10-Q/A 1 f10q0920a1_scworxcorp.htm AMENDMENT NO. 1 TO FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q\A

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37899

SCWORX CORP.

(Exact name of registrant as specified in its charter)

Delaware		47-5412331
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

590 Madison Avenue, 21st Floor

New York, New York 10022

(Address of principal executive offices, including zip code)

(844) 472-9679

(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
Common stock, $0.001 par value per share		WORX		Nasdaq Capital Market

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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	☐
Non-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 13, 2020: 9,861,731

EXPLANATORY NOTE

SCWorx Corp. (the “Company”) is filing this amended Form 10-Q/A (this “Amendment”) to amend its Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 that was originally filed with the Securities and Exchange Commission (the “SEC”) on November 16, 2020 (“Original Filing”) to restate its unaudited financial statements as of September 30, 2020 to correct an error that caused stock based compensation expense for the period to be overstated. As described in Item 4.02 of the Company’s Current Report on Form 8-K filed with the SEC on April 21, 2021, the previously filed unaudited financial statements for these periods should no longer be relied upon. This Amendment also amends certain other items in the Original Filing, as listed below.

As further discussed in Note 3 to the Company’s unaudited financial statements in Part I, Item 1, “Financial Statements” of this Amendment, the Company concluded that it would restate the previously issued financial statements included in the Original Filing to correct an error related to a modification of restricted stock unit awards which resulted in the Company’s stock -based compensation expense for the period being overstated.

For the convenience of the reader, this Amendment sets forth the Original Filing in its entirety, as modified and superseded as necessary to reflect the restatement described above. Accordingly, the Amendment does not reflect events occurring after the filing of the Original Filing or modify or update those disclosures affected by subsequent events and should be read in conjunction with the Original Filing and the Company’s other filings with the SEC. Information not affected by the restatement and other immaterial changes are unchanged and reflect disclosures made at the time of the filing of the Original Filing. The disclosures impacted by the restatement include, but are not limited to, those related to additional paid-in capital, accumulated deficit, general and administrative expenses and net loss. The following items in the Original Filing have been amended as a result of, and to reflect, the restatement:

Part I, Item 1. Financial Statements

Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Part II, Item 6. Exhibits

In accordance with applicable SEC rules, this Amendment includes new certifications required by Rule 13a-14 under the Securities Exchange Act of 1934, as amended, from the Company’s Chief Executive Officer and Chief Financial Officer dated as of the date of filing of this Amendment.

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	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II - OTHER INFORMATION		37

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	38

Item 6.	Exhibits	39

Signatures		40

Exhibit Index		39

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, 2019. 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;

	●	obtain additional financing in sufficient amounts or on acceptable terms when required;

	●	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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

	Page
	Number

Condensed consolidated balance sheets as of September 30, 2020 (unaudited) and December 31, 2019 (audited)	2

Unaudited Condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019	3

Unaudited Condensed consolidated statements of changes in stockholders’ equity for the three and nine months ended September 30, 2020 and 2019	4

Unaudited Condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019	6

Notes to unaudited condensed consolidated financial statements	7

SCWorx Corp.

Condensed Consolidated Balance Sheets

	September 30,
	2020			December 31,
	(Restated)			2019
	(Unaudited)
ASSETS
Current assets:
Cash	$	189,855		$	487,953
Accounts receivable - net of allowance of $309,979 and $344,412 as of September 30, 2020 and December 31, 2019, respectively		416,639			799,246
Inventory		991,309			-
Prepaid expenses and other assets		255,831			11,160
Total current assets		1,853,634			1,298,359

Property and equipment, net		77,153			105,199
Goodwill		8,366,467			8,366,467
Intangible assets, net		176,762			205,219
Other assets		-			17,561
Total assets	$	10,474,016		$	9,992,805

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	2,435,171		$	2,010,556
Accounts payable and accrued liabilities – related party		203,171			-
Shareholder advance		475,000			-
Deferred Revenue		1,641,720			1,056,637
Equity financing		515,000			-
Total current liabilities		5,270,062			3,067,193

Long-term liabilities:
Loan payable		293,972			-
Total long-term liabilities		293,972			-

Total liabilities		5,564,034			3,067,193

Commitments and contingencies

Stockholders’ equity:
Series A Convertible Preferred stock, $0.001 par value; 900,000 shares authorized; 89,872 and 578,567 shares issued and outstanding, respectively		90			579
Common stock, $0.001 par value; 45,000,000 shares authorized; 9,845,600 and 7,390,261 shares issued and outstanding, respectively		9,846			7,391
Additional paid-in capital		25,341,185			19,712,115
Accumulated deficit		(20,441,139	)		(12,794,473	)
Total stockholders’ equity		4,909,982			6,925,612

Total liabilities and stockholders’ equity	$	10,474,016		$	9,992,805

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SCWorx Corp.

Condensed Consolidated Statements of Operations

(Unaudited)

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2020			2019			2020			2019
	(Restated)						(Restated)
Revenue	$	1,171,399		$	1,681,928		$	3,739,798		$	4,294,944

Operating expenses:
Cost of revenues		956,203			1,088,782			2,739,737			3,353,729
General and administrative		2,235,643			1,384,435			7,034,188			10,384,759
Total operating expenses		3,191,846			2,473,217			9,773,925			13,738,488

Loss from operations		(2,020,447	)		(791,289	)		(6,034,127	)		(9,443,544	)

Other income (expenses):
Interest expense		-			-			-			(23,720	)
Loss on settlement of accounts payable		(726,766	)		-			(1,612,539	)		-
Gain on settlement of related party debt		-			151,646			-			151,646
Other Income		-			-			-			465,055
Total other income (expense)		(726,766	)		151,646			(1,612,539	)		592,981

Net loss before income taxes		(2,747,213	)		(639,643	)		(7,646,666	)		(8,850,563	)

Provision for (benefit from) income taxes		-			747			-			747

Net loss	$	(2,747,213	)	$	(640,390	)	$	(7,646,666	)	$	(8,851,310	)

Net loss per share, basic and diluted	$	(0.29	)	$	(0.10	)	$	(0.87	)	$	(1.49	)

Weighted average common shares outstanding, basic and diluted		9,616,717			6,716,060			8,754,824			5,935,372

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SCWorx Corp.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

Three months ended	Preferred Stock						Common stock				Additional paid-in			Accumulated
September 30, 2020 (Restated)	Shares			$			Shares		$		capital			deficit			Total

Balances, June 30, 2020		94,872		$	95			9,490,582	$	9,491	$	23,863,806		$	(17,693,926	)	$	6,179,466

Conversion of Series A Convertible Preferred Stock into common stock		(5,000	)		(5	)		13,158		13		(8	)		-			-
Settlement of Accounts Payable		-			-			157,000		157		847,043			-			847,200
Shares issued in cashless exercise of warrants		-			-			68,715		69		(69	)		-			-
Shares issued in cashless exercise of options		-			-			28,890		29		(29	)		-			-
Shares issued to current and former employees and directors		-			-			87,255		87		142,138			-			142,225
Stock based compensation		-			-			-		-		488,304			-			488,304
Net Loss		-			-			-		-		-			(2,747,213	)		(2,747,213	)

Ending balance, September, 2020		89,872		$	90			9,845,600	$	9,846	$	25,341,185		$	(20,441,139	)	$	4,909,982

Nine months ended	Preferred Stock						Common stock				Additional paid-in			Accumulated
September 30, 2020 (Restated)	Shares			$			Shares		$		capital			deficit			Total

Balances, December 31, 2019		578,567		$	579			7,390,261	$	7,391	$	19,712,115		$	(12,794,473	)	$	6,925,612

Conversion of Series A Convertible Preferred Stock into common stock		(488,695	)		(489	)		1,286,042		1,286		(797	)		-			-
Settlement of Accounts Payable								441,567		442		2,604,948			-			2,605,390
Shares issued in cashless exercise of warrants		-			-			415,904		416		(416	)		-			-
Shares issued in cashless exercise of options		-			-			86,424		86		(86	)		-			-
Warrants exercised for cash		-			-			7,000		7		38,563			-			38,570
Shares issued to current and former employees and directors		-			-			218,402		218		142,007			-			142,225
Stock based compensation		-			-			-		-		2,844,851						2,844,851
Net Loss		-			-			-		-		-			(7,646,666	)		(7,646,666	)

Ending balance, September 30, 2020		89,872		$	90			9,845,600	$	9,846	$	26,679,488		$	(20,441,139	)	$	4,909,982

Three months ended	Preferred Stock						Common stock				Additional paid-in			Accumulated
September 30, 2019	Shares			$			Shares		$		capital			deficit			Total

Balances, June 30, 2019		819,138		$	819			6,584,180	$	6,584	$	17,895,657		$	(9,692,893	)	$	8,210,167
																		-
Conversion of Series A Convertible Preferred Stock into common stock		(158,571	)		(158	)		417,292		417		(259	)		-			-
Issuance of common stock in settlement of Series A Convertible Preferred Stock contractual fee		-			-			73,156		73		245,668			-			245,741
Settlement of disputed contractual claim		-			-			24,843		25		74,975			-			75,000
Stock-based compensation		-			-			-		-		433,438			-			433,438
Net loss		-			-			-		-		-			(640,390	)		(640,390	)

Ending balance, September 30, 2019		660,567		$	661			7,099,471	$	7,099	$	18,649,479		$	(10,333,283	)	$	8,323,956

Nine months ended	Preferred Stock						Common stock						Additional paid-in			Accumulated
September 30, 2019	Shares			$			Shares			$			capital			deficit			Total

Balances, December 31, 2018		-		$	-			5,838,149		$	5,838		$	1,244,273		$	(1,481,973	)	$	(231,862	)

Surrender of common shares in settlement of due from stockholder balance		-			-			(574,991	)		(575	)		(1,608,258	)		-			(1,608,833	)
Series A Convertible Preferred share issuance (Alliance MMA)		619,138			619			-			-			5,980,326			-			5,980,945
Issuance of common stock in settlement of Series A Convertible Preferred Stock contractual fee		-			-			73,156			73			245,668			-			245,741
Conversion of Series A Convertible Preferred Stock into common stock		(158,571	)		(158	)		417,292			417			(259	)					-
Issuance of common stock		-			-			1,283,124			1,283			5,883,078			-			5,884,361
Series A Convertible Preferred share issuance		10,000			10			-			-			99,990			-			100,000
Conversion of notes payable - related party into Series A Convertible Preferred share issuance		190,000			190			-			-			1,899,810			-			1,900,000
Exercise of warrants		-			-			11,075			11			67,537			-			67,548
Settlement of disputed contractual claim		-			-			44,644			45			192,957			-			193,002
Issuance of warrants in settlement of lease dispute		-			-			-			-			66,275			-			66,275
Shares issued in cashless exercise of warrants		-			-			3,732			4			(4	)		-			-
Stock-based compensation related to founder’s transfers of common shares to contractors		-			-			-			-			5,322,930			-			5,322,930
Stock-based compensation related to employee and contractor equity awards		-			-			3,290			3			960,878			-			960,881
Stock and warrant dividend		-			-			-			-			(1,705,722	)		-			(1,705,722	)
Net loss		-			-			-			-			-			(8,851,310	)		(8,851,310	)

Ending balance, September 30, 2019		660,567		$	661			7,099,471		$	7,099		$	18,649,479		$	(10,333,283	)	$	8,323,956

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SCWorx Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the nine months ended
	September 30,
	2020			2019
	(Restated)
Cash flows from operating activities:
Net loss	$	(7,646,666	)	$	(8,851,310	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		29,275			4,194
Amortization of intangibles		28,457			25,295
Stock-based compensation		2,747,615			6,283,811
Loss on settlement of accounts payable		1,612,539			-
Bad debt expense		189,987			-
Gain (loss) on change in fair value of warrant assets		-			(55,000	)
Common stock issued in settlement of litigation		-			75,000
Gain on exchange of debt for common stock		-			(151,646	)
Issuance of common stock in settlement of Series A Convertible Preferred Stock contractual fee		-			245,741
Gain (loss) on change in fair value of convertible notes receivable		-			(531,405	)
Changes in operating assets and liabilities:
Accounts receivable		192,620			(646,393	)
Inventory		(991,309	)		-
Prepaid expenses and other assets		(244,671	)		35,514
Other assets		17,561			-
Accounts payable and accrued liabilities		2,237,862			(619,954	)
Deferred revenue		585,083			(61,316	)
Net cash used in operating activities		(1,144,411	)		(4,247,469	)

Cash flows from investing activities:
Cash acquired in reverse acquisition		-			5,441,437
Advances to shareholder		-			(199,549	)
Purchase of convertible notes receivable - Alliance MMA		-			(215,000	)
Purchase of fixed assets		(1,229	)		(114,806	)
Net cash (used in) provided by investing activities		(1,229	)		4,912,082

Cash flows from financing activities:
Proceeds from equity financing		515,000			-
Proceeds from loan payable		293,972			-
Proceeds from notes payable - related party		-			120,000
Proceeds from exercise of warrants		38,570			67,548
Proceeds from preferred stock placement		-			100,000
Net cash provided by financing activities		847,542			287,548

Net (decrease) increase in cash		(298,098	)		952,161

Cash, beginning of period		487,953			76,459

Cash, end of period	$	189,855		$	1,028,620

Supplemental disclosures of cash flow information:
Cash paid for interest	$	-		$	-
Cash paid for income taxes	$	-		$	-

Non-cash investing and financing activities:
Cashless exercise of warrant	$	416		$	4
Cashless exercise of options	$	86		$	-
Settlement of accounts payable with issuance of common stock	$	2,747,615		$	-
Shareholder advances for purchase of inventory	$	475,000			-
Issuance of warrant in settlement of vendor liability	$	-		$	66,275
Conversion of Series A Convertible Preferred Stock into common shares		-		$	1,585,710
Common stock issued in settlement of litigation		-		$	75,000
Surrender of common stock in settlement of due from shareholder balance	$	-		$	1,608,833
Stock and warrant dividend	$	-		$	1,705,722
Warrants issued to company	$	-		$	19,000
Conversion of notes payable-related party and interest into Series A Convertible Preferred Stock	$	-		$	1,900,000
Issuance of preferred and common stock in connection with acquisition of Alliance MMA, net of cash	$	-		$	6,423,864
Settlement of disputed contractual claim with issuance of common stock	$	-		$	118,002

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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 $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, the Company and certain of its stockholders agreed to cancel 6,510 shares of common stock. In June 2018, the Company began to collect subscriptions for common stock. From June to November 2018, the Company 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 the Company’s current name, with SCW FL Corp. becoming the Company’s subsidiary. On March 16, 2020, in response to the COVID-19 pandemic, SCWorx established a wholly-owned subsidiary, Direct-Worx, LLC.

Business Combination and Related Transactions

On February 1, 2019, Alliance MMA completed the acquisition of SCWorx, changed its name to SCWorx Corp., changed its ticker symbol to “WORX”, and effected a one-for-nineteen reverse stock split of its common stock, which combined the 100,000,000 Alliance shares of common stock issued to the Company’s shareholders into 5,263,158 shares of common stock of the newly combined company.

From a legal perspective, Alliance MMA acquired SCWorx FL Corp, and as a result, historical equity awards including stock options and warrants are carried forward at their historical basis.

From an accounting perspective, Alliance MMA was acquired by SCWorx FL Corp in a reverse merger and as a result, the Company has completed purchase accounting for the transaction.

Operations of the 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.

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;

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CDM management;

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contract management;

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request for proposal automation;

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rebate management;

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big data analytics modeling; and

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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.

SCWorx, as part of the acquisition of Alliance MMA, operates an online event ticketing platform focused on serving regional MMA (“mixed martial arts”) promotions.

On March 16, 2020, in response to the COVID-19 pandemic, SCWorx 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. These products the Company has sought to source include:

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Test Kits — the Company currently has no contracted supply of Rapid Test Kits.

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PPE — Personal Protective Equipment (PPE) includes items such as masks, gloves, gowns, shields, etc. Currently the Company has no contracted supply of PPE.

Regarding PPE and Test Kits, the Company’s Board of Directors has recently determined to limit the Company’s role to acting as an intermediary between buyers and sellers with commission based compensation.

The sale of PPE and rapid test kits for COVID-19 represents a new business for the Company and is subject to the myriad risks associated with any new venture. The Company has 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, the Company has encountered shipping delays with regard to masks and other PPE, and significant quality related issues regarding N95 masks. In addition, regarding the Company’s sourcing of COVID-19 Rapid Test Kits, the Company has encountered significant shipping delays, as well as reduced quantities. In addition, the Company currently has no contracted supply of Rapid Test Kits. Consequently, there is no assurance as to whether the Company will be able to source a reliable supply of COVID-19 test kits. For the three and nine months ended September 30, 2020, the Company has completed only minimal sales of COVID-19 rapid test kits and PPE. As of September 30, 2020, the Company had approximately 45,000 testing kits, approximately 40,000 sampling kits, and approximately 87,000 gowns 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 the Company not saleable in the United States, which could have a material adverse effect on the Company. There can be no assurance that the Company will be able to generate any significant revenue from the sale of PPE products or rapid test kits. As of the date of this report, the Company has not generated any material revenue from the sale of PPE or rapid test kits.

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 spreading 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 has since spread to the rest of the country and is adversely impacting new customer acquisition. 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 the Company’s 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, the Company believes that its customers have not been able to focus resources on expanding the utilization of the Company’s services, which has adversely impacted 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 hospitals to delay payments due to the Company for services, which could negatively impact the Company’s cash flows.

The Company is endeavoring to mitigate these impacts to revenue through the sale of personal protective equipment (“PPE”) and COVID-19 rapid test kits to the health care industry, including many of the Company’s hospital customers. The Company’s 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, SCWorx 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. Notwithstanding these efforts, the Company has to date realized only a de-minimis amount of revenue from the sale of PPE and Test Kits.

Note 2. Liquidity and Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

The Company’s primary need for liquidity is to fund the working capital needs of the business and general corporate purposes. The Company has historically incurred losses and has relied on borrowings and equity capital to fund the operations and growth of the business. The Company has suffered recurring losses from operations and incurred a net loss of $7,646,666 for the nine months ended September 30, 2020. As of September 30, 2020, the Company had cash of $189,855, a working capital deficit of $3,416,428, and an accumulated deficit of $20,441,139. The Company has not yet achieved profitability and expects to continue to incur negative operating cash flows. The Company expect that its operating expenses will continue to increase and, as a result, the Company will eventually need to generate significant increases in product revenues to achieve profitability. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the condensed consolidated financial statements issuance date.

The Company has begun implementing various alternatives, including reducing operating expenses, seeking to secure additional financing through debt or equity securities to fund future business activities and other strategic alternatives. There can be no assurance that the Company will be able to generate the level of operating revenues in its business plan, or if additional sources of financing will be available on acceptable terms, if at all. If no additional sources of financing are available, the Company’s future operating prospects will be adversely affected. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 3. 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.

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, 2019 filed with the SEC on June 12, 2020.

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, 2020, and the results of its operations and cash flows for the three and nine months ended September 30, 2020. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for future quarters or the full year.

Reclassifications

Certain balances in previously issued consolidated financial statements have been reclassified to be consistent with the current period presentation. The reclassification had no impact on total financial position, net income, or stockholders’ equity.

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 $250,000. There were no amounts in excess of the FDIC insured limit as of September 30, 2020 and amounts in excess of the FDIC insured limit of $163,846 as of December 31, 2019.

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.

For the quarter ended September 30, 2020, the Company had one customer representing 25% of aggregate revenues. For the quarter ended September 30, 2019, the Company had two customers representing 19% and 12% of aggregate revenues. At September 30, 2020, the Company had four customers representing 28%, 18%, 12% and 12% of aggregate accounts receivable. At September 30, 2019, the Company had four customers representing 22%, 16%, 15%, and 11% of aggregate accounts receivable.

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’s allowance for doubtful accounts as of September 30, 2020 and December 31, 2019 was $309,979 and $344,412, respectively.

Inventory

The inventory balance at September 30, 2020 is related to the Company’s Direct-Worx, LLC subsidiary and consisted of approximately 45,000 testing kits, approximately 40,000 sampling kits, and approximately 87,000 gowns. These items are carried on the unaudited condensed consolidated balance sheet at cost. A company affiliated with a shareholder advanced the $475,000 in cash to the supplier of the test kits and the amount due is recorded in shareholder advance.

Inventory is valued at the lower of cost or market value. When market value is determined to be less than cost, the Company records an allowance. As of September 30, 2020 and December 31, 2019, the Company had allowances for obsolescence of $0.

Business Combinations

The Company includes the results of operations of a business it acquires in its consolidated results as of the date of acquisition. The Company allocates the fair value of the purchase consideration of its acquisition to the tangible assets, liabilities and intangible assets acquired, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired businesses and the Company. Intangible assets are amortized over their estimated useful lives. The fair value of contingent consideration (earn out) associated with acquisitions is remeasured each reporting period and adjusted accordingly. Acquisition and integration related costs are recognized separately from the business combination and are expensed as incurred.

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.

Identified intangible assets

Identified finite-lived intangible assets consist of ticketing software and promoter relationships resulting from the February 1, 2019 business combination. The Company’s identified intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 7 years. The Company makes judgments about the recoverability of finite-lived intangible assets whenever facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, the Company assesses recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the Company would accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. For further discussion of identified intangible assets, refer to Note 5, Intangible Assets.

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.

Depreciation expense for the three months ended September 30, 2020 and 2019 was $9,758 and $2,390, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $29,275 and $4,194, respectively.

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:

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Step 1: Identify the contract(s) with a customer

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Step 2: Identify the performance obligations in the contract

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Step 3: Determine the transaction price

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Step 4: Allocate the transaction price to the performance obligations in the contract

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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:

Data Normalization: which includes data preparation, product and vendor mapping, product categorization, data enrichment and other data related services,

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,

Maintenance: which includes ongoing data cleansing and normalization, content enrichment, and optimization,

	4)	Professional Services: mainly related to specific customer projects to manage and/or analyze data and review for cost reduction opportunities, and

	5)	PPE: which includes items such as masks, gloves, gowns, shields, etc.

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 judgement 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 includes 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.

The Company has one principal 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.

PPE sales

PPE revenues are recognized once the customer obtains physical possession of the product(s). Because the Company acts as an agent in arranging the relationship between the customer and the supplier, PPE revenues are presented net of related costs, including product procurement, warehouse and shipping fees, etc.

Remaining Performance Obligations

As of September 30, 2020 and December 31, 2019, the Company had $1,641,720 and $1,056,637, respectively, of remaining performance obligations recorded as deferred revenue. The Company expects to recognize a majority of sales relating to these existing performance obligations of $1,429,609 during the remainder of 2020.

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, 2020 and December 31, 2019.

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 $1,641,720 and $1,056,637 as of September 30, 2020 and December 31, 2019, respectively.

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, 2020 and December 31, 2019, 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.

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.

The income tax expense for the three months ended September 30, 2020 and 2019 was $0 and $747, respectively. The income tax expense for the nine months ended September 30, 2020 and 2019 was $0 and $747, respectively.

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 9, 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.

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 8, 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.

Recently Issued Accounting Pronouncements

In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”). ASU 2018-17 provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. ASU 2018-17 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We adopted this new standard on January 1, 2020, and the adoption of the standard did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective in the first quarter of fiscal 2020, and earlier adoption is permitted. We adopted this new standard on January 1, 2020, and the adoption of the standard did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. We adopted this new standard on January 1, 2020, and the adoption of the standard did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which was subsequently amended in February 2020 by ASU 2020-02 “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842).” Topic 326 introduces an impairment model that is based on expected credit losses, rather than incurred losses, to estimate credit losses on certain types of financial instruments (e.g. accounts receivable, loans and held-to-maturity securities), including certain off-balance sheet financial instruments (e.g., loan commitments). The expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. Financial instruments with similar risk characteristics may be grouped together when estimating expected credit losses. Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact the new guidance will have on its consolidated financial statements.

Note 4. Restatement of Financial Statements

The Company restated its previously issued financial statements as of September 30, 2020 and the three and nine months ended September 30, 2020 to correct an accounting error related to the modification of restricted stock units which caused the Company’s stock -based compensation expense for the period to be overstated:

The Company determined that it had overstated share based compensation by $1,338,303 for the three and nine months ended September 30, 2020.

The following tables summarize the effect of the restatement on the specific items presented in our previously reported financial statements:

SCWorx Corp.

Balance Sheet

September 30, 2020

	September 30,						December 31,
	2020						2019
ASSETS	(As Filed)			Adjustments			(As Restated)

Total assets	$	10,474,016		$	-		$	10,474,016

LIABILITIES AND STOCKHOLDERS’ EQUITY

Total liabilities		5,564,034			-			5,564,034

Stockholders’ equity:
Series A Convertible Preferred stock, $0.001 par value; 900,000 shares authorized; 89,872 and 578,567 shares issued and outstanding, respectively		90			-			90
Common stock, $0.001 par value; 45,000,000 shares authorized; 9,845,600 and 7,390,261 shares issued and outstanding, respectively		9,846			-			9,846
Additional paid-in capital		26,667,488	(1)		(1,338,303	)		25,329,185
Accumulated deficit		(21,779,442	)(1)		1,338,303			(20,441,139	)
Total stockholders’ equity		4,897,982			-			4,897,982

Total liabilities and stockholders’ equity	$	10,462,016		$	-		$	10,462,016

SCWorx Corp.

Statement of Operations

Three Months Ended September 30, 2020

	Three months ended September 30, 2020						Three months ended September 30, 2020
	(As Filed)			Adjustments			(As Restated)


Revenue	$	1,171,399		$	-		$	1,171,399

Operating expenses:
Cost of revenues		956,203			-			956,203
General and administrative		3,573,946	(1)		(1,338,303	)		2,235,643
Total operating expenses		4,530,149			(1,338,303	)		3,191,846

Loss from operations		(3,358,750	)		1,338,303			(2,020,447	)

Other income (expenses):
Interest expense		-			-			-
Loss on settlemet of sccounts payable		(726,766	)		-			(726,766	)
Other income		-			-			-
Total other income (expense)		(726,766	)		-			(726,766	)

Net loss before income taxes		(4,085,516	)		1,338,303			(2,747,213	)

Provision for (benefit from) income taxes		-			-			-

Net loss	$	(4,085,516	)				$	(2,747,213	)

Net loss per share, basic and diluted	$	(0.42	)				$	(0.29	)

Weighted average common shares outstanding, basic and diluted		9,616,717						9,616,717

SCWorx Corp.

Statement of Operations

Nine Months Ended September 30, 2020

	Nine months ended September 30, 2020						Nine months ended September 30, 2020
	(As Filed)			Adjustments			(As Restated)


Revenue	$	3,739,798		$	-		$	3,739,798

Operating expenses:
Cost of revenues		2,739,737			-			2,739,737
General and administrative		8,372,491	(1)		(1,338,303	)		7,034,188
Total operating expenses		11,112,228			(1,338,303	)		9,773,925

Loss from operations		(7,372,430	)		1,338,303			(6,034,127	)

Other income (expenses):
Interest expense		-			-			-
Loss on settlemet of sccounts payable		(1,612,539	)		-			(1,612,539	)
Other income		-			-			-
Total other income (expense)		(1,612,539	)		-			(1,612,539	)

Net loss before income taxes		(8,984,969	)		1,338,303			(7,646,666	)

Provision for (benefit from) income taxes		-			-			-

Net loss	$	(8,984,969	)				$	(7,646,666	)

Net loss per share, basic and diluted	$	(1.03	)				$	(0.87	)

Weighted average common shares outstanding, basic and diluted		8,754,824						8,754,824

SCWorx Corp.

Statement of Stockholder’s Deficit

Three Months Ended September 30, 2020

	Preferred Stock						Common stock				Additional paid-in			Accumulated
As Filed	Shares			$			Shares		$		capital			deficit			Total

Balances, June 30, 2020		94,872		$	95			9,490,582	$	9,491	$	23,863,806		$	(17,693,926	)	$	6,179,466
																		-
Conversion of Series A Convertible Preferred Stock into common stock		(5,000	)		(5	)		13,158		13		(8	)		-			-
Settlement of Accounts Payable		-			-			157,000		157		847,043			-			847,200
Shares issued in cashless exercise of warrants		-			-			68,715		69		(69	)		-			-
Shares issued in cashless exercise of options		-			-			28,890		29		(29	)		-			-
Shares issued to current and former employees and directors		-			-			87,255		87		142,138			-			142,225
Stock based compensation		-			-			-		-		488,304			-			488,304
Net Loss		-			-			-		-		-			(4,085,516	)		(4,085,516	)

Ending balance, September, 2020		89,872		$	90			9,845,600	$	9,846	$	25,341,185		$	(21,779,442	)	$	3,571,679

Preferred Stock

Common stock

Additional
paid-in

Accumulated

As Restated

Shares

capital

deficit

Total

Balances, June 30, 2020

SEC Form 10-Q/A filed by SCWorx Corp. (Amendment)