Commitments and Contingencies
|9 Months Ended|
Sep. 30, 2019
|Commitments and Contingencies|
|Commitments and Contingencies||
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 October 25, 2019, the Company and John Price, the Company’s Chief Financial Officer, mutually agreed that Mr. Price would cease to be employed by the Company in any capacity, effective immediately. In addition, on October 25, 2019, the Board of Directors appointed Marc S. Schessel, Chief Executive Officer and Chairman of the Board of Directors of the Company, as interim Chief Financial Officer.
In conjunction with the termination of his employment, the Company and Mr. Price executed a Settlement Agreement and Mutual Release (the “Settlement Agreement”) pursuant to which Mr. Price agreed that his existing employment agreement would be deemed terminated without cause and that Mr. Price would continue to provide transitional assistance to the Company for a period of 90 days from the date of his termination (the “Transition Period”). In addition, the Company agreed to pay Mr. Price an adjusted annual base salary of $150,000 during the Transition Period, as well issue him 75,000 shares of restricted stock pursuant to the Company’s Amended and Restated 2016 Equity Incentive Plan, with 25,000 shares issuable eon the second trading day following the filing by the Company of its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2019 and the remaining 50,000 shares issuable on January 2, 2020.
On March 29, 2019, Network 1 Financial Securities Inc. (“Network 1”) served a complaint against Alliance and SCWorx. Network 1 alleges that Alliance breached its obligation under Network 1's agreements with Alliance to indemnify Network 1 for certain costs that Network 1 allegedly incurred in connection with the defense and settlement of the class action litigation previously instituted against Alliance and Network 1. This class action litigation has since been resolved, as previously disclosed in the consolidated financial statements that were filed with the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on May 22, 2019. Network 1 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 August 9, 2019, SCWorx and Alliance filed a motion to dismiss the complaint on the grounds that Network 1 is a foreign corporation that is not authorized to do business in the State of New York and/or seeking a stay of the action until such time as Network 1 has obtained such authorization and paid to the State of New York all fees and taxes, penalties and interest accrued under the tax law. The briefing on such motion is complete and the Court has scheduled oral argument for November 21, 2019.
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 breached such 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. During the second quarter 2019, the Company reached a settlement with Mr. Mazzeo whereas the Company agreed to pay $35,000 in cash and issue $75,000 of common stock. On September 30, 2019, 24,843 shares of common stock were issued to Mr. Mazzeo. In October 2019, the Company paid Mr. Mazzeo the $35,000 cash portion of the settlement.
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 $175,000 in 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 Stock securities purchase agreements pursuant to which such Series A Convertible Preferred Stock was issued. The terms of the agreements required SCWorx to register the underlying common stock under a registration statement on 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 accrued for the penalty of approximately $250,000 during the second quarter of 2019. During the third quarter 2019, the Company issued 73,156 shares of common stock as full settlement of the fee obligation.
On June 28, 2019, the Company terminated a 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