Note 14. Subsequent Events

Formation of Direct-Worx LLC subsidiary

On March 16, 2020, the Company formed a new subsidiary, Direct-Worx LLC, a Delaware corporation.

Issuance of Shares Pursuant to Conversion of Series A Preferred Stock

During January 2020, three Series A Preferred stockholders converted 55,000 shares of Series A Preferred Stock into 144,738 shares of common stock.

During February 2020, two Series A Preferred stockholders converted 12,500 shares of Series A Preferred Stock into 32,895 shares of common stock.

During April 2020, fifteen Series A Preferred stockholders converted 396,695 shares of Series A Preferred Stock into 1,043,935 shares of common stock.

During May 2020, three Series A Preferred stockholders converted 19,500 shares of Series A Preferred Stock into 51,316 shares of common stock.

Issuance of Shares Pursuant to Cashless Exercises of Common Stock Warrants

During April 2020, thirteen holders of common stock warrants exercised 520,925 warrants using a cashless exercise into 352,488 shares of common stock.

During May 2020, four holders of common stock warrants exercised 56,982 warrants using a cashless exercise into 26,034 shares of common stock.

Issuance of Shares Pursuant to Exercises of Common Stock Warrants

On April 14, 2020, a holder of common stock warrants exercised 7,000 warrants for a cash payment of $38,570.

Issuance of Shares Pursuant to Cashless Exercises of Stock Options

During April 2020, five holders of common stock options exercised 108,978 options using a cashless exercise into 26,361 shares of common stock.

Issuance of Shares Pursuant to Settlement of Accounts Payable

On April 16, 2020, the Company issued 100,000 shares of common stock in full settlement of $640,517 of accounts payable.

On May 12, 2020, the Company issued 104,567 shares of common stock in full settlement of $93,150 of accounts payable.

Issuance of Shares Pursuant to Stock Compensation

On March 12, 2020, the Company issued 16,667 shares of common stock to an employee pursuant to a vesting schedule.

On April 15, 2020, the Company issued 3,913 shares of common stock to a consultant of the company as stock compensation.

On April 16, 2020, the Company issued 5,264 shares of common stock to a consultant of the company as stock compensation.

On April 21, 2020, the Company issued 30,303 shares of common stock to an employee pursuant to a vesting schedule.

Issuance of Shares Pursuant to a Settlement

On January 8, 2020, the Company issued 50,000 shares of common stock to a former employee per the terms of a separation settlement. 

Issuance of Restricted Stock Units

On March 17, 2020, the Company granted 80,000 restricted stock units to each of the members of the Board of Directors, for a total of 320,000 restricted stock units. Such units vest fully on September 17, 2020.

On April 7, 2020, the Company granted 1,569,000 restricted stock units to 36 individuals for services rendered. Such shares vest in between six months and two years from the date of grant.

On April 7, 2020, the Company granted 329,000 restricted stock units to its Chief Executive Officer. Such shares vest 50% upon the Company filing its 2019 Form 10-K and 50% upon the Company filing its 2020 Form 10-K.

On May 15, 2020, the Company granted 20,000 restricted stock units to three of the four members of the Board of Directors. The fourth member, in connection with his appointment to the board on May 15, 2020, was granted 100,000 restricted stock units. The total amount of 160,000 restricted stock units granted by the Company vest fully on September 17, 2020.

Securities Class Action and Investigations

On April 29, 2020, a securities class action case was filed in the United States District Court for the Southern District of New York against the Company and its CEO. The action is captioned Daniel Yannes, individually and on behalf of all others similarly situated, Plaintiff vs. SCWorx Corp. and Marc S. Schessel, Defendants. 

On May 27, 2020, a second securities class was filed in the United States District Court for the Southern District of New York against the Company and its CEO. The action is captioned Caitlin Leeburn, individually and on behalf of all others similarly situated, Plaintiff v. SCWorx Corp. and Marc S. Schessel, Defendants. Both lawsuits allege that the Company and its CEO mislead investors in connection with the Company’s April 13, 2020 press release with respect to the sale of COVID-19 rapid test kits. The plaintiffs in these actions are seeking unspecified monetary damages. The Company intends to vigorously defend against these proceedings. In connection with these actions, the Company may be obligated to indemnify its CEO and any of its officers or directors who incur any liability or expense incurred as a result of serving at our company’s request in such capacity.

In addition, following the April 13, 2020 press release and related disclosures (related to COVID-19 rapid test kits), the Securities and Exchange Commission made an inquiry regarding the disclosures the Company made in relation to the transaction involving COVID-19 test kits. On April 22, 2020, the Securities and Exchange Commission ordered that trading in the securities of the Company be suspended because of “questions and concerns regarding the adequacy and accuracy of publicly available information in the marketplace” (the “SEC Trading Halt”). The SEC Trading Halt expired May 5, 2020, at 11:59 PM EDT. The Company is fully cooperating with the SEC’s investigation and is providing documents and other requested information.

In April 2020, the Company received related inquiries from The Nasdaq Stock Market and the Financial Industry Regulatory Authority (FINRA). The Company has been fully cooperating with these agencies and providing information and documents, as requested. On May 5, 2020, the Nasdaq Stock Market informed the Company that it has initiated a “T12 trading halt,” which means the halt will remain in place until the Company has fully satisfied Nasdaq's request for additional information. The Company continues to fully cooperate with Nasdaq and respond to Nasdaq’s information requests as they are issued. The T12 trading halt remains in effect as of the filing of this Form 10-K.

Also in April 2020, the Company was contacted by the U.S. Attorney’s Office for the District of New Jersey, which is seeking information and documents from the Company’s officers and directors relating primarily to the April 13, 2020 press release concerning COVID-19 rapid test kits. The Company is fully cooperating with the U.S. Attorney’s Office in its investigation. 

Equity Offering

During May 2020 the Company received $515,000 in connection with an equity financing. This transaction is subject to execution of definitive documents.

COVID-19

The Company’s operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic spreading throughout the United States and the world. The New York and New Jersey area, where the Company is headquartered, is currently at one of the epicenters of the coronavirus outbreak in the United States. The Company has been following the recommendations of local health authorities to minimize exposure risk for its team members since the outbreak.

In addition, the Company’s customers (hospitals) have also experienced extraordinary disruptions to their businesses and supply chains, while experiencing unprecedented demand for health care services related to COVID-19. As a result of these extraordinary disruptions to our customers’ business, the Company’s customers are currently focused on meeting the nation’s health care needs in response to the COVID-19 pandemic. As a result, there is a significant risk that the Company’s customers will not be able to focus any resources on expanding the utilization of the Company’s services, which could adversely impact the Company’s future growth prospects, at least until the adverse effects of the pandemic subside. In addition, the financial impact of COVID-19 on the Company’s hospital customers could cause the hospital to delay payments due to us for services, which could negatively impact the Company’s cash flows.

Receipt of CARES funding

On May 5, 2020, we received $293,972 in financing from the U.S. government’s Payroll Protection Program (“PPP”). We entered into a loan agreement with Bank of America. This loan agreement was pursuant to the CARES Act. The CARES Act was established in order to enable small businesses to pay employees during the economic slowdown caused by COVID-19 by providing forgivable loans to qualifying businesses for up to 2.5 times their average monthly payroll costs. The amount borrowed under the CARES Act is eligible to be forgiven provided that (a) the Company uses the PPP Funds during the eight week period after receipt thereof, and (b) the PPP Funds are only used to cover payroll costs (including benefits), rent, mortgage interest, and utility costs. The amount of loan forgiveness will be reduced if, among other reasons, the Company does not maintain staffing or payroll levels. Principal and interest payments on any unforgiven portion of the PPP Funds (the “PPP Loan”) will be deferred for six months and will accrue interest at a fixed annual rate of 1.0% and carry a two year maturity date. There is no prepayment penalty on the CARES Act Loan.