Yesterday, SCWorx Corp.’s share price enjoyed a remarkable parabolic run, increasing by more than five-fold. Volume was also remarkable, exceeding 90 million shares traded, which is ridiculous when one bears in mind that the number of outstanding shares does not even reach 8 million. Given this highly unusual market activity we decided to take a closer look at WORX and unsurprisingly we found enough red flags to warrant putting out a short report. These red flags include: atrocious financials, dilution, a so-called “dubious” past as an MMA (mixed martial arts) promotion that settled a securities violations class action lawsuit, a reverse merger involving thousands of cheap shares, press releases making hard to believe claims, terrible financials and ongoing dilution.
SCWorx describes itself as: “a (former) privately held limited liability company which was organized in Florida on November 17, 2016. On December 31, 2017, SCW LLC acquired Primrose Solutions, LLC, 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 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, 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.” The company also claims to be: “a leading provider of data content and services related to the repair, normalization and interoperability of information for healthcare providers and big data analytics for the healthcare industry.”
- April 13, 2020, SCWorx To Host Business Update Conference Call Wednesday, April 15, 2020 at 11am Eastern Time
- April 13, 2020, SCWorx Skyrockets After Saying It Has Orders for 2 Million Coronavirus Testing Kits
- April 13, 2020, SCWorx Announces First Installment of Purchase Order For 48 Million COVID-19 Rapid Testing Units Over Twenty-Four Weeks at $35 Million Dollars Per Week
- March 30, 2020, SCWorx Announces an Annual Data Management Contract with a Leading Cancer Research Institute
To say that WORX’s financials are bad is an understatement if the three quarters of 2019 that have been so far reported are anything to go by. Between 2019 Q1 and 2019 Q3 cash fell by more than 60% and total liabilities increased by nearly 20%, a clear indication that WORX is struggling stay afloat. Furthermore, quarterly net losses averaged nearly $3 million, which is very significant when one considers how low the company is on cash. And last but not least, this worsening situation is further compounded by dilution. The current number of outstanding shares stands at 7.6 million, a 16% increase since the end of 2019 Q1, which is concerning if one takes into account the 1-for-19 reverse split that took place in February 2019.
Reverse merger, a securities purchase agreement and cheap convertibles:
As previously mentioned WORX became publicly listed by acquiring Alliance MMA’s (AMMA) shares. But how did this merger take place? The answer is a securities purchase agreement, discussed on the company’s latest 10Q (1) : “In June 2018, SCWorx Acquisition Corp. entered into a Securities Purchase Agreement (SPA) with Alliance MMA, under which SCWorx Acquisition Corp. agreed to purchase up to $1.25 million in principal amount of Alliance’s convertible notes and warrants to purchase up to 1,128,356 [59,387 shares reflective of one for nineteen stock split] shares of Alliance MMA common stock. The initial $750,000 tranche of the notes was convertible into shares of Alliance common stock at an initial conversion price of $0.3725 [$7.0775 post-split] and the related 503,356 [26,492 post-split] warrants have an exercise price of $0.3725 [$7.0775 post-split]. The conversion price on the $750,000 convertible note was reduced to $0.215 [$4.085 post-split] per share in January 2019. The remaining $500,000 tranche of the notes was convertible into shares of Alliance common stock at a conversion price of $0.20 [$3.80 post-split] and the related 625,000 [32,895 post-split] warrants had an exercise price of $0.30 [$5.70 post-split]. All of these notes (an aggregate of $1.25 million in principal amount) converted automatically into Alliance common stock upon the closing of the Company’s acquisition on February 1, 2019 and were distributed to certain of the Company’s common stockholders”.
It is thus clear that thousands of AMMA’s share were purchased at prices that are considerably below the current market price as some of these shares were obtained as cheaply as $3.80 per share and $5.70 per warrant.
In January 2018, Alliance MMA was named as a defendant in a class action lawsuit in which the plaintiffs claimed that Alliance MMA, Paul K. Danner (CEO at the time) and John Price (current CFO) misled investors during its 2016 IPO by omitting crucial information relating to stock-based compensation (2).
Alliance MMA opted to settle this class action litigation in March 2018 (3). The fact that Alliance MMA was not willing to keep this in court in order to clear its name is not particularly reassuring. Especially, if one bears in mind that John Price remains at the company as CFO.
Furthermore, one of the company directors, Charles K. Miller has been a member of Intercloud Systems Inc.’s (ICLD) board of directors since November 2012 (4) . In February 2015, Intercloud Systems Inc. was named as a defendant in a class action lawsuit claiming that it had “engaged in a fraudulent scheme to artificially inflate the company’s stock price by disseminating false and misleading analyst reports into the market”. Intercloud Systems Inc. ended up settling the matter for the sum of $2.7 million (5).
It thus appears that members of management are no strangers to being involved/linked to securities laws violations class action lawsuits for misleading investors. This should be of great concern when bearing in mind the outlandish claims made by the company over the last few weeks.
WORX’s price run yesterday coincided with news that the company had received a “committed purchase order” from Rethink My Healthcare, for two million COVID-19 Rapid Testing Units, with provision for additional weekly orders of 2 million units for 23 weeks, valued at $35M per week (6). This claim is very difficult to believe in light of the fact that the number of COVID-19 test carried out in the USA amount to only 298,499 since January 21, 2020 (7). How will Rethink My Healthcare sell all these tests is a very good question, especially as it is a company that specialises in virtual healthcare services with a somewhat underwhelming website (8). Yet this is not the only grandiose claim recently made by WORX’s management. On March 27, 2020, the company claimed that its subsidiary sourced one million surgical masks for “existing large hospital customer”, the hospital’s name is not specified. (9) And on March 30, 2020, it announced that it had signed a new renewable annual data management contract with one of the Northeast’s leading Cancer Institutes, once again the name of the customer is not specified (10).
WORX is not a good investment. The combination of: ludicrous claims made by management; a CFO named as a defendant in a class action lawsuit that the company settled; terrible financials; a merger involving thousands of shares purchased at a fraction of the current trading price; drastic share price and trading volume increases in a single day; and ongoing dilution, should be enough to make most people highly sceptical about purchasing this company’s shares. Stay away from WORX unless you are an experienced trader.