company will eventually need to generate
significant increases in product revenues to achieve profitability. These conditions indicate that there is substantial doubt about
the Company’s ability to continue as a going concern within one year after the condensed consolidated financial statements
issuance date.
On May 5, 2020, the
Nasdaq Stock Market informed the Company that it had initiated a “T12 trading halt,” which means the halt will remain
in place until the Company has fully satisfied Nasdaq’s request for additional information. This trading halt was lifted
on August 10, 2020.
The
Company is evaluating various alternatives, including reducing operating expenses, securing additional financing through debt
or equity securities to fund future business activities and other strategic alternatives. There can be no assurance that the Company
will be able to generate the level of operating revenues in its business plan, or if additional sources of financing will be available
on acceptable terms, if at all. If no additional sources of financing are available, the Company’s future operating prospects
may be adversely affected. The condensed consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Note
3. Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and the rules and regulations of the
U.S. Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated financial statements
include the accounts of SCWorx and its wholly-owned subsidiaries. All material intercompany balances and transactions have been
eliminated in consolidation.
These interim unaudited
condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information.
They do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements.
Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited
financial statements and notes thereto contained in its report on Form 10-K for the year ended December 31, 2019 filed with the
SEC on June 12, 2020.
The unaudited condensed
consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments
that, in the opinion of management, are necessary to present fairly the Company’s financial position at June 30, 2020, and
the results of its operations and cash flows for the three and six months ended June 30, 2020. The results of operations for the
three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for future quarters or the
full year.
Reclassifications
Certain balances in
previously issued consolidated financial statements have been reclassified to be consistent with the current period presentation.
The reclassification had no impact on total financial position, net income, or stockholders’ equity.
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 (“FDIC”) up to $250,000. There were no amounts in excess of the FDIC insured limit as of June 30, 2020
and December 31, 2019.
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 the Company 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 cash, accounts
receivable and warrants. 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.
For
the quarter ended June 30, 2020, the Company had one customer representing 26% of aggregate revenues. For the quarter ended
June 30, 2019, the Company had three customers representing 23%, 19% and 11% of aggregate revenues. At June 30, 2020, the
Company had four customers representing 15%, 13%, 13% and 11% of aggregate accounts receivable. At June 30, 2019, the Company
had four customers representing 18%, 16%, 13%, and 12% of aggregate accounts receivable.
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’s allowance for doubtful
accounts as of June 30, 2020 and December 31, 2019 was $311,266 and $344,412, respectively.
Inventory
The inventory balance at
June 30, 2020 is related to the Company’s Direct-Worx, LLC subsidiary and consisted of approximately 47,000 testing kits
and approximately 40,000 sampling kits. These items are carried on the unaudited condensed consolidated balance sheet at cost.
A company affiliated with a shareholder advanced the cash to the supplier of the test kits and the amount due is recorded in accounts
payable.
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.
Goodwill
and Purchased 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 identified intangible assets, refer to Note 4, Intangible
Assets.
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.
Depreciation
expense for the three months ended June 30, 2020 and 2019 was $17,257 and $1,353, respectively. Depreciation expense for the six
months ended June 30, 2020 and 2019 was $19,516 and $1,804, respectively.
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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3)
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Maintenance:
which includes ongoing data cleansing and normalization, content enrichment, and optimization,
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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,
and
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5)
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PPE:
which includes items such as masks, gloves, gowns, shields, etc.
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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.
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.
SaaS
and Maintenance
SaaS
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 includes 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.
The Company has one
principal revenue stream, from the SaaS business, and believes it has presented all varying factors that affect the nature, timing
and uncertainty of revenues and cash flows.
PPE
sales
PPE
revenues are recognized once the customer obtains physical possession of the product(s). Because the Company acts as an agent
in arranging the relationship between the customer and the supplier, PPE revenues are presented net of related costs, including
product procurement, warehouse and shipping fees, etc.
Remaining
Performance Obligations
As
of June 30, 2020 and December 31, 2019, the Company had $1,827,262 and $1,056,637, respectively, of remaining performance obligations
recorded as contract liabilities. The Company expects to recognize a majority of sales relating to these existing performance
obligations of $1,827,262 during the remainder of 2020.
Costs
to Obtain and 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.
Cost
of Revenues
Cost
of revenues primarily represent 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 associated revenue was earned prior to the Company’s unconditional right to receive a payment under
a contract with a customer (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, 2020 and December 31, 2019.
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 $1,827,262 and $1,056,637 as of June 30, 2020 and December 31, 2019, respectively.
Income
Taxes
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, 2020 and December 31, 2019, the Company has evaluated available evidence and concluded
that the Company may not realize all the benefits 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 March 27, 2020,
the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act, among
other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments,
net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations
and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine the
impact that the tax changes in the CARES Act may have on its business but does not expect the impact to be material.
The
income tax expense for the three months ended June 30, 2020 and 2019 was $0 and $195,000, respectively. The income tax expense
for the six months ended June 30, 2020 and 2019 was $0.
Stock-Based
Compensation
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 or warrant 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
authoritative guidance also requires that the Company measures and recognizes 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’s 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. Refer to Note 8, Stockholders’ Equity, for additional
detail.
Loss
Per Share
The
Company computes earnings (loss) per share in accordance with ASC 260, “Earnings per Share” which requires presentation
of both basic and diluted earnings (loss) per share (“EPS”) on the face of the income statement. Basic EPS is computed
by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator)
during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury
stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price
for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants.
Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of June 30, 2020 and 2019, the Company
had 1,060,576 and 1,450,563, respectively, of common stock equivalents outstanding.
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 its condensed consolidated 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. In
addition, the Company has directors’ and officers’ liability insurance coverage that is intended to reduce its financial
exposure and may enable it to recover any payments above the applicable policy retention, should they occur.
In connection with
the Class Action and derivative claims and investigations described in Note 7, Commitments and Contingencies, the Company obligated
to indemnify its officers and directors for costs incurred in defending against these claims and investigations. Because the Company
currently does not have the resources to pay for these costs, its directors and officers liability insurance carrier has agreed
to indemnify these persons even though the $750,000 retention under such policy has not yet been met. Ultimately, the Company will
be obligated to pay the amount of the retention to the extent of actual settlement and defense costs, which payments could have
a material adverse effect on the Company.
Contingencies
The
Company records a liability when the Company believes that it is both probable that a loss has been incurred and the amount can
be reasonably estimated. If the Company determines that a loss is reasonably possible, and the loss or range of loss can be estimated,
the Company discloses the possible loss in the notes to the consolidated financial statements. The Company reviews the developments
in its contingencies that could affect the amount of the provisions that has been previously recorded, and the matters and related
possible losses disclosed. The Company adjusts provisions and changes to its disclosures accordingly to reflect the impact of
negotiations, settlements, rulings, advice of legal counsel, and updated information. Significant judgment is required to determine
both the probability and the estimated amount.
Legal
costs associated with loss contingencies are accrued based upon legal expenses incurred by the end of the reporting period.
Use
of Estimates
The preparation of
consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported and disclosed in the consolidated financial statements and accompanying notes. The Company regularly evaluates
estimates and assumptions related to the allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived
assets, stock-based compensation, goodwill, and deferred income tax asset valuation allowances. The Company bases its estimates
and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of
costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially
and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual
results, future results of operations will be affected. Actual results could differ materially from those estimates.
Recently
Issued Accounting Pronouncements
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 adopted this new standard on January 1, 2020, and the adoption of the standard did
not have a material impact on our 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 adopted this
new standard on January 1, 2020, and the adoption of the standard did not have a material impact on our consolidated financial
statements.
In
January 2017, the FASB issued ASU 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. We adopted this new standard on January 1, 2020, and the adoption
of the standard did not have a material impact on our consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which was subsequently
amended in February 2020 by ASU 2020-02 “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842).”
Topic 326 introduces an impairment model that is based on expected credit losses, rather than incurred losses, to estimate credit
losses on certain types of financial instruments (e.g. accounts receivable, loans and held-to-maturity securities), including
certain off-balance sheet financial instruments (e.g., loan commitments). The expected credit losses should consider historical
information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual
term. Financial instruments with similar risk characteristics may be grouped together when estimating expected credit losses.
Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
The Company is currently evaluating the impact the new guidance will have on its consolidated financial statements.
Note
4. Intangible Assets
Intangible
assets as of June 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Intangible assets
|
|
Useful life
|
|
Gross
assets
|
|
|
Accumulated amortization
|
|
|
Net
|
|
|
Gross
assets
|
|
|
Accumulated amortization
|
|
|
Net
|
|
Ticketing software
|
|
5 years
|
|
$
|
64,000
|
|
|
$
|
(18,133
|
)
|
|
$
|
45,867
|
|
|
$
|
64,000
|
|
|
$
|
(11,733
|
)
|
|
$
|
52,267
|
|
Promoter relationships
|
|
7 years
|
|
|
176,000
|
|
|
|
(35,619
|
)
|
|
|
140,381
|
|
|
|
176,000
|
|
|
|
(23,048
|
)
|
|
|
152,952
|
|
Total intangible assets
|
|
|
|
$
|
240,000
|
|
|
$
|
(53,752
|
)
|
|
$
|
186,248
|
|
|
$
|
240,000
|
|
|
$
|
(34,781
|
)
|
|
$
|
205,219
|
|
Amortization
expense for the three months ended June 30, 2020 and 2019, was $9,485 and $9,486, respectively. Amortization expense for the six
months ended June 30, 2020 and 2019, was $18,971 and $15,810, respectively.
As
of June 30, 2020, the estimated future amortization expense of amortizable intangible assets is as follows:
Year ending December 31,
|
|
|
|
2020 (remaining 6 months of 2020)
|
|
$
|
18,972
|
|
2021
|
|
|
37,943
|
|
2022
|
|
|
37,943
|
|
2023
|
|
|
37,943
|
|
2024
|
|
|
26,209
|
|
Thereafter
|
|
|
27,238
|
|
Total
|
|
$
|
186,248
|
|
Note 5. Loan Payable
Receipt of CARES funding
On May 5, 2020, the
Company obtained a $293,972 unsecured loan payable through the Paycheck Protection Program (“PPP”), which was enacted
as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES ACT”). The funds were received from Bank
of America through a loan agreement pursuant to the CARES Act. The CARES Act was established in order to enable small businesses
to pay employees during the economic slowdown caused by COVID-19 by providing forgivable loans to qualifying businesses for up
to 2.5 times their average monthly payroll costs. The amount borrowed under the CARES Act and used for payroll costs, rent, mortgage
interest, and utility costs during the 24 week period after the date of loan disbursement is eligible to be forgiven provided that
(a) the Company uses the PPP Funds during the eight week period after receipt thereof, and (b) the PPP Funds are only used to cover
payroll costs (including benefits), rent, mortgage interest, and utility costs. While the full loan amount may be forgiven, the
amount of loan forgiveness will be reduced if, among other reasons, the Company does not maintain staffing or payroll levels or
less than 60% of the loan proceeds are used for payroll costs. Principal and interest payments on any unforgiven portion of the
PPP Funds (the “PPP Loan”) will be deferred to the date the SBA remits the borrower’s loan forgiveness amount
to the lender or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness
period for six months and will accrue interest at a fixed annual rate of 1.0% and carry a two year maturity date. There is no prepayment
penalty on the CARES Act Loan. The Company expects the loan to be fully forgiven.
Note
6. Leases
Operating
Leases
The
Company’s principal executive office in New York City is under a month to month arrangement. The Company also had a lease
in Greenwich, CT which was set to expire in March 2020 and is now month-to-month.
The Company has 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 condensed consolidated balance sheet, unless the arrangement includes an option to purchase
the underlying asset, or an option to renew the arrangement, that the Company is reasonably certain to exercise (short-term leases).
The Company recognizes lease expense for these leases on a straight-line bases over the lease term. The Company’s only two
remaining leases are month-to-month. As a practical expedient, the Company elected, for all office and facility leases, not to
separate non-lease components (common-area maintenance costs) from lease components (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.
The
Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) electing the practical expedient
that allows the Company not to restate its comparative periods prior to the adoption of the standard on January 1, 2019. As such,
the disclosures required under ASC 842 are not presented for periods before the date of adoption. For the comparative periods
prior to adoption, the Company presented the disclosures which were required under ASC 840. The Company elected the optional transition
method and adopted the new guidance on January 1, 2019 on a modified retrospective basis with no restatement of prior period amounts.
As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original
lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption.
The Company also elected not to separate lease components from non-lease components and to exclude short-term leases from its
condensed consolidated balance sheet. The Company’s adoption of the new standard as of January 1, 2019 resulted in the recognition
of right-of-use assets of approximately $53,000 and liabilities of approximately $53,000. There was no impact to the accumulated
deficit upon adoption of Topic 842.
As
of June 30, 2020, assets recorded under operating leases were $0. 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 the Company’s 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.
For
the three and six months ended June 30, 2020 and 2019, the components of lease expense were as follows:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
14,898
|
|
|
$
|
5,000
|
|
|
$
|
24,323
|
|
|
$
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
14,898
|
|
|
$
|
5,000
|
|
|
$
|
24,323
|
|
|
$
|
11,000
|
|
Other
information related to leases was as follows:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of operating lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
14,898
|
|
|
$
|
11,250
|
|
|
$
|
24,323
|
|
|
$
|
22,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (months) – operating leases
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate– operating leases
|
|
|
N/A
|
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
10
|
%
|
As
of June 30, 2020, the Company has no additional operating leases, other than that noted above, and no financing leases.
Note
7. Commitments and Contingencies
In
conducting its business, the Company may become involved in legal proceedings. The Company 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.
On
April 29, 2020, a securities class action case was filed in the United States District Court for the Southern District of New
York against the Company and its CEO. The action is captioned Daniel Yannes, individually and on behalf of all others similarly
situated, Plaintiff vs. SCWorx Corp. and Marc S. Schessel, Defendants.
On
May 27, 2020, a second securities class was filed in the United States District Court for the Southern District of New York against
the Company and its CEO. The action is captioned Caitlin Leeburn, individually and on behalf of all others similarly situated,
Plaintiff v. SCWorx Corp. and Marc S. Schessel, Defendants.
On
June 23, 2020, a third securities class was filed in the United States District Court for the Southern District of New York against
us and our CEO. The action is captioned Jonathan Charles Leonard, individually and on behalf of all others similarly situated,
Plaintiff v. SCWorx Corp. and Marc S. Schessel, Defendants.
All
three lawsuits allege that our company and our CEO mislead investors in connection with our April 13, 2020 press release with
respect to the sale of COVID-19 rapid test kits. The plaintiffs in these actions are seeking unspecified monetary damages. We
intend to vigorously defend against these proceedings.
On
June 15, 2020, a shareholder derivative claim was filed in the United States District Court for the Southern District of New York
against Marc S. Schessel, Charles K. Miller, Steven Wallitt (all of whom are current directors), and Robert Christie (a former
director) (“Director Defendants”). The action is captioned Javier Lozano, derivatively on behalf of SCWorx Corp.,
Plaintiff, v. Marc S. Schessel, Charles K. Miller, Steven Wallitt, Defendants, and SCWorx Corp., Nominal Defendant. This lawsuit
alleges that the Director Defendants breached their fiduciary duties to us, including by misleading investors in connection with
our April 13, 2020 press release with respect to the sale of COVID-19 rapid test kits, failing to correct false and misleading
statements and failing to implement proper disclosure and internal controls. The Plaintiff, on our behalf, is seeking an award
of monetary damages to us, improvements in our disclosure and internal controls, and legal fees. The Director Defendants intend
to vigorously defend against these proceedings.
In connection with
these actions, the Company may be obligated to indemnify its CEO and its officers or directors who incur any liability or expense
as a result of serving at the Company’s request in such capacity.
In
addition, following the April 13, 2020 press release and related disclosures (related to COVID-19 rapid test kits), the Securities
and Exchange Commission made an inquiry regarding the disclosures the Company made in relation to the transaction involving COVID-19
test kits. On April 22, 2020, the Securities and Exchange Commission ordered that trading in the securities of the Company be
suspended because of “questions and concerns regarding the adequacy and accuracy of publicly available information in the
marketplace” (the “SEC Trading Halt”). The SEC Trading Halt expired May 5, 2020, at 11:59 PM EDT. The Company
is fully cooperating with the SEC’s investigation and is providing documents and other requested information.
In April 2020, the
Company received related inquiries from The Nasdaq Stock Market and the Financial Industry Regulatory Authority (FINRA). The Company
has been fully cooperating with these agencies and providing information and documents, as requested. On May 5, 2020, the Nasdaq
Stock Market informed the Company that it had initiated a “T12 trading halt,” which means the halt will remain in place
until the Company has fully satisfied Nasdaq’s request for additional information. The Company continues to fully cooperate
with Nasdaq and respond to Nasdaq’s information requests as they are issued. The T12 trading halt was lifted on August 10,
2020.
Also
in April 2020, the Company was contacted by the U.S. Attorney’s Office for the District of New Jersey, which is seeking
information and documents from the Company’s officers and directors relating primarily to the April 13, 2020 press release
concerning COVID-19 rapid test kits. The Company is fully cooperating with the U.S. Attorney’s Office in its investigation.
Note
8. Stockholders’ Equity
Common
Stock
Authorized
Shares
The
Company has 45,000,000 common shares authorized with a par value of $0.001 per share.
Issuance
of Shares Pursuant to Conversion of Series A Preferred Stock
During
January 2020, the Company issued 5,264 shares of common stock to a holder of its Series A Convertible Preferred Stock upon the
conversion of 2,000 of such shares of Series A Convertible Preferred Stock.
During
February 2020, the Company issued an aggregate of 172,369 shares of common stock to holders of its Series A Convertible Preferred
Stock upon the conversion of an aggregate of 65,500 of such shares of Series A Convertible Preferred Stock.
During
April 2020, the Company issued an aggregate of 1,043,935 shares of common stock to holders of its Series A Convertible Preferred
Stock upon the conversion of an aggregate of 396,695 of such shares of Series A Convertible Preferred Stock.
During
May 2020, the Company issued an aggregate of 51,316 shares of common stock to holders of its Series A Convertible Preferred Stock
upon the conversion of an aggregate of 19,500 of such shares of Series A Convertible Preferred Stock.
Issuance
of Shares to Current and Former Employees and Directors
On
January 8, 2020, the Company issued 50,000 shares of common stock to a former employee per the terms of a settlement agreement.
On
March 12, 2020, the Company issued 16,667 shares of common stock to an employee pursuant to a vesting schedule.
On
April 15, 2020, the Company issued 3,913 shares of common stock to an employee pursuant to a vesting schedule.
On
April 16, 2020, the Company issued 5,264 shares of common stock to a director pursuant to a vesting schedule.
On
April 21, 2020, the Company issued 30,303 shares of common stock to a former employee pursuant to a vesting schedule.
On
June 24, 2020, the Company issued 25,000 shares of common stock to an employee pursuant to a vesting schedule.
Issuance
of Shares Pursuant to Exercises of Common Stock Warrants
On
April 14, 2020, a holder of common stock warrants exercised 7,000 warrants for a cash payment of $38,570.
Issuance
of Shares Pursuant to Cashless Exercises of Common Stock Warrants
During
April 2020, holders of common stock warrants exercised an aggregate of 520,925 warrants using a cashless exercise into 321,155
shares of common stock.
During
May 2020, holders of common stock warrants exercised an aggregate of 56,982 warrants using a cashless exercise into 26,034 shares
of common stock.
Issuance
of Shares Pursuant to Cashless Exercises of Stock Options
During
April 2020, holders of common stock options exercised an aggregate of 105,028 options using a cashless exercise into 57,534 shares
of common stock.
Issuance
of Shares Pursuant to Settlement of Accounts Payable
On April 16, 2020,
the Company issued 100,000 shares of common stock in full settlement of $640,517 of accounts payable. The shares had a fair value
of $6.95 per shares.
On May 12, 2020, the
Company issued 104,567 shares of common stock in full settlement of $93,150 of accounts payable. The shares had a fair value of
$5.76 per shares.
On June 24, 2020, the Company issued 80,000 shares of common
stock and warrants to purchase 100,000 shares of common stock, of which 50,000 shall be exercisable at $3.80 per share and the
remaining 50,000 shall be exercisable at $5.80 per share, in each case for a term of 5 years, in connection with the termination
of a consulting arrangement and in full settlement of any and all claims again the Company. The Company had previously accrued
$195,000 in connection with this consulting arrangement. The stock had a fair value of $5.76 per share.
Equity Financing
During May 2020, the Company received
$515,000 of a committed $565,000 from the sale of 135,527 shares of common stock (at a price of $3.80 per share) and warrants
to purchase 169,409 shares of common stock, at an exercise price of $4.00 per share. As of June 30, 2020, the full amount has
not been received and the shares have not been issued. The $515,000 received through June 30, 2020 is included in equity financing
within current liabilities on the unaudited condensed consolidated balance sheet.
Stock
Incentive Plan
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 and for the six months ended June 30, 2020 were:
|
|
Warrant Grants
|
|
|
Stock Option Grants
|
|
|
Restricted Stock Units
|
|
|
|
Number of shares subject to warrants
|
|
|
Weighted-
average exercise price per share
|
|
|
Number of shares subject to options
|
|
|
Weighted-
average exercise price per share
|
|
|
Number of shares subject to restricted stock units
|
|
|
Weighted-
average exercise price per share
|
|
Balance at December 31, 2019
|
|
|
1,311,916
|
|
|
$
|
8.80
|
|
|
|
338,595
|
|
|
$
|
3.94
|
|
|
|
630,303
|
|
|
$
|
-
|
|
Granted
|
|
|
100,000
|
|
|
|
4.80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,300,845
|
|
|
|
-
|
|
Exercised
|
|
|
(584,907
|
)
|
|
|
5.70
|
|
|
|
(105,028
|
)
|
|
|
4.28
|
|
|
|
(41,667
|
)
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(475,000
|
)
|
|
|
-
|
|
Balance at June 30, 2020
|
|
|
827,009
|
|
|
$
|
10.51
|
|
|
|
233,567
|
|
|
$
|
7.16
|
|
|
|
2,414,481
|
|
|
$
|
-
|
|
Exercisable at June 30, 2020
|
|
|
827,009
|
|
|
$
|
10.51
|
|
|
|
233,567
|
|
|
$
|
7.16
|
|
|
|
189,500
|
|
|
$
|
-
|
|
As of June 30, 2020
and December 31, 2019, the total unrecognized expense for unvested stock options and restricted stock awards, net of actual forfeitures,
was $3,885,115 and $3,236,292, respectively, to be recognized over a one to three year period for restricted stock awards and one
year for option grants from the date of grant.
Stock-based
compensation expense for the three and six months ended June 30, 2020 and 2019 was as follows:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Stock-based compensation expense
|
|
$
|
1,988,883
|
|
|
$
|
220,540
|
|
|
$
|
2,356,547
|
|
|
$
|
5,850,373
|
|
Stock-based
compensation expense categorized by the equity components for the three and six months ended June 30, 2020 and 2019 was as follows:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Common stock
|
|
$
|
1,988,883
|
|
|
$
|
147,012
|
|
|
$
|
2,356,416
|
|
|
$
|
404,896
|
|
Stock option awards
|
|
|
-
|
|
|
|
73,528
|
|
|
|
-
|
|
|
|
122,547
|
|
Transfer of common stock by founders to contractors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,322,930
|
|
Total
|
|
$
|
1,988,883
|
|
|
$
|
220,540
|
|
|
$
|
2,356,416
|
|
|
$
|
5,850,373
|
|
Note
9. 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.
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:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
233,567
|
|
|
|
188,595
|
|
|
|
233,567
|
|
|
|
188,595
|
|
Warrants
|
|
|
827,009
|
|
|
|
1,261,968
|
|
|
|
827,009
|
|
|
|
1,261,968
|
|
Total common stock equivalents
|
|
|
1,060,576
|
|
|
|
1,450,563
|
|
|
|
1,060,576
|
|
|
|
1,450,563
|
|
Note 10. Related Party Transactions
Included in accounts payable are amounts due
to officers of the Company in the amount of $170,505.
Note
11. Subsequent Events
Complaint Filed Against the Company
On July 9, 2020, James
Schweikert, the former COO of the Company, filed a complaint against the Company alleging breach of his employment agreement with
the Company. Mr. Schweikert is seeking enforcement of the severance provisions of his employment agreement, stock awards and other
unspecified compensatory damages. The Company is currently in discussions to settle this matter.
Issuance of Restricted Stock Units
On August 6, 2020,
the Company issued 140,000 RSUs in satisfaction of approximately $90,000 in accounts payable. If the Company pays all or a portion
of this payable prior to September 5, 2020, a pro rata portion of the RSUs would be returned to the Company.
On August 10, 2020,
Timothy A. Hannibal accepted the appointment of President and COO of the Company. In connection with his appointment, the Company
issued Mr. Hannibal 200,000 RSUs, of which 100,000 vest in ninety days, and the remaining 100,000 vest in six equal quarterly installments,
commencing February 7, 2021 and every 90 days thereafter, until fully vested. 99,226 RSUs were issued to Mr. Hannibal in satisfaction
of $153,800 of indebtedness for services, and are fully vested. 307,581 RSUs were issued to him compensation for services and vest
in three equal semi-annual installments commencing October 7, 2020.