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 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.
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 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. Currently the Company has no contracted supply of PPE.
Regarding PPE and Test Kits, the Company’s
Board of Directors has recently determined to limit the Company’s role to acting as an intermediary between buyers and sellers
with commission based compensation.
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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 nine months ended September 30, 2020, the Company has completed only minimal sales of COVID-19 rapid test kits and
PPE. As of September 30, 2020, the Company had approximately 45,000 testing kits, approximately 40,000 sampling kits, and approximately
87,000 gowns 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 adversely 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, the Company believes that its customers have not been able to focus resources
on expanding the utilization of the Company’s services, which has adversely impacted the Company’s 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 impacts 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. Notwithstanding these efforts, the Company
has to date realized only a de-minimis amount of revenue from the sale of PPE and Test Kits.
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 $8,984,969 for the nine months ended September
30, 2020. As of September 30, 2020, the Company had cash of $189,855, a working capital deficit of $3,416,428, and an accumulated
deficit of $21,779,442. The Company has not yet achieved profitability and expects to continue to incur negative operating cash
flows. The Company expect 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.
The
Company has begun implementing various alternatives, including reducing operating expenses, seeking to secure 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 will 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 September 30, 2020,
and the results of its operations and cash flows for the three and nine months ended September 30, 2020. The results of operations
for the three and nine months ended September 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 September 30, 2020 and amounts in excess of the
FDIC insured limit of $163,846 as of 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
September 30, 2020, the Company had one customer representing 25% of aggregate revenues. For the quarter ended September 30,
2019, the Company had two customers representing 19% and 12% of aggregate revenues. At September 30, 2020, the Company had four
customers representing 28%, 18%, 12% and 12% of aggregate accounts receivable. At September 30, 2019, the Company had four customers
representing 22%, 16%, 15%, and 11% 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 September 30,
2020 and December 31, 2019 was $309,979 and $344,412, respectively.
Inventory
The inventory balance
at September 30, 2020 is related to the Company’s Direct-Worx, LLC subsidiary and consisted of approximately 45,000 testing
kits, approximately 40,000 sampling kits, and approximately 87,000 gowns. 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.
Inventory is valued at
the lower of cost or market value. When market value is determined to be less than cost, the Company records an allowance for obsolescence.
As of September 30, 2020 and December 31, 2019, the Company had allowances for obsolescence of $0.
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 fourth 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 September 30, 2020 and 2019 was $9,758 and $2,390, respectively. Depreciation expense for the nine months
ended September 30, 2020 and 2019 was $29,275 and $4,194, 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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Data Normalization: which includes data preparation, product and vendor mapping, product categorization, data enrichment and other data related services,
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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,
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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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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 September 30, 2020 and December 31, 2019, the Company had $1,641,720 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 $1,429,609 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 September 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 $1,641,720 and $1,056,637 as of September 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 September 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 September 30, 2020 and 2019 was $0 and $747, respectively. The income tax expense for the nine months
ended September 30, 2020 and 2019 was $0 and $747, respectively.
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 September 30, 2020 and 2019, the Company had
888,865 and 1,500,511, 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 is 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. The Company estimates it
is currently obligated to pay approximately $700,000 of the retention, 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 September 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
September 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
|
|
|
$
|
(21,333
|
)
|
|
$
|
42,667
|
|
|
$
|
64,000
|
|
|
$
|
(11,733
|
)
|
|
$
|
52,267
|
|
Promoter relationships
|
|
7 years
|
|
|
176,000
|
|
|
|
(41,905
|
)
|
|
|
134,095
|
|
|
|
176,000
|
|
|
|
(23,048
|
)
|
|
|
152,952
|
|
Total intangible assets
|
|
|
|
$
|
240,000
|
|
|
$
|
(63,238
|
)
|
|
$
|
176,762
|
|
|
$
|
240,000
|
|
|
$
|
(34,781
|
)
|
|
$
|
205,219
|
|
Amortization expense
for the three months ended September 30, 2020 and 2019, was $8,941 and $9,485, respectively. Amortization expense for the nine
months ended September 30, 2020 and 2019, was $28,457 and $25,295, respectively.
As of September 30,
2020, the estimated future amortization expense of amortizable intangible assets is as follows:
The estimated future amortization expense for the next five
years and thereafter is as follows:
Year ending December 31,
|
|
|
|
2020 (remaining 3 months of 2020)
|
|
$
|
9,486
|
|
2021
|
|
|
37,943
|
|
2022
|
|
|
37,943
|
|
2023
|
|
|
37,943
|
|
2024
|
|
|
26,209
|
|
Thereafter
|
|
|
27,238
|
|
Total
|
|
$
|
176,762
|
|
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 expired 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 September 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 nine
months ended September 30, 2020 and 2019, the components of lease expense were as follows:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
17,145
|
|
|
$
|
11,250
|
|
|
$
|
41,467
|
|
|
$
|
31,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
17,145
|
|
|
$
|
11,250
|
|
|
$
|
41,467
|
|
|
$
|
31,250
|
|
Other information related
to leases was as follows:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of operating lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
17,145
|
|
|
$
|
11,250
|
|
|
$
|
41,467
|
|
|
$
|
35,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (months) – operating leases
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate– operating leases
|
|
|
N/A
|
|
|
|
10
|
%
|
|
|
N/A
|
|
|
|
10
|
%
|
As of September 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 our business, 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.
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 us and our 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
us and our 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. These three
class actions were consolidated on September 18, 2020 and Daniel Yannes was designated lead plaintiff. A consolidated Amended
Complaint was filed on October 19, 2020. 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, Steven Wallitt (current directors), and Robert Christie and Charles Miller (former directors) (“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 the Company, 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, improvements in
our disclosure and internal controls, and legal fees. The Director Defendants intend to vigorously defend against these proceedings.
This derivative action is also still pending, and the plaintiff in such action has agreed to voluntarily stay the case until a
ruling on a motion to dismiss, which we intend to file in the securities class action case.
On
August 21, 2020, a shareholder derivative claim was filed in the United States District Court for the Southern District of New
York against Marc S. Schessel, Steven Wallitt (current directors), and Robert Christie and Charles Miller (former directors) (“Director
Defendants”). The action is captioned Josstyn Richter, 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 the Company, 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, improvements in
our disclosure and internal controls, and legal fees. The Director Defendants intend to vigorously defend against these proceedings.
On
August 27, 2020, the Lozano and Richter derivative actions were consolidated and jointly stayed until a ruling on a motion to dismiss
which we intend to file in the securities class action case.
On
September 30, 2020, a shareholder derivative action was filed in the Supreme Court State of New York, New York County
against Marc S. Schessel and Steven Wallitt (current directors) and Charles Miller (a former director). The action is
captioned Hemrita Zarins, derivatively on behalf of SCWorx Corp. v. Marc S. Schessel, Charles Miller, Steven Wallitt and
SCWorx, Nominal Defendant. This lawsuit alleges that the Director Defendants breached their fiduciary duties to the
Company, including by misleading investors in connection with the Company’s 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, improvements in our
disclosure and internal controls, and legal fees. On October 28, 2020, Zarins withdrew this action and refiled an
action in the Chancery Court in the State of Delaware on October 29, 2020. Zarins named as Defendants Marc S.
Schessel, Robert Christie (a former director), Steven Wallitt and SCWorx, Nominal Defendant. The allegations, as well
as the relief sought, in the Delaware Chancery Court proceeding are substantially the same as that filed in the New York
State Action. The Director Defendants intend to vigorously defend against these proceedings.
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 we 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 our 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. We are fully cooperating
with the SEC’s investigation and are providing documents and other requested information.
In
April 2020, we received related inquiries from The Nasdaq Stock Market and the Financial Industry Regulatory Authority (FINRA).
We have been fully cooperating with these agencies and providing information and documents, as requested. On May 5, 2020, the Nasdaq
Stock Market informed us that it had initiated a “T12 trading halt,” which means the halt will remain in place until
we have fully satisfied Nasdaq’s request for additional information. We fully cooperated with Nasdaq and responded to all
of Nasdaq’s information requests as they were issued. The T12 trading halt was lifted on August 10, 2020.
Also
in April 2020, we were contacted by the U.S. Attorney’s Office for the District of New Jersey, which is seeking information
and documents from our officers and directors relating primarily to the April 13, 2020 press release concerning COVID-19 rapid
test kits. We are fully cooperating with the U.S. Attorney’s Office in its investigation.
In connection
with these actions and investigations, the Company is 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. The Company estimates it is currently obligated to pay approximately
$700,000 of the retention, which payments could have a material adverse effect on the Company. The $700,000 have been accrued
in accounts payable and accrued liabilities in theses financial statements.
David
Klarman v. SCWorx Corp. f/k/a Alliance MMA, Inc.,
Index
No. 619536/2019 (N.Y. State Sup. Ct., Suffolk County)
On
October 3, 2019, David Klarman, a former employee of Alliance, served a complaint against SCWorx seeking $400,000.00
for a breach of his employment agreement with Alliance. Klarman claims that Alliance ceased paying him his salary
in March 2018 as well as other alleged contractual benefits. SCWorx does not believe that it owes the amount
demanded and intends to vigorously defend against these claims. On March 6, 2020, SCWorx filed an answer and counterclaims
against Mr. Klarman. On September 18, 2020, the Court granted Klarman’s counsel’s motion to withdraw as counsel due to irreconcilable differences.”
The Court stayed the case for 45 days after service of the Court’s order. Mr. Klarman’s wife, Marie Klarman, Esq.,
filed a Notice of Appearance on November 6, 2020 and filed a motion on November 9, 2020 seeking various forms of relief -- in violation
of the Court’s Individual Rules and the Commercial Division Rules. We have requested that the Court strike the motion and
direct that a pre-motion conference be held.
At
this time, we are unable to predict the duration, scope, or possible outcome of these investigations and lawsuits.
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.
During August 2020,
the Company issued 13,158 shares of common stock to a holder of its Series A Convertible Preferred Stock upon the conversion of
5,000 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 valued at $36,584.80 or $6.95 per share 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.
On August 25, 2020, the Company issued 87,255 shares of common
stock valued at $142,226 to a former employee per the terms of a settlement agreement, settling $125,000 of accrued expenses and
recorded a loss on settlement of $17,226.
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.
During August 2020,
holders of common stock warrants exercised an aggregate of 116,448 warrants using a cashless exercise into 68,715 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.
During August
2020, holders of common stock options exercised an aggregate of 55,263 options using a cashless exercise into 28,890 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.
On August 27, 2020, the Company issued 17,000 shares of common
stock valued at $40,800 in full settlement of $48,790 of accounts payable. The shares had a fair value of $2.20 per shares. The
Company recorded a loss on settlement of accounts payable of $7,990.
On September 10, 2020, the Company issued 140,000 shares of
common stock valued at $806,400 in full settlement of $88,950 of accounts payable and recorded a loss on settlement of $547,756.
The shares 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 September
30, 2020, the full amount has not been received and the shares and warrants have not been issued. The $515,000 received
through September 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 nine months ended September 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
|
|
|
$
|
9.35
|
|
|
|
338,595
|
|
|
$
|
5.96
|
|
|
|
630,303
|
|
|
$
|
-
|
|
Granted
|
|
|
100,000
|
|
|
|
4.80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,300,845
|
|
|
|
-
|
|
Exercised
|
|
|
(701,355
|
)
|
|
|
5.44
|
|
|
|
(160,291
|
)
|
|
|
4.26
|
|
|
|
(46,931
|
)
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(475,000
|
)
|
|
|
-
|
|
Balance at September 30, 2020
|
|
|
710,561
|
|
|
$
|
11.42
|
|
|
|
178,304
|
|
|
$
|
3.00
|
|
|
|
2,409,217
|
|
|
$
|
-
|
|
Exercisable at September 30, 2020
|
|
|
710,561
|
|
|
$
|
11.42
|
|
|
|
178,304
|
|
|
$
|
3.00
|
|
|
|
2,409,217
|
|
|
$
|
-
|
|
As of September 30,
2020 and December 31, 2019, the total unrecognized expense for unvested stock options and restricted stock awards, net of actual
forfeitures, was $3,311,888 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 nine months ended September 30, 2020 and 2019 was as follows:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Stock-based compensation expense
|
|
$
|
1,826,607
|
|
|
$
|
433,438
|
|
|
$
|
4,183,154
|
|
|
$
|
6,283,811
|
|
Stock-based compensation
expense categorized by the equity components for the three and nine months ended September 30, 2020 and 2019 was as follows:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Common stock
|
|
$
|
1,826,607
|
|
|
$
|
359,910
|
|
|
$
|
4,183,154
|
|
|
$
|
764,807
|
|
Stock option awards
|
|
|
-
|
|
|
|
73,528
|
|
|
|
-
|
|
|
|
196,074
|
|
Transfer of common stock by founders to contractors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,322,930
|
|
Total
|
|
$
|
1,826,607
|
|
|
$
|
433,438
|
|
|
$
|
4,183,154
|
|
|
$
|
6,283,811
|
|
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 nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
178,304
|
|
|
|
188,595
|
|
|
|
178,304
|
|
|
|
188,595
|
|
Warrants
|
|
|
710,561
|
|
|
|
1,311,916
|
|
|
|
710,561
|
|
|
|
1,311,916
|
|
Total common stock equivalents
|
|
|
888,865
|
|
|
|
1,500,511
|
|
|
|
888,865
|
|
|
|
1,500,511
|
|
Note 10. Related Party Transactions
Included in accounts payable are amounts
due to officers of the Company in the amount of $203,171.
On July 24, 2020, the
Company’s Chief Executive Officer, Marc Schessel, transferred 20,000 of his personally held common shares to Mark Shefts,
a Director. The company deemed this transfer to be in consideration for services and recorded a non-cash expense of $115,100 for
the fair value of the shares transferred.
Note 11. Subsequent Events
On November 1, 2020,
Christopher J. Kohler was appointed part-time CFO of SCWorx, Corp., a Delaware corporation (the “Company”). Timothy
Hannibal, our President, who was acting as our Interim CFO, resigned said CFO position concurrent with Mr. Kohler’s appointment. Mr.
Kohler will initially be paid $6,000 per month for his services. The agreement between the Company and Mr. Kohler may be terminated
by either party upon sixty days written notice, provided that such notice period shall not be applicable if the other party is
in material breach of the agreement.
Mr. Kohler has
over 15 years of experience serving in a wide variety of roles in the finance and accounting sectors. Mr. Kohler is the
founder and CEO of Kohler Consulting, Inc., which he founded in 2012. The firm, through Mr. Kohler, provides outsourced CFO
and advisory services to private and public companies, with a focus on small cap and start-up businesses.
Issuance of Shares Pursuant to Conversion
of Series A Preferred
During October 2020,
the Company issued 13,158 shares of common stock to a holder of its Series A Convertible Preferred Stock upon the conversion of
5,000 of such shares of Series A Convertible Preferred Stock.
Issuance of Shares Pursuant to Cashless
Exercises of Common Stock Warrants
During October 2020,
holders of common stock warrants exercised an aggregate of 6,579 warrants using a cashless exercise into 2,973 shares of common
stock.