SCWORX CORP. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as "may" "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the
Our Business
? virtualized Item
? CDM management; ? contract management;
? request for proposal automation;
? rebate management;
? big data analytics modeling; and
? data integration and warehousing.
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We currently host our solutions, serve our customers, and support our operations
in
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.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our consolidated financial condition and
results of operations are based upon our consolidated financial statements.
These consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") in
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance to
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Cash
Cash is maintained with various financial institutions. Financial instruments
that potentially subject us to concentrations of credit risk consist principally
of cash deposits. Accounts at each institution are insured by the
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Fair Value of Financial Instruments
Management applies fair value accounting for significant financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. Management defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, management considers the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Inputs that are generally unobservable and typically reflect management's estimate of assumptions that market participants would use in pricing the asset or liability.
Concentration of Credit and Other Risks
Financial instruments that potentially subject our company to significant concentrations of credit risk consist principally of cash, accounts receivable and warrants. We believe that any concentration of credit risk in its accounts receivable is substantially mitigated by our evaluation process, relatively short collection terms and the high level of credit worthiness of its customers. We perform ongoing internal credit evaluations of its customers' financial condition, obtain deposits and limit the amount of credit extended when deemed necessary but generally require 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 years ended Accounts Receivable
December 31, December 31,
Customers 2022 2021 2022 2021
Customer A 12 % 7 % 12 % 4 %
Customer B 10 % 9 % 10 % 7 %
Customer C 14 % 5 % 15 % 16 %
Customer D 5 % 4 % 30 % - %
Customer E 2 % 4 % - % 17 %
Customer F 3 % 3 % 3 % 14 %
Allowance for Doubtful Accounts
Our company continually monitors customer payments and maintains a reserve for
estimated losses resulting from our customers' inability to make required
payments. In determining the reserve, we evaluate the collectability of our
accounts receivable based upon a variety of factors. In cases where we become
aware of circumstances that may impair a specific customer's ability to meet its
financial obligations, we record a specific allowance against amounts due. For
all other customers, we recognize allowances for doubtful accounts based on our
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 our estimates. The Company recorded an allowance for doubtful
accounts as of
29 Leases
We determine if an arrangement is a lease at inception. The current portion of lease obligations are included in accounts payable and accrued liabilities on the consolidated balance sheets. Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease, which are included in the lease ROU asset when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease components only, none with non-lease components, which are generally accounted for separately.
Business Combinations
Our company includes the results of operations of a business we acquire in our consolidated results as of the date of acquisition. We allocate the fair value of the purchase consideration of our acquisition to the tangible assets, liabilities and intangible assets acquired, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired businesses and our company. Intangible assets are amortized over their estimated useful lives. The fair value of contingent consideration (earn out) associated with acquisitions is remeasured each reporting period and adjusted accordingly. Acquisition and integration related costs are recognized separately from the business combination and are expensed as incurred. For additional information regarding our acquisitions, refer to Note 4, Business Combinations.
Goodwill
For further discussion of goodwill, refer to Note 4, Business Combinations.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the related assets' estimated useful lives. Equipment, furniture and fixtures are being amortized over a period of three years.
Expenditures that materially increase asset life are capitalized, while ordinary maintenance and repairs are expensed as incurred.
30 Revenue Recognition
We recognize 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 we perform the following steps:
? Step 1: Identify the contract(s) with a customer
? Step 2: Identify the performance obligations in the contract
? Step 3: Determine the transaction price
? Step 4: Allocate the transaction price to the performance obligations in the
contract
? Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation
We follow 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.
Management has identified the following performance obligations in our 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 our hosted software solutions on a subscription basis for a specified
contract term, which is usually annually. In SaaS arrangements, the client
cannot take possession of the software during the term of the contract and
generally has the right to access and use the software and receive any
software upgrades published during the subscription period,
3. Maintenance: which includes ongoing data cleansing and normalization, content
enrichment, and optimization, and
4. Professional Services: mainly related to specific customer projects to manage
and/or analyze data and review for cost reduction opportunities.
A contract will typically include Data Normalization, SaaS and Maintenance, which are distinct performance obligations and are accounted for separately. The transaction price is allocated to each separate performance obligation on a relative stand-alone selling price basis. Significant judgement is required to determine the stand-alone selling price for each distinct performance obligation and is typically estimated based on observable transactions when these services are sold on a stand-alone basis. At contract inception, an assessment of the goods and services promised in the contracts with customers is performed and a performance obligation is identified for each distinct promise to transfer to the customer a good or service (or bundle of goods or services). To identify the performance obligations, management 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. We consider control to have transferred upon delivery because we have a present right to payment at that time, we have 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.
Our 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 we have not satisfied a performance obligation, revenue recognition will be deferred until the performance obligation is deemed to be satisfied.
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Revenue recognition for our performance obligations are as follows:
Data Normalization and Professional Services
Our 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 our service is made available to customers.
Some contracts have payment terms that differ from the timing of revenue recognition, which requires us to assess whether the transaction price for those contracts include a significant financing component. We have 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. We do 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.
As of
Costs to Fulfill a Contract
Costs to fulfill a contract typically include costs related to satisfying performance obligations as well as general and administrative costs that are not explicitly chargeable to customer contracts. These expenses are recognized and expensed when incurred in accordance with ASC 340-40.
Cost of Revenue
Cost of revenues primarily represent data center hosting costs, consulting services and maintenance of our large data array that were incurred in delivering professional services and maintenance of our large data array during the periods presented.
Contract Balances
Contract assets arise when the revenue associated prior to our unconditional
right to receive a payment under a contract with a customer (i.e., unbilled
revenue) and are derecognized when either it becomes a receivable or the cash is
received. There were no contract assets as of
Contract liabilities arise when customers remit contractual cash payments in
advance of our company satisfying our performance obligations under the contract
and are derecognized when the revenue associated with the contract is recognized
when the performance obligation is satisfied. Deferred revenue for contract
liabilities were
32 Income Taxes
Our company converted to a corporation from a limited liability company during 2018.
We use the asset and liability method of accounting for income taxes in accordance with Accounting Standard Codification ("ASC") Topic 740, "Income Taxes." Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity's financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.
Valuation allowances are provided if, based upon the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. During the year ended
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. We have no material uncertain tax positions for any of the reporting periods presented.
On
Stock-based Compensation Expense
The Company accounts for stock-based compensation expense in accordance with the authoritative guidance on share-based payments. Under the provisions of the guidance, stock-based compensation expense is measured at the grant date based on the fair value of the option 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 measure and recognize stock-based compensation expense upon modification of the term of stock award. The stock-based compensation expense for such modification is accounted for as a repurchase of the original award and the issuance of a new award.
Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. The Company estimates the expected life of options granted based on historical exercise patterns, which are believed to be representative of future behavior. The Company estimates the volatility of the Company's common stock on the date of grant based on historical volatility. The assumptions used in calculating the fair value of stock-based awards represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management'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 employeeconsultant-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 8, Stockholders' Equity, for additional detail.
33 Loss Per Share
We compute 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 and warrants and the exercise of fully vested
restricted stock units. Diluted EPS excludes all dilutive potential shares if
their effect is anti-dilutive. As of
Indemnification
We provide indemnification of varying scope to certain customers against claims of intellectual property infringement made by third parties arising from the use of our software. In accordance with authoritative guidance for accounting for guarantees, we evaluate estimated losses for such indemnification. We consider 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 our company and no liability has been recorded in our financial statements.
As permitted under
In connection with the Class Action claims and investigations described in Item 3. Legal Proceedings of this Annual Report on Form 10-K, the Company is obligated to indemnify its officers and directors for costs incurred in defending against these claims and investigations.
Contingencies
From time to time, we may be involved in legal and administrative proceedings and claims of various types. We record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably estimated, we disclose the loss contingency and an estimate of possible loss or range of loss (unless such an estimate cannot be made). We do not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred. Refer to Note 7, Commitments and Contingencies, for further information.
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 allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, equity component of convertible debt, stock-based compensation, 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.
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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.
Results of Operations
The COVID-19 Pandemic has disrupted our business and the business of our hospital customers.
Our operations and business have experienced disruption due to the unprecedented
conditions surrounding the COVID-19 pandemic which spread throughout
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 had 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.
The Company is no longer actively seeking to procure and sell Test Kits or PPE.
Year Ended
The following summary of our results of operations should be read in conjunction
with our consolidated financial statements for the years ended
Our operating results for the years endedDecember 31, 2021 and 2020 are summarized as follows: Years ended December 31, December 31, 2022 2021 Difference Revenue$ 4,038,188 $ 4,632,529 $ (594,341 ) Cost of revenues 2,624,553 2,782,509 (157,956 ) General and administrative 3,540,232 5,664,488 (2,124,256 ) Other income (expense) 279,191 - 279,191 Provision for income taxes - - - Net loss$ (1,847,406 ) $ (3,814,468 ) $ 1,967,062 Revenues
Revenue for the year ended
35 Cost of Revenues
Cost of revenues for the year ended
Expenses
General and administrative expenses decreased
We had other income of
Liquidity and Capital Resources
Going Concern
Management has concluded on our consolidated financial statements for the year
ended
Recent Fundraising
Between
Liquidity
We are currently experiencing a working capital deficiency, have limited cash on hand, and we are experiencing negative cash flows from operations. Consequently, we have an immediate need for additional capital to fund our operations and the implementation of our business plan.
Based on our current business plan, if we had sufficient capital resources, we
anticipate that our operating activities would use a net of approximately
In order to remedy this liquidity deficiency, we have cut spending and are actively seeking to raise additional funds through the sale of equity and debt securities. Ultimately, we will need to generate substantial positive operating cash flows. Our internal sources of funds will consist of cash flows from operations, but not until we begin to realize substantial additional revenues from the sale of our products and services. As previously stated, our operations are generating negative cash flows, and thus adversely affecting our liquidity. If we are able to secure sufficient funding in the first half of 2023 to fully implement our business plan, we expect that our operations could begin to generate positive cash flows by the end of 2023, which should ameliorate our liquidity deficiency. If we are unable to raise additional funds in the near term, we will not be able to fully implement our business plan, in which case there could be a material adverse effect on our results of operations and financial condition.
36
In the event we do not generate sufficient funds from revenues or financing through the issuance of common stock or from debt financing, we will be unable to fully implement our business plan and pay our obligations as they become due, any of which circumstances would have a material adverse effect on our business prospects, financial condition, and results of operations. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to recover the value of its assets or satisfy its liabilities.
Based on our current limited availability of funds, we expect to spend minimal amounts on expansion of our sales organization, software development and capital expenditures. We expect to fund any future software development expenditures through a combination of cash flows from operations and proceeds from equity and/or debt financing. If we are unable to generate positive cash flows from operations, and/or raise additional funds (either through debt or equity), we will be unable to fund our software development expenditures, in which case, there could be an adverse effect on our business and results of operations.
Cash Flows
Years ended December 31,
2022 2021
Net cash used in operating activities
- -
Net cash provided by financing activities 725,050 764,595 Change in cash
$ 178,387 $ (305,350 )
Our operations through
Operating Activities
Net cash used in operating activities was
Net cash used in operating activities was
37 Investing Activities
The Company did not have any investing activities during the years ended
Financing Activities
Net cash provided by financing activities was
Net cash provided by financing activities was
Contractual Cash Obligations
Refer to Note 7, Commitments and Contingencies, in the accompanying consolidated financial statements for additional detail.
Off-Balance Sheet Arrangements
As of
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