Commitments and Contingencies
|6 Months Ended|
Jun. 30, 2019
|Commitments and Contingencies Disclosure [Abstract]|
|Commitments and Contingencies Disclosure [Text Block]||
Note 9. Commitments and Contingencies
In the normal course of business or otherwise, we may become involved in legal proceedings. We will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred.
On March 29, 2019, Network 1 Financial Securities Inc. (“Network One”) served a complaint against Alliance. Network One alleges that Alliance breached its obligation under its agreements with Alliance to indemnify Network One for certain costs that Network One incurred in connection with the defense and settlement of the class action litigation previously instituted against Alliance and Network One. This class action litigation has since been resolved, as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission on April 1, 2019. Network One has demanded
approximately $135,000 in payment of alleged damages. The Company does not believe that it owes the amount demanded and intends to vigorously defend against these claims.
On December 19, 2018, the Company’s former CEO, Robert L. Mazzeo, who resigned on May 25, 2018, served a complaint against Alliance in the United States District Court for the Southern District of NY. Mr. Mazzeo alleges that he (i) was fraudulently induced to become the CEO of the Company and (ii) entered into an employment contract with the Company and that the Company breachedsuch
contract. Mr. Mazzeo seeks damages in excess of $500,000. The Company believes that the lawsuit is frivolous and violative of Rule 11 of the Federal Rules of Civil Procedure. The Company filed an answer to the complaint on February 5, 2019, and in addition to mounting a vigorous defense, filed counter claimsagainst Mr. Mazzeo
alleging breach of fiduciary duty. The Company does not believe that it owes the amount demanded and intends to vigorously defend against these claims.
In August 2018, SCWorx settled a dispute with a former employee for $260,000, of which approximately $132,000 was paid in 2018 and the balance of $128,000 was accrued at December 31, 2018. The remaining balance was paid in January 2019. The employee had sued the Company in Massachusetts Superior Court for compensation under an employment agreement.
Disputed Contract Claim
As part of Alliance’s public offering of shares of its common stock and warrants in January 2018, Alliance issued warrants with a provision requiring Alliance to pay the warrant holder the Black-Scholes value of the warrant upon a fundamental transaction as defined in the SPA. On August 20, 2018, Alliance entered into a Stock Exchange Agreement with SCWorx which upon the closing in February 2019, qualified as a fundamental transaction. The holders of the warrants had thirty days to notify SCWorx of the exercise of their rights under this provision, and two holders did so in the allotted time. The Company negotiated settlements with the warrant holders aggregating approximately
$175,000in fair value. During the second quarter 2019, the Company issued 19,801 shares of common stock and approximately $55,000 in cash in full settlement of the claims.
Preferred Stock Penalty
On December 18, 2018, Alliance closed the placement of the first round of Series A Convertible Preferred securities purchase agreements pursuant to which such Series A Convertible Preferred Stock was issued. The terms of the convertible preferred stock agreements required SCWorx to register the underlying common shares under a Form S-1 within a prescribed period or pay the holders a penalty. The Company did not file a registration statement on Form S-1 within the required timeframe and has accrued the total penalty of approximately $205,000 as of June 30, 2019. The Company is negotiating with certain holders of the Series A Convertible Preferred Stock to accept Series A Convertible Preferred Stock instead of cash as settlement of the penalty.
June 28, 2019
, the Company terminated
consulting arrangement with a contractor providing investor relation services. The Company and contractor have been in discussions regarding the settlement of contract terms and services provided through
June 28, 2019
. The Company has accrued $195,000 as the best estimate of the cost to settle any potential dispute regarding the contract terms.
The entire disclosure for commitments and contingencies.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef