SCWorx (WORX) - 2021 Q4 - Annual Report

Part I Business SCWorx provides healthcare IT solutions for data normalization, interoperability, and big data analytics, helping clients reduce costs and improve accuracy - The company's primary business is providing a SaaS platform to healthcare providers for data management, aiming to integrate supply chain, financial, and clinical systems to improve efficiency and reduce costs[20][21] - SCWorx's software solutions are delivered on a SaaS model, typically with three-to-five-year contracts, and are hosted on third-party data centers like AWS or RackSpace[29] - In response to the COVID-19 pandemic, the company established a subsidiary, Direct-Worx, LLC, to sell PPE and rapid test kits, but this venture faced significant difficulties, generated minimal sales, and is no longer actively pursued[33][34] - The company's CageTix ticketing platform for regional MMA promotions was paused due to COVID-19 restrictions on large gatherings[30][47] Risk Factors The company faces significant risks including going concern doubt, operational disruptions from COVID-19, high customer concentration, and internal control weaknesses - Auditors have expressed substantial doubt about the company's ability to continue as a going concern due to recurring operating losses and a working capital deficit[81][82] Financial Health Indicators (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Net Loss (FY 2021) | $3,814,468 | | Net Loss (FY 2020) | $7,402,350 | | Accumulated Deficit | $24,011,291 | | Working Capital Deficit | $1,527,830 | - The company has a high customer concentration, with two customers accounting for 19% and 13% of revenue in 2021, and two customers accounting for 22% and 17% in 2020[91] - A material weakness in internal controls over financial reporting has been identified, related to a lack of proper segregation of duties[125] - The company's common stock is at risk of delisting from Nasdaq for trading below the minimum $1.00 bid price requirement[117] Properties The company does not own real property, operating from a leased New York office on a month-to-month basis after terminating a previous lease - The company does not own any real estate and operates from a leased office in New York under a month-to-month agreement[156] Legal Proceedings The company settled securities class action and derivative lawsuits but remains under SEC investigation following a Wells Notice related to a 2020 press release - The Consolidated Securities Class Action was settled in February 2022, involving a cash payment from insurers, a transfer of 100,000 shares from the former CEO, and the issuance of $600,000 worth of common stock by the company[161] - The Consolidated Derivative Action was also settled in February 2022, with terms including a cash payment from insurers for plaintiffs' legal fees and the company's adoption of corporate governance reforms[165] - The SEC is continuing an investigation related to the April 2020 press release, with the company receiving a Wells Notice in December 2021 indicating a potential enforcement action for alleged violations[166] - A lawsuit from a former employee, David Klarman, seeking $400,000 for breach of an employment agreement was settled in December 2021 for $100,000 worth of SCWorx shares[170] Part II Market for Common Equity and Related Stockholder Matters The company's common stock trades on Nasdaq, experiencing volatility, and the company has never paid cash dividends, intending to retain earnings for growth Common Stock Price Range (2021 vs. 2020) | Quarter | 2021 High ($) | 2021 Low ($) | 2020 High ($) | 2020 Low ($) | | :--- | :--- | :--- | :--- | :--- | | Q1 | 3.08 | 1.28 | 3.14 | 1.55 | | Q2 | 2.49 | 1.28 | 12.02 | 2.09 | | Q3 | 5.00 | 1.45 | 5.75 | 1.29 | | Q4 | 2.28 | 1.16 | 2.22 | 1.03 | - The company has never paid cash dividends and does not plan to in the foreseeable future, retaining earnings to finance growth[177] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2021, SCWorx's revenue decreased by 11% to $4.6 million, while net loss narrowed to $3.8 million due to reduced expenses, but the company faces substantial doubt about its going concern ability Results of Operations (2021 vs. 2020) | Metric | 2021 ($) | 2020 ($) | Change ($) | | :--- | :--- | :--- | :--- | | Revenue | 4,632,529 | 5,213,118 | (580,589) | | Cost of Revenues | 2,782,509 | 3,515,279 | (732,770) | | General & Administrative | 5,664,488 | 7,742,850 | (2,078,362) | | Net Loss | (3,814,468) | (7,402,350) | 3,587,882 | - The decline in 2021 revenue was primarily due to a ~$410,000 decrease in PPE sales and a ~$125,000 decrease from the suspended Cagetix operations[242] - General and administrative expenses decreased by $2.1 million, driven by lower stock-based compensation (~$600k) and reduced legal and professional fees (~$1.08M)[244] - The company has substantial doubt about its ability to continue as a going concern, citing a working capital deficit of $1,527,830, an accumulated deficit of $24,011,291, and a net loss of $3,814,468 for the year ended Dec 31, 2021[246] Cash Flow Summary (2021 vs. 2020) | Activity | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | (1,069,945) | (959,070) | | Net cash used in investing activities | 0 | 0 | | Net cash provided by financing activities | 764,595 | 847,542 | Changes in and Disagreements with Accountants The company experienced multiple auditor changes, with Sadler Gibb terminating its engagement due to reliance issues and disagreements, leading to the appointment of BF Borgers CPA PC - Withum Smith + Brown discontinued its audit services in October 2020 for reasons unrelated to the company's financials[267] - Sadler Gibb & Associates, LLC, the successor firm, terminated its engagement in April 2021, stating it could not rely on management's representations and citing disputed disagreements on accounting matters[272] - BF Borgers CPA PC was appointed as the new independent registered public accounting firm in April 2021[273] Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2021, due to a material weakness in internal controls related to a lack of segregation of duties - The CEO and CFO concluded that disclosure controls were not effective as of December 31, 2021[275] - A material weakness was identified in internal controls due to a lack of segregation of duties, with remediation efforts expected to be resolved during 2022[276] Part III Directors, Executive Officers and Corporate Governance The company's leadership includes President & CEO Timothy Hannibal and CFO Chris Kohler, with a five-member Board of Directors, a majority of whom are independent and serve on established committees Executive Officers and Directors | Name | Position(s) | | :--- | :--- | | Timothy A. Hannibal | President & Chief Executive Officer | | Chris Kohler | Chief Financial Officer | | Alton Irby | Director | | John Ferrara | Director | | Steven Horowitz | Director | | Steven Wallitt | Director | - The Board of Directors has three standing committees: Audit, Compensation, and Nominating and Governance[304] - All directors except for CEO Timothy Hannibal are considered independent under Nasdaq listing standards[337] Executive Compensation In 2021, CEO Timothy Hannibal received $551,013 in total compensation, including $319,350 in stock awards, while director compensation consisted entirely of stock awards 2021 Executive Compensation Summary | Name and Principal Position | Salary ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Timothy Hannibal (President, CEO) | 225,000 | 319,350 | 551,013 | | Chris Kohler (CFO) | 90,000 | 185,828 | 275,828 | 2021 Director Compensation Summary | Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Alton Irby | - | 157,000 | 157,000 | | John Ferrara | - | 124,584 | 124,584 | | Steven Horowitz | - | 124,584 | 124,584 | | Steven Wallitt | - | 157,000 | 157,000 | Security Ownership As of March 31, 2022, directors and executive officers collectively owned 10.0% of outstanding common stock, with CEO Timothy Hannibal holding 6.6% and former CEO Marc Schessel holding 9.3% - As of March 31, 2022, there were 11,383,454 shares of common stock outstanding[325] Beneficial Ownership (as of March 31, 2022) | Name | Total Shares | Percentage Ownership | | :--- | :--- | :--- | | Timothy Hannibal (CEO) | 805,141 | 6.6% | | Steven Wallitt (Director) | 201,120 | 1.8% | | Marc Schessel (Former CEO) | 1,106,606 | 9.3% | | Directors & Executive Officers as a Group (6 persons) | 1,248,095 | 10.0% | - The company's Amended and Restated 2016 Equity Incentive Plan allows for the issuance of up to 5,000,000 shares[328] Certain Relationships and Related Transactions The company owed $153,838 to officers at year-end 2021, and its former CEO advanced $100,000 in cash and entered a $295,000 annual consulting agreement - The company's former CEO, Marc Schessel, advanced $100,000 in cash to the company in September 2021 for short-term capital needs[334] - Upon his departure as CEO in January 2021, Marc Schessel entered into a two-year consulting agreement with the company at an annual fee of $295,000[335] Principal Accountant Fees and Services In 2021, the company paid a total of $212,450 in audit and other fees to its accounting firms, with BF Borgers CPA PC billing $164,800 for audit services Accountant Fees (2021) | Firm | Audit Fees ($) | All Other Fees ($) | Total ($) | | :--- | :--- | :--- | :--- | | BF Borgers CPA PC | 164,800 | - | 164,800 | | Sadler Gibb | 40,000 | - | 40,000 | | Withum | - | 7,650 | 7,650 | Part IV Exhibits and Financial Statement Schedules This section presents the company's consolidated financial statements for 2021 and 2020, including the auditor's report which expresses substantial doubt about the company's going concern ability - The Report of Independent Registered Public Accounting Firm (BF Borgers CPA PC) contains a paragraph highlighting substantial doubt about the Company's ability to continue as a going concern due to significant operating losses[360] Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Cash | 71,075 | 376,425 | | Total Current Assets | 756,468 | 2,184,651 | | Goodwill | 8,366,467 | 8,366,467 | | Total Assets | 9,122,935 | 10,627,274 | | Total Current Liabilities | 2,284,298 | 4,599,286 | | Total Liabilities | 2,717,865 | 4,893,258 | | Total Stockholders' Equity | 6,405,070 | 5,734,016 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Revenue | 4,632,529 | 5,213,118 | | Loss from Operations | (3,814,468) | (6,045,011) | | Net Loss | (3,814,468) | (7,402,350) | | Net Loss Per Share | (0.36) | (0.82) |