Item 3. Legal Proceedings
Item 3. Legal Proceedings
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.
SCWorx Corp. and Marc S. Schessel. Subsequently, two additional class actions were filed in the same court (Leeburn v. SCWorx, et ano.
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
Action. 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. By
order dated March 22, 2022, the Court granted preliminary approval of the class action. After a fairness hearing held on June 29, 2022,
the Court approved the Stipulation of Settlement.
CorProminence d/b/a Core IR v. SCWorx
AAA Arbitration Case 01-22-0001-5709
As previously disclosed, on April 25, 2022, the
Company received a Demand for Arbitration along with a Statement of Claim filed by Core IR with the American Arbitration Association seeking
damages in the amount of approximately $190,000.00 arising out of a marketing and consulting agreement. The Company filed its answer,
affirmative defenses and counterclaims on May 16, 2022. By order of the arbitrator dated November 1, 2022, Core IR received permission
to amend its Statement of Claim to increase its request for damages to $257,545.63. The arbitration hearing commences on March 20, 2023
and will continue through March 24, 2023.
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Hadrian Equities Partners, LLC et ano. v. SCWorx Corp,
Case No. 22-cv-07096 (JLR) (S.D.N.Y)
On August 19, 2022, Hadrian Equities Partners,
LLC and the Phillip W. Caprio, Jr. 2007 Irrevocable Trust filed a complaint in the United States District Court for the Southern District
of New York alleging that SCWorx was dilatory and did not comply with its alleged contractual duties to remove the restrictions from Plaintiffs’
converted AMMA stock to SCWorx stock until August 10 and August 11, 2020. Plaintiffs allege that as a result, they were unable to sell
their SCWorx stock when SCWorx was trading at its highest price on April 13, 2020. The Complaint seeks $500,000 in damages. To date, the
Complaint has not been served. Upon review of the Complaint, SCWorx counsel provided Plaintiffs’ counsel with a “safe harbor”
Notice of Motion for sanctions pursuant to Fed. R. Civ. Pro. 11 and letter explaining that the material allegations in the Complaint are
false inasmuch as the restrictions on Plaintiffs’ SCWorx shares were removed on April 21, 2020– after months of waiting for
Plaintiffs to supply the correct documents with accurate information so that outside counsel could provide an opinion and clear the stocks
for trading. The “safe harbor” letter and Notice of Motion gave Plaintiffs 21 days to withdraw the Complaint. After asking
for and receiving several extensions in addition to the 21 days, Plaintiffs have not withdrawn the Complaint and thus, a Motion for Sanctions
was filed by SCWorx on November 4, 2022. After the motion for sanctions was filed, Plaintiffs filed an Amended Complaint on November 28,
2022. On February 6, 2023, SCWorx filed its answer to the Amended Complaint interposing numerous defenses. SCWorx is awaiting a decision
from the Court on its Motion for Sanctions.
Other Investigations
As previously disclosed, on or about April 6,
2022, the Company reached a settlement in principle with the SEC Staff which, subject to a few changes, was subsequently approved by the
Commission in which the Company agreed to resolve the SEC’s investigation regarding the April 13, 2020 press release and related
disclosures (related to Covid-19 rapid test kits) through the Company’s payment of (a) a civil monetary penalty of $125,000, payable
in 4 equal installments over 12 months and (b) disgorgement of $471,000 and prejudgment interest in the amount of $32,761.56 which payment
is to be deemed satisfied by the transfer by the Company, no later than 30 days after the entry of the Class Distribution Order in the
class action entitled Yannes v. SCWorx Corp. of shares of SCWorx’s common stock, valued at $600,000 at the time of issuance to authorized
claimants in the Yannes settlement, provided that the Class Distribution Order is entered within 365 days from the entry of the Final
Judgment in the SEC action. In the event that the Company does not transfer shares of its common stock, valued at $600,000 at the time
of issuance to authorized claimants in the class action settlement within 365 days from the entry of a Final Judgment, the Company will
be required to remit to the SEC the full amount of disgorgement within 395 days from entry of a Final Judgment. On May 31, 2022, the Commission
filed a complaint against Marc Schessel and the Company in the United States District Court for the District of New Jersey alleging 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 relating to the April 13,
2020 press release and related disclosures we made in relation to the transaction involving COVID-19 test kits. At the same time, on May
31, 2022, the Commission filed a motion for approval of the Consent Judgment which contained the aforementioned fine, disgorgement requirement
as well as an agreement by the Company to an injunction permanently restraining and enjoining the Company from violating Section 10(b)
of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rules 10b-5(a), (b), and (c) thereunder
[17 C.F.R § 240.10b .. 5(a), (b), (c)]; and Section 17(a) of the Securities Act of 1933 (“Securities Act’’) [15
U.S.C. § 77q(a)]. On June 2, 2022, the Court granted the motion, approved the settlement and entered a final judgment. SCWorx has
thus far paid 3 of 4 installments on the monetary penalty of $125,000.
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.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.