UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
New York,
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Number of shares of the registrant’s common
stock outstanding at November 14, 2023:
SCWorx Corp.
Form 10-Q
TABLE OF CONTENTS
| PART I - FINANCIAL INFORMATION | 1 | ||
| Item 1. | Financial Statements (unaudited) | 1 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28 | |
| Item 4. | Controls and Procedures | 28 | |
| PART II - OTHER INFORMATION | 29 | ||
| Item 1. | Legal Proceedings | 29 | |
| Item 1A. | Risk Factors | 30 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30 | |
| Item 3. | Defaults Upon Senior Securities | 30 | |
| Item 4. | Mine Safety Disclosures | 30 | |
| Item 5. | Other Information | 30 | |
| Item 6. | Exhibits | 31 | |
| Exhibit Index | 31 | ||
| Signatures | 32 | ||
i
Cautionary Statement Regarding Forward-Looking Statements
Certain statements that we make from time to time, including statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this Form 10-Q are forward-looking statements. These statements, among other things, relate to our business strategy, goals and expectations concerning our future operations, prospects, plans and objectives of management. The words “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, and similar terms and phrases are used to identify forward-looking statements in this presentation.
Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. Forward-looking statements in this Form 10-Q include, without limitation, statements reflecting management’s expectations for future financial performance and operating expenditures (including our ability to continue as a going concern, to raise additional capital and to succeed in our future operations), expected growth, profitability and business outlook and increased operating expenses.
Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those anticipated by such statements. These factors include, among other things, the unknown risks and uncertainties that we believe could cause actual results to differ from these forward looking statements as set forth under the heading, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all of the risks and uncertainties that could have an impact on the forward-looking statements, including without limitation, risks and uncertainties relating to our ability to:
| ● | reverse the recent decline in our revenue and resume growing our revenue; |
| ● | resolve the various litigation proceedings pending against us on favorable terms or at all; |
| ● | obtain additional financing in sufficient amounts or on acceptable terms so that we can fund our business plan; |
| ● | reduce our dependence on third-party subcontractors to perform some of the work on our contracts; |
| ● | mitigate the impact of new or changed laws, regulations or other industry standards that could adversely affect our ability to conduct our business; |
| ● | mitigate the impact of the COVID-19 pandemic on our revenues; |
| ● | adopt and master new technologies and adjust certain fixed costs and expenses to adapt to our industry’s and customers’ evolving demands; and |
| ● | mitigate the impact of changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters. |
Although we believe that the expectations reflected in the forward-looking statements contained in this Form 10-Q are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. In light of inherent risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Except as required by law, we are under no duty to update or revise any of such forward-looking statements, whether as a result of new information, future events, or otherwise, after the date of this Form 10-Q.
You should read this Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
All references to “SCWorx,” “we,” “us,” “our” or the “Company” mean SCWorx Corp., a Delaware corporation, and where appropriate, its wholly owned subsidiaries.
ii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
1
SCWorx Corp.
Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable - net | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total current assets | ||||||||
| Fixed assets - net | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Accounts payable and accrued liabilities - related party | ||||||||
| Shareholder advance | ||||||||
| Deferred revenue | ||||||||
| Equity financing | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Loans payable | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Series A Convertible Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Subscriptions payable | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
SCWorx Corp.
Condensed Consolidated Statements of Operations
(Unaudited)
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Gain on forgiveness of PPP loan | ||||||||||||||||
Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for (benefit from) income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
SCWorx Corp.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| Preferred Stock | Common stock | Additional paid-in | Subscriptions | Accumulated | ||||||||||||||||||||||||||||
| Three months ended September 30, 2023 | Shares | $ | Shares | $ | capital | payable | deficit | Total | ||||||||||||||||||||||||
| Balances, June 30, 2023 | $ | $ | $ | $ | - | $ | ( | ) | $ | |||||||||||||||||||||||
| Shares issued as settlement of accounts payable | ||||||||||||||||||||||||||||||||
| Shares issued under equity line of credit | ||||||||||||||||||||||||||||||||
| Shares issued for vested restricted stock units | ( | ) | ||||||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Preferred Stock | Common stock | Additional paid-in | Subscriptions | Accumulated | ||||||||||||||||||||||||||||
| Nine months ended September 30, 2023 | Shares | $ | Shares | $ | capital | payable | deficit | Total | ||||||||||||||||||||||||
| Balances, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Shares issued as settlement of accounts payable | ||||||||||||||||||||||||||||||||
| Shares issued under equity line of credit | ||||||||||||||||||||||||||||||||
| Shares issued for vested restricted stock units | ( | ) | ||||||||||||||||||||||||||||||
| Shares issued for settlement of class action | ( | ) | ||||||||||||||||||||||||||||||
| Shares issued for cashless exercise of warrants | ( | ) | ||||||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
SCWorx Corp.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| Preferred Stock | Common stock | Additional paid-in | Subscriptions | Accumulated | ||||||||||||||||||||||||||||
| Three months ended September 30, 2022 | Shares | $ | Shares | $ | capital | payable | deficit | Total | ||||||||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Shares issued as settlement of accounts payable | ||||||||||||||||||||||||||||||||
| Shares issued for common stock placement | - | - | - | |||||||||||||||||||||||||||||
| Shares issued for vested restricted stock units | - | ( | ) | - | - | - | ||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance, September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Preferred Stock | Common stock | Additional paid-in | Subscriptions | Accumulated | ||||||||||||||||||||||||||||
| Nine months ended September 30, 2022 | Shares | $ | Shares | $ | capital | payable | deficit | Total | ||||||||||||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Shares issued as settlement of accounts payable | ||||||||||||||||||||||||||||||||
| Shares issued for common stock placement | - | - | - | - | ||||||||||||||||||||||||||||
| Shares issued for vested restricted stock units | ( | ) | ||||||||||||||||||||||||||||||
| Commitment shares issued in conjunction with capital raise | ||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance, September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
SCWorx Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Gain on forgiveness of PPP loan | ( | ) | ||||||
| Change in inventory value | ||||||||
| Stock-based compensation | ||||||||
| Bad debt expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the sale of common stock | ||||||||
| Payments of notes payable | ( | ) | ||||||
| Payments of shareholder advance | ( | ) | ||||||
| Proceeds from advances - related party | ||||||||
| Payments of advances - related party | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Commitment shares issued in conjunction with capital raise | $ | $ | ||||||
| Shares issued for vested restricted stock units | $ | $ | ||||||
| Shares issued for settlement of class action | $ | $ | ||||||
| Shares issued for cashless exercise of warrants | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
SCWorx Corp.
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 $
Operations of the Business
SCWorx is a 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:
| ● | virtualized Item Master File repair, expansion and automation; |
| ● | CDM management; |
| ● | contract management; |
7
| ● | request for proposal automation; |
| ● | rebate management; |
| ● | big data analytics modeling; and |
| ● | data integration and warehousing. |
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.
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 which spread 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 adversely impacted new customer acquisition. The Company has followed the recommendations of local health authorities to minimize exposure risk for its team members since the outbreak.
In addition, the Company’s customers (hospitals) 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 were 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 were not able to focus resources on expanding the utilization of the Company’s services, which has adversely impacted the Company’s 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.
Note 2. 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.
8
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, 2022, filed with the SEC on April 17, 2023.
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, 2023, the results of its operations for the three and nine months ended September 30, 2023 and cash flows for the nine months ended September 30, 2023. The results of operations for three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for future quarters or the full year.
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 $
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.
9
Significant customers are
those which represent more than 10% of the Company’s revenue for each period presented, or the Company’s accounts receivable
balance as of each respective balance sheet date.
| Revenue | ||||||||||||||||
| For the nine months ended | Accounts Receivable | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| Customers | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Customer A | % | % | % | % | ||||||||||||
| Customer B | % | % | % | % | ||||||||||||
| Customer C | % | % | % | % | ||||||||||||
| Customer D | % | % | % | % | ||||||||||||
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 had a recorded allowance for doubtful accounts of $
Inventory
The inventory balance at September
30, 2023 is related to the Company’s Direct-Worx, LLC subsidiary and consisted of approximately
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Inventory | $ | $ | ||||||
| Allowance for obsolescence | ( | ) | ( | ) | ||||
| Net inventory value | $ | $ | ||||||
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.
10
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.
The Company did not record any depreciation expense for the three and nine months ended September 30, 2023 and 2022.
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:
| ● | Step 1: Identify the contract(s) with a customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
| ● | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation |
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 SaaS contracts with customers:
| 1) | Data Normalization: which includes data preparation, product and vendor mapping, product categorization, data enrichment and other data related services, |
| 2) | 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, |
11
| 3) | Maintenance: which includes ongoing data cleansing and normalization, content enrichment, and optimization, and |
| 4) | Professional Services: mainly related to specific customer projects to manage and/or analyze data and review for cost reduction opportunities |
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 judgment 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 include a significant financing component. The Company has elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if it expects that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. The Company does not maintain contracts in which the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service exceeds the one-year threshold.
In periods prior to the adoption of ASC 606, the Company recognized revenues when persuasive evidence of an arrangement existed, delivery had occurred, the sales price was fixed or determinable, and the collectability of the resulting receivable was reasonably assured. The adoption of Topic 606 did not result in a cumulative effect adjustment to the Company’s opening retained earnings since there was no significant impact upon adoption of Topic 606. There was also no material impact to revenues, or any other financial statement line items for the year ended December 31, 2018 as a result of applying ASC 606.
The Company has one revenue stream, from the SaaS business, and believes it has presented all varying factors that affect the nature, timing and uncertainty of revenues and cash flows.
12
Remaining Performance Obligations
As of September 30, 2023 and
December 31, 2022, the Company had $
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, 2023 and December 31, 2022.
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 $
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, 2023 and December 31, 2022, 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.
13
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.
There was no income tax expense for three and nine months ended September 30, 2023 and 2022.
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 employee\consultant-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 6, 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.
14
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 5, Commitments and Contingencies, the Company is obligated to indemnify its officers and directors for costs incurred in defending against these claims and investigations.
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.
15
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
Note 3. Loans Payable
CARES funding
On May 5, 2020, the Company
obtained a $
Note 4. Leases
Operating Leases
The Company’s principal executive office in New York City is under a month-to-month arrangement.
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.
As of September 30, 2023 and December 31, 2022, there were no assets recorded under operating leases. 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 | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
As of September 30, 2023, the Company has no additional operating leases, other than that noted above, and no financing leases.
16
Note 5. 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.
Legal Proceedings
CorProminence d/b/a Core IR v. SCWorx
AAA Arbitration Case 01-22-0001-5709
As previously disclosed in
the Company’s period reports filed with he SEC, on April 25, 2022, the Company received a Demand for Arbitration along with a Statement
of Claim filed by Core IR with the American Arbitration Association seeking damages in the amount of approximately $
Hadrian Equities Partners, LLC et ano. v. SCWorx Corp,
Case No. 22-cv-07096 (JLR) (S.D.N.Y)
On August 19, 2022, Hadrian
Equities Partners, LLC and the Phillip W. Caprio, Jr. 2007 Irrevocable Trust filed a complaint in the United States District Court for
the Southern District of New York alleging that SCWorx was dilatory and did not comply with its alleged contractual duties to remove the
restrictions from Plaintiffs’ converted AMMA stock to SCWorx stock until August 10 and August 11, 2020. Plaintiffs allege that as
a result, they were unable to sell their SCWorx stock when SCWorx was trading at its highest price on April 13, 2020. The Complaint seeks
$
Carole R. Bernstein, Esq. v. SCWorx Corp.
As previously disclosed in the Company’s Form 10-Q for the quarter
ended June 30, 2023, on June 7, 2023, Carole R. Bernstein, Esq. filed a complaint in the United States District Court for the Southern
District of New York against the Company. The complaint alleges that the Company breached its engagement agreement with Ms. Bernstein
by failing to pay legal fees when due. Ms. Bernstein is seeking to recover $
17
Note 6. Stockholders’ Equity
Authorized Shares
The Company has
Common Stock
Issuance of Shares for Vested Restricted Stock Units
Between January 10, 2023 and
January 26, 2023, the Company issued a total of
Between June 5, 2023 and June
16, 2023, the Company issued a total of
Between July 5, 2023 and July
19, 2023, the Company issued a total of
Issuance of Shares as Settlement of Accounts Payable
On
May 24, 2023, the Company issued
On
June 22, 2023, the Company issued
On
July 26, 2023, the Company issued
On
August 18, 2023, the Company issued
On
September 27, 2023, the Company issued
Issuance of Shares under Common Stock Purchase Agreement
On June 1, 2023, the Company
issued
On June 22, 2023, the Company
issued
On Between July 7, 2023 and
September 28, 2023, the Company issued a total of
18
Issuance of Shares for the Exercise of Warrants
On June 15, 2023, the Company
issued
Equity Financing
During May 2020, the Company
received $
Stock Incentive Plan
| 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 | |||||||||||||||
| Balance at December 31, 2022 | $ | $ | |||||||||||||||||
| Granted | |||||||||||||||||||
| Exercised | ( | ) | ( | ) | |||||||||||||||
| Cancelled/Expired | ( | ) | ( | ) | ( | ) | |||||||||||||
| Balance at September 30, 2023 | $ | $ | |||||||||||||||||
| Exercisable at September 30, 2023 | $ | $ | |||||||||||||||||
The Company has classified the warrant as having Level 2 inputs, and has used the Black-Scholes option-pricing model to value the warrants.
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
| Exercise Price Range | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | Intrinsic Value | ||||||||||||||||
| $0.65 - $4.00 | $ | $ | ||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Exercise Price Range | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | Intrinsic Value | ||||||||||||||||
| $2.64 | $ | $ | ||||||||||||||||||||
As of September 30, 2023 and
December 31, 2022, the total unrecognized expense for unvested stock options and restricted stock awards was approximately $
19
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Common stock | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Note 7. 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.
| For the three and nine months ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Restricted stock units | ||||||||
| Total common stock equivalents | ||||||||
20
Note 8. Related Party Transactions
At September 30, 2023 and
December 31, 2022 Company had a payable due to an officer in the amount of $
During September 2021, the
Company’s former CEO and shareholder advanced $
Between May 24, 2023 and August
30, 2023, the Company’s CFO advanced and aggregate $
Note 9. Subsequent Events
We have evaluated all events that occurred after the balance sheet date through the date when our financial statements were issued to determine if they must be reported. Management has determined that other than those disclosed below, there were no additional reportable subsequent events to be disclosed.
Reverse Stock Split
Entry into material agreement
As previously disclosed, on October 20, 2023, the Company entered into a letter of intent to acquire American Energy Partners, Inc. (“American Environmental”) (OTC: AEPT).
The letter of intent sets forth the proposed terms and conditions pursuant to which the Company and American Environmental intend to effect a business combination, as a result of which American Environmental and the Company’s healthcare data management business will each be conducted through wholly-owned subsidiaries of the Company (the “Proposed Transaction”).
The Company anticipates
that the Proposed Transaction will be structured as a share-for-share exchange, with SCWorx shareholders retaining
The
Proposed Transaction has been approved by the Boards of Directors of both SCWorx and American Environmental and is expected to close in
the first quarter of CY 2024. The Transaction will be considered a “reverse merger” because the shareholders of American Environmental
will own more than a majority of the outstanding common stock of the Company following completion of the Proposed Transaction. As such,
the Proposed Transaction is subject to NASDAQ approving a listing application based on initial inclusion standards. In addition, the closing
of the Proposed Transaction is subject to satisfaction of the following conditions: (i) satisfactory completion of due diligence review
by both parties, (ii) the negotiation, execution and delivery of definitive agreements, (iii) American Environmental raising $
There can be no assurance that the Proposed Transaction will be completed as currently contemplated, or at all.
American Environmental is an environmental services company headquartered in Pennsylvania. Effective October 30, 2023, American Energy Partners, Inc.’s name will be changed to “American Environmental Partners, Inc.”, subject to regulatory approval.
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes included in Item 1, “Financial Statements” of this Form 10-Q. In addition to our historical unaudited condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs which involves risk, uncertainty and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q.
Corporate Information
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, our company and certain of our stockholders agreed to cancel 6,510 shares of common stock. In June 2018, we began to collect subscriptions for common stock. From June to November 2018, we 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 our company’s current name, with SCW FL Corp. becoming our subsidiary. On March 16, 2020, in response to the COVID-19 pandemic, SCWorx established a wholly-owned subsidiary, Direct-Worx, LLC.
Our principal executive offices are located at 590 Madison Avenue, 21st Floor, New York, New York, 10022. Our telephone number is (844) 472-9679. The Company also had a lease in Greenwich, CT which expired in March 2020 and became a month to month tenancy until it was terminated in April 2021.
In this Quarterly Report, the terms “SCWorx,” the “Company,” “we,” “us” and “our” refer to SCWorx Corp., a Delaware corporation, unless the context requires otherwise. Unless specified otherwise, the historical financial results in this Annual Report are those of our company and our subsidiaries on a consolidated basis.
Our Business
SCWorx is a 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 care information technology solutions and associated services that improve healthcare processes and information flow within hospitals and other healthcare facilities. SCWorx’s software enables a healthcare provider to simplify 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”). Customers use our software to achieve multiple operational benefits, such as supply chain cost reductions, decreased accounts receivables aging, accelerated and completed patient billing in less than 72 hours, contract optimization, increased supply chain management and total cost visibility via dynamic AI connections that automatically structures, repairs, synchronizes and maintains purchasing (“MMIS”), Clinical (“EMR”) and finance (“CDM”) systems. SCWorx’s customers include some of the most prestigious healthcare organizations in the United States. SCWorx offers an advanced software solution for the management of health care providers’ foundational business applications, empowering its customers to significantly reduce costs, drive better clinical outcomes and enhance their revenue. SCWorx supports the interrelationship between the three core healthcare provider systems: Supply Chain, Financial and Clinical. This solution integrates common keys within distinct and variable databases that allows the repaired foundational data to move seamlessly from one application to another enabling our Customers to drive supply chain cost reductions, optimize contracts, increase supply chain management (“SCM”), cost visibility, control rebates and contract administration fees.
22
Currently, the business systems of hospitals are frequently deficient and often unconnected from each other. These deficiencies in part result from the vast amount of unstructured, manually created and managed data that proliferates within the hospital’s supply chain, clinical and billing systems. SCWorx’s solutions are designed to improve the flow of information quickly and accurately between the buy-side (supply chain purchasing systems), the consumption-side (clinical documentation systems like the electronic medical records (“EMR”)) and billing and collection systems (patient billing systems). The currently poor state of interoperability limits the potential value of each independent system and requires significant expense and extensive human resource commitments from senior personnel to stay ahead of problems and complete basic administrative tasks. SCWorx provides an information service that ultimately leads to safer, more cost effective and financially efficient patient care.
SCWorx has demonstrated that in order for the core hospital systems to function properly there must be a Single Source of Truth (“SSOT”) for all products utilized and ultimately billed for. The Item Master File (“IMF”), which is a database of all known products used in hospital and health care settings, must be accurate at all times and expanded upon to hold both clinical and financial attributes. An accurate and expanded Item Master File supports interoperability between the supply chain, clinical and financial systems by delivering, on demand, reports detailing the purchasing, utilization and revenue associated with each and every item used, allowing hospitals to better manage their business. The Single Source of Truth establishes a common vernacular and syntax, while assigning a consistent meaning across the healthcare provider’s core systems and accurately migrating data from one application to another and removing disconnects between critical business systems.
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:
| ● | virtualized Item Master File repair, expansion and automation; |
| ● | EMR management; |
| ● | CDM management; |
| ● | contract management; |
| ● | request for proposal automation; |
| ● | rebate management; |
| ● | Integration of acquired management; |
| ● | big data analytics modeling; |
| ● | data integration and warehousing; and |
| ● | ScanWorx. |
23
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. Our focus is to assist healthcare providers with issues they have pertaining to data interoperability.
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.
We currently host our solutions, serve our customers, and support our operations in the United States through an agreement with a third party hosting and infrastructure provider, RackSpace. We incorporate standard IT security measures, including but not limited to; firewalls, disaster recovery, backup, etc. Our 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 our operations. Disruptions in these systems could have an adverse impact on our operations. We 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 our business operations.
In addition, our 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 we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise the security of our information systems. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud or deception aimed at our employees, contractors or temporary staff. In the event that the security of our information systems is compromised, confidential information could be misappropriated, and system disruptions could occur. Any such misappropriation or disruption could cause significant harm to our reputation, lead to a loss of sales or profits or cause us 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 which spread throughout the United States and the world. The outbreak adversely impacted new customer acquisition. The Company has followed the recommendations of local health authorities to minimize exposure risk for its team members since the outbreak.
In addition, the Company’s customers (hospitals) 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 were 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 were not able to focus resources on expanding the utilization of the Company’s services, which has adversely impacted the Company’s 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.
24
Results of Operations – Three Months Ended September 30, 2023
Our operating results for the three month period ended September 30, 2023 and 2022 are summarized as follows:
| Three Months Ended | ||||||||||||
| September 30, 2023 | September 30, 2022 | Difference | ||||||||||
| Revenue | $ | 906,099 | $ | 986,949 | $ | (80,850 | ) | |||||
| Cost of revenues | 666,808 | 693,353 | (26,545 | ) | ||||||||
| General and administrative | 1,097,273 | 832,715 | 264,558 | |||||||||
| Other (expense) income | (276 | ) | 139,596 | (139,872 | ) | |||||||
| Provision for income taxes | - | - | - | |||||||||
| Net loss | $ | (858,258 | ) | $ | (399,523 | ) | $ | (458,735 | ) | |||
Revenues
Revenue for the three months ended September 30, 2023 was $906,099 as compared to $986,949 for the three months ended September 30, 2022. This slight decrease was primarily due to the expiration of a customer contract and normal fluctuations in our billing cycle.
Operating Expenses
Cost of revenues
Cost of revenues was $666,808 for the three months ended September 30, 2023 compared to $693,353 for the same period in 2022. The decrease was the result of staffing consolidations and normal business fluctuations.
General and administrative
General and administrative expenses increased $264,558 to $1,097,273 for the three months ended September 30, 2023, as compared to $832,715 in the same period of 2022. The increase is primarily attributable to a one-time legal judgement of $461,856 and approximate increases in legal and professional fees of $55,000, and bad debt expense of $64,000, partially offset by approximate decreases in stock-based compensation of $221,000, and inventory write downs of $44,000. We expect general and administrative expenses adjusted for one-time expenses to remain relatively flat during the rest of 2023.
Other income
We had other expense of $276 during the three months ended September 30, 2023 comprised of interest expense.
Net Loss
For the three months ended September 30, 2023, we incurred a net loss of $858,258 compared to a net loss of $399,523 for the same period in 2022.
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Results of Operations – Nine months Ended September 30, 2023
Our operating results for the six month period ended September 30, 2023 and 2022 are summarized as follows:
| Nine months ended | ||||||||||||
| September 30, 2023 | September 30, 2022 | Difference | ||||||||||
| Revenue | $ | 2,894,647 | $ | 3,010,322 | $ | (115,675 | ) | |||||
| Cost of revenues | 1,972,300 | 2,014,537 | (42,237 | ) | ||||||||
| General and administrative | 2,328,209 | 2,864,408 | (536,199 | ) | ||||||||
| Other income (expense) | (6,208 | ) | 279,191 | (285,399 | ) | |||||||
| Provision for income taxes | - | - | - | |||||||||
| Net loss | $ | (1,412,070 | ) | $ | (1,589,432 | ) | $ | 177,362 | ||||
Revenues
Revenue for the nine months ended September 30, 2023 was $2,894,647 as compared to $3,010,322 for the nine months ended September 30, 2022. This slight decrease was primarily due to the expiration of a customer contract and normal fluctuations in our billing cycle.
Operating Expenses
Cost of revenues
Cost of revenues was $1,972,300 for the nine months ended September 30, 2023 compared to $2,014,537 for the same period in 2022. The decrease was the result of staffing consolidations and normal business fluctuations.
General and administrative
General and administrative expenses decreased $536,199 to $2,328,209 for the nine months ended September 30, 2023, as compared to $2,864,408 in the same period of 2022. The decrease is primarily attributable to approximate decreases in stock-based compensation of $570,000, legal and professional fees of $46,000, bad debt reserve expense of $14,000 and inventory write downs of $157,000, partially offset by a one-time legal judgement of $461,856. We expect general and administrative expenses adjusted for one-time expenses to remain relatively flat during the rest of 2023.
Other income
We had other expense of $6,208 during the nine months ended September 30, 2023 comprised of interest expense.
We had other income of $279,191 during the nine months ended September 30, 2022 related to the forgiveness of PPP Loans under the CARES Act.
Net Loss
For the nine months ended September 30, 2023, we incurred a net loss of $1,412,070 compared to a net loss of $1,589,432 for the same period in 2022.
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Liquidity and Capital Resources
Cash Flows
| Nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (701,282 | ) | $ | (434,399 | ) | ||
| Net cash used in investing activities | - | - | ||||||
| Net cash used in by financing activities | 524,249 | 725,050 | ||||||
| Change in cash | $ | (177,033 | ) | $ | 290,651 | |||
Operating Activities
Cash used in operating activities was approximately $701,000 for the nine months ended September 30, 2023, mainly related to the net loss of approximately $1,412,000, a $51,000 increase in accounts receivable and a decrease in deferred revenue of $188,000, partially offset by non-cash stock-based compensation of $336,000, bad debt expense of $64,000, an increase in accounts payable and accrued liabilities of $539,000 and decrease in prepaid expenses of $10,000.
Cash used in operating activities was approximately $434,000 for the nine months ended September 30, 2022 (about $48,000 per month), mainly related to the net loss of approximately $1,589,000, a $174,000 decrease in deferred revenue, a $59,000 increase in prepaid expenses, and a $279,000 gain on forgiveness of debt, partially offset by non-cash stock-based compensation of $907,000, debt expense of $78,000, an increase in accounts payable and accrued liabilities of $371,000 and a decrease in accounts receivable of $155,000.
Investing Activities
The Company did not have any investing activities during the nine months ended September 30, 2023 and 2022.
Financing Activities
Cash provided by financing activities was approximately $524,000 for the nine months ended September 30, 2023, consisting of approximately $573,000 in proceeds from the sale of common stock and $23,000 in proceeds from advances from related party, offset by $48,000 in repayments of notes payable, and $24,000 in repayments of shareholder advances.
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Cash provided by financing activities was $725,050 for the nine months ended September 30, 2022. This consisted of net proceeds from a common stock placement.
Off-Balance Sheet Arrangements
As September 30, 2023 and December 31, 2022, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of September 30, 2023, the end of the period covered by this Form 10-Q, as required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, based on the 2013 framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission. There are inherent limitations to the effectiveness of any system of Disclosure Controls. Accordingly, even effective Disclosure Controls can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our President and Chief Financial Officer have concluded that, due to deficiencies in the design of internal controls and lack of segregation of duties, our Disclosure Controls were not effective as of September 30, 2023, such that the Disclosure Controls did not ensure that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
During the quarter ended September 30, 2023, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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.
CorProminence d/b/a Core IR v. SCWorx
AAA Arbitration Case 01-22-0001-5709
As previously disclosed in the Company’s periodic reports filed with the SEC, on April 25, 2022, the Company received a Demand for Arbitration along with a Statement of Claim filed by Core IR with the American Arbitration Association seeking damages in the amount of approximately $190,000.00 arising out of a marketing and consulting agreement. The Company filed its answer, affirmative defenses and counterclaims on May 16, 2022. By order of the arbitrator dated November 1, 2022, Core IR received permission to amend its Statement of Claim to increase its request for damages to $257,545.63. The Company received the final decision of the Arbitrator on October 16, 2023, awarding Core IR $461,856.15, including unpaid compensation, indemnification for legal fees and costs, prevailing party legal fees and interest (the “Award”). The payment is required to be made within thirty days of the Award. The Company is currently evaluating its legal options, including commencing legal action to set aside the Award. The Company may or may not be able to obtain a modification/reversal of the Award. If the Company is not able to obtain a modification/reversal, the Company will be obligated to pay the amount of the Award.
Hadrian Equities Partners, LLC et ano. v. SCWorx Corp,
Case No. 22-cv-07096 (JLR) (S.D.N.Y)
On August 19, 2022, Hadrian Equities Partners, LLC and the Phillip W. Caprio, Jr. 2007 Irrevocable Trust filed a complaint in the United States District Court for the Southern District of New York alleging that SCWorx was dilatory and did not comply with its alleged contractual duties to remove the restrictions from Plaintiffs’ converted AMMA stock to SCWorx stock until August 10 and August 11, 2020. Plaintiffs allege that as a result, they were unable to sell their SCWorx stock when SCWorx was trading at its highest price on April 13, 2020. The Complaint seeks $500,000 in damages. To date, the Complaint has not been served. Plaintiffs filed an Amended Complaint on November 28, 2022. On February 6, 2023, SCWorx filed its answer to the Amended Complaint interposing numerous defenses. Plaintiff has since filed a Second Amended Complaint which the Company has answered. The Company and Plaintiffs have reached an agreement in principle to resolve this matter and are currently negotiating a settlement agreement. The agreement in principle calls for the Company to issue the Plaintiffs 30,000 shares of restricted common stock and make a cash payment of $20,000 upon the earlier of the closing of the planned business combination transaction previously disclosed and March 1, 2024.
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Carole R. Bernstein, Esq. v. SCWorx Corp.
As previously disclosed in the Company’s Form 10-Q for the quarter ended June 30, 2023, on June 7, 2023, Carole R. Bernstein, Esq. filed a complaint in the United States District Court for the Southern District of New York against the Company. The complaint alleges that the Company breached its engagement agreement with Ms. Bernstein by failing to pay legal fees when due. Ms. Bernstein is seeking to recover $69,163.98 fees owing for services, plus interest, costs, including her attorney’s fees. At the request of the Plaintiff, the Clerk of the Court entered a default against the Company for failure to file responsive pleadings in a timely fashion. The Plaintiff has since moved the Court for entry of a default judgment. The Company has filed a motion to oppose Plaintiff’s motion for the entry of a default judgment and cross-moved for an order to vacate the default. These motions are currently pending before the Court.
Item 1A. Risk Factors
We are a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Since the beginning of the nine month period ended September 30, 2023, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in a current report on Form 8-K.
Item 3. Default under Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits.
EXHIBIT INDEX
Pursuant to the rules and regulations of the SEC, we have filed certain agreements as exhibits to this Quarterly Report on Form 10-Q. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof and should not be relied upon.
| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SCWORX CORP. | ||
| Date: November 14, 2023 | By: | /s/ Timothy A. Hannibal |
| Timothy A. Hannibal | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SCWORX CORP. | ||
| Date: November 14, 2023 | By: | /s/ Christopher J. Kohler |
| Christopher J. Kohler | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
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