UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172022
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
ALLIANCE MMA, INC.SCWORX CORP.
(Exact name of registrant as specified in its charter)
Delaware | 47-5412331 | |
(State or other jurisdiction of
| (I.R.S. Employer
|
590 Madison Avenue, 21st21st Floor
New York, New York 10022
(Address of principal executive offices)offices, including zip code)
(212) 739-7825(844) 472-9679
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock, $0.001 par value per share | WORX | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files.files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☒ | ☒ | ||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
Number of shares of the registrant’s common stock outstanding at November 9, 2017 was 12,662,974.14, 2022: 13,010,409
Alliance MMA, Inc.SCWorx Corp.
Form 10-Q - Quarterly Report
For the Quarter Ended September 30, 2017
TABLE OF CONTENTS
i
Cautionary Statement Regarding Forward-Looking Statements
Certain statements that we make from time to time, including statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this Form 10-Q are forward-looking statements. These statements, among other things, relate to our business strategy, goals and expectations concerning our future operations, prospects, plans and objectives of management. The words “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, and similar terms and phrases are used to identify forward-looking statements in this presentation.
Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. Forward-looking statements in this Form 10-Q include, without limitation, statements reflecting management’s expectations for future financial performance and operating expenditures (including our ability to continue as a going concern, to raise additional capital and to succeed in our future operations), expected growth, profitability and business outlook and increased operating expenses.
Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those anticipated by such statements. These factors include, among other things, the unknown risks and uncertainties that we believe could cause actual results to differ from these forward looking statements as set forth under the heading, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all of the risks and uncertainties that could have an impact on the forward-looking statements, including without limitation, risks and uncertainties relating to our ability to:
● | reverse the recent decline in our revenue and resume growing our revenue; |
● | resolve the various litigation proceedings pending against us on favorable terms or at all; |
● | obtain additional financing in sufficient amounts or on acceptable terms so that we can fund our business plan; |
● | reduce our dependence on third-party subcontractors to perform some of the work on our contracts; |
● | mitigate the impact of new or changed laws, regulations or other industry standards that could adversely affect our ability to conduct our business; |
● | mitigate the impact of the COVID-19 pandemic on our revenues; |
● | adopt and master new technologies and adjust certain fixed costs and expenses to adapt to our industry’s and customers’ evolving demands; and |
● | mitigate the impact of changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters. |
Although we believe that the expectations reflected in the forward-looking statements contained in this Form 10-Q are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. In light of inherent risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Except as required by law, we are under no duty to update or revise any of such forward-looking statements, whether as a result of new information, future events, or otherwise, after the date of this Form 10-Q.
You should read this Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
All references to “SCWorx,” “we,” “us,” “our” or the “Company” mean SCWorx Corp., a Delaware corporation, and where appropriate, its wholly owned subsidiaries.
ii
PART I—I – FINANCIAL INFORMATION
Alliance MMA, Inc.
SCWorx Corp.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 1,035,697 | $ | 4,678,473 | ||||
Accounts receivable, net of allowance for doubtful accounts of $0 as of September 30, 2017 and December 31, 2016 | 421,095 | 8,450 | ||||||
Prepaid expenses | 57,201 | 134,852 | ||||||
Total current assets | 1,513,993 | 4,821,775 | ||||||
Property and equipment, net | 249,052 | 122,312 | ||||||
Intangible assets, net | 5,449,091 | 5,780,213 | ||||||
Goodwill | 6,470,225 | 3,271,815 | ||||||
Total assets | $ | 13,682,361 | $ | 13,996,115 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 856,163 | $ | 284,361 | ||||
Earn out liability | 310,000 | — | ||||||
Customer deposits | 117,761 | — | ||||||
Total current liabilities | 1,283,924 | 284,361 | ||||||
Long-term deferred tax liabilities | 64,867 | — | ||||||
Commitments and contingencies (Note 5) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $.001 par value; 5,000,000 shares authorized and no shares issued and outstanding | — | — | ||||||
Common stock, $.001 par value; 45,000,000 shares authorized at September 30, 2017 and December 31, 2016; 12,272,974 and 9,022,308 shares issued and outstanding, respectively | 12,273 | 9,022 | ||||||
Additional paid-in capital | 24,003,109 | 18,248,582 | ||||||
Accumulated deficit | (11,681,812 | ) | (4,545,850 | ) | ||||
Total stockholders’ equity | 12,333,570 | 13,711,754 | ||||||
Total liabilities and stockholders’ equity | $ | 13,682,361 | $ | 13,996,115 |
September 30, | December 31, | |||||||
ASSETS | 2022 | 2021 | ||||||
Current assets: | ||||||||
Cash | $ | 361,726 | $ | 71,075 | ||||
Accounts receivable - net | 231,886 | 464,851 | ||||||
Inventory | - | 156,600 | ||||||
Prepaid expenses and other assets | 323,028 | 63,942 | ||||||
Total current assets | 916,640 | 756,468 | ||||||
Fixed assets - net | - | - | ||||||
Goodwill | 8,366,467 | 8,366,467 | ||||||
Total assets | $ | 9,283,107 | $ | 9,122,935 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 1,651,912 | $ | 1,432,710 | ||||
Accounts payable and accrued liabilities - related party | 153,838 | 153,838 | ||||||
Shareholder advance | 100,000 | 100,000 | ||||||
Deferred revenue | 298,500 | 472,750 | ||||||
Equity financing | 125,000 | 125,000 | ||||||
Total current liabilities | 2,329,250 | 2,284,298 | ||||||
Long-term liabilities: | ||||||||
Loans payable | 154,376 | 433,567 | ||||||
Total long-term liabilities | 154,376 | 433,567 | ||||||
Total liabilities | 2,483,626 | 2,717,865 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Series A Convertible Preferred stock, $0.001 par value; 900,000 shares authorized; 39,810 shares issued and outstanding | 40 | 40 | ||||||
Common stock, $0.001 par value; 45,000,000 shares authorized; 13,007,409 and 11,293,030 shares issued and outstanding, respectively | 13,008 | 11,293 | ||||||
Additional paid-in capital | 31,787,156 | 29,805,028 | ||||||
Subscriptions payable | 600,000 | 600,000 | ||||||
Accumulated deficit | (25,600,723 | ) | (24,011,291 | ) | ||||
Total stockholders’ equity | 6,799,481 | 6,405,070 | ||||||
Total liabilities and stockholders’ equity | $ | 9,283,107 | $ | 9,122,935 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Alliance MMA, Inc.SCWorx Corp.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue, net | $ | 1,050,450 | $ | — | $ | 2,919,660 | $ | — | ||||||||
Cost of revenue | 774,671 | — | 1,881,153 | — | ||||||||||||
Gross profit | 275,779 | — | 1,038,507 | — | ||||||||||||
Operating expenses | ||||||||||||||||
General and administrative | 1,752,560 | 357,826 | 6,494,294 | 2,994,356 | ||||||||||||
Professional and consulting fees | 218,320 | 237,585 | 912,767 | 419,996 | ||||||||||||
Total operating expenses | 1,970,880 | 595,411 | 7,407,061 | 3,414,352 | ||||||||||||
Loss from operations | (1,695,101 | ) | (595,411 | ) | (6,368,554 | ) | (3,414,352 | ) | ||||||||
Other income | 672 | — | 217 | — | ||||||||||||
Loss before provision for income taxes | (1,694,429 | ) | (595,411 | ) | (6,368,337 | ) | (3,414,352 | ) | ||||||||
Provision for income taxes | 767,625 | — | 767,625 | — | ||||||||||||
Net loss | $ | (2,462,054 | ) | $ | (595,411 | ) | $ | (7,135,962 | ) | $ | (3,414,352 | ) | ||||
Net loss per share, basic and diluted | $ | (0.23 | ) | $ | (0.11 | ) | $ | (0.74 | ) | $ | (0.65 | ) | ||||
Weighted average shares used to compute net loss per share, basic and diluted | $ | 10,714,200 | $ | 5,289,882 | $ | 9,608,042 | $ | 5,289,221 |
For the Three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenue | $ | 986,949 | $ | 1,138,124 | $ | 3,010,322 | $ | 3,382,205 | ||||||||
Operating expenses: | ||||||||||||||||
Cost of revenues | 693,353 | 722,031 | 2,014,537 | 2,152,651 | ||||||||||||
General and administrative | 832,715 | 1,377,900 | 2,864,408 | 4,184,848 | ||||||||||||
Total operating expenses | 1,526,068 | 2,099,931 | 4,878,945 | 6,337,499 | ||||||||||||
Loss from operations | (539,119 | ) | (961,807 | ) | (1,868,623 | ) | (2,955,294 | ) | ||||||||
Other income (expense) | ||||||||||||||||
Gain on forgiveness of PPP loan | 139,596 | - | 279,191 | - | ||||||||||||
Total other income (expense) | 139,596 | 279,191 | - | |||||||||||||
Net loss before income taxes | (399,523 | ) | (961,807 | ) | (1,589,432 | ) | (2,955,294 | ) | ||||||||
Provision for (benefit from) income taxes | - | - | - | - | ||||||||||||
Net loss | $ | (399,523 | ) | $ | (961,807 | ) | $ | (1,589,432 | ) | $ | (2,955,294 | ) | ||||
Net loss per share, basic and diluted | $ | (0.03 | ) | $ | (0.09 | ) | $ | (0.14 | ) | $ | (0.29 | ) | ||||
Weighted average common shares outstanding, basic and diluted | 12,069,412 | 10,654,635 | 11,616,820 | 10,267,543 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Alliance MMA, Inc.SCWorx Corp.
Condensed Consolidated StatementStatements of Changes Inin Stockholders’ Equity
(Unaudited)
Preferred Stock | Common stock | Additional paid-in | Accumulated | Accumulated | ||||||||||||||||||||||||||||
Three months ended September 30, 2022 | Shares | $ | Shares | $ | capital | deficit | deficit | Total | ||||||||||||||||||||||||
Balances, June 30, 2022 | 39,810 | $ | 40 | 11,726,428 | $ | 11,727 | $ | 30,735,143 | $ | 600,000 | $ | (25,201,200 | ) | $ | 6,145,710 | |||||||||||||||||
Shares issued as settlement of accounts payable | - | - | 90,804 | 91 | 66,783 | - | - | 66,874 | ||||||||||||||||||||||||
Shares issued for common stock placement | 1,153,845 | 1,154 | 723,896 | - | - | 725,050 | ||||||||||||||||||||||||||
Shares issued for vested restricted stock units | - | - | 36,332 | 36 | (36 | ) | - | - | - | |||||||||||||||||||||||
Stock based compensation | - | - | - | - | 261,370 | - | - | 261,370 | ||||||||||||||||||||||||
Net Loss | - | - | - | - | - | - | (399,523 | ) | (399,523 | ) | ||||||||||||||||||||||
Ending balance, September 30, 2022 | 39,810 | $ | 40 | 13,007,409 | $ | 13,008 | $ | 31,787,156 | $ | 600,000 | $ | (25,600,723 | ) | $ | 6,799,481 |
Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance—December 31, 2015 | — | $ | — | 5,289,136 | $ | 5,289 | $ | — | $ | (386,456 | ) | $ | (381,167 | ) | ||||||||||||||
Issuance of common stock related to IPO, net | — | — | 2,222,308 | 2,222 | 8,898,966 | — | 8,901,188 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Initial Business Units and Acquired Assets | — | — | 1,377,531 | 1,378 | 6,197,511 | — | 6,198,889 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Iron Tiger Fight Series | — | — | 133,333 | 133 | 506,532 | — | 506,665 | |||||||||||||||||||||
Stock based compensation related to employee stock option grant | — | — | — | — | 50,573 | — | 50,573 | |||||||||||||||||||||
Stock based compensation related to common stock issued to non-employees by an affiliate | — | — | — | — | 2,595,000 | — | 2,595,000 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (4,159,394 | ) | (4,159,394 | ) | |||||||||||||||||||
Balance—December 31, 2016 | — | $ | — | 9,022,308 | $ | 9,022 | $ | 18,248,582 | $ | (4,545,850 | ) | $ | 13,711,754 | |||||||||||||||
Stock based compensation related to employee stock option grants | — | — | — | — | 470,087 | — | 470,087 | |||||||||||||||||||||
Issuance of common stock and warrant related to acquisition of SuckerPunch | — | — | 307,487 | 307 | 1,328,540 | — | 1,328,847 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Fight Time Promotions | — | — | 74,667 | 75 | 287,393 | — | 287,468 | |||||||||||||||||||||
Stock based compensation related to warrant issued for consulting services | — | — | — | — | 169,401 | — | 169,401 | |||||||||||||||||||||
Issuance of common stock related to acquisition of National Fighting Championships | — | — | 273,304 | 273 | 365,954 | — | 366,227 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Fight Club OC | — | — | 693,000 | 693 | 810,117 | — | 810,810 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Sheffield video library | — | — | 5,556 | 6 | 8,494 | — | 8,500 | |||||||||||||||||||||
Stock based compensation related to common stock issued for consulting services | — | — | 150,000 | 150 | 148,350 | — | 148,500 | |||||||||||||||||||||
Issuance of common stock units related to private placement | — | — | 1,478,761 | 1,479 | 1,523,521 | — | 1,525,000 | |||||||||||||||||||||
Issuance of common stock related to acquisition of Victory Fighting Championship | — | — | 267,891 | 268 | 642,670 | — | 642,938 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (7,135,962 | ) | (7,135,962 | ) | |||||||||||||||||||
Balance—September 30, 2017 | — | $ | — | 12,272,974 | $ | 12,273 | $ | 24,003,109 | $ | (11,681,812 | ) | $ | 12,333,570 |
Preferred Stock | Common stock | Additional paid-in | Subscriptions | Accumulated | ||||||||||||||||||||||||||||
Nine Months Ended September 30, 2022 | Shares | $ | Shares | $ | capital | payable | deficit | Total | ||||||||||||||||||||||||
Balances, December 31, 2021 | 39,810 | $ | 40 | 11,293,030 | $ | 11,293 | $ | 29,805,028 | $ | 600,000 | $ | (24,011,291 | ) | $ | 6,405,070 | |||||||||||||||||
Shares issued as settlement of accounts payable | - | - | 174,758 | 175 | 151,699 | - | - | 151,874 | ||||||||||||||||||||||||
Shares issued for common stock placement | - | - | 1,153,845 | 1,154 | 723,896 | - | - | 725,050 | ||||||||||||||||||||||||
Shares issued for vested restricted stock units | - | - | 107,998 | 108 | (108 | ) | - | - | - | |||||||||||||||||||||||
Commitment shares issued in conjunction with capital raise | - | - | 277,778 | 278 | 199,722 | - | - | 200,000 | ||||||||||||||||||||||||
Stock based compensation | - | - | - | - | 906,919 | - | - | 906,919 | ||||||||||||||||||||||||
Net Loss | - | - | - | - | - | - | (1,589,432 | ) | (1,589,432 | ) | ||||||||||||||||||||||
Ending balance, September 30, 2022 | 39,810 | $ | 40 | 13,007,409 | $ | 13,008 | $ | 31,787,156 | $ | 600,000 | $ | (25,600,723 | ) | $ | 6,799,481 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Alliance MMA, Inc.
SCWorx Corp.
Condensed Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity
(Unaudited)
Preferred Stock | Common stock | Additional paid-in | Subscriptions | Accumulated | ||||||||||||||||||||||||||||
Three months ended September 30, 2021 | Shares | $ | Shares | $ | capital | payable | deficit | Total | ||||||||||||||||||||||||
Balances, June 30, 2021 | 64,872 | $ | 65 | 10,389,522 | $ | 10,390 | $ | 27,533,303 | $ | - | $ | (22,190,310 | ) | $ | 5,353,448 | |||||||||||||||||
Conversion of Series A Convertible Preferred Stock into common stock | (25,062 | ) | (25 | ) | 65,953 | 66 | (41 | ) | - | - | - | |||||||||||||||||||||
Shares issued as settlement of accounts payable | - | - | 73,497 | 73 | 191,005 | - | - | 191,078 | ||||||||||||||||||||||||
Shares issued for common stock placement | - | - | 298,883 | 299 | 524,701 | - | - | 525,000 | ||||||||||||||||||||||||
Shares issued for vested restricted stock units | - | - | 232,801 | 233 | (233 | ) | - | - | - | |||||||||||||||||||||||
Stock based compensation | - | - | - | - | 699,084 | - | - | 699,084 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (961,807 | ) | (961,807 | ) | ||||||||||||||||||||||
Ending balance, September 30, 2021 | 39,810 | $ | 40 | 11,060,656 | $ | 11,061 | $ | 28,947,819 | $ | - | $ | (23,152,117 | ) | $ | 5,806,803 |
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (7,135,962 | ) | $ | (3,414,352 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation | 787,988 | 2,615,240 | ||||||
Amortization of acquired intangibles | 894,373 | — | ||||||
Depreciation of fixed assets | 96,810 | — | ||||||
Deferred income tax and other, net | 767,625 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (380,465 | ) | — | |||||
Prepaid expenses | 77,651 | — | ||||||
Deferred offering costs | — | 25,000 | ||||||
Accounts payable and accrued liabilities | 733,154 | (90,106 | ) | |||||
Net cash used in operating activities | (4,158,826 | ) | (864,218 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of Victory Fighting Championship | (180,000 | ) | — | |||||
Purchase of Fight Club OC, net | (48,900 | ) | — | |||||
Purchase of National Fighting Championships | (140,000 | ) | — | |||||
Purchase of Fight Time Promotions | (84,000 | ) | — | |||||
Purchase of SuckerPunch | (357,500 | ) | — | |||||
Purchase of Sheffield video library | (25,000 | ) | — | |||||
Purchase of fixed assets | (173,550 | ) | — | |||||
Purchase of Initial Business Units and Initial Acquired Assets | — | (1,391,736 | ) | |||||
Net cash used in investing activities | (1,008,950 | ) | (1,391,736 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from sale of common stock | 1,525,000 | — | ||||||
Proceeds from note payable – related party | — | 523,550 | ||||||
Repayment of note payable – related party | — | (877,000 | ) | |||||
Net proceeds from IPO | — | 7,732,280 | ||||||
Net cash provided by financing activities | 1,525,000 | 7,378,830 | ||||||
NET (DECREASE) INCREASE IN CASH | (3,642,776 | ) | 5,122,876 | |||||
CASH — BEGINNING OF PERIOD | 4,678,473 | — | ||||||
CASH — END OF PERIOD | $ | 1,035,697 | $ | 5,122,876 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | — | $ | 34,015 | ||||
Cash paid for taxes | $ | — | $ | — | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Stock issued in conjunction with acquisition of Victory Fighting Championship | $ | 642,938 | $ | — | ||||
Stock issued in conjunction with acquisition of Fight Club OC | $ | 810,810 | $ | — | ||||
Stock issued in conjunction with acquisition of National Fighting Championships | $ | 366,227 | $ | — | ||||
Stock issued in conjunction with acquisition of Fight Time Promotions | $ | 287,468 | $ | — | ||||
Stock issued in conjunction with acquisition of SuckerPunch | $ | 1,328,847 | $ | — | ||||
Stock issued in conjunction with acquisition of Sheffield Video Library | $ | 8,500 | $ | — | ||||
Stock issued in conjunction with acquisition of Target Companies and target assets | $ | — | $ | 6,198,889 |
Preferred Stock | Common stock | Additional paid-in | Subscriptions | Accumulated | ||||||||||||||||||||||||||||
Nine Months Ended September 30, 2021 | Shares | $ | Shares | $ | capital | payable | deficit | Total | ||||||||||||||||||||||||
Balances, December 31, 2020 | 84,872 | $ | 85 | 9,895,600 | $ | 9,896 | $ | 25,920,858 | $ | - | $ | (20,196,823 | ) | $ | 5,734,016 | |||||||||||||||||
Conversion of Series A Convertible Preferred Stock into common stock | (45,062 | ) | (45 | ) | 138,322 | 119 | (74 | ) | - | - | �� | - | ||||||||||||||||||||
Shares issued as settlement of accounts payable | - | - | 170,254 | 170 | 323,465 | - | - | 323,635 | ||||||||||||||||||||||||
Shares issued for common stock placement | - | - | 298,883 | 299 | 524,701 | - | - | 525,000 | ||||||||||||||||||||||||
Shares issued for vested restricted stock units | - | - | 504,965 | 505 | (505 | ) | - | - | - | |||||||||||||||||||||||
Shares issued for equity financing | - | - | 52,632 | 72 | 249,928 | - | - | 250,000 | ||||||||||||||||||||||||
Stock based compensation | - | - | - | - | 1,929,446 | - | - | 1,929,446 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (2,955,294 | ) | (2,955,294 | ) | ||||||||||||||||||||||
Ending balance, September 30, 2021 | 39,810 | $ | 40 | 11,060,656 | $ | 11,061 | $ | 28,947,819 | $ | - | $ | (23,152,117 | ) | $ | 5,806,803 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Alliance MMA, Inc.SCWorx Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, | ||||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,589,432 | ) | $ | (2,955,294 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | - | 73,901 | ||||||
Change in inventory value | 156,600 | 161,440 | ||||||
Gain on forgiveness of PPP loan | (279,191 | ) | - | |||||
Stock-based compensation | 906,919 | 1,929,446 | ||||||
Bad debt expense | 78,125 | 125,625 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 154,840 | 265,106 | ||||||
Prepaid expenses and other assets | (59,086 | ) | (6,312 | ) | ||||
Inventory | - | 475,000 | ||||||
Accounts payable and accrued liabilities | 371,076 | (241,840 | ) | |||||
Deferred revenue | (174,250 | ) | (566,500 | ) | ||||
Net cash used in operating activities | (434,399 | ) | (739,428 | ) | ||||
Net cash used in investing activities | - | - | ||||||
Cash flows from financing activities: | ||||||||
Proceeds from common stock placement | 725,050 | 525,000 | ||||||
Proceeds from notes payable | - | 139,595 | ||||||
Proceeds from shareholder advance | - | 100,000 | ||||||
Net cash provided by financing activities | 725,050 | 764,595 | ||||||
Net (decrease) increase in cash | 290,651 | 25,167 | ||||||
Cash, beginning of period | 71,075 | 376,425 | ||||||
Cash, end of period | $ | 361,726 | $ | 401,592 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income taxes | $ | - | $ | - | ||||
Non-cash investing and financing activities: | ||||||||
Shares issued for equity financing | $ | - | $ | 250,000 | ||||
Commitment shares issued in conjunction with capital raise | $ | 200,000 | $ | - | ||||
Shares issued for vested restricted stock units | $ | 108 | $ | 505 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SCWorx Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
Note 1. The Company and BasisDescription of PresentationBusiness
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” or), 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 “Company”) was formedsurviving entity. Subsequently, on August 17, 2018, SCW Acquisition changed its name to SCWorx Corp. On November 30, 2018, the Company and certain of its stockholders agreed to cancel 6,510 shares of common stock. In June 2018, the Company began to collect subscriptions for common stock. From June to November 2018, the Company collected $1,250,000 in Delawaresubscriptions and issued 3,125 shares of common stock to new third-party investors. In addition, on February 12, 20151, 2019, (i) SCWorx Corp. (f/k/a SCWorx Acquisition Corp.) changed its name to acquire companiesSCW 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 mixed martial arts (“MMA”) industry.Company’s current name, with SCW FL Corp. becoming the Company’s subsidiary. On September 30, 2016, Alliance completedMarch 16, 2020, in response to the first tranche of its initial public offering and acquired the assets and assumed certain liabilities of six companies, consisting of five MMA promoters and a ticketing platform focused on MMA events. In October 2016, GFL Acquisition, Co., Inc.,COVID-19 pandemic, SCWorx established a wholly-owned subsidiary, of Alliance, merged with a seventh company, Go Fight Net, Inc., which produces and distributes MMA video entertainment. GFL was subsequently rebranded as Alliance Sports Media. The respective acquired businessesDirect-Worx, LLC.
Operations of the seven companies are referred to in these Notes as the “Initial Business Units”. At the completion
SCWorx is a provider of the offering in October 2016, the Company acquired certain MMAdata content and kickboxing video libraries (the “Initial Acquired Assets”). Subsequentservices related to the acquisitionrepair, normalization and interoperability of information for healthcare providers and big data analytics for the Initial Business Unitshealthcare 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 Initial Acquired Assets,data to be utilized across multiple internal software applications (“interoperability”) and provides the Company acquiredbasis for sophisticated data analytics (“big data”). SCWorx’s solutions are designed to improve the assetsflow of five additional promotion companies, Iron Tiger Fight Series, Fight Time, National Fighting Championships, Fight Club OC,information quickly and Victory Fighting Championshipaccurately between the existing supply chain, electronic medical records, clinical systems, and a fighterpatient 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 marketing company, SuckerPunch, along with the intellectual property rights to the Sheffield video fight librarycost visibility, synchronous Charge Description Master (“CDM”) and control of Shogun Fights (the “Subsequent Acquisitions”).vendor rebates and contract administration fees.
Initial Business Units
PromotionsSCWorx 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:
Ticketing Platform
Video Production and Distribution
Initial Acquired Assets
Following the completion of its initial public offering, Alliance also acquired the following assets:
Louis Neglia’s Ring of Combat
All rights in the existing MMA and kickboxing video libraries of Louis Neglia’s Martial Arts Karate, Inc. related to the Louis Neglia’s Ring of Combat and Louis Neglia’s Kickboxing events and shows, a right of first refusal to acquire the rights to all future Louis Neglia MMA and kickboxing events.
Hoss Promotions, LLC
The MMA and video library of Hoss Promotions, LLC related to certain CFFC events.
Subsequent Acquisitions
Following the acquisition of the Initial Business Units and Initial Acquired Assets, the Company acquired:
Iron Tiger Fight Series
The Ohio-based MMA promotion business of Ohio Fitness and Martial Arts, LLC doing business as Iron Tiger Fight Series (“ITFS”) on December 9, 2016.
In June 2017, ITFS hired the former owner of Explosive Fight Promotions, an Ohio based MMA promotion business, as General Manager, along with certain staff members.
Sucker Punch
Roundtable Creative Inc., a Virginia corporation d/b/a SuckerPunch Entertainment (“SuckerPunch”), a leading fighter management and marketing company on January 4, 2017.
Fight Time
The MMA Promotion business of Ft. Lauderdale, Florida based Fight Time Promotions, LLC (“Fight Time”) on January 18, 2017.
National Fighting Championships
The Atlanta, Georgia based mixed martial arts promotion business of Undisputed Productions, LLC, doing business as National Fighting Championships or NFC (“NFC”) on May 12, 2017.
Fight Club OC
The Orange County, California based mixed martial arts business of The Englebrecht Company, Inc., doing business as Roy Englebrecht Promotions or Fight Club OC (“Fight Club OC”) on June 14, 2017.
Victory Fighting Championship
The Omaha, Nebraska based mixed martial arts promotion business of Victory Fighting Championship, LLC, doing business as Victory Fighting Championship (“Victory”) on September 28, 2017.
Sheffield Recordings Limited, Inc. - Media Library Rights
The intellectual property rights to the Sheffield video fight library of the Shogun promotions.
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.
Basis of Presentation
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 Principles of Consolidation
The accompanying interim unaudited condensed consolidated financial statements as of September 30, 2017 and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016, have been preparedaccessed by the Companyclient through a secure connection in accordance with generally accepted accounting principlesa software as a service (“GAAP”SaaS”) delivery method.
SCWorx currently sells its solutions and services in the United States (“U.S.”) for interim financial information. to hospitals and health systems through its direct sales force and its distribution and reseller partnerships.
Impact of the COVID-19 Pandemic
The amounts asCompany’s operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic which spread throughout the United States and the world. The New York and New Jersey area, where the Company is headquartered, was at one of December 31, 2016 have been derived from the Company’s annual audited consolidated financial statements but does not include all disclosures required by accounting principles generally acceptedearly epicenters of the coronavirus outbreak in the United StatesStates. The outbreak adversely impacted new customer acquisition. The Company has followed the recommendations of America. Certain informationlocal health authorities to minimize exposure risk for its team members since the outbreak.
In addition, the Company’s customers (hospitals) also experienced extraordinary disruptions to their businesses and footnote disclosures normally includedsupply chains, while experiencing unprecedented demand for health care services related to COVID-19. As a result of these extraordinary disruptions to the Company’s customers’ business, the Company’s customers were focused on meeting the nation’s health care needs in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations.response to the COVID-19 pandemic. As a result, the Company believes that its customers were not able to focus resources on expanding the utilization of the Company’s services, which has adversely impacted the Company’s growth prospects, at least until the adverse effects of the pandemic subside. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairlyaddition, the financial positionimpact of the Company and its results of operations, changes in stockholders’ equity and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2016, included inCOVID-19 on the Company’s Annual Report on Form 10-K forhospital customers could cause the year ended December 31, 2016, filed on April 17, 2017 (the “Form 10-K”). The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2017 or any future period and the Company makes no representations related thereto.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires managementhospitals to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, the assessment of the recoverability of goodwill, likelihood and range of possible losses on contingencies, valuation and recognition of stock-based compensation expense, recognition and measurement of current and deferred income tax assets and liabilities, assessment of unrecognized tax benefits, among others. Actual results could differ from those estimates.
Liquidity and Going Concern
Our primary need for liquidity is to fund the working capital needs of our business, our planned capital expenditures, the continued acquisition of regional promotions and related companies, and general corporate purposes. We have incurred losses and experienced negative operating cash flows since the inception of our operations in October 2016. We believe, however, that the successful implementation of our business plan, along with other actions we have taken and will continue to take, will improve our operating margins and address corporate overhead expenditures.
Since completing our IPO in October 2016, we have focused primarily on building out a domestic MMA platform, which is expected eventually to include a presence in the top 20 media markets. To date, we have created a persistent brand presence in twelve markets through the acquisition of ten promotional businesses along with the promotion of regional Alliance MMA events in two additional markets. We have also continued to develop our existing media library of live MMA events, and have built a professional corporate infrastructure that will support our long-term goals. These activities and investments in our business directly support our stated goal of promoting at least 125 regional MMA events annually.
To ensure the Company’s capital needs are met over the next twelve months, in August 2017, the Company completed a capital raise of approximately $1.5 million through the placement of approximately 1.5 million units at $1.00 per unit, which consist of one share of common stock and a warrant to purchase one share of common stock at $1.50.
In November 2017, the Company raised approximately $500,000 through the placement of 390,000 units at $1.25 per unit, which consist of one common share and a warrant to purchase one-half share of common stock at an exercise price equal to $1.75 per whole share.
Additionally in November, the Company filed a “shelf” registration statement on Form S-3 which, when declared effective by the SEC, will allow the Company to issue various types of securities up to an aggregate of $20 million.
Management is in negotiations with multiple national sponsors and, on the basis of those negotiations, expects to receive at least $500,000 in national sponsorship revenue during the next twelve months.
Additionally, management is in discussions with national casinos to promote our MMA events at venues that would produce better margins through entertainment fees paiddelay payments due to the Company and, in certain cases, a reduction in event overhead through complimentary food and lodging for fighters and staff.services, which could negatively impact the Company’s cash flows.
WhileThe Company sought to mitigate these impacts to revenue through the sale of personal protective equipment (“PPE”) and COVID-19 rapid test kits to the health care industry, including many challenges associatedof the Company’s hospital customers. On March 16, 2020, in response to the COVID-19 pandemic, SCWorx established a wholly owned subsidiary, Direct-Worx, LLC to endeavor to source and provide critical, difficult-to-find items for the healthcare industry. Items had become difficult to source due to unexpected disruptions within the supply chain due to the COVID-19 pandemic. The products the Company sought to source included:
● | Test Kits — the Company currently has no contracted supply of Rapid Test Kits. |
● | PPE — Personal Protective Equipment (PPE) includes items such as masks, gloves, gowns, shields, etc. Currently the Company has no contracted supply of PPE. |
Regarding PPE and Test Kits, during the second quarter of 2020 the Company limited its role to acting as an intermediary between buyers and sellers with successfully executing our aggressive expansion plan exist, and while our historical operating results raise doubts with respect to our ability to continue as a going concern, we expect that our recent and anticipated financings, the continued implementation of our business plan and the expected increase in sponsorship revenue will provide sufficient liquidity and financial flexibility over the next twelve months. We cannot, however, predict with certainty the outcome of our actions to generate liquidity, including our success in raising additional capital or the anticipated results of our operations.commission-based compensation.
Note 2. Summary of Significant Accounting Policies
ThereBasis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been no significant changesprepared in accordance with U.S. GAAP and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated financial statements include the accounts of SCWorx and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
These interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. They do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto contained in its report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022.
The unaudited condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s significant accounting policies duringfinancial position at September 30, 2022, the results of its operations for the three and nine months ended September 30, 2017, as compared to the significant accounting policies described in the Form 10-K, with the exception2022 and cash flows for nine months ended September 30, 2022. The results of operations for three and nine months ended September 30, 2022 are not necessarily indicative of the fighter commission revenue recognition policy disclosed below.results to be expected for future quarters or the full year.
Revenue RecognitionCash
Promotion Revenue
Cash is maintained with various financial institutions. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Company records revenue from ticket sales and sponsorship income upon the successful completion of the related event, at which time services have been deemed rendered, the sales price is fixed and determinable and collectability is reasonably assured. Customer deposits consist ofhad amounts received from the customer for fight promotion and entertainment services to be provided in the next fiscal year. The Company receives these funds and recognizes them as a liability until the services are provided and revenue can be recognized.
Ticket Service Revenue
The Company acts as an agent for ticket sales for promoters and records revenue upon receipt of cash from the credit card companies. The Company charges a fee per transaction for collecting the cash on ticket sales and remits the remaining amount to the promoter upon completion of the event or request for advance from the promoter. The Company’s fee is non-refundable and is recognized immediately as it is not tied to the completion of the event. The Company recognizes revenue upon receipt from the credit card companies due to the following: the fee is fixed and determined and the service of collecting the cash for the promoter has been rendered and collection has occurred.
Fighter Commission Revenue
The Company records fighter commission revenue upon the completion of the contracted athlete’s related event, at which time the fighter’s services have been deemed rendered, the contractual amount due to the fighter is known and the commission due to the Company related to these activities is fixed and determinable and collectability is reasonably assured.
Distribution Revenue
The Company acts as a producer, distributor and licensor of video content. The Company’s online video content is offered on a pay per view (“PPV”) basis. The Company records revenue on PPV transactions upon receipt of payment to credit processing partners. The Company charges viewers a fee per PPV purchase transaction for entitling a viewer to watch the desired video. The Company records revenue net of a fee for the credit card processing cost per transaction. The Company maintains all revenues from videos the Company films and distribute a profit share, typically 50% to promoters who use our streaming services. The Company generates revenues from video production services, and books this revenue upon completion of the video production project. The Company generates revenues from licensing the rights to videos to networks overseas and domestically, and books revenue upon delivery of content. To the extent there are issues (i) watching a video (ii) with our production services or (iii) with the quality of a video we send out for distribution to a network we would issue a partial or full refund based on the circumstances. Given the nature of our business, these refund requests come within days of delivery, thus we would not anticipate any refund request in excess of the FDIC insured limit as of September 30, days from a PPV purchase, a license delivery or video production performance.2022 of $111,726 and none as of December 31, 2021.
Business CombinationsFair Value of Financial Instruments
Management applies fair value accounting for significant financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. Management defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, management considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, accounts receivable and warrants. The Company believes that any concentration of credit risk in its accounts receivable is substantially mitigated by the Company’s evaluation process, relatively short collection terms and the high level of credit worthiness of its customers. The Company performs ongoing internal credit evaluations of its customers’ financial condition, obtains deposits and limits the amount of credit extended when deemed necessary but generally requires no collateral.
Significant customers are those which represent more than 10% of the Company’s revenue for each period presented, or the Company’s accounts receivable balance as of each respective balance sheet date. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total net accounts receivable are as follows:
Revenue For the nine months ended September 30, | Accounts Receivable September 30, | |||||||||||||||
Customers | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Customer A | 13 | % | 8 | % | 26 | % | 4 | % | ||||||||
Customer B | 10 | % | 9 | % | 14 | % | 10 | % | ||||||||
Customer C | 14 | % | 5 | % | 22 | % | 2 | % | ||||||||
Customer D | - | % | 4 | % | - | % | 24 | % |
Allowance for Doubtful Accounts
The Company allocatescontinually monitors customer payments and maintains a reserve for estimated losses resulting from its customers’ inability to make required payments. In determining the reserve, the Company evaluates the collectability of its accounts receivable based upon a variety of factors. In cases where the Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due. For all other customers, the Company recognizes allowances for doubtful accounts based on its historical write-off experience in conjunction with the length of time the receivables are past due, customer creditworthiness, geographic risk and the current business environment. Actual future losses from uncollectible accounts may differ from the Company’s estimates. The Company’s allowance for doubtful accounts as of September 30, 2022 and December 31, 2021 was $0 and $421,736, respectively.
Inventory
The inventory balance at December 31, 2021 is related to the Company’s Direct-Worx, LLC subsidiary and consisted of approximately 87,000 gowns. These items are carried on the unaudited condensed consolidated balance sheet at the lower of cost or market.
During the year ended December 31, 2021, the Company recorded a write down on the fair value of its inventory of $366,840. During the three months ended September 30, 2022, the Company wrote off the remaining value of this inventory as unsellable and is in the process of disposal. Inventory assets as of September 30, 2022 and December 31, 2021 consisted of the following:
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
Inventory | $ | 523,440 | $ | 523,440 | ||||
Allowance for obsolescence | (523,440 | ) | (366,840 | ) | ||||
Net inventory value | $ | - | $ | 156,600 |
Goodwill and Purchased Identified Intangible Assets
Goodwill
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the purchase consideration of its acquisitions to thenet tangible assets, liabilities, and identified intangible assets acquired based on their estimated fair values.under a business combination. Goodwill also includes acquired assembled workforce, which does not qualify as an identifiable intangible asset. The excessCompany reviews impairment of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses and related restructuring costs are recognized separately from the business combination and are expensed as incurred.
Goodwill and Purchased Intangible Assets
Goodwill is tested for impairment on an annual basisgoodwill annually in the fourth fiscal quarter, and, when specificor more frequently if events or circumstances dictate, between annual tests. When impaired,indicate that the carrying value of goodwill might be impaired. The Company first assesses qualitative factors to determine whether it is written downnecessary to fair value. Theperform the quantitative goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, comparestest. 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 withis less than its carrying amount, including goodwill. Ifthen the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further stepsquantitative goodwill impairment test is unnecessary.
Property and Equipment
Property and equipment are necessary as no potential impairment exists. If necessary, the second step to measure the impairment loss would be to compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. Purchased intangible assets with finite lives are carriedrecorded at cost, less accumulated amortization. Amortizationdepreciation. Depreciation is computedcalculated using the straight-line method over the related assets’ estimated useful liveslives. Equipment, furniture and fixtures are being amortized over a period of the respective assets. See “Long-Lived Assets” for the Company’s policy regarding impairment testing of purchased intangible assets with finite lives. Purchased intangible assets with indefinite lives are assessed for potential impairment annually or when events or circumstances indicate that their carrying amounts might be impaired.three years.
Long-Lived AssetsExpenditures that materially increase asset life are capitalized, while ordinary maintenance and repairs are expensed as incurred.
Long-lived assets that are held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the difference between the fair value of the asset and its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), and since May 2014 the FASB has issued amendments to this new guidance, which collectively provides guidance for revenue recognition. ASU 2014-09 is effective for the Company beginning January 1, 2018 and, at that time, the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Under the new standard, the current practice of many licensing companies of reporting revenues from per-unit royalty based agreements one quarter in arrears would no longer be accepted and instead companies will be expected to estimate royalty-based revenues. The Company is currently evaluating the method of adoption and the resulting impact on the financial statements.
In August 2014, the FASB issued “Accounting Standards Update No. 2014-15,” Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40) (“Update 2014-15”), which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. For public entities, Update 2014-15 was effective for annual reporting periods ending after December 15, 2016. The Company adopted this update in 2016 resulting in no impact on its consolidated results of operations, financial position, cash flows and disclosures.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842):” The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases while the accounting by a lessor is largely unchanged from that applied under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this new standard.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718):” (“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted this update effective January 1, 2017.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):” Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently assessing the impact of this new guidance.
In January 2017, the FASB issued ASU No. 2017-04, “Compensation – Retirement Benefits (Topic 715):” to simplify the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted. The Company is currently assessing the impact of this new guidance.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805):” This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted for transactions for which the acquisition date occurs before the effective date of the ASU only when the transaction has not been reported in financial statements that have been issued. The Company chose to early adopt this standard effective for the year ended December 31, 2016.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350):” which removes Step 2 of the goodwill impairment test. Step 2 requires the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value. ASU 2017-4 will be effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019, on a prospective basis, and early adoption is permitted.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718):” scope of modification accounting (“ASU 2017-09”), which provides clarity regarding the applicability of modification accounting in relation to share-based payment awards. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The effective date for the standard is for fiscal years beginning after December 15, 2017, which for the Company is January 1, 2018. Early adoption is permitted. The new standard is to be applied prospectively. The Company does not expect ASU 2017-09 to have a material impact on its consolidated financial statements.
Note 3. Property and Equipment
Property and equipment, net, consisted of the following:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Promotion equipment | $ | 83,185 | $ | 31,393 | ||||
Production equipment | 110,245 | 61,209 | ||||||
Equipment, furniture and other | 165,382 | 42,660 | ||||||
Total property and equipment | 358,812 | 135,262 | ||||||
Less accumulated depreciation | (109,760 | ) | (12,950 | ) | ||||
Total property and equipment, net | $ | 249,052 | $ | 122,312 |
Depreciation expense for the three and nine months ended September 30, 20172022 was $41,111 and $96,810, respectively.
zero. Depreciation expense for the three and nine months ended September 30, 20162021 was zero for both periods.$1,353 and $73,901, respectively.
Note 4. AcquisitionsRevenue Recognition
The Company completedrecognizes 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 acquisitionssteps:
● | 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 SaaS 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 judgment is required to determine the stand-alone selling price for each distinct performance obligation and is typically estimated based on observable transactions when these services are sold on a stand-alone basis. At contract inception, an assessment of the goods and services promised in the contracts with customers is performed and a performance obligation is identified for each distinct promise to transfer to the customer a good or service (or bundle of goods or services). To identify the performance obligations, the Company considers all the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. Revenue is recognized when the performance obligation has been met. The Company considers control to have transferred upon delivery because the Company has a present right to payment at that time, the Company has transferred use of the good or service, and the customer is able to direct the use of, and obtain substantially all the remaining benefits from, the good or service.
The Company’s SaaS and Maintenance contracts typically have termination for convenience without penalty clauses and accordingly, are generally accounted for as month-to-month agreements. If it is determined that the Company has not satisfied a performance obligation, revenue recognition will be deferred until the performance obligation is deemed to be satisfied.
Revenue recognition for the Company’s performance obligations are as follows:
Data Normalization and Professional Services
The Company’s Data Normalization and Professional Services are typically fixed fee. When these services are not combined with SaaS or Maintenance revenues as a single unit of accounting, these revenues are recognized as the services are rendered and when contractual milestones are achieved and accepted by the customer.
SaaS and Maintenance
SaaS and Maintenance revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date on which the Company’s service is made available to customers.
The Company does have some contracts that have payment terms that differ from the timing of revenue recognition, which requires the Company to assess whether the transaction price for those contracts 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 ASC 606, the Company recognized revenues when persuasive evidence of an arrangement existed, delivery had occurred, the sales price was fixed or determinable, and the collectability of the resulting receivable was reasonably assured. The adoption of Topic 606 did not result in a cumulative effect adjustment to the Company’s 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 believes it has presented all varying factors that affect the nature, timing and uncertainty of revenues and cash flows.
PPE Inventory sales
Revenues from the sale of inventory are typically recognized upon shipment to a customer as long as the Company has met all performance obligations related to the sale in accordance with Topic 606.
Brokered PPE sales
Brokered PPE sales revenues are recognized once the customer obtains physical possession of the product(s). Because the Company acts as an agent in arranging the relationship between the customer and the supplier, PPE revenues are presented net of related costs, including product procurement, warehouse and shipping fees.
Remaining Performance Obligations
As of September 30, 2022 and December 31, 2021, the Company had $298,500 and $472,750, respectively, of remaining performance obligations recorded as deferred revenue. The Company expects to recognize the majority of revenue relating to the current performance obligations during the nine months ended September 30, 2017:following 12 month period.
SuckerPunchCosts to Obtain and Fulfill a Contract
On January 4, 2017, the Company acquired the stockCosts to fulfill a contract typically include costs related to satisfying performance obligations as well as general and administrative costs that are not explicitly chargeable to customer contracts. These expenses are recognized and expensed when incurred in accordance with ASC 340-40.
Cost of Roundtable Creative Inc., a Virginia corporation d/b/a SuckerPunch Entertainment, a leading fighter managementRevenues
Cost of revenues primarily represent data center hosting costs, consulting services and marketing company, for an aggregate purchase price of $1,686,347, of which $357,500 was paid in cash and $1,146,927 was paid with the issuance of 307,487 shares of Alliance MMA common stock valued at $3.73 per share, the fair value of Alliance MMA common stock on January 4, 2017 and $181,920 was paid with the issuance of a warrant to acquire 93,583 sharesmaintenance of the Company’s common stock.
Fight Time
On January 18, 2017, the Company acquired the mixed martial arts promotion business of Fight Time Promotions, LLC (“Fight Time”) for an aggregate consideration of $371,468, of which $84,000 was paidlarge data array that were incurred in cashdelivering professional services and $287,468 was paid with the issuance of 74,667 shares of the Alliance MMA’s common stock valued at $3.85 per share, the fair value of Alliance MMA common stock on January 18, 2017.
National Fighting Championships
On May 12, 2017, Alliance MMA acquired the mixed martial arts promotion business of Undisputed Productions, LLC, doing business as National Fighting Championships or NFC for an aggregate consideration of $506,227, of which $140,000 was paid in cash and $366,227 was paid with the issuance of 273,304 shares of Alliance MMA common stock valued at $1.34 per share, the fair value of Alliance MMA common stock on May 12, 2017.
Fight Club OC
On June 14, 2017, Alliance MMA acquired the mixed martial arts promotion business of The Englebrecht Company, Inc., doing business as Roy Englebrecht Promotions and Fight Club Orange County for an aggregate consideration of $1,018,710 of which $207,900 was paid in cash and $810,810 was paid with the issuance of 693,000 sharesmaintenance of the Company’s common stock valued at $1.17 per share,large data array during the fair value of Alliance MMA common stock on June 14, 2017.periods presented.
Victory Fighting Championship
On September 28, 2017, Alliance MMA acquired the mixed martial arts promotion business of Victory Fighting Championship, LLC, doing business as Victory Fighting Championship for an aggregate consideration of $822,938 of which $180,000 was paid in cash and $642,938 was paid with the issuance of 267,891 shares of the Company’s common stock valued at $2.40 per share, the fair value of Alliance MMA common stock on September 28, 2017.
All acquisitions have been accounted for as business acquisitions, under the acquisition method of accounting.
Preliminary Purchase Allocation – SuckerPunchContract Balances
As consideration forContract assets arise when the acquisitionassociated revenue was earned prior to the Company’s unconditional right to receive a payment under a contract with a customer (unbilled revenue) and are derecognized when either it becomes a receivable or the cash is received. There were no contract assets as of SuckerPunch,September 30, 2022 and December 31, 2021.
Contract liabilities arise when customers remit contractual cash payments in advance of the Company deliveredsatisfying its performance obligations under the following amountscontract and are derecognized when the revenue associated with the contract is recognized when the performance obligation is satisfied. Contract liabilities were $298,500 and $472,750 as of cashSeptember 30, 2022 and shares of common stock.December 31, 2021, respectively.
Cash | Shares | Warrant Grant | Consideration Paid | |||||||||||||
SuckerPunch | $ | 357,500 | 307,487 | 93,583 | $ | 1,686,347 |
In connection with the acquisition, 108,289 shares of the 307,487 shares of common stock that were issued as part of the purchase price were placed into escrow to guarantee the financial performance of SuckerPunch post-closing. Accordingly, in the event the gross profit is less than $265,000 during fiscal year 2017, all 108,289 shares held in escrow will be forfeited.
The following table reflects the preliminary allocation of the purchase price for SuckerPunch to identifiable assets and preliminary pro forma intangible assets and goodwill:
SuckerPunch | ||||||||||||
Cash | $ | — | ||||||||||
Accounts receivable, net | — | |||||||||||
Intangible assets | 1,525,584 | |||||||||||
Goodwill | 160,763 | |||||||||||
Total identifiable assets | $ | 1,686,347 | ||||||||||
Total identifiable liabilities | — | |||||||||||
Total purchase price | $ | 1,686,347 |
Preliminary Purchase Allocation – Fight Time PromotionsIncome Taxes
As considerationThe 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 acquisitionamount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of the MMA promotion business of Fight Time, the Company delivered the following amounts of cashtemporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and shares of common stock.
Cash | Shares | Consideration Paid | ||||||||||
Fight Time | $ | 84,000 | 74,667 | $ | 371,468 |
In connection with the business acquisition, 28,000 shares of the 74,667 shares of common stock that were issued as part of the purchase price were placed into escrowliabilities are measured using enacted tax rates expected to guarantee the financial performance of Fight Time post-closing. Accordingly,apply to taxable income in the event the gross profit of Fight Time is less than $60,000 during fiscal year 2017, all 28,000 shares heldyears in escrow willwhich those temporary differences are expected to be forfeited.
recovered or settled. The following table reflects the preliminary allocation of the purchase price for the business of Fight Time to identifiableeffect on deferred tax assets and preliminary pro forma intangible assets and goodwill:
Fight Time | ||||||||||||
Cash | $ | — | ||||||||||
Accounts receivable | — | |||||||||||
Intangible assets | 48,867 | |||||||||||
Goodwill | 322,601 | |||||||||||
Total identifiable assets | $ | 371,468 | ||||||||||
Total identifiable liabilities | — | |||||||||||
Total purchase price | $ | 371,468 |
Preliminary Purchase Allocation – National Fighting Championships
As consideration for the acquisitionliabilities of the MMA promotion business of NFC, the Company delivered the following amounts of cash and shares of common stock.
Cash | Shares | Consideration Paid | ||||||||||
NFC | $ | 140,000 | 273,304 | $ | 506,227 |
In connection with the business acquisition, 81,991 shares of the 273,304 shares of common stock that were issued as part of the purchase price were placed into escrow to guarantee the financial performance of NFC post-closing. Accordingly,a change in the event the gross profit of NFCtax rates is less than $100,000 during the 12 month period following the acquisition, all 81,991 shares heldrecognized in escrow will be forfeited.
The following table reflects the preliminary allocation of the purchase price for the business of NFC to identifiable assets and preliminary pro forma intangible assets and goodwill:
NFC | ||||||||||||
Cash | $ | — | ||||||||||
Accounts receivable | — | |||||||||||
Fixed assets | 20,000 | |||||||||||
Intangible assets | 120,000 | |||||||||||
Goodwill | 366,227 | |||||||||||
Total identifiable assets | $ | 506,227 | ||||||||||
Total identifiable liabilities | — | |||||||||||
Total purchase price | $ | 506,227 |
Preliminary Purchase Allocation – Fight Club OC
As consideration for the acquisition of the MMA promotion business of Fight Club OC, the Company delivered the following amounts of cash and shares of common stock.
Cash | Shares | Consideration Paid | ||||||||||
Fight Club OC | $ | 207,900 | 693,000 | $ | 1,018,710 |
In connection with the business acquisition, 258,818 shares of the 693,000 shares of common stock that were issued as part of the purchase price were placed into escrow to guarantee the financial performance of Fight Club OC post-closing. Accordingly, in the event the gross profit of Fight Club OC is less than $148,500 during the 12 month period following the acquisition, all 258,818 shares held in escrow will be forfeited. Among the assets purchased is a cash balance of $159,000 related to customer deposits on ticket sales for future 2017 MMA promotion events.
The following table reflects the preliminary allocation of the purchase price for the business of the Fight Club OC to identifiable assets, liabilities, and preliminary pro forma intangible assets and goodwill:
Fight Club OC | ||||||||||||
Cash | $ | 159,000 | ||||||||||
Accounts receivable | — | |||||||||||
Intangible assets | 500,000 | |||||||||||
Goodwill | 518,710 | |||||||||||
Total identifiable assets | $ | 1,177,710 | ||||||||||
Total identifiable liabilities | (159,000 | ) | ||||||||||
Total purchase price | $ | 1,018,710 |
Preliminary Purchase Allocation – Victory Fighting Championship
As consideration for the acquisition of the MMA promotion business of Victory, the Company delivered the following amounts of cash and shares of common stock.
Cash | Shares | Consideration Paid | ||||||||||
Victory Fighting Championship | $ | 180,000 | 267,891 | $ | 822,938 |
In connection with the business acquisition, 121,699 shares of the 267,891 shares of common stock that were issued as part of the purchase price were placed into escrow to guarantee the financial performance of Victory post-closing. Accordingly, in the event the gross profit of Victory is less than $140,000 during the 12 month period following the acquisition, all 121,699 shares held in escrow will be forfeited. Additionally, 146,192 shares were placed into a separate escrow to indemnify the Company for potential additional expenses incurred by Victory prior to the acquisition and to cover any uncollectible accounts receivable.
The following table reflects the preliminary allocation of the purchase price for the business of Victory to identifiable assets, liabilities, and preliminary pro forma intangible assets and goodwill:
Victory | ||||||||||||
Cash | $ | — | ||||||||||
Accounts receivable | 32,180 | |||||||||||
Fixed assets | 30,000 | |||||||||||
Intangible assets | 600,000 | |||||||||||
Goodwill | 268,167 | |||||||||||
Total identifiable assets | $ | 930,347 | ||||||||||
Total identifiable liabilities | (107,409 | ) | ||||||||||
Total purchase price | $ | 822,938 |
Final Purchase Allocation - Initial Business Units
The Company completed the first tranche of its IPO on September 30, 2016, and closed the acquisitions of the Initial Business Units and the Acquired Assets. The transactions were accounted for as business combinations and 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 Initial Business Units havedeferred tax assets will not be realized. As of September 30, 2022 and December 31, 2021, the Company has evaluated available evidence and concluded that the Company may not realize all the benefits of its deferred tax assets; therefore, a valuation allowance has been includedestablished for its deferred tax assets.
ASC Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions for any of the reporting periods presented.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine the impact that the tax changes in the Alliance MMA results sinceCARES Act may have on its business but does not expect the date of acquisition.impact to be material.
The following table is a reconciliation of the preliminary purchase price allocation at September 30, 2016 to the final purchase price allocation based on the final fair value of the acquired assets and assumed liabilities at the acquisition date:
Under acquisition accounting, assets and liabilities acquired are recorded at their fair value on the acquisition date, with any excess in purchase price over these values being allocated to identifiable intangible assets and goodwill at September 30, 2017.
Preliminary | Adjustments | Final | ||||||||||
Cash and equivalents | $ | 118,764 | $ | — | $ | 118,764 | ||||||
Accounts receivable and other current assets, net | 34,599 | — | 34,599 | |||||||||
Property and equipment, net | 23,661 | — | 23,661 | |||||||||
Intangible assets | 5,839,700 | (2,264,700 | ) | 3,575,000 | ||||||||
Goodwill | �� | 2,878,071 | 1,561,942 | 4,440,013 | ||||||||
Total identifiable assets | $ | 8,894,795 | $ | 702,758 | $ | 8,192,037 | ||||||
Accounts payable and accrued expenses | 1,055,906 | (702,758 | ) | 353,148 | ||||||||
Total identifiable liabilities | $ | 1,055,906 | $ | (702,758 | ) | $ | 353,148 | |||||
Total purchase price | $ | 7,838,889 | $ | — | $ | 7,838,889 |
The Company allocated $3,575,000 to intangible assets as follows:
Intangible assets | Useful Life | Allocated Amount | ||||||||||
Video library, intellectual property | 4 years | $ | 1,125,000 | |||||||||
Venue relationships | 7 years | 1,720,000 | ||||||||||
Ticketing software | 3 years | 90,000 | ||||||||||
Trademark and brand | 3 years | 330,000 | ||||||||||
Promoter relationships | 6 years | 310,000 | ||||||||||
Total intangible assets, gross | $ | 3,575,000 |
In conjunction with the final purchase price allocation, the Company recognized a cumulative measurement period adjustment benefit of approximately $(551,687) related to the adjustment to intangible assets. This benefit is a reduction to amortizationThere was no income tax expense which is included within General and Administrative expense of the Statement of Operations for the three and nine months ended September 30, 2017.2022 and 2021.
Goodwill and Identifiable Intangible Assets
Stock-Based Compensation
The Company accounts for stock-based compensation expense in accordance with the authoritative guidance on share-based payments. Under the provisions of the guidance, stock-based compensation expense is measured at the grant date based on the fair value of the option or warrant using a Black-Scholes option pricing model and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.
The authoritative guidance also requires that the Company measures and recognizes stock-based compensation expense upon modification of the term of stock award. The stock-based compensation expense for such modification is accounted for as a repurchase of the original award and the issuance of a new award.
Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. The Company estimates the expected life of options granted based on historical exercise patterns, which are believed to be representative of future behavior. The Company estimates the volatility of the Company’s common stock on the date of grant based on historical volatility. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, its stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical experience of its stock-based awards that are granted, exercised and cancelled. If the actual forfeiture rate is materially different from the estimate, stock-based compensation expense could be significantly different from what was recorded in the current period. The Company also grants performance based restricted stock awards to employees and consultants. These awards will vest if certain employee\consultant-specific or Company-designated performance targets are achieved. If minimum performance thresholds are achieved, each award will convert into a designated number of the Company’s common stock. If minimum performance thresholds are not achieved, then no shares will be issued. Based upon the expected levels of achievement, stock-based compensation is recognized on a straight-line basis over the requisite service period. The expected levels of achievement are reassessed over the requisite service periods and, to the extent that the expected levels of achievement change, stock-based compensation is adjusted in the period of change and recorded on the statements of operations and the remaining unrecognized stock-based compensation is recorded over the remaining requisite service period. Refer to Note 6, Stockholders’ Equity, for additional detail.
GoodwillLoss Per Share
The Company computes earnings (loss) per share in accordance with ASC 260, “Earnings per Share” which requires presentation of both basic and diluted earnings (loss) per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
Indemnification
The Company provides indemnification of varying scope to certain customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s software. In accordance with authoritative guidance for accounting for guarantees, the Company evaluates estimated losses for such indemnification. The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, no such claims have been filed against the Company and no liability has been recorded in its condensed consolidated financial statements.
As permitted under Delaware law, the Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. In addition, the Company has directors’ and officers’ liability insurance coverage that is intended to reduce its financial exposure and may enable it to recover any payments above the applicable policy retention, should they occur.
In connection with the Class Action and derivative claims and investigations described in Note 5, Commitments and Contingencies, the Company is obligated to indemnify its officers and directors for costs incurred in defending against these claims and investigations.
Contingencies
The Company records a liability when the Company believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible, and the loss or range of loss can be estimated, the Company discloses the possible loss in the notes to the consolidated financial statements. The Company reviews the developments in its contingencies that could affect the amount of the provisions that has been previously recorded, and the matters and related possible losses disclosed. The Company adjusts provisions and changes to its disclosures accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. Significant judgment is required to determine both the probability and the estimated amount.
Legal costs associated with loss contingencies are accrued based upon legal expenses incurred by the end of the reporting period.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. The Company regularly evaluates estimates and assumptions related to the allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, stock-based compensation, goodwill, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. Actual results could differ materially from those estimates.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
Note 3. Loans Payable
CARES funding
On May 5, 2020, the Company obtained a $293,972 unsecured loan payable through the Paycheck Protection Program (“PPP”), which was enacted as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES ACT”). The changefunds were received from Bank of America through a loan agreement pursuant to the CARES Act. The CARES Act was established in order to enable small businesses to pay employees during the economic slowdown caused by COVID-19 by providing forgivable loans to qualifying businesses for up to 2.5 times their average monthly payroll costs. The amount borrowed under the CARES Act and used for payroll costs, rent, mortgage interest, and utility costs during the 24 week period after the date of loan disbursement is eligible to be forgiven provided that (a) the Company uses the PPP Funds during the eight week period after receipt thereof, and (b) the PPP Funds are only used to cover payroll costs (including benefits), rent, mortgage interest, and utility costs. While the full loan amount may be forgiven, the amount of loan forgiveness will be reduced if, among other reasons, the Company does not maintain staffing or payroll levels or less than 60% of the loan proceeds are used for payroll costs. Principal and interest payments on any unforgiven portion of the PPP Funds (the “PPP Loan”) will be deferred to the date the SBA remits the borrower’s loan forgiveness amount to the lender or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness period for six months and will accrue interest at a fixed annual rate of 1.0% and carry a two year maturity date. There is no prepayment penalty on the CARES Act Loan. In May 2022, the Company was granted an extension on the maturity date of this note until March 5, 2025. The loan was partially forgiven in the carrying amount of goodwill$139,569 in September 2022 with the balance remaining due.
On March 17, 2021, we received $139,595 in financing from the U.S. government’s Payroll Protection Program (“PPP”). We entered into a loan agreement with Bank of America. This loan agreement was pursuant to the CARES Act. The CARES Act was established in order to enable small businesses to pay employees during the economic slowdown caused by COVID-19 by providing forgivable loans to qualifying businesses for up to 2.5 times their average monthly payroll costs. The amount borrowed under the CARES Act is eligible to be forgiven provided that (a) the Company uses the PPP Funds during the eight week period after receipt thereof, and (b) the PPP Funds are only used to cover payroll costs (including benefits), rent, mortgage interest, and utility costs. The amount of loan forgiveness will be reduced if, among other reasons, the Company does not maintain staffing or payroll levels. Principal and interest payments on any unforgiven portion of the PPP Funds (the “PPP Loan”) will be deferred for six months and will accrue interest at a fixed annual rate of 1.0% and carry a two year maturity date. There is no prepayment penalty on the CARES Act Loan. This note was fully forgiven on March 12, 2022.
Note 4. Leases
Operating Leases
The Company’s principal executive office in New York City is under a month-to-month arrangement.
The Company has 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 the Company is reasonably certain to exercise (short-term leases). The Company recognizes lease expense for these leases on a straight-line bases over the lease term. The Company’s only remaining lease is month-to-month. As a practical expedient, the Company elected, for all office and facility leases, not to separate non-lease components (common-area maintenance costs) from lease components (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.
As of September 30, 2022 and December 31, 2021, assets recorded under operating leases were $0. 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 the Company’s 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.
For three and nine months ended September 30, 2017 is:2022 and 2021, the components of lease expense were as follows:
Balance as of December 31, 2016 | $ | 3,271,815 | ||||||||||
Goodwill – Sucker Punch | 160,763 | |||||||||||
Goodwill – Fight Time Promotions | 322,601 | |||||||||||
Goodwill – National Fighting Championships | 366,227 | |||||||||||
Goodwill – Fight Club OC | 518,710 | |||||||||||
Goodwill – Victory | 268,167 | |||||||||||
Final purchase price adjustment – Initial Business Units | 1,561,942 | |||||||||||
Balance as of September 30, 2017 | $ | 6,470,225 |
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Operating lease cost | $ | 434 | $ | 1,167 | $ | 921 | $ | 17,697 | ||||||||
Total lease cost | $ | 434 | $ | 1,167 | $ | 921 | $ | 17,697 |
Other information related to leases was as follows:
Intangible Assets
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Cash paid for amounts included in the measurement of operating lease liabilities: | ||||||||||||||||
Operating cash flows for operating leases | $ | 434 | $ | - | $ | 921 | $ | - | ||||||||
Weighted average remaining lease term (months) – operating leases | - | - | - | - | ||||||||||||
Weighted average discount rate– operating leases | N/A | N/A | N/A | N/A |
Identified intangible assets consist of the following:
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||
Intangible assets | Useful Life | Gross Assets | Accumulated Amortization | Net | Gross Assets | Accumulated Amortization | Net | |||||||||||||||||||
Video library, intellectual property | 4 years | $ | 1,158,500 | $ | 286,136 | $ | 872,364 | $ | 3,512,741 | $ | 181,824 | $ | 3,330,917 | |||||||||||||
Venue relationships | 7 years | 1,720,000 | 245,174 | 1,474,286 | 1,966,400 | 163,867 | 1,802,533 | |||||||||||||||||||
Ticketing software | 3 years | 90,000 | 30,000 | 60,000 | 360,559 | 30,047 | 330,512 | |||||||||||||||||||
Trademark and brand | 3 years | 1,723,867 | 283,946 | 1,439,921 | 325,000 | 8,749 | 316,251 | |||||||||||||||||||
Fighter contracts | 3 years | 1,525,584 | 381,396 | 1,144,188 | — | — | — | |||||||||||||||||||
TV contract | 2 years | 200,000 | — | 200,000 | — | — | — | |||||||||||||||||||
Promoter relationships | 6 years | 310,000 | 51,668 | 258,332 | — | — | — | |||||||||||||||||||
Total intangible assets, gross | $ | 6,727,951 | $ | 1,278,860 | $ | 5,449,091 | $ | 6,164,700 | $ | 384,487 | $ | 5,780,213 |
Amortization expense for the three months ended September 30, 2017 and 2016, was $382,374 less the cumulative measurement period adjustment benefit of $(551,687) or $(169,313), net and $0, respectively.
The amortization expense benefit of $(551,687) for the quarter ended September 30, 2017, is attributable to the final purchase price allocation of the Initial Business Units and reclass of $2,264,700 from intangible assets to goodwill.
Amortization expense for the nine months ended September 30, 2017 and 2016, was $894,373 and $0, respectively.
As of September 30, 2017, estimated amortization expense for the unamortized acquired intangible assets over the next five years and thereafter is as follows:
2017 (Remaining three months) | $ | 437,672 | |||
2018 | 1,750,688 | ||||
2019 | 1,714,716 | ||||
2020 | 736,695 | ||||
2021 | 288,344 | ||||
Thereafter | 520,976 | ||||
$ | 5,449,091 |
Pro Forma Results
The combined pro forma net revenue and net loss of2022, the Company as if Initial Business Units were acquired in January 1, 2016 are (in 000’s):has no additional operating leases, other than that noted above, and no financing leases.
Three Months Ended | Nine Months Ended | ||||||||
September 30, 2016 | September 30, 2016 | ||||||||
Revenue | $ | 335 | $ | 1,559 | |||||
Net (loss) | $ | (848 | ) | $ | (4,052 | ) |
Significant adjustments to expenses for the three months ended September 30, 2016 include $420,000 of amortization of acquired intangible assets.
Significant adjustments to expenses for the nine months ended September 30, 2016 include $1,127,000 of amortization of acquired intangible assets, and $311,000 professional fees attributable to consulting fees related to the acquisitions.
Note 5. Commitments and Contingencies
Operating Leases
The Company does not own any real property. The principal executive offices are located at an office complex in New York, New York, which includes approximately twenty thousand square feet of shared office space and services that we are leasing. The lease had an original one-year term that commenced on December 1, 2015, which was renewed until November 30, 2018. The lease allows for the limited use of private offices, conference rooms, mail handling, videoconferencing, and certain other business services.
In November 2016, the Company entered a sublease agreement for office and video production space in Cherry Hill, New Jersey. The lease expires on June 30, 2019.
With the acquisition of Fight Club OC, the Company assumed a lease for office space in Orange County, California. The lease expires in September 2018.
Each of the acquiredconducting our business, operate from home offices or shared office space arrangements.
Rent expense was $30,000 and $0 for the three months ended September 30, 2017 and 2016, respectively.
Rent expense was $87,000 and $0 for the nine months ended September 30, 2017 and 2016, respectively.
As of September 30, 2017, the aggregate minimum lease payments for the years ending December 31, 2017, 2018, and 2019 were:
2017 (three months remaining) | $ | 34,292 | ||||||||||
2018 | 147,507 | |||||||||||
2019 | 76,201 | |||||||||||
Total minimum lease payments | $ | 258,000 |
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.
InLegal Proceedings
Settlement of Consolidated Securities Class Action
As previously disclosed, on April and May 2017, two purported29, 2020, a securities class action complaints—Shapiro v. Alliance MMA, Inc., No. 1:17-cv-2583 (D.N.J.),case was filed in the United States District Court for the Southern District of New York against us andShulman v. Alliance MMA, Inc., No. 1:17-cv-3282 (S.D.N.Y.)— our former CEO. The action is captioned Daniel Yannes, individually and on behalf of all others similarly situated vs. SCWorx Corp. and Marc S. Schessel,. Subsequently, two additional class actions were filed in the same court (Leeburn v. SCWorx, et ano. and Leonard v. SCWorx et ano.) and thereafter, the three class actions were consolidated (the “Consolidated Class Action”). The Consolidated Class Action alleged that our company and our former CEO misled investors in connection with our April 13, 2020 press release with respect to the sale of COVID-19 rapid test kits.
As previously disclosed, on February 11, 2022, the parties entered into a Stipulation of Settlement (subject to Court approval) to settle the Consolidated Class Action. The settlement resolves all claims asserted against SCWorx and the other named defendant without any admission, concession or finding of any fault, liability or wrongdoing by the Company or any defendant. Under the terms of this agreement, (i) the insurers for the Company and certainMarc Schessel (former CEO) will make a cash payment to the class plaintiffs (ii) the former CEO will transfer 100,000 shares of company common stock to the class plaintiffs, and (iii) the Company will issue $600,000 worth of common stock to the class plaintiffs, in exchange for which all parties will be released from all claims related to the securities class action litigation. After giving effect to the share issuance by the Company, the Company believes that it will have satisfied the accrued retention liability of $700,000. By order dated March 22, 2022, the Court granted preliminary approval of the class action. After a fairness hearing held on June 29, 2022, the Court approved the Stipulation of Settlement.
CorProminence d/b/a Core IR v. SCWorx
AAA Arbitration Case 01-22-0001-5709
As previously disclosed, on April 25, 2022, the Company received a Demand for Arbitration along with a Statement of Claim filed by Core IR with the American Arbitration Association seeking damages in the amount of approximately $190,000.00 arising out of a marketing and consulting agreement. The Company filed its answer, affirmative defenses and counterclaims on May 16, 2022. By order of the arbitrator dated November 1, 2022, Core IR received permission to amend its Statement of Claim to increase its request for damages to $257,545.63. The parties are currently engaged in discovery. Hearing dates have been scheduled for the week of March 20, 2023.
Hadrian Equities Partners, LLC et ano. v. SCWorx Corp,
Case No. 22-cv-07096 (JLR) (S.D.N.Y)
On August 19, 2022, Hadrian Equities Partners, LLC and the Phillip W. Caprio, Jr. 2007 Irrevocable Trust filed a complaint in the United States District Court for the Southern District of New York alleging that SCWorx was dilatory and did not comply with its alleged contractual duties to remove the restrictions from Plaintiffs’ converted AMMA stock to SCWorx stock until August 10 and August 11, 2020. Plaintiffs allege that as a result, they were unable to sell their SCWorx stock when SCWorx was trading at its highest price on April 13, 2020. The Complaint seeks $500,000 in damages. To date, the Complaint has not been served. Upon review of the Complaint, SCWorx counsel provided Plaintiffs’ counsel with a “safe harbor” Notice of Motion for sanctions pursuant to Fed. R. Civ. Pro. 11 and letter explaining that the material allegations in the Complaint are false inasmuch as the restrictions on Plaintiffs’ SCWorx shares were removed on April 21, 2020– after months of waiting for Plaintiffs to supply the correct documents with accurate information so that outside counsel could provide an opinion and clear the stocks for trading. The “safe harbor” letter and Notice of Motion gave Plaintiffs 21 days to withdraw the Complaint. After asking for and receiving several extensions in addition to the 21 days, Plaintiffs have not withdrawn the Complaint and thus, a Motion for Sanctions was filed by SCWorx on November 4, 2022.
Other Investigations
As previously disclosed, on or about April 6, 2022, the Company reached a settlement in principle with the SEC Staff which, subject to a few changes, was subsequently approved by the Commission in which the Company agreed to resolve the SEC’s investigation regarding the April 13, 2020 press release and related disclosures (related to Covid-19 rapid test kits) through the Company’s payment of (a) a civil monetary penalty of $125,000, payable in 4 equal installments over 12 months and (b) disgorgement of $471,000 and prejudgment interest in the amount of $32,761.56 which payment is to be deemed satisfied by the transfer by the Company, no later than 30 days after the entry of the Class Distribution Order in the class action entitled Yannes v. SCWorx Corp. of shares of SCWorx’s common stock, valued at $600,000 at the time of issuance to authorized claimants in the Yannes settlement, provided that the Class Distribution Order is entered within 365 days from the entry of the Final Judgment in the SEC action. In the event that the Company does not transfer shares of its officerscommon stock, valued at $600,000 at the time of issuance to authorized claimants in the class action settlement within 365 days from the entry of a Final Judgment, the Company will be required to remit to the SEC the full amount of disgorgement within 395 days from entry of a Final Judgment. On May 31, 2022, the Commission filed a complaint against Marc Schessel and the Company in the United States District Court for the District of New Jersey alleging violations of Sections 17(a)(1), 17(a)(2), and the United States District Court for the Southern District of New York, respectively. The complaints allege that the defendants violated certain provisions17(a)(3) of the federal securities laws,Securities Act of 1933 (the “Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and purport to seek damages on behalf of a class of shareholders who purchased the Company’s common stock pursuant or traceableRules 10b-5(a), 10b-5(b), and 10b-5(c) thereunder relating to the Company’s initial public offering. In July 2017,April 13, 2020 press release and related disclosures we made in relation to the plaintiffs intransaction involving COVID-19 test kits. At the New York action voluntarily dismissed their claim. The courtsame time, on May 31, 2022, the Commission filed a motion for approval of the Consent Judgment which contained the aforementioned fine, disgorgement requirement as well as an agreement by the Company to an injunction permanently restraining and enjoining the Company from violating Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rules 10b-5(a), (b), and (c) thereunder [17 C.F.R § 240.10b .. 5(a), (b), (c)]; and Section 17(a) of the Securities Act of 1933 (“Securities Act’’) [15 U.S.C. § 77q(a)]. On June 2, 2022, the Court granted the motion, approved the settlement and entered a final judgment. SCWorx has not yet ruledthus far paid 2 of 4 installments on the motion by the claimants in the New Jersey case to be named lead plaintiffs.monetary penalty of $125,000.
We believe that
In connection with these actions and investigations, the remaining claimCompany is without meritobligated to indemnify its officers and intenddirectors for costs incurred in defending against these claims and investigations. Because the Company currently does not have the resources to defend against it vigorously. Based on the very early stagepay for these costs, its directors and officers liability insurance carrier has agreed to indemnify these persons. Upon consummation of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of the case. TheConsolidated Class Action, the Company maintains directors and officers insurance and has notifiedbelieves it will have satisfied its insurance carrier of the claims made against it.
Earn Out
Management evaluated the financial performance of the Initial Business Units comparedaccrued retention obligations with respect to the earn out thresholds as described in the respective Asset Purchase Agreements. Based upon Management’s estimates the Company recognized an earn out liability during the third quarter 2017 of approximately $310,000 related to Shogun’s financial results. This estimated amount is subject to provisions as defined in the related Asset Purchase Agreement. Additionally, the liability will be settled with the issuance of approximately 141,000 shares of Alliance MMA common stock and will be remeasured each reporting period until the shares are issued.insurance coverage.
Note 6. Stockholders’ Equity
Common Stock Private PlacementAuthorized Shares
In July 2017,The Company has 45,000,000 Common shares and 900,000 Series A convertible preferred shares authorized with a par value of $0.001 per share.
Common Stock
Issuance of Shares for Vested Restricted Stock Units
Between January 20, 2022 and August 9, 2022, the boardCompany issued a total of directors approved107,998 shares of common stock to holders of fully vested restricted stock units.
Issuance of Shares Pursuant to Settlement of Accounts Payable
On March 31, 2022, the issuanceCompany issued 12,196 shares of up to $2.5 million of AMMAcommon stock in onefull settlement of $10,000 of accounts payable. The shares had a fair value of $0.82 per share.
On August 11, 2022, the Company issued 69,444 shares of common stock in full settlement of $50,000 of accounts payable. The shares had a fair value of $0.72 per share.
On September 27, 2022, the Company issued 21,360 shares of common stock in full settlement of $16,875 of accounts payable. The shares had a fair value of $0.79 per share.
Issuance of Shares Pursuant to Legal Settlement
Between January 18, 2022 and March 18, 2022, the Company issued an aggregate 71,758 shares of common stock in settlement of $75,000 pursuant to a legal settlement.
Issuance of Shares in conjunction with capital raise
On June 28, 2022, the Company issued 277,778 shares of common stock as commitment shares pursuant to a capital funding agreement. The shares had a fair value of $200,000 or more$0.72 per share.
Between September 7, 2022 and September 12, 2022, the Company issued an aggregate 1,153,845 shares of common stock as commitment shares pursuant to a private placements. In July 2017, Board members and an employee executed subscription agreements for 513,761 units atplacement agreement. The shares had a purchasefair value of $750,000 or $0.65 per share. Company received aggregate net proceeds related to this placement of $725,050.
Equity Financing
During May 2020, the Company received $515,000 of a committed $565,000 from the sale of 135,527 shares of common stock (at a price of $1.09$3.80 per unit. In August 2017, the Company determined that the amount raised through such sales was insufficientshare) and warrants to meet its current needs, and accordingly solicited subscription agreements from third parties for 965,000 units at $1.00 per unit. Each unit sold in these placements consists of one restricted share of AMMA common stock and a warrant to acquire one sharepurchase 169,409 shares of common stock, at an exercise price of $1.50$4.00 per share. The Company issued all 1,478,761 sharesAs of common stock sold in these placements on August 29, 2017.
Stock Option Plan
Common Stock Grant
In February 2017, the Company entered a consulting arrangement with DC Consulting for management consulting services with a term of one year and included the grant of 150,000 shares subject to board of director approval. In July 2017, the Company issued the 150,000 restricted shares to DC Consulting under the arrangement and recognized stock based compensation of approximately $148,000, the fair valueSeptember 30, 2022, $415,000 worth of the shares and warrants have been issued. The remaining $125,000 received by the Company is included in equity financing within current liabilities on the date of issuance, in relation to the common stock grant.consolidated balance sheet.
Option GrantsStock Incentive Plan
On December 19, 2016, the Board of Directors of the Company awarded stock option grants under the 2016 Equity Incentive Plan to four employees to acquire an aggregate of 200,000 shares of the Company’s common stock. The stock options have a term of 10 years and an exercise price of $3.56 per share, vest annually over three years in three equal tranches and have a grant date fair value of $497,840. The Company determined the fair value of the stock options using the Black-Scholes model. Each award was accepted by the recipient during the first quarter 2017 at which point the Company began to recognize stock-based compensation expense.
On February 1, 2017, the Company entered into an employment agreement with James Byrne as the Company’s Chief Marketing Officer. In connection with Mr. Byrne’s employment he was awarded a stock option grant to acquire 100,000 shares of the Company’s common stock. The stock option has a term of 5 years, an exercise price of $3.55, and a grant date fair value of $247,882, and was fully-vested upon grant. The Company determined the fair value of the stock option using the Black-Scholes model.
On May 15, 2017, the Company entered into an employment agreement with Ira Rainess as the Company’s EVP of Business Affairs. In connection with Mr. Rainess’ employment, in September 2017, he was awarded a stock option grant to acquire 100,000 shares of the Company’s common stock. The stock option has a term of 3 years, an exercise price of $1.30, and a grant date fair value of $53,306, and vests one half of the shares on the one year anniversary of the grant date of one half on the one year anniversary thereafter. The Company determined the fair value of the stock option using the Black-Scholes model.
Warrant Grants
On January 4, 2017, in connection with the acquisition of SuckerPunch, the Company entered an employment agreement with Bryan Hamper as Managing Director. Mr. Hamper was awarded a warrant to acquire 93,583 shares of the Company’s common stock. The warrant has a term of 10 years, an exercise price of $3.74, and a grant date fair value of $181,920, and was fully-vested upon grant and is included as a component of the SuckerPunch purchase price. The Company determined the fair value of the warrant using the Black-Scholes model.
On March 10, 2017, the Company entered into a service agreement with World Wide Holdings and issued a warrant to acquire 250,000 shares of the Company’s common stock. The warrant has an exercise price of $4.50, term of three years and vest in equal one third increments on April 1, July 1 and October 1, 2017. The Company has recognized stock-based compensation expense of $169,401 during the three months ended June 30, 2017 as the vendor is not required to perform future services to earn the warrant and the vesting provisions are only time based.
The number of shares of the Company’s common stock that are issuable pursuant to warrant and stock option grants with time basedtime-based vesting as of and for the nine months ended September 30, 2017 are:2022 were:
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, 2016 | 222,230 | $ | 7.43 | 200,000 | $ | 4.50 | ||||||||||
Granted | 1,822,344 | 2.03 | 400,000 | 2.99 | ||||||||||||
Exercised | — | — | — | — | ||||||||||||
Forfeited | — | — | — | — | ||||||||||||
Balance at September 30, 2017 | 2,044,574 | $ | 2.61 | 600,000 | $ | 3.50 | ||||||||||
Exercisable at September 30, 2017 | 482,480 | 5.70 | 166,666 | 3.93 |
Warrant Grants | Stock Option Grants | Restricted Stock Units | ||||||||||||||||||
Number of shares subject to warrants | Weighted- average exercise price per share | Number of shares subject to options | Weighted- average exercise price per share | Number of shares subject to restricted stock units | ||||||||||||||||
Balance at December 31, 2021 | 1,043,525 | $ | 2.57 | 118,388 | $ | 3.25 | 2,160,757 | |||||||||||||
Granted | 524,195 | 0.65 | - | - | 465,314 | |||||||||||||||
Exercised | - | - | - | - | (213,312 | ) | ||||||||||||||
Cancelled/Expired | - | - | - | - | - | |||||||||||||||
Balance at September 30, 2022 | 1,567,720 | $ | 1.49 | 118,388 | $ | 3.25 | 2,412,759 | |||||||||||||
Exercisable at September 30, 2022 | 1,567,720 | $ | 1.49 | 118,388 | $ | 3.25 | 2,108,884 |
The Company has classified the warrant as having Level 2 inputs, and has used the Black-Scholes option-pricing model to value the warrants.
The Company’s outstanding warrants and options at September 30, 2022 are as follows:
Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||||
Exercise Price Range | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | Intrinsic Value | ||||||||||||||||||
$0.65 - $20.90 | 1,567,720 | 2.81 | $ | 1.35 | 1,567,720 | $ | 1.35 | 79,478 |
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Exercise Price Range | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | Intrinsic Value | ||||||||||||||||||
$2.64 - $28.50 | 118,388 | 1.94 | $ | 3.25 | 118,388 | $ | 3.25 | - |
As of September 30, 20172022 and 2016,December 31, 2021, the total unrecognized expense for unvested stock options net of expected forfeitures,and restricted stock awards was approximately $642,694$551,000 and $0,$1.0 million, respectively, which is expected to be amortized on a weighted-average basisrecognized over a twelve month to three year period of three years.from the original grant dates.
Stock-based compensation expense for the three and nine months ended September 30, 20172022 and 2016 is2021 was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
General and administrative expense | $ | 227,010 | $ | — | $ | 787,988 | $ | — |
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Stock-based compensation expense | $ | 261,370 | $ | 699,084 | $ | 906,919 | $ | 1,929,446 |
Stock-based compensation expense categorized by the equity components for the three and nine months ended September 30, 20172022 and 2016 is2021 was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
Employee stock options | $ | 78,510 | $ | — | $ | 470,087 | $ | — | ||||||||
Warrants | — | — | 169,401 | — | ||||||||||||
Common stock | 148,500 | — | 148,500 | — | ||||||||||||
$ | 227,010 | $ | — | $ | 787,988 | $ | — |
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Common stock | $ | 261,370 | $ | 699,084 | $ | 906,919 | $ | 1,929,446 | ||||||||
Total | $ | 261,370 | $ | 699,084 | $ | 906,919 | $ | 1,929,446 |
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 table sets forth the computation of the Company’s basic and diluted net loss per share for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net loss | $ | (2,462,054 | ) | $ | (595,411 | ) | $ | (7,135,962 | ) | $ | (3,414,352 | ) | ||||
Weighted-average common shares used in computing net loss per share, basic and diluted | 10,714,200 | 5,289,882 | 9,608,042 | 5,289,221 | ||||||||||||
Net loss per share, basic and diluted | $ | (0.23 | ) | $ | (0.11 | ) | $ | (0.74 | ) | $ | (0.65 | ) |
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, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Stock options (exercise price $3.55 - $4.50 per share) | 166,666 | — | 166,666 | — | ||||||||||||
Warrants (exercise price $4.50 - $7.43) | 482,480 | — | 482,480 | — | ||||||||||||
Total common stock equivalents | 649,146 | — | 649,146 | — |
For the three months ended | For the nine months ended | |||||||
September 30, | September 30, | |||||||
2022 | 2021 | 2022 | 2021 | |||||
Stock options | 118,388 | 118,388 | 118,388 | 118,388 | ||||
Warrants | 1,567,720 | 1,050,104 | 1,567,720 | 1,050,104 | ||||
Restricted stock units | 2,412,759 | 2,318,339 | 2,412,759 | 2,318,339 | ||||
Total common stock equivalents | 4,098,867 | 3,486,831 | 4,098,867 | 3,486,831 |
Note 8. Income TaxesRelated Party Transactions
The Company recorded no income tax provision for the nine months endedAt September 30, 20172022 and 2016, asDecember 31, 2021 Company had a payable due to an officer in the amount of $153,838 for contract work performed prior to becoming an officer.
During September 2021, the Company’s former CEO and shareholder advanced $100,000 in cash to the Company has incurred losses for these periods.
Income taxes are provided forshort term capital requirements. This amount is non-interest bearing and payable upon demand and included in Shareholder advance on the tax effects of transactions reported in theCompany’s consolidated financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has established a full valuation allowance as it is more likely than not that the tax benefits will not be realizedbalance sheet as of September 30, 2017.2022 and December 31, 2021
Note 9. Subsequent Events
In November 2017,We have evaluated all events that occurred after the Company completed a private placement of 390,000 units at $1.25 per unit for approximately $488,000 in aggregate. Each unit consists of one restricted share of AMMA common stock and a warrantbalance sheet date through the date when our financial statements were issued to acquire one-half share of common stock at an exercise price of $1.75 per whole share.determine if they must be reported. Management has determined that there were no additional reportable subsequent events to be disclosed.
In October 2017 a purported stockholders’ derivative claim was filed against the Company and certain of its officers based on the same facts as described in the class action complaints described in Note 1.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-QYou should read the following discussion of our financial condition and other written and oral statements made from time to time by us or on our behalf may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to anticipated future events, future results of operations or futurein conjunction with our unaudited condensed consolidated financial performance.statements and the related notes included in Item 1, “Financial Statements” of this Form 10-Q. In some cases, you can identifyaddition to our historical unaudited condensed consolidated financial information, the following discussion contains forward-looking statements by terminology such as, “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue”that reflect our plans, estimates, and similar expressions or variations of such words that are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to:
Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on factsbeliefs which involves risk, uncertainty and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading “Risk Factors” within Part I, Item 1A of this Quarterly Report and other documents we file from time to time with the Securities and Exchange Commission, such as our annual reports on Form 10-K for the year ended December 31, 2016, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause ourassumptions. Our actual results tocould differ materially from those expressed hereindiscussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to review carefully and consider the various disclosures madeelsewhere in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.Form 10-Q.
Corporate Information
SCWorx, LLC (n/k/a SCW FL Corp.) (“SCW LLC”) was a privately held limited liability company which was organized in Florida on November 17, 2016. On December 31, 2017, SCW LLC acquired Primrose Solutions, LLC (“Primrose”), a Delaware limited liability company, which became its wholly-owned subsidiary and focused on developing functionality for the software now used and sold by SCWorx Corp. (the “Company” or “SCWorx”). The majority interest holders of Primrose were interest holders of SCW LLC and based upon Staff Accounting Bulletin Topic 5G, the technology acquired has been accounted for at predecessor cost of $0. To facilitate the planned acquisition by Alliance MMA, Inc., a Delaware corporation (“Alliance”), on June 27, 2018, SCW LLC merged with and into a newly-formed entity, SCWorx Acquisition Corp., a Delaware corporation (“SCW Acquisition”), with SCW Acquisition being the surviving entity. Subsequently, on August 17, 2018, SCW Acquisition changed its name to SCWorx Corp. On November 30, 2018, our company and certain of our stockholders agreed to cancel 6,510 shares of common stock. In June 2018, we began to collect subscriptions for common stock. From June to November 2018, we collected $1,250,000 in subscriptions and issued 3,125 shares of common stock to new third-party investors. In addition, on February 1, 2019, (i) SCWorx Corp. (f/k/a SCWorx Acquisition Corp.) changed its name to SCW FL Corp. (to allow Alliance to change its name to SCWorx Corp.) and (ii) Alliance acquired SCWorx Corp. (n/k/a SCW FL Corp.) in a stock-for-stock exchange transaction and changed Alliance’s name to SCWorx Corp., which is our company’s current name, with SCW FL Corp. becoming our subsidiary. On March 16, 2020, in response to the COVID-19 pandemic, SCWorx established a wholly-owned subsidiary, Direct-Worx, LLC.
Our principal executive offices are located at 590 Madison Avenue, 21st Floor, New York, New York, 10022. Our telephone number is (212) 739-7825. We maintain(844) 472-9679. The Company also had a web site at www.alliancemma.com. The referencelease in Greenwich, CT which expired in March 2020 and became a month to the Company’s website address does not constitute incorporation by reference of the information contained on this website.month tenancy until it was terminated in April 2021.
In thethis Quarterly Report, the “Company”, “we”,terms “SCWorx,” the “Company,” “we,” “us”, and “our” refersrefer to Alliance MMA, Inc.SCWorx Corp., which operates its business through its parent company and subsidiaries.a Delaware corporation, unless the context requires otherwise. Unless specified otherwise, specified, the historical financial results in this QuarterlyAnnual Report are those of the Companyour company and itsour subsidiaries on a consolidated basis.
Our Business Overview
NatureSCWorx is a provider of Businessdata content and services related to the repair, normalization and interoperability of information for healthcare providers and big data analytics for the healthcare industry.
The Company was formed on February 12, 2015SCWorx has developed and markets health care information technology solutions and associated services that improve healthcare processes and information flow within hospitals and other healthcare facilities. SCWorx’s software enables a healthcare provider to acquire companiessimplify 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”). Customers use our software to achieve multiple operational benefits, such as supply chain cost reductions, decreased accounts receivables aging, accelerated and completed patient billing in less than 72 hours, contract optimization, increased supply chain management and total cost visibility via dynamic AI connections that automatically structures, repairs, synchronizes and maintains purchasing (“MMIS”), Clinical (“EMR”) and finance (“CDM”) systems. SCWorx’s customers include some of the most prestigious healthcare organizations in the mixed martial artsUnited States. 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 their revenue. SCWorx supports the interrelationship between the three core healthcare provider systems: Supply Chain, Financial and Clinical. This solution integrates common keys within distinct and variable databases that allows the repaired foundational data to move seamlessly from one application to another enabling our Customers to drive supply chain cost reductions, optimize contracts, increase supply chain management (“MMA”SCM”) industry,, cost visibility, control rebates and contract administration fees.
Currently, the business systems of hospitals are frequently deficient and often unconnected from each other. These deficiencies in part result from the vast amount of unstructured, manually created and managed data that proliferates within the hospital’s supply chain, clinical and billing systems. SCWorx’s solutions are designed to developimprove the flow of information quickly and promote fighters toaccurately between the sport's highest level of professional competition, including The Ultimate Fighting Championship (UFC)buy-side (supply chain purchasing systems), Bellator MMA, World Series of Fighting (now known as the “Professional Fighter League”consumption-side (clinical documentation systems like the electronic medical records (“EMR”)) and other prestigious MMA promotions worldwide.billing and collection systems (patient billing systems). The Company planscurrently poor state of interoperability limits the potential value of each independent system and requires significant expense and extensive human resource commitments from senior personnel to stay ahead of problems and complete basic administrative tasks. SCWorx provides an information service that ultimately leads to promote over 125 domestic events per year, showcasingsafer, more than 1,000 fighters, through regional promotions operating under the Alliance MMA umbrella. As of the date of this filing, the Company has acquired 12 businessescost effective and hired the general manager and staff of Explosive Fight Promotions in Ohio, to form the operations of Alliance MMA. See Note 1– “Description of Business and Basis of Presentation” and Note 4 – “Acquisitions” of the Notes to Consolidated Financial Statements for additional information concerning the businesses acquired by the Company.financially efficient patient care.
SCWorx has demonstrated that in order for the core hospital systems to function properly there must be a Single Source of Truth (“SSOT”) for all products utilized and ultimately billed for. The Item Master File (“IMF”), which is a database of all known products used in hospital and health care settings, must be accurate at all times and expanded upon to hold both clinical and financial attributes. An accurate and expanded Item Master File supports interoperability between the supply chain, clinical and financial systems by delivering, on demand, reports detailing the purchasing, utilization and revenue associated with each and every item used, allowing hospitals to better manage their business. The Single Source of Truth establishes a common vernacular and syntax, while assigning a consistent meaning across the healthcare provider’s core systems and accurately migrating data from one application to another and removing disconnects between critical business systems.
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; |
● | EMR management; |
● | CDM management; |
● | contract management; |
● | request for proposal automation; |
● | rebate management; |
● | Integration of acquired management; |
● | big data analytics modeling; |
● | data integration and warehousing; and |
● | ScanWorx. |
SCWorx continues to provide transformational data-driven solutions to some of the finest, most well-respected healthcare providers in the United States. Clients are geographically dispersed throughout the country. Our focus is to assist healthcare providers with issues they have pertaining to data interoperability.
SCWorx’s software solutions are delivered to clients within a fixed term period, typically a three-to-five-year contracted term, where such software is hosted in SCWorx data centers (Amazon Web Service’s “AWS” or RackSpace) and accessed by the client through a secure connection in a software as a service (“SaaS”) delivery method.
SCWorx currently sells its solutions and services in the United States to hospitals and health systems through its direct sales force and its distribution and reseller partnerships.
SCWorx, as part of the acquisition of Alliance MMA, owns an online event ticketing platform focused on serving regional MMA (“mixed martial arts”) promotions which it has paused due to COVID-19.
We currently host our solutions, serve our customers, and support our operations in the United States through an agreement with a third party hosting and infrastructure provider, RackSpace. We incorporate standard IT security measures, including but not limited to; firewalls, disaster recovery, backup, etc. Our operations are dependent upon the integrity, security and consistent operation of various information technology systems and data centers that process transactions, communication systems and various other software applications used throughout our operations. Disruptions in these systems could have an adverse impact on our operations. We could encounter difficulties in developing new systems or maintaining and upgrading existing systems. Such difficulties could lead to significant expenses or to losses due to disruption in our business operations.
In addition, our information technology systems are subject to the risk of infiltration or data theft. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage information technology systems change frequently and may be difficult to detect or prevent over long periods of time. Moreover, the hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise the security of our information systems. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud or deception aimed at our employees, contractors or temporary staff. In the event that the security of our information systems is compromised, confidential information could be misappropriated, and system disruptions could occur. Any such misappropriation or disruption could cause significant harm to our reputation, lead to a loss of sales or profits or cause us to incur significant costs to reimburse third parties for damages.
Impact of the COVID-19 Pandemic
The Company’s operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic which spread throughout the United States and the world. The outbreak adversely impacted new customer acquisition. The Company has followed the recommendations of local health authorities to minimize exposure risk for its team members since the outbreak.
In addition, the Company’s customers (hospitals) also experienced extraordinary disruptions to their businesses and supply chains, while experiencing unprecedented demand for health care services related to COVID-19. As a result of these extraordinary disruptions to the Company’s customers’ business, the Company’s customers were focused on meeting the nation’s health care needs in response to the COVID-19 pandemic. As a result, the Company believes that its customers were not able to focus resources on expanding the utilization of the Company’s services, which has adversely impacted the Company’s growth prospects, at least until the adverse effects of the pandemic subside. In addition, the financial impact of COVID-19 on the Company’s hospital customers could cause the hospitals to delay payments due to the Company for services, which could negatively impact the Company’s cash flows.
The Company sought to mitigate these impacts to revenue through the sale of personal protective equipment (“PPE”) and COVID-19 rapid test kits to the health care industry, including many of the Company’s hospital customers. On March 16, 2020, in response to the COVID-19 pandemic, SCWorx established a wholly-owned subsidiary, Direct-Worx, LLC to endeavor to source and provide critical, difficult-to-find items for the healthcare industry. Items had become difficult to source due to unexpected disruptions within the supply chain due to the COVID-19 pandemic. The products the Company sought to source included:
● | Test Kits — the Company currently has no contracted supply of Rapid Test Kits. |
● | PPE — Personal Protective Equipment (PPE) includes items such as masks, gloves, gowns, shields, etc. Currently the Company has no contracted supply of PPE. |
Regarding PPE and Test Kits, during the second quarter of 2020 the Company limited its role to acting as an intermediary between buyers and sellers with commission based compensation.
Results of Operations - 3 Months Ended– three months ended September 30, 20172022
RevenuesOur operating results for the three month period ended September 30, 2022 and 2021 are summarized as follows:
Our revenue is derived primarily from promotional activities including gate receipts, venue fees, food and beverage sales, merchandise sales, and sponsorships. Revenue from ticket sales is realized at the conclusion of the promotion. The majority of our ticket sales are made in cash which is collected prior to the start of the event. Sponsorship and venue fees are earned with the completion of the event and customers typically pay such fees within 60 days following the event. We generate additional revenue from ticket services from CageTix, fees earned through broadcast television advertising, internet streaming pay-per-view offerings, video production services from Alliance Sports Media, and from management commissions associated with fighter purses, third-party video pay-per-view sales, personal brand sponsorships and ancillary activities from SuckerPunch.
Three Months Ended | ||||||||||||
September 30, 2022 | September 30, 2021 | Difference | ||||||||||
Revenue | $ | 986,949 | $ | 1,138,124 | $ | (151,175 | ) | |||||
Cost of revenues | 693,353 | 722,031 | (28,678 | ) | ||||||||
General and administrative | 832,715 | 1,377,900 | (545,185 | ) | ||||||||
Other (expense) income | 139,596 | - | 139,596 | |||||||||
Provision for income taxes | - | - | - | |||||||||
Net loss | $ | (399,523 | ) | $ | (961,807 | ) | $ | 562,284 |
Revenues
Revenue for the three months ended September 30, 20172022 was $1.05 million,$986,949 as compared to $0 in the same period 2016 as the Company had not yet commenced operations until the completion of our IPO. During the third quarter 2017 the Company held 23 promotions resulting in $740,000 of revenue. Net revenue from ticket services, electronic content distribution and video production totaled $59,000, and revenue from fighter-related commission was $253,000. We expect revenues to increase as we continue to acquire MMA promotions and enhance the revenue opportunities for our existing promotions and related businesses.
Expenses
General and administrative expenses increased approximately $1,395,000 to $1,753,000$1,138,124 for the three months ended September 30, 20172021. This decrease was primarily due to normal fluctuations in our billing cycle. We expect near term revenues to remain relatively flat, unless and until we raise sufficient capital to fully implement our business plan.
Operating Expenses
Cost of revenues
Cost of revenues was $693,353 for the three months ended September 30, 2022 compared to $358,000$722,031 for the same period in 2021. The decrease was primarily the result of a reduction in salaries coupled with a decrease in cloud hosting expense.
General and administrative
General and administrative expenses decreased $545,185 to $832,715 for the three months ended September 30, 2022, as compared to $1,377,900 in the same period of 2016.2021. The third quarter 2016 Generaldecrease is primarily attributable to approximate decreases in stock-based compensation of $438,000, legal and Administrativeprofessional fees of $47,000, bad debt reserve expense of $20,000 partially offset by an increase in inventory write down expense of $44,000. We expect general and administrative expenses were composedto remain relatively flat during the rest of 2022, until we complete a capital raise, in which case we would expect expenses in preparationto grow as we ramp our sales force.
Other income
We had other income of the Company’s IPO including $20,000 of stock based compensation $42,000 of travel expenses $77,000 of fees, $13,000 of business insurance, $31,000 of employee salary, $17,000 of sales and marketing and $158,000 of consulting services. Whereas$139,596 during the three months ended September 2017 reflect the integration and operation of the promotions we acquired during 2016 and 2017, and comprise primarily the following approximate expenditures:
1 These expenses, totaling $409,000 represent non-cash charges.
Professional and consulting expenses decreased by $20,000 compared to the quarterforgiveness of a PPP Loan under the CARES Act.
Net Loss
For the three months ended September 30, 2016, primarily2022, we incurred a net loss of $399,523 compared to a net loss of $961,807 for the same period in 2021.
Results of Operations – nine months ended September 30, 2022
Our operating results for the nine-month period ended September 30, 2022 and 2021 are summarized as a result of an decrease in, legal fees of $100,000 mainly related to the acquisitions and evaluation of potential acquisitions and preparation for our IPO in 2016 not incurred in 2017. 2017 legal fees mainly relate to fees to defend against a purported class action lawsuit. The reduction in legal fees was offset by an increase in consulting of $55,000, investor relations of $23,000.follows:
We believe professional and consulting expenses will continue to be a significant cost as we continue to evaluate and acquire companies.
Nine months ended | ||||||||||||
September 30, 2022 | September 30, 2021 | Difference | ||||||||||
Revenue | $ | 3,010,322 | $ | 3,382,205 | $ | (371,883 | ) | |||||
Cost of revenues | 2,014,537 | 2,152,651 | (138,114 | ) | ||||||||
General and administrative | 2,864,408 | 4,184,848 | (1,320,440 | ) | ||||||||
Other income (expense) | 279,191 | - | 279,191 | |||||||||
Provision for income taxes | - | - | - | |||||||||
Net loss | $ | (1,589,432 | ) | $ | (2,955,294 | ) | $ | 1,365,862 |
Results of Operations - Nine Months Ended September 30, 2017
Revenues
Revenues
Revenue for the nine months ended September 30, 20172022 was $2.9 million$3,010,322 as compared to $0 in the same period 2016 as the Company had not yet commenced operations until completion of our IPO in October 2016. During the nine months ended September 30, 2017, the Company held 47 promotions resulting in $1,956,000 of revenue. Net revenue from ticket services, electronic content distribution and video production totaled $249,000, and revenue from fighter-related commissions was $736,000. We expect revenues to increase as we continue to acquire MMA promotions and enhance the revenue opportunities for our existing promotions and related businesses.
Expenses
General and administrative expenses increased approximately $3,500,000 to $6,500,000$3,382,205 for the nine months ended September 30, 2017 compared2021. This decrease was primarily due to $2,994,000 millionnormal fluctuations in the same period of 2016. The nine months ended September 30, 2016 Generalour billing cycle. We expect near term revenues to remain relatively flat, unless and Administrative expenses were comprised of $2,615,000 of stock-based compensation, $46,000 of travel, $78,000 of fees, $13,000 ofuntil we raise sufficient capital to fully implement our business insurance, $31,000 of employee salary, $25,000 of sales and marketing, and $186,000 of consulting services. Whereas the nine months ended September 30, 2017 reflect the integration and operation of the promotions we acquired during 2016 and 2017, and comprise primarily the following approximate expenditures:
plan.
1 These expenses, totaling $2,089,000 represent non-cash charges.
Professional and consulting expenses increased by $493,000 compared to the nine months ended September 30, 2016, primarily as a result of an increase in accounting and auditing related expenses of $190,000, legal fees of $110,000 mainly related to the acquisitions and evaluation of potential acquisitions and legal fees to defend against purported class action lawsuits, public relations expense of $119,000 offset by a reduction in SEC related fees of $18,000.
We believe professional and consulting expenses will continue to be a significant cost as we continue to evaluate and acquire companies.
Operating Expenses
Liquidity and Capital Resources
Our primary sourcesCost of cash used in the nine months ended September 30, 2017 have been the issuancerevenues
Cost of stock in our initial public offering and subsequent private placements, and the operation of the combined Alliance MMA businesses.
As of September 30, 2017, our cash balancerevenues was $1.0 million, which consists primarily of cash on deposit with banks. Our principal uses of cash include the acquisition of regional promotions, the payment of operating expenses, and the acquisition of capital assets.
NineMonths Ended September 30, | ||||||||
2017 | 2016 | |||||||
Consolidated Statements of Cash Flows Data: | ||||||||
Net cash used in operating activities | $ | (4,158,826 | ) | $ | (864,218 | ) | ||
Net cash used in investing activities | (1,008,950 | ) | (1,391,736 | ) | ||||
Net cash provided by financing activities | 1,525,000 | 7,378,830 | ||||||
Net (decrease) increase in cash | $ | (3,642,776 | ) | $ | 5,122,876 |
Our primary need for liquidity is to fund the working capital needs of our business, our planned capital expenditures, the continued acquisition of regional promotions and related companies, and general corporate purposes. We have incurred losses and experienced negative operating cash flows since the inception of our operations in October 2016. We believe, however, that the successful implementation of our business plan, along with other actions we have taken and will continue to take, will improve our operating margins and address corporate overhead expenditures.
Since completing our IPO in October 2016, we have focused primarily on building out a domestic MMA platform, which is expected eventually to include a presence in the top 20 media markets. To date, we have created a persistent brand presence in twelve markets through the acquisition of ten promotional businesses along with the promotion of regional Alliance MMA events in two additional markets. We have also continued to develop our existing media library of live MMA events, and have built a professional corporate infrastructure that will support our long-term goals. These activities and investments in our business directly support our stated goal of promoting at least 125 regional MMA events annually.
To ensure the Company’s capital needs are met over the next twelve months, in August 2017, the Company completed a capital raise of approximately $1.5 million through the placement of 1.5 million units which consist of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $1.50 per share.
In October and November 2017, the Company raised approximately $488,000 through the placement of 390,000 units which consist of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.75 per whole share.
Additionally in November, the Company filed a Universal Shelf Registration Statement on Form S-3 which allows the Company to issue various types of securities up to an aggregate $20 million.
Management is in negotiations with multiple national sponsors and, on the basis of those negotiations, expects to receive at least $500,000 in national sponsorship revenue during the next twelve months.
Additionally, management is in discussions with national casinos to promote our MMA events at venues that would produce better margins through entertainment fees paid to the Company and, in certain cases, a reduction in event overhead through complimentary food and lodging for fighters and staff.
While many challenges associated with successfully executing our aggressive expansion plan exist, and while our historical operating results raise doubts with respect to our ability to continue as a going concern, we expect that our recent and anticipated financings, the continued implementation of our business plan and the expected increase in sponsorship revenue will provide sufficient liquidity and financial flexibility over the next twelve months. We cannot, however, predict with certainty the outcome of our actions to generate liquidity, including our success in raising additional capital or the anticipated results of our operations.
Operating Activities
Cash used in operating our businesses was approximately $4.2 million$2,014,537 for the nine months ended September 30, 2017. 2022 compared to $2,152,651 for the same period in 2021. The decrease was primarily the result of a reduction in salaries coupled with a decrease in cloud hosting expense.
General and administrative
General and administrative expenses decreased $1,320,440 to $2,864,406 for the nine months ended September 30, 2022, as compared to $4,184,848 in the same period of 2021. The decrease is primarily attributable to approximate decreases in stock-based compensation of $1,023,000, legal and professional fees of $128,000, accounting fees of $106,000, bad debt reserve expense of $48,000, partially offset by an increase in salaries and wage expense of $36,000. We expect general and administrative expenses to remain relatively flat during the rest of 2022, until we complete a capital raise, in which case we would expect expenses to grow as we ramp our sales force.
Other income
We had other income of $279,191 during the nine months ended September 30, 2022 related to the forgiveness of a PPP Loan under the CARES Act.
Net Loss
For the nine months ended September 30, 2016,2022, we used approximately $0.9 millionincurred a net loss of cash$1,589,432 compared to a net loss of $2,955,294 for the same period in preparing for our initial public offering and the acquisition of the Initial Business Units.
2021.
Except for increases in costs related to the evaluationLiquidity and acquisition of additional businesses (which will be offset by the revenues provided by such acquisitions), we do not anticipate a material increase in quarterly cash expenditures during the balance of 2017 unless we begin to acquire businesses at a faster pace. We expect it to take approximately twelve months from the date of acquisition to integrate the operations and cost structure of a promotion or other business, and produce the intended improvement in profitability.Capital Resources
InvestingCash Flows
Nine months ended September 30, | ||||||||
2022 | 2021 | |||||||
Net cash used in operating activities | $ | (434,399 | ) | $ | (739,428 | ) | ||
Net cash used in investing activities | - | - | ||||||
Net cash provided by financing activities | 725,050 | 764,595 | ||||||
Change in cash | $ | 290,651 | $ | 25,167 |
Operating Activities
Cash used in investingoperating activities was approximately $1.0 million$434,000 for the nine months ended September 30, 2017,2022 (about $48,000 per month), mainly related to the acquisitionsnet loss of SuckerPunch, Fight Time, NFC, Fight Club OC,approximately $1,589,000, a $174,000 decrease in deferred revenue, a $59,000 increase in prepaid expenses, and Victory totaling $0.8 milliona $279,000 gain on forgiveness of debt, partially offset by non-cash stock-based compensation of $907,000, debt expense of $78,000, an increase in the aggregate, the acquisitionaccounts payable and accrued liabilities of $371,000 and a video library from Sheffield for $25,000, and fixed asset purchases totaling $174,000.decrease in accounts receivable of $155,000.
Cash used in investingoperating activities was $1.4 million in 2016 related to acquisition of the Initial Business Units, and Initial Acquired assets.
Financing Activities
Cash provided by financing activities was $1.5 millionapproximately $739,000 for the nine months ended September 30, 2017,2021 (about $82,000 per month), mainly related to the private placementnet loss of common stock.approximately $2,955,000, and a $566,000 decrease in deferred revenue, partially offset by non-cash stock-based compensation of $1,929,000, bad debt expense of $161,000, a decrease in accounts receivable of $265,000, a decrease in inventory of $475,000, an increase of accounts payable and accrued expense of $292,000 and depreciation expense of $74,000.
Investing Activities
The Company did not have any investing activities during the nine months ended September 30, 2022 and 2021.
Financing Activities
Cash provided by financing activities was $7.4 million$725,050 for the nine months ended September 30, 2016, primarily related to2022. This consisted of net proceeds from a common stock placement.
Cash provided by financing activities was $764,595 for the nine months ended September 30, 2021. This consisted of $139,595 in proceeds from a loan payable, $100,000 from an advance from the Company’s IPO.former CEO and shareholder, and $525,000 from a common stock placement.
Contractual Cash Obligations
Our operating lease obligation represents the future minimum lease payments under non-cancelable facility operating lease.
See Note 5— “Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional detail.
Off-Balance Sheet Arrangements
As of September 30, 2017,2022 and December 31, 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
During the nine months ended September 30, 2017 there were no significant changes in our critical accounting policies with the exception of fighter commission revenue recognition policy. See Note 2 –“Summary of Significant Accounting Policies” of the Notes to the Condensed Consolidated Financial Statements for additional detail. 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 Operationsin the Form 10-K.
Recent Accounting Pronouncements
See Note 2—“Recent Accounting Pronouncements”of the Notes to 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
Attached as exhibits to this Form 10-Q are certificationsManagement conducted an evaluation of the Company’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14effectiveness of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.
This Quarterly Report on Form 10-Q does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
As we are an emerging growth company and a newly-public company with a limited operating history following the completion of our initial public offering in October 2016, we have only recently commenced implementing “disclosure controls and procedures” (“Disclosure Controls”), as such term is defined inby Rules 13a-15(e) and 15d-15(e) underof the Exchange Act, which are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. We conducted an evaluation of the effectiveness of our Disclosure Controls as of September 30, 2017,2022, the end of the period covered by this Quarterly Report on Form 10-Q.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 Chief Financial Officer.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 OfficerPresident and Chief Financial Officer have concluded that, due to our limited financialdeficiencies in the design of internal controls and manpower resources,lack of segregation of duties, our Disclosure Controls were not effective as of September 30, 2017,2022, 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'sSEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officerprincipal executive and our Chief Financial Officer,principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management is in the process of determining how best to implement an effective system to ensure that information required to be disclosed in this Quarterly Report on Form 10-Q and subsequent filings to be submitted under the Exchange Act will be recorded, processed, summarized and reported accurately. Our management intends to develop procedures to address these issues to the extent possible given the limitations in our financial and manpower resources. No assurance can be made the implementation of these controls and procedures will be completed in a timely manner or that such controls or procedures will be adequate once implemented.
ChangeChanges in Internal Control over Financial ReportingReporting.
There has beenDuring the quarter ended September 30, 2022, there was no change in the Company’sour internal control over financial reporting as(as such term is defined in Rule 13a-15(f) under the Exchange Act Rules 13a-15(f) and 15d-15(f), during the Company’s most recent quarterAct) that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.
PART II—II - OTHER INFORMATION
In the normal course ofconducting our 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.
InSettlement of Consolidated Securities Class Action
As previously disclosed, on April and May 2017, two purported29, 2020, a securities class action complaints—Shapiro v. Alliance MMA, Inc., No. 1:17-cv-2583 (D.N.J.),case was filed in the United States District Court for the Southern District of New York against us andShulman v. Alliance MMA, Inc., No. 1:17-cv-3282 (S.D.N.Y.)— our former CEO. The action is captioned Daniel Yannes, individually and on behalf of all others similarly situated vs. SCWorx Corp. and Marc S. Schessel,. Subsequently, two additional class actions were filed in the same court (Leeburn v. SCWorx, et ano. and Leonard v. SCWorx et ano.) and thereafter, the three class actions were consolidated (the “Consolidated Class Action”). The Consolidated Class Action alleged that our company and our former CEO misled investors in connection with our April 13, 2020 press release with respect to the sale of COVID-19 rapid test kits.
As previously disclosed, on February 11, 2022, the parties entered into a Stipulation of Settlement (subject to Court approval) to settle the Consolidated Class Action. The settlement resolves all claims asserted against SCWorx and the other named defendant without any admission, concession or finding of any fault, liability or wrongdoing by the Company or any defendant. Under the terms of this agreement, (i) the insurers for the Company and certainMarc Schessel (former CEO) will make a cash payment to the class plaintiffs (ii) the former CEO will transfer 100,000 shares of company common stock to the class plaintiffs, and (iii) the Company will issue $600,000 worth of common stock to the class plaintiffs, in exchange for which all parties will be released from all claims related to the securities class action litigation. After giving effect to the share issuance by the Company, the Company believes that it will have satisfied the accrued retention liability of $700,000. By order dated March 22, 2022, the Court granted preliminary approval of the class action. After a fairness hearing held on June 29, 2022, the Court approved the Stipulation of Settlement.
CorProminence d/b/a Core IR v. SCWorx
AAA Arbitration Case 01-22-0001-5709
As previously disclosed, on April 25, 2022, the Company received a Demand for Arbitration along with a Statement of Claim filed by Core IR with the American Arbitration Association seeking damages in the amount of approximately $190,000.00 arising out of a marketing and consulting agreement. The Company filed its answer, affirmative defenses and counterclaims on May 16, 2022. By order of the arbitrator dated November 1, 2022, Core IR received permission to amend its Statement of Claim to increase its request for damages to $257,545.63. The parties are currently engaged in discovery. Hearing dates have been scheduled for the week of March 20, 2023.
Hadrian Equities Partners, LLC et ano. v. SCWorx Corp,
Case No. 22-cv-07096 (JLR) (S.D.N.Y)
On August 19, 2022, Hadrian Equities Partners, LLC and the Phillip W. Caprio, Jr. 2007 Irrevocable Trust filed a complaint in the United States District Court for the Southern District of New York alleging that SCWorx was dilatory and did not comply with its alleged contractual duties to remove the restrictions from Plaintiffs’ converted AMMA stock to SCWorx stock until August 10 and August 11, 2020. Plaintiffs allege that as a result, they were unable to sell their SCWorx stock when SCWorx was trading at its highest price on April 13, 2020. The Complaint seeks $500,000 in damages. To date, the Complaint has not been served. Upon review of the Complaint, SCWorx counsel provided Plaintiffs’ counsel with a “safe harbor” Notice of Motion for sanctions pursuant to Fed. R. Civ. Pro. 11 and letter explaining that the material allegations in the Complaint are false inasmuch as the restrictions on Plaintiffs’ SCWorx shares were removed on April 21, 2020– after months of waiting for Plaintiffs to supply the correct documents with accurate information so that outside counsel could provide an opinion and clear the stocks for trading. The “safe harbor” letter and Notice of Motion gave Plaintiffs 21 days to withdraw the Complaint. After asking for and receiving several extensions in addition to the 21 days, Plaintiffs have not withdrawn the Complaint and thus, a Motion for Sanctions was filed by SCWorx on November 4, 2022.
Other Investigations
As previously disclosed, on or about April 6, 2022, the Company reached a settlement in principle with the SEC Staff which, subject to a few changes, was subsequently approved by the Commission in which the Company agreed to resolve the SEC’s investigation regarding the April 13, 2020 press release and related disclosures (related to Covid-19 rapid test kits) through the Company’s payment of (a) a civil monetary penalty of $125,000, payable in 4 equal instalments over 12 months and (b) disgorgement of $471,000 and prejudgment interest in the amount of $32,761.56 which payment is to be deemed satisfied by the transfer by the Company, no later than 30 days after the entry of the Class Distribution Order in the class action entitled Yannes v. SCWorx Corp. of shares of SCWorx’s common stock, valued at $600,000 at the time of issuance to authorized claimants in the Yannes settlement, provided that the Class Distribution Order is entered within 365 days from the entry of the Final Judgment in the SEC action. In the event that the Company does not transfer shares of its officerscommon stock, valued at $600,000 at the time of issuance to authorized claimants in the class action settlement within 365 days from the entry of a Final Judgment, the Company will be required to remit to the SEC the full amount of disgorgement within 395 days from entry of a Final Judgment. On May 31, 2022, the Commission filed a complaint against Marc Schessel and the Company in the United States District Court for the District of New Jersey alleging violations of Sections 17(a)(1), 17(a)(2), and the United States District Court for the Southern District of New York, respectively. The complaints allege that the defendants violated certain provisions17(a)(3) of the federal securities laws,Securities Act of 1933 (the “Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and purport to seek damages on behalf of a class of shareholders who purchased the Company’s common stock pursuant or traceableRules 10b-5(a), 10b-5(b), and 10b-5(c) thereunder relating to the Company’s initial public offering. In July 2017,April 13, 2020 press release and related disclosures we made in relation to the plaintiffs intransaction involving COVID-19 test kits. At the New York action voluntarily dismissed their claim. The courtsame time, on May 31, 2022, the Commission filed a motion for approval of the Consent Judgment which contained the aforementioned fine, disgorgement requirement as well as an agreement by the Company to an injunction permanently restraining and enjoining the Company from violating Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rules 10b-5(a), (b), and (c) thereunder [17 C.F.R § 240.10b .. 5(a), (b), (c)]; and Section 17(a) of the Securities Act of 1933 (“Securities Act’’) [15 U.S.C. § 77q(a)]. On June 2, 2022, the Court granted the motion, approved the settlement and entered a final judgment. SCWorx has not yet ruledthus far paid 2 of 4 installments on the motion by the claimants in the New Jersey case to be named lead plaintiffs.monetary penalty of $125,000.
In October 2017 a purported stockholders’ derivative action was filed againstconnection with these actions and investigations, the Company and certain ofis obligated to indemnify its officers based on the same facts as describedand directors for costs incurred in the purported class action complaints.
We believe thatdefending against these claims are without merit and intendinvestigations. Because the Company currently does not have the resources to defend against them vigorously. Based on the very early stage of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement ofpay for these cases. The Company maintaincosts, its directors and officers insurance and has notified itsliability insurance carrier has agreed to indemnify these persons. Upon consummation of the claims made against it.settlement of the Consolidated Class Action, the Company believes it will have satisfied its accrued retention obligations with respect to the insurance coverage.
There have been no material changesWe are a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the Risk Factors disclosed in the Company’s Form 10-K that was filed with the Securities and Exchange Commission on April 17, 2017.information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In July 2017,Since the boardbeginning of directors approved the issuance up to $2.5 millionnine month period ended September 30, 2022, we have not sold any equity securities that were not registered under the Securities Act of AMMA stock1933 that were not previously reported in one or more private placements. In July 2017, certain board members and an employee executed subscription agreements for 513,761 units at a purchase price of $1.09 per unit. In August 2017, the Company determined that the amount raised through such sales was insufficient to meet its current needs, and accordingly solicited subscription agreements from third parties for 965,000 units at a purchase price of $1.00 per unit. Each unit sold in these placements consists of one restricted share of AMMA common stock and a warrant to acquire one share of common stock at a price of $1.50 per share. The Company issued all 1,478,761 shares of common stock sold in these placementsreport on August 29, 2017.Form 8-K
In November, 2017, the Company completed a private placement of 390,000 units at a purchase price of $1.25 per unit for approximately $488,000 in the aggregate. Each unit consists of one restricted share of AMMA common stock and a warrant to acquire one-half share of common stock at an exercise price of $1.75 per whole share.
Item 3. Defaults Upon seniorDefault under Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
On November 13, 2017, the Company received a letter from Nasdaq noting the vacancies created on the Company’s Board of Directors, and on the Audit and Compensation Committees thereof, created by the departure of Mark Shefts from the Board on October 24, 2017. As a result of these vacancies, the Audit Committee currently has two independent members instead of the three independent members required by the Nasdaq’s listing standards, and the Compensation Committee has one independent member instead of the required two. In the letter, Nasdaq informed the Company of the applicable “cure period” during which the Company must fill the outstanding vacancies on these committees, and that if the vacancies were not filled by the end of such cure period, the Company would be in violation of the Nasdaq’s listing requirements. The cure period for both vacancies is the earlier to occur of the Company’s next annual meeting of stockholders or October 24, 2018. Management has commenced a search for a new independent director to fill these vacancies.
None.
EXHIBIT INDEX
Pursuant to the rules and regulations of the SEC, we have filed certain agreements as exhibits to this Quarterly Report on Form 10-Q. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof and should not be relied upon.
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* | Filed herewith |
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, 2022 | By: | /s/ Timothy A. Hannibal |
President and Chief Executive Officer | ||
(Principal Executive Officer) |
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, 2022 | By: | /s/ Christopher J. Kohler | |
| |||
| |||
(Principal Financial Officer) | |||
32