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 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 was set to expire in March 2020 and is
now month-to-month.
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 leading provider of data content and services related to the repair,
normalization and interoperability of information for healthcare providers and
big data analytics for the healthcare industry.
SCWorx has developed and markets health information technology solutions and
associated services that improve healthcare processes and information flow
within hospitals. SCWorx's software platform enables healthcare providers to
simplify, repair, and organize its data ("data normalization"), allows the data
to be utilized across multiple internal software applications
("interoperability") and provides the basis for sophisticated data analytics
("big data"). SCWorx's solutions are designed to improve the flow of information
quickly and accurately between the existing supply chain, electronic medical
records, clinical systems, and patient billing functions. The software is
designed to achieve multiple operational benefits such as supply chain cost
reductions, decreased accounts receivables aging, accelerated and more accurate
billing, contract optimization, increased supply chain management and cost
visibility, synchronous Charge Description Master ("CDM") and control of vendor
rebates and contract administration fees.
22
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;
? 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. 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.
SCWorx, as part of the acquisition of Alliance MMA, operates an online event
ticketing platform focused on serving regional MMA ("mixed martial arts")
promotions.
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.
23
Impact of the COVID-19 Pandemic
Our 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 our company is
headquartered, was at one of the early epicenters of the coronavirus outbreak in
the United States. The outbreak has since spread to the rest of the country and
is impacting new customer acquisition. We have been following the
recommendations of local health authorities to minimize exposure risk for our
team members since the outbreak.
In addition, our 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, our 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 our customers
will not be able to focus any resources on expanding the utilization of our
services, which could adversely impact our future growth prospects, at least
until the adverse effects of the pandemic subside. In addition, the financial
impact of COVID-19 on our hospital customers could cause the hospital to delay
payments due to us for services, which could negatively impact our cash flows.
We are endeavoring to mitigate these risks through the sale of personal
protective equipment ("PPE") and COVID-19 rapid test kits to the health care
industry, including many of our hospital customers. Our Chief Executive Officer
and employees have experience in the healthcare industry and industry contacts,
and a database of items designed to assist the healthcare industry in fulfilling
its inventory demands.
On March 16, 2020, in response to the COVID-19 pandemic, we established a
wholly-owned subsidiary, Direct-Worx, LLC to endeavor to source and provide
critical, difficult-to-find items for the healthcare industry. Items have become
difficult to source due to unexpected disruptions within the supply chain, such
as the COVID-19 pandemic. The products we have sought to source include:
? Test Kits - hawse have identified potential sources for Rapid Test Kits
for COVID-19, but currently have no contracted supply of Rapid Test Kits.
? PPE - Personal Protective Equipment (PPE) includes items such as masks,
gloves, gowns, shields, etc.
The sale of PPE and rapid test kits for COVID-19 represent a new business for
our company and is subject to the myriad risks associated with any new venture.
We have for example encountered great difficulty in attempting to secure
reliable sources of supply for both COVID-19 Rapid Test Kits and PPE including,
3M N95 masks, which are the preferred medical grade mask of US healthcare
companies. Further, we have encountered shipping delays with regard to masks and
other PPE, and significant quality related issues regarding N95 masks. In
addition, regarding our sourcing of COVID-19 Rapid Test Kits, we have
encountered significant shipping delays, as well as reduced quantities. In
addition, we currently have no contracted supply of Rapid Test Kits.
Consequently, there is no assurance as to whether we will be able to source a
reliable supply of COVID-19 Test Kits. We have yet to complete the sale of any
COVID-19 rapid test kits. As of June 30, 2020, we had approximately 47,000 test
kits and approximately 40,000 sampling kits in inventory. In addition, changes
in FDA processes governing the sale of COVID-19 serology tests could have the
effect of rendering the COVID-19 serology tests to be sold by our company not
saleable in the United States, which could have a material adverse effect on our
company. There can be no assurance that we will be able to generate any
significant revenue from the sale of PPE products or rapid test kits.
We have yet to complete the sale of any COVID-19 rapid test kits. Through the
date of filing we have not generated any material revenue from the sale of PPE
or rapid test kits.
Results of Operations - three months ended June 30, 2020 and 2019
Our operating results for the three month periods ended June 30, 2020 and 2019
are summarized as follows:
Three Months Ended
June 30, June 30,
2020 2019 Difference
Revenue $ 1,444,572 $ 1,364,912 $ 79,660
Cost of revenues 950,334 1,293,738 (343,404 )
General and administrative 3,358,267 2,372,385 985,882
Other income (885,773 ) - (885,773 )
Benefit from income taxes - 195,000 (195,000 )
Net loss (3,749,802 ) (2,496,211 ) (1,253,591 )
24
Revenues
Revenue for the three months ended June 30, 2020 was $1,444,572, compared to
revenue for the three months ended June 30, 2019 of $1,364,912. The increase in
revenue is primarily related to the addition of new multi-year customer
contracts and monthly revenue from customers which were brought on in 2019
subsequent to the end of the second quarter. Given the disruption caused to our
hospital customers by the COVID-19 pandemic, our second quarter was adversely
impacted, and we expect the impact to continue into at least the third quarter
of this year, if not longer. Customer retention includes monthly and annual
recurring revenue that should not be significantly impacted by the pandemic.
Operating Expenses
Cost of revenues
Cost of revenues were $950,334 for the three months ended June 30, 2020 compared
to $1,293,738 for the same period in 2019. The decrease was primarily the result
of fees related to new product development and programming incurred in the three
months ended June 30, 2019 which was not present during the three months ended
June 30, 2020. This decrease was partially offset by an increase to our
workforce. We do not expect to incur significant product development costs for
the remainder of this year.
General and administrative
General and administrative expenses increased $985,882 to $3,358,267 for the
three months ended June 30, 2020, as compared to $2,372,385 in the same period
of 2019. Stock-based compensation increased $1,768,407 from the second quarter
of 2019 due to additional RSUs issued during April 2020. Legal fees increased
$128,397 compared to the prior period, due to a number of complaints filed
against our company during the three months ended June 30, 2020. These increases
were partially offset by a $524,603 decrease in accounting and auditing fees due
to purchase accounting completed during the second quarter of 2020, a $146,309
decrease in travel expenses due to COVID-19, and a $110,502 decrease in SEC and
proxy expenses due to Nasdaq listing fees incurred during 2019. We expect legal
fee expenses to remain high due to the ongoing litigation along with stock
compensation expense. We are putting plans in place to attempt to reduce other
general and administrative expenses.
Other Expenses
We had other expense of $885,773 in the six months ended June 30, 2020 compared
to $0 in the same period in 2019. Other expense in the first half of 2020
related to a loss on settlement of accounts payable of $885,773 due to the fair
value of the shares issued in settlement being greater than the value of the
accounts payable.
Net Loss
For the three months ended June 30, 2020, we incurred a net loss of $3,749,802
compared to a net loss of $2,496,211 for the same period in 2019.
Results of Operations - six months ended June 30, 2020 and 2019
Our operating results for the six month periods ended June 30, 2020 and 2019 are
summarized as follows:
Six Months Ended
June 30, June 30,
2020 2019 Difference
Revenue $ 2,568,399 $ 2,613,016 $ (44,617 )
Cost of revenues 1,783,534 2,264,947 (481,413 )
General and administrative 4,798,545 9,000,324 (4,201,779 )
Other income (885,773 ) 441,335 (1,327,108 )
Benefit from income taxes - - -
Net loss (4,899,453 ) (8,210,920 ) 3,311,467
Revenues
Revenue for the six months ended June 30, 2020 was $2,568,399, compared to
revenue for the six months ended June 30, 2019 of $2,613,016. The slight
decrease in revenue was partially due to one-time sales during the three months
ended June 30, 2019 that were not present during the six months ended June 30,
2020. Given the disruption caused to our hospital customers by the COVID-19
pandemic, the first half of our year has been adversely impacted, and we expect
the impact to continue into at least the third quarter of this year, if not
longer. Customer retention includes monthly and annual recurring revenue that
should not be significantly impacted by the pandemic.
25
Operating Expenses
Cost of revenues
Cost of revenues were $1,783,534 for the six months ended June 30, 2020 compared
to $2,264,947 for the same period in 2019. The decrease was primarily the result
of fees related to new product development and programming incurred in the six
months ended June 30, 2019 which was not present during the six months ended
June 30, 2020. This decrease was partially offset by an increase to our
workforce. We do not expect to incur significant development costs for the
remainder of this year.
General and administrative
General and administrative expenses decreased $4,201,779 to $4,798,545 for the
six months ended June 30, 2020, as compared to $9,000,324 in the same period of
2019. Stock-based compensation decreased $3,493,825 from the second quarter of
2019 due to shares that were transferred during the first quarter of 2019 to
non-employee consultants by our CEO and a former significant shareholder. This
decrease was partially offset by stock-based compensation of $1,988,883 during
April 2020 related to the issuance of additional RSUs. Accounting and auditing
fees decreased $589,503 due to purchase accounting completed during the six
months ended June 30, 2019. SEC and proxy expenses decreased $239,934 due to
Nasdaq listing fees incurred during the first half of 2019. Travel expenses
decreased $134,770 due to COVID-19. These decreases were partially offset by a
$260,781 increase in payroll and taxes due to additional people hired during
2019 and 2020 and health insurance fees for contract labor, a $189,030 increase
in commissions due to a new relationship with a group purchasing organization,
and a $187,642 increase in legal fees due to complaints filed against our
company during the first half of 2020. We expect legal fee expenses to remain
high due to the ongoing litigation along with stock compensation expense. We are
putting plans in place to attempt to reduce other general and administrative
expenses.
Other income (expense)
We had other expense of $885,773 in the six months ended June 30, 2020, compared
to other income of $441,335 in the same period of 2019. Other expense in the
first half of 2020 related to a loss on settlement of accounts payable of
$885,773 due to the fair value of the shares issued in settlement being greater
than the value of the accounts payable. In the prior period, there was a gain on
the fair value of convertible note receivable of $410,055 and a gain on the fair
value of warrant asset of $55,000. Additionally, interest expense was $23,720
during the six months ended June 30, 2019.
Net Loss
For the six months ended June 30, 2020, we incurred a net loss of $4,899,453
compared to a net loss of $8,210,920 for the same period in 2019.
Liquidity and Capital Resources
Going Concern
As of June 30, 2020, we had a working capital deficit of $2,164,960 and
accumulated deficit of $17,693,926. During the six months ended June 30, 2020,
we had a net loss of $4,899,453 and used $1,000,995 of cash in operations. We
have historically incurred operating losses and may continue to incur operating
losses for the foreseeable future. We believe that these conditions raise
substantial doubt about our ability to continue as a going concern. This may
hinder our future ability to obtain financing or may force us to obtain
financing on less favorable terms than would otherwise be available. If we are
unable to develop sufficient revenues and additional customers for our products
and services, we may not generate enough revenue to sustain our business, and we
may fail, in which case our stockholders would suffer a total loss of their
investment. There can be no assurance that we will be able to continue as a
going concern.
As of the date of this report, we have only limited cash on hand, and we are
experiencing negative cash flows from operations. Consequently, we need to raise
additional capital in the near term to fund our operations and the
implementation of our business plan.
On May 5, 2020, the Nasdaq Stock Market informed the Company that it had
initiated a "T12 trading halt," which means the halt will remain in place until
the Company has fully satisfied Nasdaq's request for additional information.
This trading halt was lifted on August 10, 2020.
On May 5, 2020, we obtained a $293,972 unsecured loan payable through the
Paycheck Protection Program ("PPP"), which was enacted as part of the
Coronavirus Aid, Relief and Economic Security Act (the "CARES ACT"). The funds
were received from Bank of America through a loan agreement pursuant to the
CARES Act. The CARES Act was established in order to enable small businesses to
pay employees during the economic slowdown caused by COVID-19 by providing
forgivable loans to qualifying businesses for up to 2.5 times their average
monthly payroll costs. The amount borrowed under the CARES Act and used for
payroll costs, rent, mortgage interest, and utility costs during the 24 week
period after the date of loan disbursement is eligible to be forgiven provided
that (a) we use the PPP Funds during the eight week period after receipt
thereof, and (b) the PPP Funds are only used to cover payroll costs (including
benefits), rent, mortgage interest, and utility costs. While the full loan
amount may be forgiven, the amount of loan forgiveness will be reduced if, among
other reasons, we do not maintain staffing or payroll levels or less than 60% of
the loan proceeds are used for payroll costs. Principal and interest payments on
any unforgiven portion of the PPP Funds (the "PPP Loan") will be deferred to the
date the SBA remits the borrower's loan forgiveness amount to the lender or, if
the borrower does not apply for loan forgiveness, 10 months after the end of the
borrower's loan forgiveness period for six months and will accrue interest at a
fixed annual rate of 1.0% and carry a two year maturity date. There is no
prepayment penalty on the CARES Act Loan.
26
During May 2020, we received $515,000 of a committed $565,000 from the sale of
135,527 shares of common stock (at a price of $3.80 per share) and warrants to
purchase 169,409 shares of common stock, at an exercise price of $4.00 per
share.
In connection with the Class Action and derivative claims and investigations
described in Item 1. Legal Proceedings of this Quarterly Report on 10-Q, we are
obligated to indemnify our officers and directors for costs incurred in
defending against these claims and investigations. Because we currently do not
have the resources to pay for these costs, our directors and officers liability
insurance carrier has agreed to indemnify these persons even though the $750,000
retention under such policy has not yet been met. Ultimately, we will be
obligated to pay the amount of the retention to the extent of actual settlement
and defense costs, which payments could have a material adverse effect on the
Company.
As of June 30, 2020, we had a working capital deficit of $2,164,960, compared to
a deficit of $1,768,834 as of December 31, 2019. The $396,126 increase in our
working capital deficit was due primarily to an increase in contract liabilities
of $770,625 and funds received for equity financing of $515,000 (included within
current liabilities). These increases were partially offset by an increase in
prepaid expenses and other assets of $681,471, and an increase in inventory of
$558,119.
Based on our current business plan, we anticipate that our operating activities
will use approximately $260,000 in cash per month over the next twelve months,
or approximately $3,120,000. Currently we have limited cash on hand, and
consequently, we are unable to fully implement our current business plan.
Accordingly, we have an immediate need for additional capital to fund our
operating activities.
In order to remedy this liquidity deficiency, we are actively seeking to raise
additional funds through the sale of equity and debt securities, and ultimately,
we will need to generate substantial positive operating cash flows. Our internal
sources of funds will consist of cash flows from operations, but not until we
begin to realize additional revenues from the sale of our products and services.
As previously stated, our operations are generating negative cash flows, and
thus adversely affecting our liquidity. If we are able to secure sufficient
funding in the near term to fully implement our business plan, we expect that
our operations could begin to generate significant cash flows during early 2021,
which should ameliorate our liquidity deficiency. If we are unable to raise
additional funds in the near term, we will not be able to fully implement our
business plan, in which case there could be a material adverse effect on our
results of operations and financial condition.
In the event we do not generate sufficient funds from revenues or financing
through the issuance of common stock or from debt financing, we may be unable to
fully implement our business plan and pay our obligations as they become due,
any of which circumstances would have a material adverse effect on our business
prospects, financial condition, and results of operations. The accompanying
financial statements do not include any adjustments that might be required
should we be unable to recover the value of our assets or satisfy our
liabilities.
Based on our limited availability of funds we expect to spend minimal amounts on
software development and capital expenditures. We expect to fund any future
software development expenditures through a combination of cash flows from
operations and proceeds from equity and/or debt financing. If we are unable to
generate positive cash flows from operations, and/or raise additional funds
(either through debt or equity), we will be unable to fund our software
development expenditures, in which case, there could be an adverse effect on our
business and results of operations.
27
Cash Flows
Six months ended
June 30,
2020 2019
Net cash used in operating activities $ (1,000,995 ) $ (3,941,722 )
Net cash provided by investing activities
- 4,912,081
Net cash provided by financing activities 847,542 287,548
Change in cash $ (153,453 ) $ 1,257,907
Operating Activities
Cash used in operating activities was $1,000,995 for the six months ended June
30, 2020, mainly related to the net loss of $4,899,453 and an increase of
$655,346 in prepaid expenses related to deposits for PPE. This was partially
offset by stock-based compensation of $2,356,547, the loss on settlement of
accounts payable of $885,773, an increase in contract liabilities of $770,625
related to customer repayments on long-term SaaS agreements, and net changes in
accounts payable and accrued liabilities of $530,501.
Cash used in operating activities was $3,941,722 for the six months ended June
30, 2019, mainly related to the net loss of $8,210,920, an increase of $640,541
in accounts receivable mainly related to data consulting completed and invoiced
in June 2019, an increase in prepaid assets of $14,746 due to prepayments on
insurance and our lease right to use asset, a decrease in accounts payable and
accrued liabilities of $452,579 related to payments made on payable balances
related to the Acquisition and operating expenses of SCWorx offset by a $95,482
increase in customer contract liabilities related to customer prepayments on
long-term SaaS agreements, non-cash stock-based compensation of $5,850,373
related to the transfer of shares of common stock from our founder/CEO and a
former significant shareholder to non-employee contractors and equity awards to
our management team and board of directors, and $586,405 of non-cash gains on
warrants and convertible note assets with Alliance.
Investing Activities
We had no investing activities for the six months ended June 30, 2020.
Cash provided by investing activities was $4,912,081 for the six months ended
June 30, 2019, related to $5,441,437 cash acquired as part of the Acquisition,
offset by $199,549 in advances to a stockholder and founder in January 2019,
advances on convertible notes receivable from Alliance of $215,000, and capital
asset acquisitions totaling $114,807.
Financing Activities
Cash provided by financing activities was $847,542 for the six months ended June
30, 2020. This consisted of $515,000 proceeds from equity financing, $293,872 of
proceeds from a loan payable, and $38,570 of proceeds from the exercise of
warrants.
Cash provided by financing activities was $287,548 for the six months ended June
30, 2019. This consisted of proceeds from our notes payable with a significant
Stockholder and former officer of $120,000, sale of Series A Convertible
Preferred Stock totaling $100,000, and cash from the exercise of common stock
warrants of $67,548.
Off-Balance Sheet Arrangements
As of June 30, 2020 and December 31, 2019, we did not have any off-balance sheet
arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
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