What changed in this filing

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Item 3. Legal Proceedings

2022-03-31 compared with 2021-05-19 · 116 added, 134 removed, 5 unchanged (98% of the section changed)

Legal Proceedings

conducting our business, 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.

April 29, 2020, a securities class action case was filed in the United States District Court for the Southern District of New

York against us and our CEO.

The action is captioned Daniel Yannes, individually and on behalf of all others similarly situated,

Plaintiff vs.

Schessel, Defendants.

May 27, 2020, a second securities class was filed in the United States District Court for the Southern District of New York against

us and our CEO.

The action is captioned Caitlin Leeburn, individually and on behalf of all others similarly situated, Plaintiff

Schessel, Defendants.

June 23, 2020, a third securities class was filed in the United States District Court for the Southern District of New York against

us and our CEO.

The action is captioned Jonathan Charles Leonard, individually and on behalf of all others similarly situated,

Schessel, Defendants.

three lawsuits allege that our company and our CEO mislead investors in connection with our April 13, 2020 press release with

respect to the sale of COVID-19 rapid test kits.

The plaintiffs in these actions are seeking unspecified monetary damages.

three class actions were consolidated on September 18, 2020 and Daniel Yannes was designated lead plaintiff.

A consolidated Amended

Complaint (“CAC”) was filed on October 19, 2020.

The Defendants filed a motion to dismiss the CAC on November 18,

2020, and the briefing on that motion was complete on January 8, 2021.

We are still awaiting a ruling on the motion, and we intend

to continue vigorously defending against this lawsuit.

June 15, 2020, a shareholder derivative claim was filed in the United States District Court for the Southern District of New York

against Marc S.

Schessel, Steven Wallitt (current directors), and Robert Christie and Charles Miller (former directors) (“Director

Defendants”).

The action is captioned Javier Lozano, derivatively on behalf of SCWorx Corp., Plaintiff, v.

Miller, Steven Wallitt, Defendants, and SCWorx Corp., Nominal Defendant.

This lawsuit alleges that the Director Defendants

breached their fiduciary duties to the Company, including by misleading investors in connection with our April 13, 2020 press

release with respect to the sale of COVID-19 rapid test kits, failing to correct false and misleading statements and failing to

implement proper disclosure and internal controls.

The Plaintiff, on our behalf, is seeking an award of monetary damages, improvements

in our disclosure and internal controls, and legal fees.

The Director Defendants intend to vigorously defend against these proceedings.

This derivative action is also still pending, and the plaintiff in such action has agreed to voluntarily stay the case until a

ruling on a motion to dismiss, which we intend to file in the securities class action case.

August 21, 2020, a shareholder derivative claim was filed in the United States District Court for the Southern District of New

York against Marc S.

Schessel, Steven Wallitt (current directors), and Robert Christie and Charles Miller (former directors) (“Director

Defendants”).

The action is captioned Josstyn Richter, derivatively on behalf of SCWorx Corp., Plaintiff, v.

In conducting our business,

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.

Settlement of Consolidated

Securities Class Action

As previously disclosed,

on April 29, 2020, a securities class action case was filed in the United States District Court for the Southern District of New York

against us and our former CEO.

The action is captioned Daniel Yannes, individually and on behalf of all others similarly situated vs.

Subsequently, two additional class actions were filed in the same court ( Leeburn v.

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

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 Marc 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.

Settlement of Consolidated

Derivative Action

As previously disclosed, on

June 15, 2020, a shareholder derivative claim was filed in the United States District Court for the Southern District of New York against

Steven Wallitt (current director), Marc S.

Schessel, Robert Christie and Charles Miller (former directors) (“Director Defendants”).

The action is captioned Lozano, derivatively on behalf of SCWorx Corp.

Schessel, Charles K.

Miller, Steven Wallitt, Defendants,

and SCWorx Corp., Nominal Defendant.

The Lozano lawsuit was consolidated with another shareholder derivative lawsuit, Richter, v.

Schessel, Charles K.

Miller, Steven Wallitt, Defendants, and SCWorx Corp., Nominal Defendant.

This lawsuit alleges that the Director Defendants

breached their fiduciary duties to the Company, including by misleading investors in connection with our April 13, 2020 press

release with respect to the sale of COVID-19 rapid test kits, failing to correct false and misleading statements and failing to

implement proper disclosure and internal controls.

The Plaintiff, on our behalf, is seeking an award of monetary damages, improvements

in our disclosure and internal controls, and legal fees.

The Director Defendants intend to vigorously defend against these proceedings.

August 27, 2020, the Lozano and Richter derivative actions were consolidated and jointly stayed until a ruling on a motion to

dismiss which we filed in the securities class action case.

September 30, 2020, a shareholder derivative action was filed in the Supreme Court State of New York, New York County against

Schessel and Steven Wallitt (current directors) and Charles Miller (a former director).

The action is captioned Hemrita

Zarins, derivatively on behalf of SCWorx Corp.

Schessel, Charles Miller, Steven Wallitt and SCWorx, Nominal Defendant.

This lawsuit alleges that the Director Defendants breached their fiduciary duties to the Company, including by misleading investors

in connection with the Company’s April 13, 2020 press release with respect to the sale of COVID-19 rapid test kits, failing

to correct false and misleading statements and failing to implement proper disclosure and internal controls.

The Plaintiff, on

our behalf, is seeking an award of monetary damages, improvements in our disclosure and internal controls, and legal fees.

October 28,2020, Zarins withdrew this action and refiled an action in the Chancery Court in the State of Delaware on October

Zarins named as Defendants Marc S.

Schessel, Robert Christie (a former director), Steven Wallitt and SCWorx, Nominal

The allegations, as well as the relief sought, in the Delaware Chancery Court proceeding are substantially the

same as that filed in the New York State Action.

This action has been stayed pending the ruling on the motion to dismiss in the

aforementioned securities class action.

The Director Defendants intend to vigorously defend against these proceedings.

addition, following the April 13, 2020 press release and related disclosures (related to COVID-19 rapid test kits), the Securities

and Exchange Commission made an inquiry regarding the disclosures we made in relation to the transaction involving COVID-19 test

On April 22, 2020, the Securities and Exchange Commission ordered that trading in the securities of our company be suspended

because of “questions and concerns regarding the adequacy and accuracy of publicly available information in the marketplace”

(the “SEC Trading Halt”).

The SEC Trading Halt expired May 5, 2020, at 11:59 PM EDT.

We are fully cooperating

with the SEC’s investigation and are providing documents and other requested information.

April 2020, we received related inquiries from The Nasdaq Stock Market and the Financial Industry Regulatory Authority (FINRA).

We have been fully cooperating with these agencies and providing information and documents, as requested.

On May 5, 2020, the

Nasdaq Stock Market informed us that it had initiated a “T12 trading halt,”

which means the halt will remain in place

until we have fully satisfied Nasdaq’s request for additional information.

We fully cooperated with Nasdaq and responded

to all of Nasdaq’s information requests as they were issued.

The T12 trading halt was lifted on August 10, 2020.

in April 2020, we were contacted by the U.S.

Attorney’s Office for the District of New Jersey, which is seeking information

and documents from our officers and directors relating primarily to the April 13, 2020 press release concerning COVID-19 rapid

We are fully cooperating with the U.S.

Attorney’s Office in its investigation.

connection with these actions and investigations, the Company is obligated to indemnify its officers and directors for costs incurred

in defending against these claims and investigations.

Because the Company currently does not have the resources to pay for these

costs, its directors and officers liability insurance carrier has agreed to indemnify these persons even though the $750,000 retention

under such policy has not yet been met.

The Company estimates it is currently obligated to pay approximately $700,000 of the retention,

which payments could have a material adverse effect on the Company.

f/k/a Alliance MMA, Inc.,

(the “Consolidated Derivative Action”).

The Consolidated Derivative

Action alleged that the Director Defendants breached their fiduciary duties to the Company, including by misleading investors in connection

with our April 13, 2020 press release with respect to the sale of COVID-19 rapid test kits, failing to correct false and misleading statements

and failing to implement proper disclosure and internal controls.

In addition, on October 29,

2020, Hemrita Zarins filed a shareholder derivative action in the Chancery Court in the State of Delaware against Steven Wallitt (current

director) and Marc S.

Schessel and Charles Miller (former directors).

The action is captioned Hemrita Zarins, v.

Schessel, Robert

Christie, Steven Wallitt and SCWorx, Nominal Defendant.

The Zarins action contains substantially similar allegations as in the Consolidated

Derivative Action.

On February 15, 2022, the

Company and the Director Defendants (Marc Schessel, Steven Wallitt, Charles Miller and Robert Christie) entered into a stipulation of

settlement (subject to Court approval) with the shareholder derivative plaintiffs to settle the Consolidated Derivative Action as well

as the Zarins action.

Under the terms of the settlement, (i) the insurers for the Director Defendants will make a cash payment to legal

counsel for the shareholder derivative Plaintiffs to cover their legal fees and (ii) the Company will adopt certain corporate governance

reforms within 60 days of court approval of the settlement, in exchange for which all parties will be released from all claims related

to the derivative class action litigation.

The settlement resolves all claims asserted against the defendants without any admission, concession

or finding of any fault, liability or wrongdoing by the Company or any defendant.

Other Investigations

In addition, as previously

disclosed, following the April 13, 2020 press release and related disclosures (related to COVID-19 rapid test kits), the Securities and

Exchange Commission made an inquiry regarding the disclosures we made in relation to the transaction involving COVID-19 test kits.

Company is continuing to cooperate with the SEC regarding its investigation arising out of the April 13, 2020 press release and the events

The Company received a Wells notice on December 8, 2021 and an amended Wells notice on December 10, 2021.

Notice states that the staff of the Securities and Exchange Commission has made a preliminary determination to recommend that the Commission

file an enforcement action against the Company which would allege violations of Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities

Act of 1933 (the “Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”),

and Rules 10b-5(a), 10b-5(b), and 10b-5(c) thereunder.

The Wells Notice also indicates that the staff would seek fines and disgorgement,

including pre and post judgment interest in such enforcement proceeding.

The Company did not make a Wells submission to the Commission

in response to the Wells Notice.

The Company has since been actively engaged in discussions with

the Staff to settle the claims set forth in the Wells Notice.

In April 2020, we received related inquiries from The Nasdaq Stock

Market and the Financial Industry Regulatory Authority (FINRA).

We cooperated fully with these agencies, providing information and documents,

as requested.

We have not had any requests from these agencies since January 2021.

Also in April 2020, as previously

disclosed, we were contacted by the U.S.

Attorney’s Office for the District of New Jersey, which was seeking information and documents

from our officers and directors relating primarily to the April 13, 2020 press release concerning COVID-19 rapid test kits.

We have cooperated

fully with the U.S.

Attorney’s Office in its investigation.

In connection with these

actions and investigations, the Company is obligated to indemnify its officers and directors for costs incurred in defending against these

claims and investigations.

Because the Company currently does not have the resources to pay for these costs, its directors and officers

liability insurance carrier has agreed to indemnify these persons.

Upon consummation of the settlement of the Consolidated Class Action,

the Company believes it will have satisfied its accrued retention obligations with respect to the insurance coverage.

David Klarman v.

f/k/a Alliance MMA, Inc., Index No.

619536/2019 (N.Y.

Ct., Suffolk County )

On October 3, 2019, David Klarman, a former employee of Alliance, served

a complaint against SCWorx seeking $400,000.00 for a breach of his employment agreement with Alliance.

Klarman claims

that Alliance ceased paying him his salary in March 2018 as well as other alleged contractual benefits.

does not believe that it owes the amount demanded and intends to vigorously defend against these claims.

On March 6, 2020,

SCWorx filed an answer and counterclaims against Mr.

On September 18, 2020, the Court granted Klarman's counsel's motion

to withdraw as counsel due to "irreconcilable differences."

The Court stayed the case for 45 days after service of

the Court's order.

Klarman's wife, Marie Klarman, Esq., filed a Notice of Appearance on November 6, 2020 and filed a motion

on November 9, 2020 seeking various forms of relief -- in violation of the Court's Individual Rules and the Commercial Division Rules.

We opposed Klarman’s motion on December 31, 2020 and the case was marked fully submitted on January 21, 2021.

and Order dated March 26, 2021, the Court granted Klarman’s motion to dismiss four (4) of fourteen (14) defenses, denied Klarman’s

motion to dismiss SCWorx’s counterclaims against him;

denied Klarman’s motion for summary judgment and denied Klarman’s

motion to strike allegations contained in the Affirmative Defenses and Counterclaims based on his contention that such allegations were

“scandalous”

or prejudicial.

On April 7, 2021, Klarman filed a Reply to the Counterclaims, denying the material allegations

and interposed numerous affirmative defenses.

The Court has issued a preliminary conference order, setting a discovery cut-off of

October 2022.

this time, we are unable to predict the duration, scope, or possible outcome of these investigations and lawsuits.

On October 3, 2019, David

Klarman, a former employee of Alliance, served a complaint against SCWorx seeking $400,000.00 for a breach of his employment agreement

with Alliance.

Klarman claims that Alliance ceased paying him his salary in March 2018 as well as other alleged contractual benefits.

This action was settled on or about December 16, 2021 by the parties without any admission of liability or wrongdoing.

In exchange for

a release, the Company agreed to settle with Mr.

Klarman with $100,000 of SCWorx shares calculated over a period of 4 months pursuant

to an agreed upon schedule with respect to amounts, dates and a restriction on sales of SCWorx stock to no more than 4,000 shares per

To date, all shares have been issued pursuant to this agreement.

Mine Safety Disclosures

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 3. Legal Proceedings