SCWorx (WORX) - 2023 Q2 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements The report contains forward-looking statements subject to significant risks and uncertainties - The report contains forward-looking statements identified by terms such as "anticipate," "believe," "expect," "intend," "may," "plan," and "will"[7] - Operations involve risks and uncertainties, many outside the Company's control, which could materially affect results and cause actual outcomes to differ from forward-looking statements[8] - Specific risks include potential revenue decline, ongoing litigation, the need for additional financing, dependence on third-party subcontractors, regulatory changes, the impact of the COVID-19 pandemic, and general economic conditions[11] PART I - FINANCIAL INFORMATION This part presents the company's unaudited financial statements and management's analysis of financial performance Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes Consolidated Balance Sheets The balance sheets show a slight decrease in total assets and stockholders' equity from year-end 2022 Condensed Consolidated Balance Sheets (Unaudited) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total assets | $9,048,832 | $9,247,142 | | Total liabilities | $2,454,524 | $2,470,622 | | Total stockholders' equity | $6,594,308 | $6,776,520 | | Cash | $133,034 | $249,462 | | Accounts receivable - net | $458,798 | $336,033 | | Prepaid expenses and other assets | $90,533 | $295,180 | | Total current assets | $682,365 | $880,675 | | Total current liabilities | $2,340,226 | $2,322,873 | Condensed Consolidated Statements of Operations The company significantly reduced its net loss in Q2 and H1 2023 compared to the prior year Condensed Consolidated Statements of Operations (Unaudited) For the three months ended June 30: | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Revenue | $991,099 | $992,424 | | Cost of revenues | $616,030 | $623,548 | | General and administrative | $523,532 | $932,239 | | Loss from operations | $(148,463) | $(563,363) | | Net loss | $(153,922) | $(563,363) | | Net loss per share, basic and diluted | $(0.01) | $(0.05) | For the six months ended June 30: | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Revenue | $1,988,548 | $2,023,373 | | Cost of revenues | $1,305,492 | $1,321,184 | | General and administrative | $1,230,936 | $2,031,693 | | Loss from operations | $(547,880) | $(1,329,504) | | Net loss | $(553,812) | $(1,189,909) | | Net loss per share, basic and diluted | $(0.04) | $(0.10) | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased slightly due to net loss, offset by new common stock issuances Changes in Stockholders' Equity (Six Months Ended June 30, 2023) | Metric | December 31, 2022 Balance | June 30, 2023 Balance | | :--- | :--- | :--- | | Common stock (shares) | 13,010,409 | 16,159,878 | | Common stock ($) | $13,011 | $16,160 | | Additional paid-in capital | $32,022,166 | $32,990,617 | | Accumulated deficit | $(25,858,697) | $(26,412,509) | | Total stockholders' equity | $6,776,520 | $6,594,308 | - During the six months ended June 30, 2023, the Company issued common stock for settlement of accounts payable, under an equity line of credit, for vested restricted stock units, for settlement of class action, and for cashless exercise of warrants[21] Condensed Consolidated Statements of Cash Flows Cash used in operations increased while financing activities provided a net cash inflow in H1 2023 Condensed Consolidated Statements of Cash Flows (Unaudited) For the six months ended June 30: | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(328,475) | $(47,584) | | Net cash from investing activities | $0 | $0 | | Net cash provided by financing activities | $212,047 | $0 | | Net decrease in cash | $(116,428) | $(47,584) | | Cash, end of period | $133,034 | $23,491 | - Cash used in operating activities significantly increased in 2023, primarily due to the net loss and increases in accounts receivable and prepaid expenses, partially offset by non-cash stock-based compensation and increases in accounts payable and deferred revenue[27][149] - Financing activities provided $212,047 in cash in 2023, mainly from common stock sales, contrasting with no financing activities in 2022[27][153][154] Notes to Condensed Consolidated Financial Statements These notes detail the company's business, accounting policies, and specific financial items Note 1. Description of Business The company provides healthcare data content and services through a SaaS model - SCWorx is a provider of data content and services related to the repair, normalization, and interoperability of information for healthcare providers and big data analytics for the healthcare industry[30][31] - The Company's software solutions are delivered via a Software-as-a-Service (SaaS) model, hosted in SCWorx data centers (AWS or RackSpace), typically under three-to-five-year contracted terms[34] - The COVID-19 pandemic adversely impacted new customer acquisition and growth prospects, as hospital customers prioritized pandemic response over expanding the Company's services[35][36] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting policies used in preparing the financial statements Cash Cash deposits are maintained with various financial institutions and insured by the FDIC - Cash deposits are maintained with various financial institutions and are insured by the FDIC up to $250,000; the Company did not exceed this limit as of June 30, 2023, and December 31, 2022[41] Fair Value of Financial Instruments Fair value is based on the price received to sell an asset or paid to transfer a liability - Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants[42] - The Company uses a three-level hierarchy (Level 1, 2, and 3) to prioritize inputs used to measure fair value, based on the observability and significance of those inputs[42] Concentration of Credit and Other Risks The company has significant customer concentration in both revenue and accounts receivable - Financial instruments potentially subject to significant concentrations of credit risk include cash, accounts receivable, and warrants[43] - Credit risk in accounts receivable is mitigated by the Company's evaluation process, relatively short collection terms, and the high creditworthiness of its customers[43] Significant Customers (Revenue & Accounts Receivable %) | Customers | Revenue (6 months ended June 30, 2023) | Revenue (6 months ended June 30, 2022) | Accounts Receivable (June 30, 2023) | Accounts Receivable (June 30, 2022) | | :--- | :--- | :--- | :--- | :--- | | Customer A | 11% | 13% | 13% | 13% | | Customer B | 10% | 10% | 44% | 11% | | Customer C | 15% | 12% | 8% | 18% | | Customer D | 11% | 12% | 4% | 6% | | Customer E | 2% | 2% | 14% | -% | | Customer F | 0% | 3% | 0% | 19% | Allowance for Doubtful Accounts No allowance for doubtful accounts was recorded as of June 30, 2023 - The Company did not have a recorded allowance for doubtful accounts as of June 30, 2023, and December 31, 2022[45] Inventory The company's inventory has been fully written off and has a net value of zero Net Inventory Value | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Inventory | $523,440 | $523,440 | | Allowance for obsolescence | $(523,440) | $(523,440) | | Net inventory value | $0 | $0 | - The Company wrote off the remaining value of its inventory as unsellable during the year ended December 31, 2022, and is in the process of disposal[47] Goodwill and Purchased Identified Intangible Assets Goodwill is reviewed for impairment annually or more frequently if impairment indicators exist - Goodwill is reviewed for impairment annually in the fourth quarter, or more frequently if events or circumstances indicate potential impairment[48] Property and Equipment No depreciation expense was recorded for property and equipment in H1 2023 or H1 2022 - No depreciation expense was recorded for property and equipment for the three and six months ended June 30, 2023, and 2022[51] Revenue Recognition Revenue is recognized based on performance obligations in contracts under Topic 606 - The Company recognizes revenue in accordance with Topic 606, identifying performance obligations and allocating transaction price based on stand-alone selling price[52][54] - Key performance obligations in SaaS contracts include Data Normalization, SaaS, Maintenance, and Professional Services, with revenue recognized ratably over contract terms for SaaS and Maintenance[54][56][57][58] - Revenue from PPE inventory sales is recognized upon shipment, and brokered PPE sales are recognized net of related costs once the customer obtains physical possession[62][63] Costs to Obtain and Fulfill a Contract Costs to fulfill contracts are expensed as incurred - Costs to fulfill a contract, including those related to satisfying performance obligations and general and administrative costs not explicitly chargeable to customer contracts, are recognized and expensed as incurred[65] Cost of Revenues Cost of revenues primarily consists of data center hosting and consulting services - Cost of revenues primarily represents data center hosting costs, consulting services, and maintenance of the Company's large data array[66] Contract Balances Deferred revenue represents the company's contract liabilities from customer prepayments Contract Liabilities (Deferred Revenue) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Deferred revenue | $586,083 | $579,833 | - The Company expects to recognize the majority of revenue relating to current performance obligations during the following 12-month period[64] Income Taxes A full valuation allowance has been established for deferred tax assets - A valuation allowance has been established for deferred tax assets, as the Company concluded it may not realize all the benefits[71] - No income tax expense was recorded for the three and six months ended June 30, 2023, and 2022[74] Stock-Based Compensation Stock-based compensation is measured using a Black-Scholes model and recognized over the vesting period - Stock-based compensation expense is measured at the grant date fair value using a Black-Scholes option pricing model and recognized on a straight-line basis over the vesting period[75] - Highly subjective assumptions, including expected term, stock price volatility, and pre-vesting option forfeiture rate, are used in calculating stock-based compensation expense[78] Loss Per Share Diluted net loss per share excludes anti-dilutive potential shares - Diluted net loss per share excludes all dilutive potential shares if their effect is anti-dilutive[79] Indemnification The company indemnifies its officers and directors, with costs covered by liability insurance - The Company indemnifies its officers and directors for costs incurred in defending against claims and investigations, with the directors' and officers' liability insurance carrier covering these costs due to the Company's current resource limitations[81][82][102] Contingencies A liability is recorded for probable losses that can be reasonably estimated - A liability is recorded when a loss is probable and the amount can be reasonably estimated; if only reasonably possible, the potential loss is disclosed[83] Use of Estimates Financial statement preparation requires management to make estimates and assumptions - The preparation of financial statements requires management to make estimates and assumptions, which are based on current facts, historical experience, and various other factors, and actual results may differ materially[85] Recently Issued Accounting Pronouncements Recently issued accounting standards are not expected to have a material impact - Management believes that recently issued accounting standards not yet effective will not have a material impact on the Company's financial statements upon adoption[86] Note 3. Loans Payable A portion of the company's PPP loan was forgiven, with the remainder's maturity extended - The Company obtained a $293,972 Paycheck Protection Program (PPP) loan in May 2020[87] - A portion of the PPP loan, amounting to $139,569, was forgiven in September 2022[87] - The maturity date for the unforgiven balance of the PPP loan was extended to March 5, 2025[87] Note 4. Leases The company's principal executive office is under a month-to-month operating lease - The Company's principal executive office in New York City is under a month-to-month operating lease arrangement[88][89] Total Lease Cost | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three months ended June 30 | $435 | $434 | | Six months ended June 30 | $870 | $921 | Note 5. Commitments and Contingencies The company has settled major litigation but faces several ongoing legal proceedings - The Company has fulfilled all obligations under the Consolidated Securities Class Action settlement by issuing $600,000 worth of common stock to class plaintiffs on June 5, 2023[94] - The SEC investigation regarding the April 13, 2020 press release was resolved with a $125,000 civil monetary penalty and disgorgement satisfied by the $600,000 stock issuance, with all financial obligations under the Consent Judgment fulfilled[99][100] - Ongoing legal proceedings include an arbitration with CorProminence d/b/a Core IR seeking approximately $257,545.63, a complaint from Hadrian Equities Partners, LLC seeking $500,000, and a complaint from Carole R. Bernstein, Esq. seeking $69,163.98 in unpaid legal fees[96][97][98] Note 6. Stockholders' Equity The company issued common stock for various purposes and has significant unvested equity awards - The Company issued 227,999 shares for vested restricted stock units, 151,044 shares for accounts payable settlement, 600,000 shares under an equity line of credit, and 228,568 shares for cashless exercise of warrants during the six months ended June 30, 2023[104][105][106][107] - Total unrecognized expense for unvested stock options and restricted stock awards was approximately $148,240 as of June 30, 2023, to be recognized over a twelve-month period[111] Stock Incentive Plan Balances (June 30, 2023) | Metric | Warrants | Stock Options | Restricted Stock Units | | :--- | :--- | :--- | :--- | | Balance at December 31, 2022 | 1,567,720 | 118,388 | 2,409,759 | | Granted | - | - | 491,044 | | Exercised | (823,078) | - | (379,043) | | Cancelled/Expired | (44,614) | (14,441) | - | | Balance at June 30, 2023 | 700,028 | 103,947 | 2,521,760 | Note 7. Net Loss per Share Over 3.3 million common stock equivalents were excluded from the EPS calculation Anti-Dilutive Securities Excluded from EPS Calculation (June 30) | Security Type | 2023 | 2022 | | :--- | :--- | :--- | | Stock options | 103,947 | 118,388 | | Warrants | 700,028 | 1,043,525 | | Restricted stock units | 2,521,760 | 2,449,091 | | Total common stock equivalents | 3,325,735 | 3,611,004 | Note 8. Related Party Transactions The company has payables to an officer and a receivable from its former CEO - As of June 30, 2023, the Company had a payable of $153,838 due to an officer for contract work performed prior to becoming an officer[116] - A shareholder advance from the Company's former CEO decreased from $100,000 at December 31, 2022, to $83,811 at June 30, 2023[117] - The Company's CFO advanced an aggregate of $160,085 in cash for short-term capital requirements between May 24, 2023, and June 8, 2023, which was fully repaid by June 30, 2023[118] Note 9. Subsequent Events No reportable subsequent events occurred after the balance sheet date - Management has evaluated all events that occurred after the balance sheet date through the financial statement issuance date and determined there were no additional reportable subsequent events[119] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's business, operational results, and liquidity and capital resources Corporate Information The company's current name was adopted in 2019, and a subsidiary was formed in 2020 - SCWorx Corp. was formed through a series of mergers and name changes, with its current name adopted on February 1, 2019[121] - Direct-Worx, LLC, a wholly-owned subsidiary, was established on March 16, 2020, in response to the COVID-19 pandemic[121] Our Business SCWorx provides SaaS-based health information technology solutions to US healthcare providers - SCWorx provides health information technology solutions and services for healthcare providers, focusing on data repair, normalization, interoperability, and big data analytics[124][125] - The Company's software aims to improve healthcare processes, reduce supply chain costs, decrease accounts receivable aging, accelerate patient billing, and optimize contracts[125] - SCWorx's solutions are delivered as Software-as-a-Service (SaaS) from third-party data centers (AWS or RackSpace) and are sold to hospitals and health systems in the United States[130] - The Company's operations are dependent on the integrity, security, and consistent operation of its information technology systems and data centers, which are subject to risks of infiltration or data theft[131][132] Impact of the COVID-19 Pandemic The COVID-19 pandemic adversely impacted new customer acquisition and growth prospects - The COVID-19 pandemic caused significant disruption to the Company's operations and business, adversely impacting new customer acquisition[133] - Hospital customers focused on meeting COVID-19 related healthcare needs, which limited their ability to focus resources on expanding the utilization of the Company's services, negatively affecting growth prospects[134] Results of Operations – Three Months Ended June 30, 2023 The company significantly reduced its net loss in Q2 2023 due to lower operating expenses Revenues Revenue remained stable with a slight decrease of 0.13% in Q2 2023 - Revenue for the three months ended June 30, 2023, was $991,099, a slight decrease of $1,325 (0.13%) compared to $992,424 for the same period in 2022, primarily due to normal fluctuations in the billing cycle[136] Operating Expenses General and administrative expenses decreased significantly by 43.8% in Q2 2023 - General and administrative expenses decreased by $408,707 (43.8%) to $523,532 for the three months ended June 30, 2023, from $932,239 in the prior year[138] - The decrease in G&A expenses was primarily attributable to approximate decreases in stock-based compensation ($150,000), legal and professional fees ($79,000), bad debt reserve expense ($31,000), and inventory write-downs ($112,000)[138] - Cost of revenues slightly decreased by $7,518 to $616,030 for the three months ended June 30, 2023, compared to $623,548 in the same period in 2022[137] Other Income The company incurred a small other expense from interest in Q2 2023 - The Company incurred other expense of $5,459 during the three months ended June 30, 2023, entirely comprised of interest expense[139] Net Loss Net loss for Q2 2023 improved significantly, reducing by over $400,000 - Net loss for the three months ended June 30, 2023, significantly improved to $153,922, compared to a net loss of $563,363 for the same period in 2022, representing a reduction of $409,441[140] Results of Operations – Six Months Ended June 30, 2023 The company's net loss improved by over $636,000 in H1 2023 compared to the prior year Revenues Revenue for H1 2023 saw a slight decrease of 1.72% - Revenue for the six months ended June 30, 2023, was $1,988,548, a slight decrease of $34,825 (1.72%) compared to $2,023,373 for the same period in 2022, attributed to normal fluctuations in the billing cycle[142] Operating Expenses General and administrative expenses decreased by 39.4% in H1 2023 - General and administrative expenses decreased by $800,757 (39.4%) to $1,230,936 for the six months ended June 30, 2023, from $2,031,693 in the prior year[145] - The decrease in G&A expenses was primarily attributable to approximate reductions in stock-based compensation ($350,000), legal and professional fees ($101,000), bad debt reserve expense ($78,000), and inventory write-downs ($112,000)[145] - Cost of revenues slightly decreased by $15,692 to $1,305,492 for the six months ended June 30, 2023, compared to $1,321,184 in the same period in 2022[143] Other Income The company reported a small other expense in H1 2023 versus other income in H1 2022 - The Company reported other expense of $5,932 during the six months ended June 30, 2023, due to interest expense, contrasting with other income of $139,596 in the prior year from the forgiveness of a PPP Loan[146] Net Loss Net loss for H1 2023 was more than halved compared to the prior year - Net loss for the six months ended June 30, 2023, significantly improved to $553,812, compared to a net loss of $1,189,909 for the same period in 2022, representing a reduction of $636,097[147] Liquidity and Capital Resources Cash used in operations increased, while financing activities provided a net cash inflow Cash Flows Summary Financing activities provided cash inflow, offsetting increased cash use in operations Cash Flows Summary (Six Months Ended June 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(328,475) | $(47,584) | | Net cash used in investing activities | $0 | $0 | | Net cash provided by financing activities | $372,132 | $0 | | Change in cash | $43,657 | $(47,584) | Operating Activities Cash used in operating activities increased significantly in H1 2023 - Cash used in operating activities increased significantly to $328,475 for the six months ended June 30, 2023, compared to $47,584 in the prior year[149][150] - The increase in cash used was mainly due to the net loss of approximately $554,000, a $123,000 increase in accounts receivable, and a $25,000 increase in prepaid expenses, partially offset by non-cash stock-based compensation of $296,000 and increases in accounts payable and deferred revenue[149] Investing Activities The company had no investing activities in H1 2023 or H1 2022 - The Company did not have any investing activities during the six months ended June 30, 2023, and 2022[151] Financing Activities Financing activities provided approximately $372,000 in cash during H1 2023 - Cash provided by financing activities was approximately $372,000 for the six months ended June 30, 2023, primarily from $262,000 in proceeds from the sale of common stock, offset by repayments of notes payable and shareholder advances[153] - The Company did not have any financing activities during the six months ended June 30, 2022[154] Off-Balance Sheet Arrangements The company had no off-balance sheet arrangements - As of June 30, 2023, and December 31, 2022, the Company did not have any off-balance sheet arrangements[155] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exempt from market risk disclosures as a smaller reporting company - The Company is a smaller reporting company and is therefore not required to provide quantitative and qualitative disclosures about market risk[156] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective due to internal control deficiencies Evaluation of Disclosure Controls and Procedures Disclosure controls were deemed not effective as of June 30, 2023 - Management concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2023, due to deficiencies in the design of internal controls and lack of segregation of duties[157] Changes in Internal Control over Financial Reporting No material changes to internal controls occurred during the quarter - During the quarter ended June 30, 2023, there was no change in the Company's internal control over financial reporting that materially affected, or is reasonably likely to materially affect, its internal control over financial reporting[158] PART II - OTHER INFORMATION This part covers legal proceedings, equity sales, and other required disclosures Item 1. Legal Proceedings The company has settled major litigation but faces several ongoing legal proceedings - The Company fulfilled all obligations under the Consolidated Securities Class Action settlement and SEC Consent Judgment by issuing $600,000 worth of common stock and paying a $125,000 civil penalty[162][167] - Ongoing legal proceedings include an arbitration with CorProminence d/b/a Core IR seeking approximately $257,545.63, a complaint from Hadrian Equities Partners, LLC seeking $500,000, and a complaint from Carole R. Bernstein, Esq. seeking $69,163.98 in unpaid legal fees[163][165][166] - The Company is obligated to indemnify its officers and directors for costs incurred in defending against these claims, with the directors' and officers' liability insurance carrier agreeing to cover these costs[168] Item 1A. Risk Factors The company is not required to provide risk factor disclosures under this item - The Company is a smaller reporting company and is not required to provide risk factor information under this item[170] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No previously unreported unregistered sales of equity securities occurred during the period - No unregistered equity securities were sold since the beginning of the six-month period ended June 30, 2023, that were not previously reported in a current report on Form 8-K[171] Item 3. Defaults Upon Senior Securities This item is not applicable to the Company - This item is not applicable[171] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable[172] Item 5. Other Information No other information is reported under this item - None[173] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q - Exhibits include the Certificate of Incorporation, Amended and Restated By-laws, CEO and CFO certifications (pursuant to Sections 302 and 1350 of the Sarbanes-Oxley Act), and Inline XBRL documents[177] - Representations and warranties in filed agreements are solely for the benefit of the parties to such agreements and may not describe the Company's actual state of affairs[176] Signatures The report was duly signed by the CEO and CFO on August 14, 2023 - The report was signed by Timothy A. Hannibal, President and Chief Executive Officer, and Christopher J. Kohler, Chief Financial Officer, on August 14, 2023[181][183]