The unaudited interim condensed consolidated
financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United
States of America and are presented in US dollars, unless otherwise noted.
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.
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 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.
On
March 16, 2020, in response to the COVID-19 pandemic, SCWorx established a wholly-owned subsidiary, Direct-Worx, LLC, which
will utilize the SCWorx database to identify trends within the purchasing supply chain and use this information to source and
provide critical, difficult-to-find items for the healthcare industry. Items may become
difficult to source due to unexpected disruptions within the supply chain, such as the COVID-19 pandemic. These products
currently include:
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Test Kits — the Company has identified multiple potential sources for Rapid Test Kits for COVID-19.
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PPE — Personal Protective Equipment (PPE) includes items such as masks, gloves, gowns, shields, etc. The Company’s Chief Executive Officer and employees have extensive experience in the healthcare industry and industry contacts, and a database of items specifically designated to assist the healthcare industry in fulfilling its inventory demands.
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The
sale of PPE and rapid test kits for COVID-19 represent 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. Consequently, there is no assurance as to the timing or quantities
of any future deliveries of COVID-19 Test Kits. For the three months ended March 31, 2020, the Company did not complete the sale
of any COVID-19 rapid test kits or PPE, and had no test kits or PPE in inventory as of March 31, 2020. 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.
Note
2. Liquidity and Going Concern
The
accompanying 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 consolidated financial statements do not include any adjustment
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 $1,149,651 for the three months ended March
31, 2020. As of March 31, 2020, the Company had cash of $201,092, a working deficit of $2,521,580, and an accumulated deficit of
$13,944,124. 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 statement
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 could impact
the Company’s ability to raise additional capital.
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 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 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 condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States for interim financial information. They do not include all of the information and footnotes required by generally accepted
accounting principles 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.
The 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 March 31, 2020, and the results of its operations
and cash flows for the three months ended March 31, 2020. The results of operations for the period ended March 31, 2020 are not
necessarily indicative of the results to be expected for future quarters or the full year.
Reclassifications
A
reclassification has been made to the consolidated balance sheet and consolidated statement of changes in stockholders’
equity to break out the total Series A Convertible Preferred Stock par value of $819 and additional paid in capital of $7,980,126.
Previously, for the quarter ended March 31, 2019, the entire balance was disclosed as Series A Convertible Preferred Stock. This
change in classification does not affect the previously reported total stockholders’ equity balance. In addition, the authorized
common stock has been restated to reflect the correct amount of 45,000,000 authorized shares of common stock.
In
addition, certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications
had no effect on reported results of operations or cash flows.
Cash
Cash
is maintained with various financial institutions. Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250,000. There were no amounts in excess of the FDIC insured limit as of March 31, 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 March 31, 2020, the Company had one customer
representing 21% of aggregate revenues. For the quarter ended March 31, 2019, the Company had two customers representing
24% and 11% of aggregate revenues. At March 31, 2020, the Company had five customers representing 22%, 16%, 12%, 11% and 11% of
aggregate accounts receivable. At March 31, 2019, the Company had three customers representing 32%, 18%, 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 March 31, 2020 and December 31, 2019 was $344,412.
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 March 31, 2020 and 2019 was $2,259 and $451, 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, and
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4)
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Professional Services: mainly related to specific customer projects to manage and/or analyze data and review for cost reduction opportunities.
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A
contract will typically include Data Normalization, SaaS and Maintenance, which are distinct performance obligations and are accounted
for separately. The transaction price is allocated to each separate performance obligation on a relative stand-alone selling price
basis. Significant judgement is required to determine the stand-alone selling price for each distinct performance obligation and
is typically estimated based on observable transactions when these services are sold on a stand-alone basis. At contract inception,
an assessment of the goods and services promised in the contracts with customers is performed and a performance obligation is
identified for each distinct promise to transfer to the customer a good or service (or bundle of goods or services). To identify
the performance obligations, the Company considers all the goods or services promised in the contract regardless of whether
they are explicitly stated or are implied by customary business practices. Revenue is recognized when the performance obligation has
been met. The Company considers control to have transferred upon delivery because the Company has a present right to payment at
that time, the Company has transferred use of the good or service, and the customer is able to direct the use of, and obtain substantially
all the remaining benefits from, the good or service.
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
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.
As of March 31, 2020 and December 31, 2019, the Company had
$1,390,637 and $1,056,637, respectively, of remaining performance obligations recorded as contract liabilities. The Company expects
to recognize sales relating to these existing performance obligations of $1,390,637 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 March 31, 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 $1,390,637 and $1,056,637 as of March 31, 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 March 31, 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 CARES Act may have on its business
but does not expect the impact to be material.
The income tax benefit
for the quarters ended March 31, 2020 and 2019 was $0 and $195,000, 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 7, 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 March 31, 2020 and 2019, the Company had 1,650,511 and 384,647, 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.
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, 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 March 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Intangible assets
|
|
Useful life
|
|
Gross assets
|
|
|
Accumulated amortization
|
|
|
Net
|
|
|
Gross assets
|
|
|
Accumulated amortization
|
|
|
Net
|
|
Ticketing software
|
|
5 years
|
|
$
|
64,000
|
|
|
$
|
(14,934
|
)
|
|
$
|
49,066
|
|
|
$
|
64,000
|
|
|
$
|
(11,733
|
)
|
|
$
|
52,267
|
|
Promoter relationships
|
|
7 years
|
|
|
176,000
|
|
|
|
(29,333
|
)
|
|
|
146,667
|
|
|
|
176,000
|
|
|
|
(23,048
|
)
|
|
|
152,952
|
|
Total intangible assets
|
|
|
|
$
|
240,000
|
|
|
$
|
(44,267
|
)
|
|
$
|
195,733
|
|
|
$
|
240,000
|
|
|
$
|
(34,781
|
)
|
|
$
|
205,219
|
|
Amortization expense
for the three months ended March 31, 2020 and 2019, was $9,486 and $6,324, respectively.
As of March 31, 2020,
the estimated future amortization expense of amortizable intangible assets is as follows:
Year ending December 31,
|
|
|
|
|
2020 (remaining 9 months of 2020)
|
|
$
|
28,457
|
|
|
2021
|
|
|
37,943
|
|
|
2022
|
|
|
37,943
|
|
|
2023
|
|
|
37,943
|
|
|
2024
|
|
|
26,209
|
|
|
Thereafter
|
|
|
27,238
|
|
|
Total
|
|
$
|
195,733
|
|
Note 5. 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 remaining
lease is 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 March 31, 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 months
ended March 31, 2020 and 2019, the components of lease expense were as follows:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
9,425
|
|
|
$
|
11,250
|
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
9,425
|
|
|
$
|
11,250
|
|
Other information related
to leases was as follows:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of operating lease liabilities:
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
9,425
|
|
|
$
|
11,250
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (months) – operating leases
|
|
|
-
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate– operating leases
|
|
|
N/A
|
|
|
|
10
|
%
|
As of March 31, 2020,
the Company has no additional operating leases, other than that noted above, and no financing leases.
Note 6. 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 any of its officers or directors who incur any liability or expense
incurred 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 remains in effect as of the
filing of this Form 10-Q.
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 7. Stockholders’ Equity
Authorized Shares
The Company has 45,000,000
common shares authorized with a par value of $0.001 per share.
Common Stock
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 January 17, 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.
On February 5, 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.
On February 21,
2020, the Company issued an aggregate of 100,000 shares of common stock to a holder of its Series A Convertible Preferred
Stock upon the conversion of 38,000 of such shares of Series A Convertible Preferred Stock.
On February 22,
2020, the Company issued an aggregate of 39,474 shares of common stock to two holders of its Series A Convertible Preferred
Stock upon the conversion of 15,000 of such shares of Series A Convertible Preferred Stock.
On February 26, 2020,
the Company issued 19,737 shares of common stock to a holder of its Series A Convertible Preferred Stock upon the conversion of
7,500 of such shares of Series A Convertible Preferred Stock.
On March 12, 2020,
the Company issued 16,667 shares of common stock to an employee pursuant to a vesting schedule.
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 three months ended March 31, 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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
395,000
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(250,000
|
)
|
|
|
-
|
|
Balance at March 31, 2020
|
|
|
1,311,916
|
|
|
$
|
9.35
|
|
|
|
338,595
|
|
|
$
|
5.96
|
|
|
|
775,303
|
|
|
$
|
-
|
|
Exercisable at March 31, 2020
|
|
|
1,311,916
|
|
|
$
|
9.35
|
|
|
|
338,595
|
|
|
$
|
5.96
|
|
|
|
41,667
|
|
|
$
|
-
|
|
As of March 31, 2020
and December 31, 2019, the total unrecognized expense for unvested stock options and restricted stock awards, net of actual forfeitures,
was approximately $1.9 million and $3.2 million, respectively, to be recognized over a one-year period for restricted stock awards
and one year for option grants from the date of grant.
Stock-based compensation
expense for the three months ended March 31, 2020 and 2019 was as follows:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock-based compensation expense
|
|
$
|
367,600
|
|
|
$
|
5,629,833
|
|
Stock-based compensation
expense categorized by the equity components for the three months ended March 31, 2020 and 2019 was as follows:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Common stock
|
|
$
|
367,600
|
|
|
$
|
257,885
|
|
Stock option awards
|
|
|
-
|
|
|
|
49,018
|
|
Transfer of common stock by founders to contractors
|
|
|
-
|
|
|
|
5,322,930
|
|
Total
|
|
$
|
367,600
|
|
|
$
|
5,629,833
|
|
Note 8. 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
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
338,595
|
|
|
|
188,595
|
|
Warrants
|
|
|
1,311,916
|
|
|
|
196,052
|
|
Total common stock equivalents
|
|
|
1,650,511
|
|
|
|
384,647
|
|
Note 9. Subsequent Events
Issuance of Shares Pursuant to Conversion
of Series A Preferred Stock
During April
2020, fifteen Series A Preferred stockholders converted an aggregate of 396,695 shares of Series A Preferred Stock into
1,043,935 shares of common stock.
During May 2020,
three Series A Preferred stockholders converted an aggregate of 19,500 shares of Series A Preferred Stock into 51,316 shares
of common stock.
Issuance of Shares Pursuant to Cashless
Exercises of Common Stock Warrants
During April
2020, thirteen holders of common stock warrants exercised an aggregate of 520,925 warrants using a cashless exercise into
352,488 shares of common stock.
During May 2020,
four 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 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 Stock Options
During April
2020, five holders of common stock options exercised an aggregate of 108,978 options using a cashless exercise into 26,361
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.
On May 12, 2020, the
Company issued 104,567 shares of common stock in full settlement of $93,150 of accounts payable.
Issuance of Shares Pursuant to Stock
Compensation
On April 15, 2020,
the Company issued 3,913 shares of common stock to a consultant of the Company as stock compensation.
On April 16, 2020,
the Company issued 5,264 shares of common stock to a consultant of the Company as stock compensation.
On April 21, 2020,
the Company issued 30,303 shares of common stock to an employee pursuant to a vesting schedule.
Issuance of Restricted Stock Units
On April 7, 2020, the
Company granted 1,569,000 restricted stock units to 36 individuals for services rendered. Such shares vest in between six months
and two years from the date of grant.
On April 7, 2020,
the Company granted 329,000 restricted stock units to its Chief Executive Officer. 50% of such shares vested upon the
Company filing its 2019 Form 10-K and the remaining 50% vest upon the Company filing its 2020 Form 10-K.
On May 15, 2020, the
Company granted 20,000 restricted stock units to three of the four members of the Board of Directors. The fourth member, in connection
with his appointment to the board on May 15, 2020, was granted 100,000 restricted stock units. The total amount of 160,000 restricted
stock units granted by the Company vest fully on September 17, 2020.
Supply Agreement for COVID-19 Rapid
Test Kits
On April 29, 2020, the
Company entered into a Supply Agreement (“Supply Agreement”) pursuant to which the Company agreed to purchase an aggregate
of 500,000 COVID-19 IGG/IGM Rapid Testing Units (“COVID-19 Test Kits”). The Supply Agreement requires the Company to
pay 50% of the total of each order at the time of order placement, with the remaining 50% due upon completion of production (goods
ready for shipment). To date, the Company has received approximately 46,500 COVID-19 Test Kits. On June 30, 2020, the supplier
notified the Company that it was terminating the Supply Agreement.
Securities Class Action and Investigations
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 any of its officers or directors who incur any liability or expense
incurred 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 remains in effect as of the
filing of this Form 10-Q.
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.
Equity Offering
During May 2020, the
Company received $515,000 in connection with an equity financing. This transaction is subject to execution of definitive documents.
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.