Company Quick10K Filing
Quick10K
Alliance Mma
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.31 7 $2
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
8-K 2019-10-25 Officers, Exhibits
8-K 2019-10-04 Officers
8-K 2019-09-12 Enter Agreement, Exhibits
8-K 2019-06-04 Other Events, Exhibits
8-K 2019-05-31 Officers, Exhibits
8-K 2019-05-24 Other Events, Exhibits
8-K 2019-04-25 Accountant, Exhibits
8-K 2019-04-11 Other Events, Exhibits
8-K 2019-04-01 Other Events, Exhibits
8-K 2019-03-20 Other Events, Exhibits
8-K 2019-03-13 Other Events, Exhibits
8-K 2019-03-05 Other Events, Exhibits
8-K 2019-02-27 Other Events
8-K 2019-02-25 Other Events, Exhibits
8-K 2019-02-19 Other Events, Exhibits
8-K 2019-02-15 Other Events, Exhibits
8-K 2019-02-13 Enter Agreement
8-K 2019-02-12 Other Events, Exhibits
8-K 2019-02-08 Other Events, Exhibits
8-K 2019-02-04 Other Events, Exhibits
8-K 2019-02-04 M&A, Control, Officers
8-K 2019-01-30 Shareholder Vote
8-K 2019-01-30 Other Events, Exhibits
8-K 2019-01-08
8-K 2018-12-24 Enter Agreement, Officers
8-K 2018-12-20 Other Events, Exhibits
8-K 2018-12-18 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-10-24 Officers
8-K 2018-09-26 Exit Costs
8-K 2018-08-20 Enter Agreement, Off-BS Arrangement
8-K 2018-07-19 Other Events
8-K 2018-06-28 Enter Agreement, Off-BS Arrangement
8-K 2018-06-06 Officers
8-K 2018-05-30 Off-BS Arrangement
8-K 2018-05-23 Exit Costs, Officers
8-K 2018-03-08 Enter Agreement, Regulation FD, Exhibits
8-K 2018-02-22
8-K 2018-02-09 Officers, Regulation FD, Exhibits
8-K 2018-02-05 Officers, Regulation FD, Exhibits
8-K 2018-01-09 Enter Agreement, Other Events, Exhibits
LYV Live Nation Entertainment 15,174
MTN Vail Resorts 9,524
SIX Six Flags Entertainment 4,848
SEAS Seaworld Entertainment 2,557
ISCA International Speedway 1,959
TRK Speedway Motorsports 807
EVRI Everi Holdings 642
CPHC Canterbury Park Holding 58
UWN Nevada Gold & Casinos 38
MANU Manchester United 0
AMMA 2019-09-30
Part I-Financial Information
Item 1. Financial Statements
Note 1. Description of Business
Note 2. Liquidity
Note 3. Summary of Significant Accounting Policies
Note 4. Business Combinations
Note 5. Related Party Transactions
Note 6. Convertible Notes Receivable
Note 7. Fair Value of Financial Instruments
Note 8. Leases
Note 9. Commitments and Contingencies
Note 10. Stockholders' Equity
Note 11. Net Loss per Share
Note 12. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii&Mdash;Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Default Under Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits.
EX-31.1 tm1919600d1_ex31-1.htm
EX-32.1 tm1919600d1_ex32-1.htm

Alliance Mma Earnings 2019-09-30

AMMA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tm1919600d1_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

or

 

  ¨ 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)

 

(212) 739-7825

(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   x     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   x     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 x Smaller reporting company x
       
    Emerging growth company x

 

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    x

  

Number of shares of the registrant’s common stock outstanding at November 12, 2019: 7,099,471

 

 

 

 

 

SCWorx Corp.

Form 10-Q - Quarterly Report

For the Quarter Ended September 30, 2019

TABLE OF CONTENTS

 

    Page
     
PART I - FINANCIAL INFORMATION 4
   
Item 1. Financial Statements (unaudited) 4
     
  Condensed Consolidated Balance Sheets as of September 30, 2019  (unaudited) and December 31, 2018 (audited) 4
     
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited) 5
     
  Condensed Consolidated Statement of Changes in Stockholders’ Equity/(Deficit) for the three and nine months ended September 30, 2019 and 2018 (unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited) 8
     
  Notes to the Condensed Consolidated Financial Statements 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
     
Item 4. Controls and Procedures 37
     
PART II - OTHER INFORMATION 38
   
Item 1. Legal Proceedings 38
     
Item 1A. Risk Factors 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
     
Item 3. Defaults Upon Senior Securities 39
     
Item 4. Mine Safety Disclosures 39
     
Item 5. Other Information 39
     
Item 6. Exhibits 40
     
Signatures 41
     
Exhibit Index 42

  

 2 

 

 

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 (this “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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (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 Form 10-Q.

 

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, 2018. 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:

  

  ·

integrate and optimize the operations from the acquisition of SCWorx Corp.; and

 

  · grow the revenues and contain the costs related to our recently acquired Software as a Service (“SaaS”) business.

 

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.

 

 3 

 

 

PART I-FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SCWorx Corp.

Condensed Consolidated Balance Sheets

 

   September 30,
2019
   December 31,
2018
 
   (Unaudited)  

(Audited)

(as restated)

 
ASSETS          
Current assets:          
Cash  $1,028,620   $76,459 
Accounts receivable   1,167,088    520,692 
Interest receivable       121,350 
Prepaid expenses and other assets   85,836     
Convertible notes receivable, at fair value       837,317 
Investment in warrants, at fair value       67,000 
Total current assets   2,281,544    1,622,818 
           
Fixed assets   110,612     
Intangible assets   214,705     
Goodwill   8,466,282     
Due from shareholder       1,409,284 
TOTAL ASSETS  $11,073,143   $3,032,102 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)          
Current liabilities:          
Accounts payable and accrued liabilities  $1,993,789   $855,759 
Contract liabilities   755,398    816,714 
Total current liabilities   2,749,187    1,672,473 
Notes payable - related party       1,591,491 
TOTAL LIABILITIES   2,749,187    3,263,964 
           
Commitments and contingencies          
           
Stockholders’ Equity/(Deficit):          
Series A Convertible Preferred stock, $0.001 par value; 900,000 shares authorized; 660,567 and 0 shares issued and outstanding, respectively   661     
Common stock, $0.001 par value; 45,000,000 shares authorized; 7,099,471 and 5,838,149 shares issued and outstanding, respectively   7,099    5,838 
Additional paid-in capital   18,649,479    1,244,273 
Accumulated deficit   (10,333,283)   (1,481,973)
TOTAL STOCKHOLDERS’ EQUITY/(DEFICIT)   8,323,956    (231,862)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $11,073,143   $3,032,102 

 

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

  

 4 

 

 

SCWorx Corp.

Condensed Consolidated Statements of Operations

(Unaudited)

   

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Revenue  $1,681,928   $975,810   $4,294,944   $2,573,974 
Cost of revenue   890,332    624,273    2,494,990    2,146,629 
Gross profit   791,596    351,537    1,799,954    427,345 
Operating expenses:                    
General and administrative   1,384,435    178,336    10,384,759    402,366 
Research and development   198,450    -    858,739    - 
Total operating expenses   1,582,885    178,336    (11,243,498)   402,366 
Income (loss) from operations   (791,289)   173,201    (9,443,544)   24,979 
Interest expense   -    (59,250)   (23,720)   (149,307)
Other income   151,646    17,177    616,701    17,177 
Loss on fair value of convertible notes   -    (94,557)   -    (94,557)
Income (loss) before taxes   (639,643)   36,571    (8,850,563)   (201,708)
Income tax expense (benefit)   747    -    747    - 
Net Income/(loss)  $(640,390)  $36,571   $(8,851,310)  $(201,708)
Income (loss) per share:                    
Basic and diluted  $(0.10)  $0.01   $(1.49)  $(0.05)
Weighted average number of shares used in per share calculation, basic and diluted   6,716,060    4,476,013    5,935,372    4,476,013 

  

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

 

 5 

 

 

SCWorx Corp.

Condensed Consolidated Statements of Changes In Stockholders’ Equity/(Deficit)

(Unaudited)

 

   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’/
Equity
 
Three Months Ended September 30, 2019  Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance at June 30, 2019, as restated   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 
Common stock issued in settlement of litigation           24,843    25    74,975        75,000 
Stock-based compensation                   433,438        433,438 
Net loss                       (640,390)   (640,390)
Balance—September 30, 2019   660,567   $661    7,099,471   $7,099   $18,649,479   $(10,333,283)  $8,323,956 
                                    
   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’/
Equity
 
Nine Months Ended September 30, 2019  Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance at December 31, 2018, as restated      $    5,838,149   $5,838   $1,244,273   $(1,481,973)  $(231,862)
Surrender of common stock in settlement of due from stockholder balance           (574,991)   (575)   (1,608,258)       (1,608,833)
Series A Convertible Preferred Stock issuance (Alliance MMA)   629,138    629            6,080,316        6,080,945 
Issuance of common stock           1,283,124    1,283    5,883,078        5,884,361 
Conversion of notes payable - related party into Series A Convertible Preferred Stock   190,000    190            1,899,810        1,900,000 
Exercise of warrants           11,075    11    67,537        67,548 
Settlement of disputed contractual claim           19,801    20    117,982        118,002 
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 stock 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)
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 
Common stock issued in settlement of litigation           24,843    25    74,975        75,000 
Net loss                       (8,851,310)   (8,651,290)
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 condensed consolidated financial statements.

 

 6 

 

 

SCWorx Corp.

Condensed Consolidated Statements of Changes In Stockholders’ Equity/(Deficit) (continued)

(Unaudited)

 

   Membership   Members’   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’/
Members’
 
Three Months Ended September 30, 2018  Units   Deficit   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
Balance—June 30, 2017   17,500   $(1,339,538)      $       $   $   $   $(1,339,538)
Conversion from LLC to Corporation   (17,500)  $1,302,792       $    17,500   $175   $   $1,302,792)  $ 
Net income       36,571                        36,571    ____ 
Balance September 30, 2018      $       $    17,500   $175   $   $(1,339,363)  $(1,339,538)
                                              
   Membership   Members’   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’/
Members’
 
Nine Months Ended September 30, 2018  Units   Deficit   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
Balance—December 31, 2017   17,500   $(1,101,259)      $       $   $   $   $(1,101,259)
Net loss as LLC       (201,708)                           (201,708)
Conversion from LLC to Corporation   (17,500)   1,302,792            17,500    175        (1,339,363)    
Balance September 30, 2018      $       $    17,500   $175   $   $(1,339,363)  $(1,339,538)

   

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

 

 7 

 

 

SCWorx Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended
September 30,
 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net (loss)  $(8,851,310)  $(201,708)
Adjustments to reconcile net loss to net cash (used in)/provided by operating activities:          
Depreciation   4,194     
Stock-based compensation   6,283,811     
Issuance of common stock in settlement of Series A Convertible Preferred Stock contractual fee   245,741     
Common stock issued in settlement of litigation   75,000     
Amortization of acquired intangibles   25,295     
Gain on change in fair value of warrant assets   (55,000)    
Gain on exchange of debt for common stock   (151,646)    
Gain on change in fair value of convertible notes receivable   (531,405)    
Changes in operating assets and liabilities:          
Accounts receivable   (646,396)   (1,872)
Prepaid expenses and other assets   35,514     
Accounts payable and accrued liabilities   (305,437)   772,345 
Contract liabilities   (61,316)   (162,190)
Net cash (used in)/provided by operating activities of continuing operations   (3,932,955)   406,575 
Net cash (used in) operating activities of discontinued operations   (314,514)    
Net cash (used in) provided by operating activities   (4,247,469)   406,575 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash acquired in reverse acquisition   5,441,437     
Advances to shareholder   (199,549)   (833,482)
Purchase of convertible notes receivable - Alliance MMA   (215,000)   (642,620)
Purchases of fixed assets   (114,806)    
Net cash provided by (used in) investing activities   4,912,082    (1,476,102)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from notes payable - related party   120,000    1,079,446 
Proceeds from preferred stock placement   100,000     
Proceeds from exercise of warrants   67,548     
Net cash provided by financing activities   287,548    1,079,446 
NET INCREASE IN CASH   952,161    9,919 
CASH - BEGINNING OF PERIOD   76,459    15,159 
CASH - END OF PERIOD   1,028,620    25,078 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
           
Cash paid for interest        
Cash paid for taxes  $747     
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Settlement of disputed contractual claim with issuance of common stock  $118,002     
Issuance of warrant in settlement of vendor liability - discontinued operations   66,275     
Cashless exercise of warrant   4     
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   6,423,869     
Conversion of Series A Convertible Preferred Stock into common shares   1,585,710     
Common stock issued in settlement of litigation   75,000     

 

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

 

 8 

 

 

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 $1.25 million 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.

 

Business Combination and Related Transactions

 

In June 2018, SCWorx Acquisition Corp. entered into a Securities Purchase Agreement (“SPA”) with Alliance, as amended on December 18, 2018, under which SCWorx Acquisition Corp. agreed to purchase up to $1.25 million in principal amount of Alliance’s convertible notes and warrants to purchase up to 1,128,356 [59,387 shares reflective of one for nineteen stock split] [bracketed amounts disclosed represent post-split adjusted shares or per share amounts] shares of Alliance common stock. The initial $750,000 tranche of the notes was convertible into shares of Alliance common stock at an initial conversion price of $0.3725 [$7.0775 post-split] and the related 503,356 [26,492 post-split] warrants have an exercise price of $0.3725 [$7.0775 post-split]. The conversion price on the $750,000 convertible note was reduced to $0.215 [$4.085 post-split] per share in January 2019. The remaining $500,000 tranche of the notes was convertible into shares of Alliance common stock at a conversion price of $0.20 [$3.80 post-split] and the related 625,000 [32,895 post-split] warrants had an exercise price of $0.30 [$5.70 post-split]. All of these notes (an aggregate of $1.25 million in principal amount) converted automatically into Alliance common stock upon the closing of the Company’s acquisition on February 1, 2019 and were distributed to certain of the Company’s common stockholders.

 

Pursuant to the SPA, between June 29, 2018 and October 16, 2018, Alliance sold SCWorx Acquisition Corp. convertible notes in the aggregate principal amount of $750,000 and warrants to purchase 503,356 [26,492 post-split] shares of Alliance common stock, for an aggregate purchase price of $750,000. Each of the notes bore interest at 10% annually and had a one year term. The warrants had an exercise price of $0.3725, [$7.0775 post-split] a term of five years and were vested upon grant. As noted above, these notes automatically converted into Alliance common stock upon the closing of the Company’s acquisition on February 1, 2019.

  

On August 20, 2018, the Company and its stockholders entered into a Stock Exchange Agreement with Alliance, as amended on December 18, 2018 (“SEA”). Under the SEA, the Company’s shareholders agreed to sell all of the issued and outstanding common stock of the Company, in exchange for which Alliance agreed to issue at the closing 100,000,000 shares of Alliance common stock to the Company’s stockholders.

 

Pursuant to the SPA, between November 16, 2018 and December 31, 2018, the Company purchased additional Alliance convertible notes in the aggregate principal amount of $275,000 and warrants to purchase 356,250 [18,750 post-split] shares of Alliance common stock, for an aggregate purchase price of $275,000. Each of the Notes bore interest at 10% annually and matured one year from the issue date. These warrants had an exercise price of $0.30 [$5.70 post-split], a term of five years and were vested upon grant. This brought the total amount funded by the Company to $1,035,000 as of December 31, 2018. In January 2019, SCWorx purchased $215,000 of additional Alliance convertible notes under the aggregate $1,250,000 SPA. These notes automatically converted into Alliance common stock upon the closing of the Company’s acquisition on February 1, 2019 and were purchased under the aggregate $1.25 million terms of the SPA. The share amounts listed in Note 6 in brackets are post-split.

 

In anticipation of the acquisition of the Company, Alliance filed an original listing application with the Nasdaq Capital Market to list the common stock of the combined company. On February 1, 2019, Nasdaq approved the listing of Alliance’s common stock (on a combined basis with the Company), with the result being that the newly combined company’s common stock is now newly listed on the Nasdaq Capital Market.

 

On February 1, 2019, SCWorx Corp. changed its name to SCW FL Corp. to allow Alliance to change its name to SCWorx Corp. Alliance completed the acquisition of SCWorx Corp. (n/k/a SCW FL Corp.), at which point Alliance 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.

 

 9 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

  

From a legal perspective, Alliance acquired SCW 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 was acquired by SCW FL Corp. in a reverse merger and as a result, the Company has completed preliminary 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 quickly and accurately improve the flow of information 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

  

  CDM Management

 

  Contract Management

 

  Request for Proposal Automation

 

  Rebate Management

  

  Big Data Analytics Model

 

  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.

 

 10 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 2. Liquidity

 

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 from members to fund the operations and growth of the business. As of September 30, 2019, the Company had cash of approximately $1.0 million, negative working capital of approximately $0.6 million and an accumulated deficit of approximately $10.3 million.

 

During 2018, the Company began to gain traction with more hospitals and witnessed customer renewals of expiring agreements with existing customers. During the first quarter of 2019, the Company signed four contracts with new customers and during the second quarter completed a number of data consulting projects as proof of concept for potentially new customers. During the third quarter the Company signed two contracts with new customers. The Company’s target is to sign on average, a contract a month, with new customers during 2019. Management expects increases in revenue to provide sufficient cash flow to fund the operations for at least the one-year period following the release of these condensed consolidated financial statements.

 

On November 30, 2018, the Company completed a private placement of common stock of $1.25 million. In February 2019, the transactions related to the purchase of Alliance MMA resulted in a gross increase of cash of $5.4 million which the Company has utilized a significant portion to operate the business. Management believes the remaining cash balance of $1.0 million along with anticipated increases in sales is expected to fund operations for at least the next 12 months; however, the Company will thereafter need to raise additional funding through strategic relationships and, public or private equity or debt financings. If such funding is not available or not available on terms acceptable to the Company, the Company’s current plans for expansion, including new product development, may be curtailed or cancelled.

 

Note 3. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation 

 

The accompanying interim unaudited condensed consolidated financial statements as of September 30, 2019 and 2018, and for the three and nine months then ended, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information. The amounts as of December 31, 2018 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

The results of operations for the three month and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2019 or any future period and the Company makes no representations related thereto.

 

Reclassification

 

A reclassification has been made to the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Changes in Stockholders’ Equity/(Deficit) to break out the total Series A Convertible Preferred Stock par value of $819 and additional paid in capital of $7,980,126. Previously, for the quarter ended March 31, 2019, the entire balance was disclosed as Series A Convertible Preferred Stock. This change in classification does not affect the previously reported total stockholders’ equity balance. In addition, the authorized common stock has been restated to reflect the correct amount of 45,000,000 authorized shares of common stock.

 

In addition, certain prior quarter amounts have been reclassified for consistency with the current quarter presentation. These reclassifications had no effect on reported results of operations or cash flows.

 

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 up to $250,000.

 

 11 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 condensed 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 we 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, 0accounts receivable, due from shareholder and convertible notes receivable. 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. The Company believes that any concentration of credit risk in its due from shareholder and convertible notes receivable was substantially mitigated by the shareholder’s material interest in the Company, ability to sell off portions of the interest, if necessary, and the closing of the acquisition of SCWorx by Alliance and conversion of the notes payable - related party into shares of Series A Convertible Preferred Stock and the settlement of the due from stockholder balance with the surrender of 1,401 SCWorx shares of common stock in January 2019.

 

For the quarter ended September 30, 2019, the Company had 2 customers representing 19% and 12% of aggregate revenues. For the quarter ended September 30, 2018, the Company had 3 customers representing 20%, 19% and 12% of aggregate revenues. At September 30, 2019, the Company had 4 customers representing 22%, 16% and 15% and 11% of aggregate accounts receivable. At December 31, 2018, the Company had 3 customers representing 39%, 21% and 13% 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 deemed no allowance for doubtful accounts necessary as of September 30, 2019 and December 31, 2018.

 

Leases

 

We determine if an arrangement is a lease at inception. Operating leases are included in the lease right-of-use (“ROU”) assets, current portion and long-term portion of lease obligations on our consolidated balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments to be made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, which are included in the lease ROU asset when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease components only, none with non-lease components, which are generally accounted for separately. See Note 9 – Leases.

 

 12 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Business Combinations

 

The Company includes the results of operations of a business it acquires in its condensed 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. For additional information regarding the Company’s acquisitions, refer to “Note 4 – Business Combinations.”

 

Goodwill and 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 goodwill and identified intangible assets, see “Note 4 – Business Combinations.”

 

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 nine months ended September 30, 2019 and 2018 was approximately $4,194 and $0, respectively.

 

 13 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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:

 

·Step 1: Identify the contract(s) with a customer
·Step 2: Identify the performance obligations in the contract
·Step 3: Determine the transaction price
·Step 4: Allocate the transaction price to the performance obligations in the contract
·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 contracts with customers:

 

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

 

  2) 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,

 

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

 

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

  

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. 

 

 14 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 include 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.

 

In periods prior to the adoption of Accounting Standard Codification (“ASC”) 606, the Company recognized revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and the collectability of the resulting receivable is reasonably assured. The adoption of Topic 606 did not result in a cumulative effect adjustment to our opening retained earnings since there was no significant impact upon adoption of Topic 606. There was also no material impact to revenues, or any other financial statement line items for the year ended December 31, 2018 as a result of applying ASC 606.

 

The Company has one revenue stream, from the SaaS business, and has not presented any varying factors that affect the nature, timing and uncertainty of revenues and cash flows.

 

There were no revenues that were recognized from performance obligations that were partially satisfied prior to January 1, 2018.

 

Costs to 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.

 

 15 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Cost of Revenue

 

Cost of revenues primarily represents 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 revenue associated prior to the Company’s unconditional right to receive a payment under a contract with a customer (i.e., 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, 2019 and December 31, 2018.

 

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 approximately $755,000 and $817,000 as of September 30, 2019 and December 31, 2018, respectively.

 

Research and Development Costs

 

The Company expenses all research and development related costs as incurred. Research and development cost for the quarters ended September 30, 2019 and 2018 was approximately $198,000 and $0, respectively. Research and development cost for the nine months ended September 30, 2019 and 2018 was approximately $859,000 and $0, respectively. These research and development cost relate to new product development and programming expenses expected to be released during 2019.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. There were no advertising costs for the quarters or nine months ended September 30, 2019 and 2018.

 

Income Taxes

 

The Company converted to a corporation from a limited liability company during 2018.

 

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, 2019, the Company has evaluated available evidence and concluded that the Company may not realize all the benefit 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 December 22, 2017, the Tax Cuts and Jobs Act of 2017, (“Tax Act”) was enacted. The Tax Act significantly revised the U.S. corporate income tax regime by, including but not limited to, lowering the U.S. corporate income tax rate from 34% to 21% effective January 1, 2018, implementing a territorial tax system, imposing a one-time transition tax on previously untaxed accumulated earnings and profits of foreign subsidiaries, and creating new taxes on foreign sourced earnings. As of September 30, 2019, we completed the accounting for tax effects of the Tax Act under ASC 740. There were no impacts to the reporting period ended September 30, 2019.

 

 16 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The income tax expense for the quarters ended September 30, 2019 and 2018 was $747 and $0, respectively, and was $747 and $0 for the nine months ended September 30, 2019 and 2018, respectively. The income tax expense represents the minimum state income tax for the quarter ended September 30, 2019.

 

Stock-based Compensation Expense

 

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 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 fair value of the Company’s stock awards for non-employees is estimated based on the fair market value on each vesting date, accounted for under the variable-accounting method.

 

The authoritative guidance also requires that the Company measure and recognize 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 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. See “Note 10 – Stockholders’ Equity” for additional detail.

 

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 the Company’s 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; however, the Company believes, given the absence of any such payments in the Company’s history, and the estimated low probability of such payments in the future, that the estimated fair value of these indemnification agreements is immaterial. In addition, the Company has directors’ and officers’ liability insurance coverage that is intended to reduce its financial exposure and may enable the Company to recover any payments, should they occur.

 

Contingencies

 

From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. The Company records a liability in its condensed consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably estimated, the Company discloses the loss contingency and an estimate of possible loss or range of loss (unless such an estimate cannot be made). The Company does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred. See “Note 9 – Commitments and Contingencies,” for further information.

 

 17 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The accounting estimates and assumptions that require management’s most significant, difficult, and subjective judgment include the accounting for the business combination, the recognition of revenue, collectability of accounts receivable, valuation of convertible notes receivable and related warrants, the assessment of recoverability of goodwill and intangible assets, the assessment of useful lives and the recoverability of property and equipment, the valuation and recognition of stock-based compensation expense, loss contingencies, and income taxes. Actual results could differ materially from those estimates.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is provided for lessees of capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) Targeted Improvements (“ASU 2018-11”). ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an additional (and optional) transition method of adoption, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-11 also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The Company adopted the provisions of ASU 2016-02 and ASU 2018-11 in the quarter beginning January 1, 2019. The adoption resulted in the recognition of additional disclosures and a right of use asset of approximately $53,000 included as a component of prepaid expenses and other assets and a lease liability of approximately $53,000, which is included as a component of accounts payable and accrued liabilities.

 

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 do not expect the standard to have a material impact on our condensed consolidated financial statements.

 

In February 2018, the FASB issued new guidance (“ASU 2018-02”) to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts & Jobs Act. We have adopted the new standard effective January 1, 2019, and the standard did not have a material impact on our condensed 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 do not expect the standard to 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. This guidance will be effective for us in the first quarter of 2020 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our condensed consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting, which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. The effective date for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, but no earlier than the Company’s adoption date of Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company has adopted this new standard in the first quarter of fiscal 2019 and the adoption of the standard did not have a material impact on its condensed consolidated financial statements.

 

In February 2016, the FASB issued its final standard on lease accounting, ASU No. 2016-02, Leases (Topic 842),which superseded Topic 840, Leases,which was further modified in ASU No. 2018-10, Codification Improvements to Topic 842, Leases,ASU No. 2018-11, Leases (Topic 842) Targeted Improvementsand ASU No. 2019-01 “Leases (Topic 842) Codification Improvements” to clarify the implementation guidance. The new accounting standard was effective for the Company beginning on January 1, 2019 and required the recognition on the balance sheet of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. The Company elected the optional transition method and adopted the new guidance on January 1, 2019 on a modified retrospective basis with no restatement of prior period amounts. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components and to exclude short-term leases from its condensed consolidated balance sheet. The Company’s adoption of the new standard as of January 1, 2019 resulted in the recognition of right-of-use assets of $53,000 and liabilities of $53,000 with no material cumulative effect adjustment to equity as of the date of adoption. In connection with the adoption of this guidance, as required, the Company reclassified deferred rent liabilities as reductions to lease assets. Adoption of the new standard did not have a material impact on the Company’s condensed consolidated statements of operations or cash flows. See Note 8- Leases for additional information.

 

 18 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 4. Business Combinations

 

Preliminary purchase accounting

 

On February 1, 2019, the Company’s shareholders exchanged all of its outstanding shares in exchange for 5,263,158 post-split shares of Alliance common stock. Due to the Company’s shareholders acquiring a controlling interest in Alliance after acquisition, the transaction was treated as a reverse merger for accounting purposes, with SCWorx being the reporting company. In accordance with purchase accounting rules under ASC 805, the purchase consideration was $11,865,306.

 

The acquisition was accounted for under the acquisition method of accounting. The assets acquired, liabilities assumed and preliminary purchase allocation, which is based on estimates and valuations of management, is as follows:

 

     Estimated
Fair Value
 
      
Cash   $5,441,437 
Goodwill    8,466,282 
Identifiable intangible assets:      
Ticketing software    64,000 
Promoter relationships    176,000 
Total identifiable intangible assets    240,000 
Accounts payable    (1,901,624)
Current liabilities - discontinued operations    (380,789)
Aggregate purchase price   $11,865,306 

 

The allocation of consideration to the assets acquired and liabilities assumed at their estimated acquisition date fair values are considered preliminary and may change within the permissible measurement period, not to exceed one year.

 

Identified intangible assets consist of the following:

 

      September 30, 2019 
Intangible assets  Useful Life  Gross
Assets
   Accumulated
Amortization
   Net 
Ticketing software  5 years  $64,000   $(8,533  $55,467 
Promoter relationships  7 years    176,000    (16,762)   159,238 
Total intangible assets, gross     $240,000   $(25,295)  $214,705 

 

Amortization expense for the quarter ended September 30, 2019 and 2018, was $9,485 and $0, respectively.

 

Amortization expense for the nine months ended September 30, 2019 and 2018, was $25,295 and $0, respectively.

 

As of September 30, 2019, the estimated future amortization expense on an annual basis of amortizable intangible assets is as follows:

 

2019 (remaining 3 months)  $9,486 
2020   37,943 
2021   37,943 
2022   37,943 
2023   37,943 
Thereafter   53,447 
   $214,705 

 

 

 19 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Goodwill

 

The changes to the carrying value of goodwill from January 1, 2019 through September 30, 2019 are reflected below:

 

December 31, 2018     
Goodwill related to the acquisition of Alliance MMA  $8,466,282 
September 30, 2019  $8,466,282 

 

Note 5. Related Party Transactions

 

Due from Shareholder

 

The Company’s founder and majority stockholder had provided cash advances on an unsecured and non-interest-bearing basis, during the first few years of operation. Beginning in 2016, the founder began receiving distributions from the Company. The amounts owed to, and due from, the shareholder have been netted in the accompanying consolidated balance sheets. In January 2019, this shareholder surrendered 1,401 common shares to the Company as settlement of the balance due. As of September 30, 2019, and December 31, 2018, the net balance due from the founder was approximately $0 and approximately $1.4 million, respectively. The balance did not carry a maturity date and there were no repayment terms.

 

Due to Shareholder

  

In October 2016, the Company entered into an unsecured loan agreement with a minority shareholder for up to $1 million of borrowings for operating expenses. In November 2016 and January 2018, the Company entered into additional note agreements to provide up to an additional $2 million of aggregate borrowings for which the Company has guaranteed payment from its subsidiary. The interest rate for the notes is 10% per annum and the notes mature in January 2021. One of the notes bore interest at 10% for the first 90 days and was then adjusted to 18% per annum.

 

As previously mentioned, on August 20, 2018, the Company entered into an SEA with Alliance MMA, as amended on December 18, 2018, in connection therewith this minority shareholder agreed to accept shares of Series A Convertible Preferred Stock having a face value equal to the total amount owed to him of $2.1 million in full satisfaction of such indebtedness (including principal and accrued interest).

 

As of September 30, 2019, and December 31, 2018, the notes payable - related party totaled $0 and $1,591,491 respectively. On September 30, 2019, the note holder agreed to accept 17,000 shares of the Company’s common stock in January 2020 as full settlement.

 

The Company incurred interest expense of approximately $0 and $48,434 for the quarters ended September 30, 2019 and 2018, respectively, and $23,720 and $149,307, for the nine months ended September 30, 2019 and 2018, respectively. The Company incurred no interest expense on the notes payable - related party since February 1, 2019 as the holder agreed to settle the principal and interest balance with Series A Convertible Preferred Stock.

 

As of September 30, 2019 and 2018, the accrued interest balance was $0 and $282,000, respectively. 

 

In addition, this shareholder also provided office space to the Company at no cost through January 2019.

  

 20 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 6. Convertible Notes Receivable

 

On June 28, 2018, SCWorx Acquisition Corp. entered into an SPA with Alliance MMA, under which SCW LLC agreed to buy up to $1.0 million in principal amount of convertible notes and warrants to purchase up to 671,142 [35,323] shares of common stock. The notes were originally convertible into shares of common stock at a conversion price of $0.3725 [$7.0775] and bore interest at 10% annually. The warrants were originally exercisable for shares of common stock at an exercise price of $0.3725 [$7.0775].

 

Under the SPA, SCWorx Acquisition Corp. agreed to fund (i) $500,000 at the initial closing, (ii) a second tranche of $250,000 upon the signing of a business combination agreement with the Company and (iii) a third tranche of $250,000 upon mutual agreement of Alliance MMA and SCWorx.

 

On December 18, 2018, SCWorx agreed to increase the total amount of principal from $1.0 million to $1.25 million and to reduce the conversion price of the final $500,000 installment of the aggregate $1,250,000 note purchase to $0.20 [$3.80] per share. The warrant exercise price for the related warrants to purchase 625,000 [32,895] shares was reduced to $0.30 [$5.70] per share.

 

Pursuant to the SPA, during 2018, SCWorx purchased convertible notes from Alliance MMA in the principal amount of $1,035,000 and warrants to purchase an aggregate of 859,606 [45,242] shares of common stock, for an aggregate purchase price of $1,035,000. The note for $750,000 bears interest at 10% annually and matures on July 31, 2019. This note was amended in January 2019 to reduce the conversion price to $0.215 [$4.09] per share. The related warrant to acquire 503,356 [26,492] shares of common stock has an exercise price of $0.3725 [$7.0775], a term of five years and was vested upon grant. The note for $275,000 has a conversion price of $0.20 [$3.80], bore interest at 10% annually and matured on June 22, 2019. The warrant to acquire 356,250 [18,750] shares of common stock has an exercise price of $0.30 [$5.70], a term of five years and was vested upon grant.

 

During the first quarter of 2019, SCWorx purchased additional convertible notes from Alliance MMA in the principal amount of $215,000 and warrants to purchase an aggregate of 268,750 [14,145] shares of common stock, for an aggregate purchase price of $215,000. The note for $215,000 had a conversion price of $0.20 [$3.80], bore interest at 10% annually and matured on June 22, 2019. The warrant to acquire 268,750 [14,145] shares of common stock had an exercise price of $0.30 [$5.70], a term of five years and was vested upon grant.

 

The Alliance acquisition closed on February 1, 2019 and the principal, commitment costs and accrued interest related to the purchased Alliance convertible notes automatically converted into 6,883,319 [362,280] shares of Alliance common stock. In January 2019, the SCWorx board of directors declared a dividend of the 6,883,319 [362,280] when-converted shares of Alliance common stock, and related warrants, to the SCWorx shareholders, two of whom waived their rights to the dividend, resulting in the shares being distributed to shareholders who participated in the November 2018 stock offering by SCWorx Corp. (f/k/a SCWorx Acquisition Corp.) of $1.25 million.

 

As of December 31, 2018, the Company held a convertible note receivable from Alliance MMA with a balance of $837,317. The Company also received warrants from the transaction which were valued at $67,000.

 

 21 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 7. Fair value of financial instruments

 

FASB ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a framework for measuring the fair value of assets and liabilities according to a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that are derived from assumptions based on management’s estimate of assumptions that market participants would use in pricing the asset or liability based on the best information available under the circumstances.

 

The hierarchy is broken down into the following three levels, based on the reliability of inputs:

 

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs for assets or liabilities that are derived from assumptions based on management’s estimate of assumptions that market participants would use in pricing the assets or liabilities.

  

Fair value was determined on a recurring basis based on appraisals by qualified licensed appraisers and was adjusted for management’s estimates of costs to sell and holding period discounts.

 

The following table presents information as of December 31, 2018 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a recurring basis:

 

Financial Instrument  Fair Value   Valuation technique  Significant Unobservable inputs
Convertible notes receivable   $837,317   Monte Carlo Simulation  Probability of conversion and interest rates on comparable financial instruments
Investment in warrants  $67,000   Black-Scholes Option Pricing Model  Common stock volatility and discount

 

The fair value of the convertible notes receivable (and related discount) at the date of issuance was determined using the Monte Carlo simulation, probability of conversion and comparable interest rates. In conjunction with the acquisition, the Company did not have any of these financial instruments at September 30, 2019.

 

The assumptions used to measure the fair value of the convertible notes receivable as of original issuance dates and as of December 31, 2018 were as follows:

 

   Issuance
Dates
   December 31,
2018
 
Risk-Free Interest Rate   2.41%-2.47%   2.41%
Probability of conversion into equity   50%-90%   90%
Expected Volatility   91.95%   91.95%
Term    .09-.59 years    .09 year 

 

As of December 31, 2018, the Company held warrants to purchase shares of common stock of Alliance MMA.  The fair value of the warrant asset (and related discount) at the date of issuance was determined using the Black-Scholes option pricing model. The Black-Scholes model uses a combination of observable inputs (Level 2) and unobservable inputs (Level 3) in calculating fair value.

 

 22 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The assumptions used to measure the fair value of the warrants as of original issuance date and as of December 31, 2018 were as follows:

 

   Issuance
Date
   December 31,
2018
 
Risk-Free Interest Rate   2.47%   2.41%
Expected Dividend Yield   0%   0%
Expected Volatility   91.95%   91.95%
Term    5 years    5 years 
Fair Market Value of Common Stock  $0.3275   $0.16 

 

The balances and levels of the assets measured at fair value on a recurring basis at December 31, 2018 are presented in the following table:

 

   Quoted         
   prices        
   in active   Significant     
   markets for   other   Significant 
   identical   observable   unobservable 
   assets   inputs   inputs 
   (level 1)   (level 2)   (level 3) 
             
Financial assets:               
                
Convertible notes receivable  $     -   $     -   $837,317 
                
Investment in warrants  -   -   67,000 
                
Total  $-   $-   $904,317 

 

In relation to the acquisition, the Company no longer held these investments at September 30, 2019, thus there is no impact to the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019, however a gain was recorded for $586,000 related to increase in fair value and is included in other income.

 

A summary of the changes in the Company’s convertible notes receivable at fair value using significant unobservable inputs (Level 3) as of and for the nine months ended September 30, 2019 is as follows:

 

     2019  
Convertible notes receivable, December 31, 2018   $ 837,317  
Notes issued (face value $215,000), at fair value     196,000  
Increase in fair value     531,405  
Conversion of notes into common stock     (1,564,722 )
Investment in notes receivable, September 30, 2019   $  -  

 

A summary of the changes in the Company’s investment in warrants measured at fair value using significant unobservable inputs (Level 3) as of and for the nine months ended September 30, 2019 is as follows:

 

    2019  
Investment in warrants, December 31, 2018   $ 67,000  
Warrants issued to the Company     19,000  
Increase in fair value     55,000  
Conversion of warrants into common stock     (141,000 )
Investment in warrants, September 30, 2019   $ -  

 

The values of the investment in warrants at issuance and as of September 30, 2019 were $152,000 and $0, respectively, with a gain from the change in fair value of $55,000 for the nine months ended September 30, 2019 and is component of other income in the accompanying condensed consolidated statement of operations.

 

 23 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 8. Leases

 

Operating Leases

 

The Company leases office facilities under operating leases. Our principle executive office in New York City is under a month to month arrangement. The Company’s also has an office lease with a remaining lease term of fifteen months. Leases with a probable term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. As a practical expedient, the Company elected, for all office and facility leases, not to separate nonlease components (e.g., common-area maintenance costs) from lease components (e.g., fixed payments including rent) and instead to account for each separate lease component and its associated non-lease components as a single lease component. The Company uses its incremental borrowing rate for purposes of discounting lease payments.

 

Lease expense for the three months ended September 30, 2019 and 2018 was approximately $11,250 and $9,000, respectively.

 

Lease expense for the nine months ended September 30, 2019 and 2018 was approximately $35,500 and $26,000, respectively.

 

The Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) electing the practical expedient that allows the Company not to restate its comparative periods prior to the adoption of the standard on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date of adoption. For the comparative periods prior to adoption, the Company presented the disclosures which were required under ASC 840. The Company elected the optional transition method and adopted the new guidance on January 1, 2019 on a modified retrospective basis with no restatement of prior period amounts. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components and to exclude short-term leases from its condensed consolidated balance sheet. The Company’s adoption of the new standard as of January 1, 2019 resulted in the recognition of right-of-use assets of approximately $53,000 and liabilities of approximately $53,000. There was no impact to the accumulated deficit upon adoption of Topic 842.

 

We have operating leases for corporate, business and technician offices.  Leases with a probable term of 12 months or less, including month-to-month agreements, are not recorded on the condensed consolidated balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases). Our leases have remaining lease terms of one to 15 months, none of which include options to extend the leases without a new arrangement.

 

As of September 30, 2019, assets recorded under operating leases were approximately $22,000, which is included as a component of prepaid expenses and other assets. Operating lease right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payment is our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

 

The following table presents supplemental condensed consolidated balance sheet information related to our operating leases:

 

   As of
September 30, 2019
 
Right-of-use Assets  $22,000 
Short-term operating lease liabilities  $22,000 

 

For the three and nine months ended September 30, 2019, the components of lease expense were as follows:

 

   Three Months Ended
September 30, 2019
   Nine Months Ended
September 30, 2019
 
Operating lease cost  $11,250   $35,500 
           
Total lease cost  $11,250   $35,500 

 

 24 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

  

Other information related to leases was as follows:

 

   Three Months Ended
September 30, 2019
 
Supplemental Cash Flows Information     
      
Cash paid for amounts included in the measurement of operating lease liabilities:     
Operating cash flows for operating leases  $11,250 
      
Weighted Average Remaining Lease term (months) – operating leases   15 
      
Weighted Average Discount Rate – operating leases   10%

 

The maturity analysis of the Company’s annual undiscounted cash flows of operating lease liabilities as of September 30, 2019 are as follows:

 

   Operating Lease 
Year Ending December 31, :     
2019 (excluding the quarters ended September 30, 2019)  $4,050 
2020   18,550 
Total minimum lease payments   22,600 
Lease amount representing interest   (600)
Total lease liabilities  $22,000 

 

There were no commitments for non-cancelable operating leases as of December 31, 2018 and as of September 30, 2019 there were non-cancelable lease liabilities of $21,960.

 

As of September 30, 2019, we have no additional operating leases, than that noted above, and no financing leases.

 

Note 9. Commitments and Contingencies

 

Legal Proceedings

 

In the normal course of business or otherwise, we may become involved in legal proceedings. We will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred.

 

On October 25, 2019, the Company and John Price, the Company’s Chief Financial Officer, mutually agreed that Mr. Price would cease to be employed by the Company in any capacity, effective immediately. In addition, on October 25, 2019, the Board of Directors appointed Marc S. Schessel, Chief Executive Officer and Chairman of the Board of Directors of the Company, as interim Chief Financial Officer.

 

In conjunction with the termination of his employment, the Company and Mr. Price executed a Settlement Agreement and Mutual Release (the “Settlement Agreement”) pursuant to which Mr. Price agreed that his existing employment agreement would be deemed terminated without cause and that Mr. Price would continue to provide transitional assistance to the Company for a period of 90 days from the date of his termination (the “Transition Period”). In addition, the Company agreed to pay Mr. Price an adjusted annual base salary of $150,000 during the Transition Period, as well issue him 75,000 shares of restricted stock pursuant to the Company’s Amended and Restated 2016 Equity Incentive Plan, with 25,000 shares issuable eon the second trading day following the filing by the Company of its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2019 and the remaining 50,000 shares issuable on January 2, 2020.

 

 25 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

On March 29, 2019, Network 1 Financial Securities Inc. (“Network 1”) served a complaint against Alliance and SCWorx. Network 1 alleges that Alliance breached its obligation under Network 1’s agreements with Alliance to indemnify  Network 1 for certain costs that Network 1 allegedly incurred in connection with the defense and settlement of the class action litigation previously instituted against Alliance and Network 1.  This class action litigation has since been resolved, as previously disclosed in the consolidated financial statements that were filed with the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on May 22, 2019. Network 1 has demanded approximately $135,000 in payment of alleged damages.  The Company does not believe that it owes the amount demanded and intends to vigorously defend against these claims. On August 9, 2019, SCWorx and Alliance filed a motion to dismiss the complaint on the grounds that Network 1 is a foreign corporation that is not authorized to do business in the State of New York and/or seeking a stay of the action until such time as Network 1 has obtained such authorization and paid to the State of New York all fees and taxes, penalties and interest accrued under the tax law. The briefing on such motion is complete and the Court has scheduled oral argument for November 21, 2019.

 

On December 19, 2018, the Company’s former CEO, Robert L. Mazzeo, who resigned on May 25, 2018, served a complaint against Alliance in the United States District Court for the Southern District of NY. Mr. Mazzeo alleges that he (i) was fraudulently induced to become the CEO of the Company and (ii) entered into an employment contract with the Company and that the Company breached such contract. Mr. Mazzeo seeks damages in excess of $500,000. The Company believes that the lawsuit is frivolous and violative of Rule 11 of the Federal Rules of Civil Procedure. The Company filed an answer to the complaint on February 5, 2019. During the second quarter 2019, the Company reached a settlement with Mr. Mazzeo whereas the Company agreed to pay $35,000 in cash and issue $75,000 of common stock. On September 30, 2019, 24,843 shares of common stock were issued to Mr. Mazzeo. . In October 2019, the Company paid Mr. Mazzeo the $35,000 cash portion of the settlement.

 

In August 2018, SCWorx settled a dispute with a former employee for $260,000, of which approximately $132,000 was paid in 2018 and the balance of $128,000 was accrued at December 31, 2018. The remaining balance was paid in January 2019. The employee had sued the Company in Massachusetts Superior Court for compensation under an employment agreement.

 

Disputed Contract Claim

 

As part of Alliance’s public offering of shares of its common stock and warrants in January 2018, Alliance issued warrants with a provision requiring Alliance to pay the warrant holder the Black-Scholes value of the warrant upon a fundamental transaction as defined in the SPA. On August 20, 2018, Alliance entered into a Stock Exchange Agreement with SCWorx which upon the closing in February 2019, qualified as a fundamental transaction. The holders of the warrants had thirty days to notify SCWorx of the exercise of their rights under this provision, and two holders did so in the allotted time. The Company negotiated settlements with the warrant holders aggregating approximately $175,000 in fair value. During the second quarter 2019, the Company issued 19,801 shares of common stock and approximately $55,000 in cash in full settlement of the claims.

 

Preferred Stock Penalty

 

On December 18, 2018, Alliance closed the placement of the first round of Series A Convertible Preferred Stock securities purchase agreements pursuant to which such Series A Convertible Preferred Stock was issued. The terms of the agreements required SCWorx to register the underlying common stock under a registration statement on Form S-1 within a prescribed period or pay the holders a penalty.  The Company did not file a registration statement on Form S-1 within the required timeframe and accrued for the penalty of approximately $250,000 during the second quarter of 2019. During the third quarter 2019, the Company issued 73,156 shares of common stock as full settlement of the fee obligation.    

 

Consultant Termination

 

On June 28, 2019, the Company terminated a consulting arrangement with a contractor providing investor relation services. The Company and contractor have been in discussions regarding the settlement of contract terms and services provided through June 28, 2019. The Company has accrued $195,000 as the best estimate of the cost to settle any potential dispute regarding the contract terms.

 

Note 10. Stockholders’ Equity

 

The December 31, 2018 common stock and additional paid-in capital amounts have been restated to reflect the share exchange in connection with the Alliance acquisition of SCW FL Corp. and subsequent one-for-nineteen reverse stock split.

 

Transfer of Common Stock to Consultants

 

On or about February 1, 2019, the Company’s founder and CEO as well as the President, transferred an aggregate of approximately 1,379,000 and 144,000 shares of common stock, respectively to certain consultants of the Company, of which approximately 983,000 and 144,000 shares of common stock, respectively were sold to consultants in exchange for promissory notes.  The Company accounted for these share transfers as stock-based compensation expense based upon the Black-Scholes model as if these were stock option grants made by the Company.  The Company used the following inputs in the Black-Scholes option pricing model, expected life of 5 years, risk-free interest rate of 2.51%, volatility 92% and dividend yield of 0%.  As a result, the Company recognized approximately $3.6 million of stock-based compensation expense during the first quarter of 2019 related to these share transfers.  Additionally, approximately 396,000 shares of common stock were transferred by the founder and CEO to contractors for no consideration.  The Company accounted for these share transfers as stock-based compensation based upon the underlying common stock price of $0.23 as of the date of transfer.  The Company recognized $1.7 million of stock-based compensation expense related to these transfers during the first quarter 2019.

 

 26 

 

 

SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Stock Incentive Plan

 

In connection with Alliance’s acquisition of SCW FL Corp., the Company adopted Alliance’s Second Amended and Restated 2016 Equity Incentive Plan (“2016 Plan”). The 2016 Plan allows the Company to grant shares of the Company’s common stock to the Company’s directors, officers, employees and consultants. On January 30, 2019, the Alliance shareholders approved the amendment of the 2016 Plan to increase the number of shares of common stock available for issuance thereunder to 3,000,000 shares of common stock, on a post-split basis.

 

On February 13, 2019, the Board of Directors of the Company granted an aggregate of 425,000 post – split restricted stock units (“RSUs”) under the 2016 Plan, of which an aggregate of 325,000 post-split shares were granted to management and vest quarterly over the next three years, and of which 100,000 were issued to a consultant and vest quarterly over one year. Upon the effectiveness under the Securities Act of a registration statement on Form S-8 with respect to the shares covered by the 2016 Plan, these RSUs vest in twelve equal quarterly installments, commencing on the grant date of February 13, 2019 and had a grant date fair value of approximately $2.7 million. The Company also granted an additional 525,000 post-split RSUs which are subject to performance vesting, of which an aggregate of 225,000 post-split shares were issued to our management and of which 300,000 were issued to a consultant. Additionally, the board of directors awarded stock options under the 2016 Plan to each of the four independent board members to acquire an aggregate of 53,572 post-split shares of the Company’s common stock and to an employee to acquire 25,000 post-split shares. The stock options have a term of five years, an exercise price of $6.49 per share, vest quarterly over four quarters beginning on the grant date of February 13, 2019 and had a grant date fair value of $431,000. The Company determined the fair value of the stock options using the Black-Scholes model with the following inputs, expected life 10 years, risk-free interest rate 0.25%, dividend yield 0%, expected volatility 90%.

 

On June 28, 2019, the Company terminated the aforementioned consultant and reversed the stock-based compensation expense recognized during the first quarter 2019 totaling $162,250 as the consultant had not vested in any of the RSU’s.

 

The number of shares of the Company’s common stock that are issuable pursuant to warrant and stock option grants with time-based vesting as of September 30, 2019 and for the nine months ended are:

 

Reflective of one-for-nineteen reverse stock split

 

    Warrant Grants     Stock Option Grants  
    Number of
Shares
Subject to
Warrants
    Weighted-Average
Exercise Price Per
Share
    Number of
Shares
Subject
to Options
    Weighted-Average
Exercise Price
Per Share
 
Balance at December 31, 2018     236,825     $ 27.84       135,023     $ 7.70  
Granted     1,112,220     $ 5.67       53,572       6.49  
Exercised     (11,075 )     5.51       -       -  
Cancelled/Forfeited     (26,054 )     5.51       -       -  
Balance at September 30, 2019     1,311,916     $ 9.88       188,595     $ 7.35  
Exercisable at September 30, 2019     1,311,916     $ 9.88       188,595     $ 7.35  

 

As of September 30, 2019 and December 31, 2018, the total unrecognized expense for unvested stock options and restricted stock awards, net of actual forfeitures, was approximately $3.7 million and $0, respectively, to be recognized over a three-year period for restricted stock awards and one year for option grants from the date of grant.

 

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SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Stock-based compensation expense is as follows:

 

   Three Months
Ended September 30,
   Nine Months
Ended September 30,
 
   2019   2018   2019   2018 
Stock-based compensation expense  $433,438   $-   $6,283,811   $-

  

Stock-based compensation expense categorized by the equity components is as follows:

 

   Three Months
Ended September 30,
   Nine Months
Ended September 30,
 
   2019   2018   2019   2018 
Stock option awards  $73,528   $-   $196,074   $- 
Common stock   359,910    -    764,807    - 
Transfer of common stock by founders to contractors   -    -    5,322,930    - 
   $433,438   $-   $6,283,811   $- 

 

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SCWorx Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 11. Net Loss per Share

  

Basic net loss per share is computed by dividing net loss for the period by the weighted average shares of common stock outstanding during each period. Diluted net loss per share is computed by dividing net loss for the period by the weighted average shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company uses the treasury stock method to determine whether there is a dilutive effect of outstanding option grants. 

 

The following securities were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:

 

   Three Months
Ended September 30,
 
   2019   2018 
Stock options   188,595     
Warrants   1,311,916     
Total common stock equivalents   1,500,511     

 

   Nine Months
Ended September 30,
 
   2019   2018 
Stock options   188,595     
Warrants   1,311,916     
Total common stock equivalents   1,500,511     

 

Note 12. Subsequent Events

 

On October 25, 2019, the Company and John Price, the Company’s Chief Financial Officer, mutually agreed that Mr. Price would cease to be employed by the Company in any capacity, effective immediately. In addition, on October 25, 2019, the Board of Directors appointed Marc S. Schessel, Chief Executive Officer and Chairman of the Board of Directors of the Company, as interim Chief Financial Officer.

 

In conjunction with the termination of his employment, the Company and Mr. Price executed a Settlement Agreement and Mutual Release (the “Settlement Agreement”) pursuant to which Mr. Price agreed that his existing employment agreement would be deemed terminated without cause and that Mr. Price would continue to provide transitional assistance to the Company for a period of 90 days from the date of his termination (the “Transition Period”). In addition, the Company agreed to pay Mr. Price an adjusted annual base salary of $150,000 during the Transition Period, as well issue him 75,000 shares of restricted stock pursuant to the Company’s Amended and Restated 2016 Equity Incentive Plan, with 25,000 shares issuable eon the second trading day following the filing by the Company of its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2019 and the remaining 50,000 shares issuable on January 2, 2020.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 Part I 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 involve risk, uncertainty and assumptions. Our actual results could differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q.

 

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 interest holders of Primrose were interest holders of SCW LLC and based upon SAB Topic 5G, the technology acquired has been accounted for at predecessor cost of $0. To facilitate the planned acquisition of SCWorx (the “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 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 $1.25 million 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.

 

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 quickly and accurately improve the flow of information 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.

 

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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 many healthcare providers in the United States. The Company’s clients are geographically dispersed throughout the country. The Company’s focus is to assist healthcare providers with issues that 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 its 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 such clients 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 a result of the Acquisition, also operates an online event ticketing platform focused on serving regional mixed martial arts promotions. Due to the relative size of the ticketing business and how information is reported to the Company’s chief operating decision maker, the Company includes such ticketing business as part of its SaaS business reporting unit.

 

SaaS Business

 

The Company’s SaaS business is focused on streamlining three core healthcare provider systems; supply chain, financial and clinical enabling providers’ enterprise systems to work as one automated and seamless business management system. SCWorx offers an advanced software solution for the management of health care providers’ foundational business applications, empowering its customers to significantly reduce costs, drive better clinical outcomes and enhance such providers’ revenue. SCWorx supports the interrelationship between the three above-referenced core healthcare provider systems. This solution moves data from one application to another to drive supply cost reductions, optimize contracts, increase supply chain management cost visibility and control rebates and contract administration fees.

 

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Revenues

  

The Company’s revenue is substantially derived from its SaaS based business.

 

Revenue is recognized upon the transfer of control of promised goods or services in an amount that reflects the consideration that the Company expects to receive in exchange for its products or services. 

 

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 contracts with customers:

 

1)data normalization: includes data preparation, product and vendor mapping, product categorization, data enrichment and other data related services.

 

  2) SaaS: 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 Company’s 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.

 

3)maintenance: 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.

 

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 standalone selling price for each distinct performance obligation and is typically estimated based on observable transactions when these services are sold on a standalone 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 of 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 a 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 contain termination for convenience provisions that do not include penalty terms 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 recognitions, which requires the Company to assess whether the transaction price for such contracts include a significant financing component. The Company has elected to rely on 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’s 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 enter into contracts whose terms permit customers to pay for the Company’s goods or services in excess of one-year from when such customers received the Company’s goods or services.

 

 32 

 

 

Results of Operations - Three and Nine Months Ended September 30, 2019 and 2018

 

Revenue

 

   Three Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Revenue   1,681,928    975,810    706,118    72%

 

Revenue for the three months ended September 30, 2019 was approximately $1.7 million, compared to revenue for the three months ended September 30, 2018, which was $976,000. The increase in revenue is primarily related to revenue from the addition of four new multi-year customer contracts during the first quarter of 2019, data consulting projects completed during the second quarter of 2019, totaling $305,000, a license renewal of $50,000, and monthly maintenance revenue from new customers from the third and fourth quarter 2018.

 

   Nine Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Revenue   4,294,944    2,573,974    1,720,970    67%

  

Revenue for the nine months ended September 30, 2019 was approximately $4.29 million, compared to revenue for the nine months ended September 30, 2018, which was approximately $2.6 million. The increase in revenue is primarily related to revenue from the addition of four new customer contracts during the first quarter of 2019, data consulting projects completed during the second quarter of 2019 totaling $305,000, a license renewal of $50,000, and monthly maintenance revenue from new customers from the third and fourth quarter 2018.

 

Expenses

 

Cost of revenue

 

   Three Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Cost of revenue  $890,332   $624,273   $266,059    43%

 

Cost of revenue increased $266,000 to $890,000 for the three months ended September 30, 2019, compared to $624,000 for the same period in 2018. The increase is due to additional consulting costs related to new customers in 2019.

 

   Nine Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Cost of revenue  $2,494,990   $2,146,629   $348,361    16%

 

Cost of revenue increased $348,000 to approximately $2.5 million for the nine months ended September 30, 2019, compared to approximately $2.1 million for the same period in 2018. The increase is due to additional consulting costs related to new customers in 2019.

 

General and administrative

 

   Three Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
General and administrative  $1,384,435   $178,336   $1,206,099    6,763%

 

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General and administrative expenses increased approximately $1.2 million to approximately $1.4 million for the three months ended September 30, 2019, compared to $178,000 for the same period in 2018. Salary and wages increased $447,000, as the Company hired additional executives in February 2019 in connection with the Acquisition and added our Chief Operating Officer during the second quarter 2019. Stock-based compensation expense increased $433,000 related to employee, director, and non-employee equity awards, accounting and auditing costs increased $34,000 related to the various required regulatory filings, technical accounting and valuation work related to the Acquisition. Legal fees increased $23,000 related to the Acquisition and various corporate matters, U.S. Securities and Exchange Commission (“SEC”) related expenses increased $7,000, travel increased $48,000 mainly related to sales opportunities, insurance increased $43,000 as the Company made adjustments to various policies, information technology supplies increased $18,000, amortization increased $9,500 and investor relations expenses increased $17,000.

 

   Nine Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
General and administrative  $10,384,759   $402,366   $9,982,393    2,481%

  

General and administrative expenses increased $9,982,000, as compared to the same period in 2018. Salary and wages increased $1,266,000 as the Company hired additional executives in February 2019 in connection with the Acquisition, added our Chief Operating Officer during the second quarter 2019 and the Company accrued $195,000 to settle a potential dispute with a contractor that the Company terminated on June 28, 2019. Stock-based compensation expense increased $6.3 million related to employee, director, and non-employee equity awards and from the transfer of shares of our common stock from our CEO and former significant stockholder to non-employee consultants, $250,000 related to the penalty associated with the company not filing a registration statement on Form S-1 as required by the securities purchase agreement dated as of December 18, 2018, between Alliance and the purchasers thereto, accounting and auditing costs increased $1,115,000 related to the various required regulatory filings, technical accounting and valuation work related to the Acquisition. Legal fees increased $475,000 related to the Acquisition and various corporate matters, SEC related expenses increased $287,000, travel increased $284,000 mainly related to sales opportunities, insurance increased $113,000 as the Company made adjustments to various policies, information technology supplies increased $31,000, amortization increased $25,000 and investor relations expenses increased $18,000 offset by a $15,000 decrease in lease expense.

 

We do not expect to incur further stock-based compensation expense related to stock transfers by our founder or significant stockholder. However, we do expect stock-based compensation expense related to employee and non-employee equity awards to increase.

 

We do not expect to incur further penalties related to certain requirements of our Series A Convertible Preferred Stock.

 

Research and Development

 

   Three Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Research and development  $198,450       $198,450    100%

 

Research and development expense increased $198,450 to $198,450 for the three months ended September 30, 2019, compared to $0 for the same period of 2018. The increase is related to product development costs for product extensions leveraging our existing large data array technology.  

 

   Nine Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Research and development  $858,739       $858,739    100%

 

Research and development expense increased $858,739 to $858,739 for the nine months ended September 30, 2019, compared to $0 in the same period of 2018. The increase is related to product development costs for product extensions leveraging our existing large data array technology. 

 

   Three Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Other income   151,646    17,177    134,649    783%

 

 34 

 

 

Other income increase $135,000 to $152,000 for the three months ended September 31, 2019 from $17,000 in the same period of 2018. The increase was primarily a result of the settlement of related party debt in 2019.

 

   Nine Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Other income  $616,701    17,177   $599,524    3,490%

 

Other income increased $600,000 to $617,000 for the nine months ended September 30, 2019, compared to $17,000 in the same period of 2018. The increase is mainly related to an increase in the fair value of the convertible notes and warrants issued by Alliance during the first quarter of 2019. We do not expect further benefits as these assets were converted in connection with the closing of the Acquisition on February 1, 2019. This was also related to a gain on settlement of related part debt of $151,000 in 2019.

 

   Three Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Interest expense      $59,250   $(59,250)   100%

 

Interest expense decreased $59,000 to $0 for the three months ended September 30, 2019, compared to $59,000 in the same period of 2018. The decrease is related to notes being settled with the issuance of approximately $1.9 million of Series A Convertible Preferred Stock on February 1, 2019 and thus no additional interest on such notes is accrued.

 

   Nine Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Interest expense  $23,720   $149,307   $(125,587)   84%

 

Interest expense decreased $125,000 to $24,000 for the nine months ended September 30, 2019, compared to $149,000 in the same period of 2018. The decrease is mainly related to notes and accrued interest being settled with the issuance of $1.9 million of Series A Convertible Preferred Stock on February 1, 2019 and thus only one month of interest on such notes accrued in 2019 (January 2019).

 

   Three Months Ended
September 30,
   Increase   % 
   2019   2018   (Decrease)   Change 
Loss on fair value of convertible notes                    —                       94,557                 (94,557)                 100%

 

Loss on fair value of convertible note decreased from $94,557 in the three months ended September 30, 2018 to $0 in the three months ended September 30, 2019, as all the convertible notes were converted during 2018.

 

Liquidity and Capital Resources

 

Our operations have historically generated negative cash flows, consequently, our primary source of cash has been from the issuance of notes and collections on customer trade receivables.

 

   Nine Months End/ed September 30, 
   2019   2018 
Consolidated Statements of Cash Flows Data:          
Net cash (used in) provided by operating activities  $(4,247,469)  $406,575 
Net cash provided by (used in) investing activities   4,912,082    (1,476,102)
Net cash provided by financing activities   287,548    1,079,446 
Net increase in cash  $952,161   $9,919 

 

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Operating Activities

 

Cash used in operating activities was approximately $4.2 million for the nine months ended September 30, 2019, mainly related to the net loss of approximately $8.9 million, an increase of $646,000 in accounts receivable mainly related to data consulting and receivables from new customers in the third quarter, a decrease in accounts payable and accrued liabilities of $305,000 related to payments made on payable balances related to the acquisition and operating expenses of SCWorx, a $61,000 decrease in customer contract liabilities related to amortization in customer prepayments on long-term SaaS agreements, equity awards to our management team and board of directors, and $961,000 non-cash gains on warrants and convertible note assets with Alliance of $246,000 and $75,000, respectively and stock-based compensation of $5.3 million related to the transfer of shares of common stock from our founders and CEO and President to non-employee contractors.

 

Cash used in operating activities was $407,000 for the nine months ended September 30, 2018, mainly related to the net loss of $202,000, an increase in accounts receivable of $2,000 related to timing of customer payments, offset by an increase of $772,000 in accounts payable, mainly related to deposits on common stock subscriptions of $750,000 and timing of vendor payments, and an increase of $162,000 in contract liabilities related to customer prepayments on long-term SaaS agreements.

 

Investing Activities

 

Cash provided by investing activities was approximately $4.9 million for the nine months ended September 30, 2019, related to $5.4 million cash acquired as part of the Acquisition, offset by funding of advances due to a stockholder and founder in January 2019 of $200,000, advances on convertible notes receivable from Alliance of $215,000, and capital asset acquisitions totaling $115,000.

 

Cash used in investing activities was approximately $1.5 million for the nine months ended September 30, 2018, related to advances on a loan with a Company stockholder of $833,000 and the purchase of $642,000 of convertible notes with Alliance.

 

Financing Activities

 

Cash provided by financing activities was $288,000 for the nine months ended September 30, 2019, primarily related to 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 $68,000.

 

Cash provided by financing activities was approximately $1.1 million for the nine months ended September 30, 2018, related to proceeds from our note with a significant stockholder and former officer of $1.1 million.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2019 and December 31, 2018, 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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Critical Accounting Policies and Estimates

 

For a discussion of our critical accounting policies and estimates, see Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Recent Accounting Pronouncements

  

Refer to Note 3 - Summary of Significant Accounting Policies in the notes to our unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements, including the respective expected dates of adoption.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Management conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of September 30, 2019, the end of the period covered by this Form 10-Q, as required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Interim Chief Financial Officer, based on the 2013 framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission. There are inherent limitations to the effectiveness of any system of Disclosure Controls. Accordingly, even effective Disclosure Controls can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our Chief Executive Officer and Interim Chief Financial Officer has concluded that, due to deficiencies in the design of internal controls and lack of segregation of duties, our Disclosure Controls were not effective as of September 30, 2019, such that the Disclosure Controls did not ensure that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Management Report on Internal Controls over Financial Reporting

 

Our management has identified material weaknesses in our internal controls related to deficiencies in the design of internal controls, effectiveness of financial reporting, disclosure controls and segregation of duties. Our management is working with the audit committee of our board of directors to develop remediation efforts, which are expected to be remediated in the fourth quarter of 2019, until such time as our management is able to conclude that its remediation efforts are operating and effective.

 

Notwithstanding the foregoing, our management, including our Chief Executive Officer and Interim Chief Financial Officer, has concluded that the unaudited condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our condensed consolidated financial position, condensed consolidated results of operations and condensed consolidated cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

 

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We may in the future identify other material weaknesses or significant deficiencies in connection with our internal control over financial reporting. Material weaknesses and significant deficiencies that may be identified in the future will need to be addressed as part of our quarterly and annual evaluations of our internal controls over financial reporting under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002. Any future disclosures of a material weakness, or errors as a result of a material weakness, could result in a negative reaction in the financial markets and a decrease in the price of our common stock.

 

Changes in Internal Control over Financial Reporting.

 

During the quarter ended September 30, 2019, other than described above, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On March 29, 2019, Network 1 Financial Securities Inc. (“Network 1”) served a complaint against Alliance and SCWorx. Network 1 alleges that Alliance breached its obligation under Network 1’s agreements with Alliance to indemnify Network 1 for certain costs that Network 1 allegedly incurred in connection with the defense and settlement of the class action litigation previously instituted against Alliance and Network 1.  This class action litigation has since been resolved, as previously disclosed in the consolidated financial statements that were filed with the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on May 22, 2019. Network 1 has demanded approximately $135,000 in payment of alleged damages.  The Company does not believe that it owes the amount demanded and intends to vigorously defend against these claims. On August 9, 2019, SCWorx and Alliance filed a motion to dismiss the complaint on the grounds that Network 1 is a foreign corporation that is not authorized to do business in the State of New York and/or seeking a stay of the action until such time as Network 1 has obtained such authorization and paid to the State of New York all fees and taxes, penalties and interest accrued under the tax law. The briefing on such motion is complete and the Court has scheduled oral argument for November 21, 2019.

 

On December 19, 2018, the Company’s former CEO, Robert L. Mazzeo, who resigned on May 25, 2018, served a complaint against Alliance in the United States District Court for the Southern District of NY. Mr. Mazzeo alleges that he (i) was fraudulently induced to become the CEO of the Company and (ii) entered into an employment contract with the Company and that the Company breached such contract. Mr. Mazzeo seeks damages in excess of $500,000. The Company believes that the lawsuit is frivolous and violative of Rule 11 of the Federal Rules of Civil Procedure. The Company filed an answer to the complaint on February 5, 2019. During the second quarter 2019, the Company reached a settlement with Mr. Mazzeo whereas the Company agreed to pay $35,000 in cash and issue $75,000 of common stock. On September 30, 2019, the Company issued 24,843 shares of common stock to Mr. Mazzeo. In October 2019, the Company paid Mr. Mazzeo the $35,000 cash portion of the settlement.

 

In August 2018, SCWorx settled a dispute with a former employee for $260,000, of which approximately $132,000 was paid in 2018 and the balance of $128,000 was accrued at December 31, 2018. The remaining balance was paid in January 2019. The employee had sued the Company in Massachusetts Superior Court for compensation under an employment agreement.

 

Disputed Contract Claim

 

As part of Alliance’s public offering of shares of its common stock and warrants in January 2018, Alliance issued warrants that contained a provision requiring Alliance to pay the warrant holders the Black-Scholes value of such warrants upon a fundamental transaction, as defined in the SPA. On August 20, 2018, Alliance entered into a Stock Exchange Agreement with SCWorx which, upon the closing of the Acquisition in February 2019, qualified as a fundamental transaction under such warrants. The holders of such warrants had thirty days to notify SCWorx of the exercise of their rights under this provision, and two holders did so in the allotted time. The Company negotiated settlements with such warrant holders aggregating approximately $175,000 in fair value. During the quarter ended June 30, 2019, the Company issued 19,801 shares of common stock and approximately $55,000 in cash in full settlement of the claim.

 

Preferred Stock Penalty

 

On December 18, 2018, Alliance closed the placement of the first round of its Series A Convertible Preferred Stock pursuant to the securities purchase agreement dated as of December 18, 2018, between Alliance and the purchasers thereto (the “Preferred SPA”). The terms of the Preferred SPA required SCWorx to register the shares of common stock on a registration statement on Form S-1 within a prescribed period and to pay the holders a cash penalty if such shares were not timely registered.  The Company did not file a registration statement on Form S-1 within the required timeframe and had accrued approximately $205,000 in cash penalties during the second quarter of 2019.  During the third quarter of 2019 the Company issued 73,156 shares of common stock as settlement of this fee obligation.

 

Consultant Termination

 

On June 28, 2019, the Company terminated a contract with a third-party contractor providing investor relation services. The Company and such contractor have been in settlement discussions regarding the contract’s terms and the services provided through June 28, 2019. The Company has accrued $195,000 in order to settle the potential dispute with such contractor regarding the contract’s terms.

 

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Item 1A. Risk Factors

 

We are a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

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

  

Since the beginning of the three month period ended September 30, 2019, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in an annual report on Form 10-K, in a quarterly report on Form 10-Q or in a current report on Form 8-K, except as listed below.

 

On July 17, 2019, we issued 65,789 shares of our common stock to a holder of our shares of Series A Convertible Preferred Stock upon the conversion of 25,000 of such shares of Series A Convertible Preferred Stock.

 

On September 9, 2019, we issued 200,000 shares of our common stock to a holder of our shares of Series A Convertible Preferred Stock upon the conversion of 76,000 of such shares of Series A Convertible Preferred Stock.

 

On September 16, 2019, we issued 43,081 shares of our common stock to a holder of our shares of Series A Convertible Preferred Stock upon the conversion of 16,371 of such shares of Series A Convertible Preferred Stock.

 

On September 16, 2019, we issued 108,422 shares of our common stock a holder of our shares of Series A Convertible Preferred Stock upon the conversion of 41,200 of such shares of Series A Convertible Preferred Stock.

 

On September 25, 2019, we issued 73,156 shares of our common stock to the holders of Series A Convertible Preferred Stock in settlement of fees owed to such holders pursuant to the terms of such of the Series A Convertible Preferred Stock.. The shares had a fair value of $250.000. 

 

On September 30, 2019, we issued 24,843 shares of our common stock to a former employee in settlement of litigation. The shares of common stock had a fair value of $75.000. 

 

The sales and the issuances of such shares of common stock described above were offered and sold in reliance upon exemptions from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”), Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.

 

Item 3. Default under Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

On October 25, 2019, the Company and John Price, the Company’s Chief Financial Officer, mutually agreed that Mr. Price would cease to be employed by the Company in any capacity, effective immediately. In addition, on October 25, 2019, the Board of Directors appointed Marc S. Schessel, Chief Executive Officer and Chairman of the Board of Directors of the Company, as interim Chief Financial Officer.

 

In conjunction with the termination of his employment, the Company and Mr. Price executed a Settlement Agreement and Mutual Release (the “Settlement Agreement”) pursuant to which Mr. Price agreed that his existing employment agreement would be deemed terminated without cause and that Mr. Price would continue to provide transitional assistance to the Company for a period of 90 days from the date of his termination (the “Transition Period”). In addition, the Company agreed to pay Mr. Price an adjusted annual base salary of $150,000 during the Transition Period, as well issue him 75,000 shares of restricted stock pursuant to the Company’s Amended and Restated 2016 Equity Incentive Plan, with 25,000 shares issuable eon the second trading day following the filing by the Company of its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2019 and the remaining 50,000 shares issuable on January 2, 2020.

 

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Item 6. Exhibits.

 

(a) Exhibits.

 

  31.1 Certificate of Chief Executive Officer and Interim Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
     
  32.1 Certificate of Chief Executive Officer and Interim Chief Financial Officer to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

  SCWORX CORP.
     
Date: November 14, 2019 By: /s/ Marc S. Schessel 
  Name:   Marc S. Schessel
  Title: Chief Executive Officer and Interim Chief Financial Officer
    (Principal Executive Officer)
    (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit Number   Description
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
32.1   Section 1350 Certification of the Chief Executive Officer *
     
101.INS   XBRL Instance Document*
     
101.SCH    XBRL Taxonomy Extension Schema Document*
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document*
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document*

 

*Filed herewith

 

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