UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~May 31, 2023~~February 29, 2024

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______ to _______

SEC File No. 001-37954

SHIFTPIXY, INC.

(Exact name of registrant as specified in its charter)

Wyoming		47-4211438
(State or other jurisdiction of of incorporation or organization)		(I.R.S. Employer Identification No.)

~~13450 W Sunrise Blvd~~~~, Suite 650, Sunrise~~4101 NW 25th Street, Miami, FL		~~33323~~33142
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number: (888) 798-9100

N/A

(Former name, former address and former three months, if changed since last report)

Securities registered under Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.0001 per share		PIXY		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s only class of common stock ~~$0.0001 par value was 12,177,191,~~issued and outstanding as of ~~July 14, 2023.~~April 15, 2024, was 6,755,686.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements		3
	Condensed Consolidated Balance Sheets as of ~~May 31, 2023~~February 29, 2024 (Unaudited) and August 31, ~~2022~~2023		3
	~~Condensed Consolidation Statements of Operations for the Three and Nine Months ended May 31, 2023 and May 31, 2022 (Unaudited)~~		4
	Condensed Consolidated Statements of ~~Stockholders’~~Operations for the Three and Six Months ended February 29, 2024 and February 28, 2023 (Unaudited)	4
	Condensed Consolidated Statements of Stockholders' Deficit for the Three and ~~Nine~~Six Months ended ~~May 31,~~February 29, 2024, and February 28, 2023 ~~and May 31, 2022~~ (Unaudited)		5
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months ended ~~May 31,~~February 29, 2024, and February 28, 2023 ~~and May 31, 2022~~ (Unaudited)		7	6
	Notes to the Condensed Consolidated Financial Statements		8	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36	31
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		50	39
Item 4.	Controls and Procedures		50	39

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings		51	40
Item 1A.	Risk Factors		51	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		51	40
Item 3.	Defaults Upon Senior Securities		51	40
Item 4.	Mine Safety Disclosures		51	40
Item 5.	Other Information		51	40
Item 6.	Exhibits		52	41

Signatures		53	42

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

~~ShiftPixy, Inc.~~

CondensedUnaudited Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

May 31,
2023

August 31,
2022

(Unaudited)

ASSETS

Current assets

Cash

$ 144,000

$ 618,000

Accounts receivable, net of reserve of $10,000 and $0 as of May 31, 2023 and August 31, 2022 respectively

537,000

279,000

Unbilled accounts receivable

2,046,000

2,105,000

Prepaid expenses

256,000

696,000

Other current assets

271,000

187,000

Cash and marketable securities held in Trust Account (See Notes 2 and 4)

—

116,969,000

Total current assets

3,254,000

120,854,000

Fixed assets, net

2,665,000

2,769,000

Right-of-use operating lease

3,567,000

4,076,000

Deposits and other assets

1,098,000

919,000

Total assets

$ 10,584,000

$ 128,618,000

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities

Accounts payable and other accrued liabilities

$ 18,342,000

$ 17,121,000

Payroll related liabilities

24,379,000

16,055,000

Accrued workers’ compensation costs

425,000

568,000

Current liabilities of discontinued operations

1,765,000

1,362,000

Class A common shares of SPAC mandatory redeemable 0 shares and 11,500,000 shares as of May 31, 2023 and August 31, 2022 (See Notes 2 and 4)

—

116,969,000

Total current liabilities

44,911,000

152,075,000

Non-current liabilities

Operating lease liability, non-current

3,017,000

3,541,000

Accrued workers’ compensation costs

922,000

1,227,000

Non-current liabilities of discontinued operations

4,133,000

3,269,000

Total liabilities

��
52,983,000

160,112,000

Commitments and contingencies

Stockholders’ deficit

Preferred stock, 50,000,000 authorized shares; $0.0001 par value: 0 and 8,600,000 shares issued and outstanding as of May 31, 2023 and August 31, 2022.

—

1,000

Common stock, 750,000,000 authorized shares; $0.0001 par value; 10,110,524 and 513,349 shares issued as of May 31, 2023 and August 31, 2022

6,000

5,000

Additional paid-in capital

168,967,000

151,731,000

Accumulated deficit

(211,372,000 )

(192,725,000 )
Total ShiftPixy, Inc. Stockholders’ deficit

(42,399,000 )

(40,988,000 )

Non-controlling interest in consolidated subsidiary (See Note 4)

—

9,494,000

Total stockholders’ deficit

(42,399,000 )

(31,494,000 )

Total liabilities and stockholders’ deficit

$ 10,584,000

$ 128,618,000

	February 29, 2024			August 31, 2023

ASSETS
Current assets
Cash	$	21		$	75
Accounts receivable, net		644			590
Unbilled accounts receivable		656			1,784
Prepaid expenses		515			839
Other current assets		428			532
Total current assets		2,264			3,820

Fixed assets, net		1,330			1,622
Right-of-use asset, net		691			866
Deposits and other assets		192			192
Total assets	$	4,477		$	6,500

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and other accrued liabilities	$	24,520		$	17,911
Payroll tax related liabilities		34,443			29,595
Payroll related liabilities		2,204			2,940
Accrued workers’ compensation costs discontinued operations		-			4,389
Total current liabilities		61,167			54,835

Non-current liabilities
Operating lease liability, non-current		2,321			2,790
Total liabilities		63,488			57,625
Commitments and contingencies (See Notes 10 and 11)
Stockholders’ deficit
Convertible preferred stock series A, 50,000,000 authorized shares; $0.0001 par value: 0 shares and 358,333 shares issued and outstanding as of February 29, 2024, and August 31, 2023, respectively		-			-
Common stock, 750,000,000 authorized shares; $0.0001 par value; and 5,397,698 shares and 507,383 issued and outstanding as of February 29, 2024, and August 31, 2023, respectively		-			-
Additional paid-in capital		177,592			175,226
Accumulated deficit		(236,603	)		(226,351	)
Total stockholders’ deficit		(59,011	)		(51,125	)
Total liabilities and stockholders’ deficit	$	4,477		$	6,500

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

Table of Contents

ShiftPixy, Inc.

Condensed Unaudited Consolidated Statements of Operations

~~(Unaudited)~~(Amounts in thousands, except share and per share amounts)

	For the Three Months Ended						For the Nine Months Ended						For the Three Months Ended						For the Six Months Ended
	May 31, 2023			May 31, 2022			May 31, 2023			May 31, 2022			February 29, 2024			February 28, 2023			February 29, 2024			February 28, 2023
Revenues (See Note 2)	$	3,988,000		$	9,643,000		$	13,833,000		$	29,021,000		$	3,813		$	4,579		$	7,587		$	9,844
Cost of revenues		3,788,000			9,039,000			12,623,000			27,782,000			3,591			4,095			6,915			8,941
Gross profit		200,000			604,000			1,210,000			1,239,000			222			484			672			903

Operating expenses:
Salaries, wages, and payroll taxes		2,621,000			3,254,000			7,477,000			10,796,000
Salaries, taxes and benefits														1,303			2,599			2,664			4,856
Professional fees		752,000			2,680,000			2,817,000			6,094,000			465			870			1,279			2,065
Software development		50,000			4,291,000			229,000			6,525,000			1			119			1			179
Depreciation and amortization		148,000			133,000			447,000			386,000			140			150			281			299
General and administrative		3,074,000			2,967,000			6,609,000			7,718,000			3,017			2,010			9,181			3,991
Total operating expenses		6,645,000			13,325,000			17,579,000			31,519,000			4,926			5,748			13,406			11,390

Operating loss		(6,445,000	)		(12,721,000	)		(16,369,000	)		(30,280,000	)		(4,704	)		(5,264	)		(12,734	)		(10,487	)

Other (expense) income:
Interest expense		(550,000	)		(1,000	)		(1,007,000	)		(2,000	)
Other income		—			27,000			536,000			43,000
SPAC offering costs		—			—			—			(515,000	)
Total other expense		(550,000	)		26,000			(471,000	)		(474,000	)
Net loss from continuing operations		(6,995,000	)		(12,695,000	)		(16,840,000	)		(30,754,000	)
Gain from legal settlement														-			-			2,500			-
Other income (expense)														-			642			(18	)		642
Total other income														-			642			2,482			642
Net loss attributable to ShiftPixy, Inc														(4,704	)		(4,622	)		(10,252	)		(9,845	)

Loss from discontinued operations, net of tax		(460,000	)		(132,000	)		(1,267,000	)		(283,000	)		-			(607	)		-			(807	)

Non-controlling interest		—			—			(540,000	)		—			-			(540	)		-			(540	)

Net loss attributable to ShiftPixy, Inc.		(7,455,000	)		(12,827,000	)		(18,647,000	)		(31,037,000	)
Net Loss														(4,704	)		(5,769	)		(10,252	)		(11,192	)

Preferred stock preferential dividend		—			—			(127,145,000	)		—			-			-			(67,444	)		(127,145	)
Deemed dividend from change in fair value from warrants modification		—			—			—			(7,731,000	)

Net loss attributable to common stockholders	$	(7,455,000	)	$	(12,827,000	)	$	(145,792,000	)	$	(38,768,000	)
Net loss attributable to Shiftpixy’s shareholders													$	(4,704	)	$	(5,769	) )	$	(77,696	)	$	(138,337	)

Net loss per share attributable stockholders, basic and diluted
Net loss per share attributable to ShiftPixy shareholders, basic and diluted
Continuing operations – basic and diluted	$	(0.70	)	$	(33.08	)	$	(14.84	)	$	(101.72	)	$	(0.87	)	$	(12.77	)	$	(18.78	)	$	(342.91	)
Discontinued operations – basic and diluted		(0.05	)		(0.34	)		(0.13	)		(0.75	)		-			(1.50	)		-			(2.01	)
Net loss per common share – basic and diluted	$	(0.75	)	$	(33.42	)	$	(14.97	)	$	(102.47	)	$	(0.87	)	$	(14.27	)	$	(18.78	)	$	(344.92	)

Weighted average common shares outstanding – basic and diluted		10,057,177			383,726			9,739,578			378,349			5,397,698			404,319			4,137,691			401,069

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

Table of Contents

ShiftPixy, Inc.

Condensed Unaudited Consolidated ~~Statement~~ Statements of ~~Stockholders’~~Stockholders' Deficit

For the ~~Nine~~Three and Six Months Ended ~~May 31, 2023~~February 29, 2024

~~(Unaudited)~~(Amounts in thousands, except shares)

Preferred Stock Issued

Common Stock Issued

Additional
Paid-In

Accumulated

Total
Stockholders’
Deficit

Noncontrolling

Total
Stockholders’

Shares

Amount

Shares

Amount

Capital

Deficit

ShiftPixy, Inc.

interest

Deficit

Balance, September 1, 2022

8,600,000

$ 1,000

513,349

$ 5,000

$ 151,731,000

$ (192,725,000 )

$ (40,988,000 )

$ 9,494,000

$ (31,494,000 )
Fair market value increase of preferred stock prior to reverse stock split

—

—

—

—

127,145,000

—

127,145,000

—

$ 127,145,000

Preferential dividend of preferred stock

—

—

—

—

(127,145,000 )

—

(127,145,000 )

—

$ (127,145,000 )
Common stock issued on exercised prefunded warrants

—

—

124,204

—

1,000

—

1,000

—

$ 1,000

Common stock issued for private placement, net of offering costs

—

—

416,667

—

4,387,000

—

4,387,000

—

$ 4,387,000

Common stock issued on conversion of preferred shares

(8,600,000 )

(1,000 )

8,600,000

1,000

—

—

—

—

$ —

Stock-based compensation expense

—

—

—

—

735,000

—

735,000

—

$ 735,000

Warrant modification expense

—

—

—

—

106,000

—

106,000

—

$ 106,000

Additional shares issued due to reverse stock split

—

—

16,976

—

—

—

—

—

$ —

Net proceeds of ATM, net of offering expenses

—

—

439,328

—

1,973,000

—

1,973,000

—

$ 1,973,000

Deconsolidation of VIE

—

—

—

—

10,034,000

—

10,034,000

(9,494,000 )

$ 540,000

Net loss

—

—

—

—

—

(18,647,000 )

(18,647,000 )

—

$ (18,647,000 )
Balance, May 31, 2023

—

$ —

10,110,524

$ 6,000

$ 168,967,000

$ (211,372,000 )

$ (42,399,000 )

$ —

$ (42,399,000 )

	Preferred Stock Issued					Common Stock Issued				Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Deficit
	Shares			Amount		Shares		Amount
Balance, September 1, 2023		—		$	—		507,383	$	—	$	175,226		$	(226,351	)	$	(51,125	)
Fair Market value increase of preferred stock prior to reverse stock split		—			—		—		—		67,444			—			67,444
Preferential dividend of preferred stock		—			—		—		—		(67,444	)		—			(67,444	)
Additional shares issued due to reverse stock split		—			—		51,706		—		—			—			—
Common stock issued for private placement, including the exercise of prefunded warrants, net of offering costs		—			—		94,375		—		2,016			—			2,016
Stock-based compensation expense		—			—		—		—		350			—			350
Preferred stock Series A issued upon the exercise of preferred stock option		4,744,234			—		—		—		—			—			—
Common stock issued on conversion of preferred stocks into common stock		(4,744,234	)		—		4,744,234		—		—			—			—
Net loss		—			—		—		—		—			(10,252	)		(10,252	)
Balance, February 29, 2024		—		$	—		5,397,698	$	—	$	177,592		$	(236,603	)	$	(59,011	)

	Preferred Stock Issued				Common Stock Issued				Additional Paid-In		Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Deficit
Balance, December 1, 2023		—	$	—		5,397,698	$	—	$	177,417	$	(231,899	)	$	(54,482	)
Stock-based compensation expense		—		—		—		—		175		—			175
Net loss		—		—		—		—		—		(4,704	)		(4,704	)
Balance, February 29, 2024		—	$	—		5,397,698	$	—	$	177,592	$	(236,603	)	$	(59,011	)

~~ShiftPixy, Inc.~~

~~Condensed Consolidated Statement of Stockholders’ Deficit~~

~~For the Three Months Ended May 31, 2023~~

~~(Unaudited)~~

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

Table of Contents

ShiftPixy, Inc.

Condensed Unaudited Consolidated Statements of ~~Stockholders’ Deficit~~

~~For the Nine Months Ended May 31, 2022~~

~~(Unaudited)~~

Preferred Stock
Issued

Common Stock
Issued

Additional
Paid-In

Accumulated

Total
Stockholders’
Deficit

Noncontrolling

Total
Stockholders’

Shares

Amount

Shares

Amount

Capital

Deficit

ShiftPixy, Inc.

interest

Deficit

Balance, September 1, 2021

—

$ —

258,631

$ 3,000

$ 142,786,000

$ (149,338,000 )

$ (6,549,000 )

$ 47,472,000

$ 40,923,000

Cumulative effect adjustment for ASC 842 lease accounting adoption

—

—

—

—

—

608,000

608,000

—

$ 608,000

Common stock issued for private placement, net of offering cost

—

—

28,500

—

4,183,000

—

4,183,000

—

$ 4,183,000

Common stock issued on exercised warrants, net of offering costs

—

—

96,218

1,000

5,409,000

—

5,410,000

—

$ 5,410,000

Prefunded warrants from private placement, net of offering costs

—

—

—

—

6,861,000

—

6,861,000

—

$ 6,861,000

Stock-based compensation expense

—

—

—

—

1,069,000

—

1,069,000

—

$ 1,069,000

Remeasurement of IHC temporary equity

—

—

—

—

(13,431,000 )

—

(13,431,000 )

—

$ (13,431,000 )
Withdrawal of SPAC registrations under Form S-1

—

—

—

—

—

—

—

(37,978,000 )

$ (37,978,000 )
Net loss

—

—

—

—

—

(31,037,000 )

(31,037,000 )

—

$ (31,037,000 )
Balance, May 31, 2022

—

$ —

383,349

$ 4,000

$ 146,877,000

$ (179,767,000 )

$ (32,886,000 )

$ 9,494,000

$ (23,392,000 )

~~ShiftPixy, Inc.~~

~~Condensed Consolidated Statements of Stockholders’~~Stockholders' Deficit

For the Three and Six Months Ended ~~May 31, 2022~~February 28, 2023

~~(Unaudited)~~(Amounts in thousands, except shares)

	Preferred Stock Issued						Common Stock Issued				Additional Paid-In			Accumulated			Total Stockholders’ Deficit			Noncontrolling			Total Stockholders'
	Shares			Amount			Shares		Amount		Capital			Deficit			ShiftPixy, Inc.			interest			Deficit
Balance, September 1, 2022		358,333		$	1			21,390	$	—	$	151,737		$	(192,725	)	$	(40,988	)	$	9,494		$	(31,494	)
Fair Market value increase of preferred stock prior to reverse stock split		—			—			—		—		127,145			—			127,145			—			127,145
Preferential dividend of preferred stock		—			—			—		—		(127,145	)		—			(127,145	)		—			(127,145	)
Common stock issued on exercised prefunded warrants		—			—			5,175		—		1			—			1			—			1
Common stock issued for private placement, net of offering costs		—			—			17,361		—		4,387			—			4,387			—			4,387
Common stock issued on conversion of preferred stock into common stock		(358,333	)		(1	)		358,333		—		—			—			—			—			—
Stock-based compensation expense		—			—			—		—		500			—			500			—			500
Warrant modification expense		—			—			—		—		106			—			106			—			106
Additional shares issued due to reverse stock split		—			—			707		—		—			—			—			—			—
Net proceeds of ATM, net of offering expenses		—			—			12,723		—		1,434			—			1,434			—			1,434
Deconsolidation of VIE		—			—			—		—		10,034			—			10,034			(9,494	)		540
Net loss		—			—			—		—		—			(11,192	)		(11,192	)		—			(11,192	)
Balance, February 28, 2023		—		$	—			415,689	$	—	$	168,199		$	(203,917	)	$	(35,718	)	$	—		$	(35,718	)

	Preferred Stock Issued				Common Stock Issued				Additional Paid-In		Accumulated			Total Stockholders’ Deficit			Noncontrolling			Total Shareholders'
	Shares		Amount		Shares		Amount		Capital		Deficit			ShiftPixy, Inc.			interest			Deficit
Balance, December 1, 2022		—	$	—		402,967	$	—	$	156,486	$	(198,148	)	$	(41,662	)	$	9,494		$	(32,168	)
Proceeds of ATM, net of offering expenses		—		—		12,722		—		1,434		—		$	1,434			—			1,434
Stock-based compensation expense		—		—		—		—		245		—			245			—			245
Deconsolidation of VIE		—		—		—		—		10,034		—			10,034		$	(9,494	)		540
Net loss		—		—		—		—		—		(5,769	)		(5,769	)		—			(5,769	)
Balance, February 28, 2023		—	$	—		415,689	$	—	$	168,199	$	(203,917	)	$	(35,718	)	$	—		$	(35,718	)

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

Table of Contents

ShiftPixy, Inc.

Condensed Unaudited Consolidated Statements of Cash Flows ~~(Unaudited)~~

(Amounts in thousands)

For the Nine Months Ended

May 31,
2023

May 31,
2022

OPERATING ACTIVITIES

Net loss attributable to ShiftPixy, Inc stockholders

$ (18,647,000 )

$ (31,037,000 )
Loss from discontinued operations

(1,267,000 )

(283,000 )
Non-controlling interest

(540,000 )

—

Net loss from continuing operations

(16,840,000 )

(30,754,000 )
Adjustments to reconcile net loss to net cash used in operations

Depreciation and amortization

447,000

386,000

Provision for doubtful accounts

10,000

—

Stock-based compensation

735,000

1,069,000

Stock-based compensation – shares for services accrued to directors

169,000

—

Impaired asset expense

—

4,004,000

Warrant modification expense

106,000

—

Expensed SPAC offering cost

—

515,000

Amortization of operating lease

85,000

727,000

Changes in operating assets and liabilities:

Accounts receivable

(268,000 )

146,000

Unbilled accounts receivable

59,000

(729,000 )
Prepaid expenses and other current assets

356,000

(146,000 )
Deposits – workers’ compensation

—

541,000

Deposits and other assets

(79,000 )

—

Accounts payable and other accrued liabilities

952,000

4,573,000

Payroll related liabilities

8,324,000

6,583,000

Accrued workers’ compensation costs

(448,000 )

(295,000 )
Total adjustment

10,448,000

17,374,000

Net cash used in continuing operations

(6,392,000 )

(13,380,000 )
Net cash provided by discontinued operating activities

—

—

Net cash used in operations

(6,392,000 )

(13,380,000 )

INVESTING ACTIVITIES

Investment of IHC IPO proceeds into Trust Account

—

(116,765,000 )
Redemption of Trust Account

117,574,000

—

Investment in private company

(100,000
)

Purchase of fixed assets

(343,000 )

(500,000 )
Net cash provided by (used in) investing activities

117,131,000

(117,265,000 )

FINANCING ACTIVITIES

SPAC related offering costs paid

—

(3,663,000 )
Proceeds from initial public offering of IHC

—

116,725,000

Payment to IHC shareholders

(117,574,000 )

—

Proceeds from exercised warrants. Net of offering costs

1,000

5,410,000

Proceeds from private placement, net of offering costs

4,387,000

4,183,000

Proceeds from At-The-Market Offering, net of offering costs

1,973,000

—

Deferred offering costs

—

Proceeds from private placement prefunded warrants, net of offering costs

—

6,861,000

Net cash (used in) provided by financing activities

(111,213,000 )

129,516,000

Net increase in cash

(474,000 )

(1,129,000 )
Cash – beginning of period

618,000

1,199,000

Cash – end of period

$ 144,000

$ 70,000

Supplemental Disclosure of Cash Flows Information:

Cash paid for interest

$ 102,000

$ 2,000

Non-cash Investing and Financing Activities:

Deconsolidation of VIE

$ 9,494,000

$ —

Elimination of deferred offering cost of abandoned SPAC’s initial public offering

$ —

$ 37,978,000

Change in fair value due to warrant modification

$ —

$ 13,728,000

Operating lease assets and liabilities s from adoption of ASC 842

$ —

$ 8,970,000

Increase in marketable securities in trust account and Class A mandatory redeemable common shares

$ 801,000

$ —

Transfer of preferred shares to common shares

$ 1,000

$ —

	For the Six Months Ended
	February 29, 2024			February 28, 2023
OPERATING ACTIVITIES
Net loss	$	(10,252	)	$	(11,192	)
Loss from discontinued operations		-			(807	)
Non-controlling interest		-			(540	)
Net loss from continuing operations		(10,252	)		(9,845	)
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
Depreciation and amortization		281			299
Stock-based compensation		350			500
Warrant modification expense		-			106
Amortization of operating lease		175			85
Fair value of shares for services to be issued to directors		80			113
Allowance for credit losses		234			-
Loss from sale of fixed assets		7			-
Changes in operating assets and liabilities:
Accounts receivable		(288	)		(466	)
Unbilled accounts receivable		1,128			(67	)
Prepaid expenses and other current assets		428			392
Other long-term assets		-			(100	)
Accounts payable and other accrued liabilities		1,670			(1,824	)
Payroll tax liabilities		4,848			5,001
Payroll related liabilities		(736	)		483
Net cash used in continuing operating activities		(2,075	)		(5,323	)

INVESTING ACTIVITIES
Purchase of fixed assets		-			(299	)
Redemption of Trust Account		-			117,574
Proceeds from the sale of fixed assts		5			-
Net cash provided by investing activities		5			117,275

FINANCING ACTIVITIES
Proceeds from prefunded warrant exercises		-			1
Payment to IHC shareholders		-			(117,574	)
Proceeds from At the Market Offering, net of offering costs		-			1,434
Proceeds from private placement, net of offering costs		2,016			4,387
Net cash provided by (used in) financing activities		2,016			(111,752	)
Net (decrease) increase in cash		(54	)		200
Cash - Beginning of Period		75			618
Cash - End of Period	$	21		$	818
Supplemental Disclosure of Cash Flows Information:
Cash paid for interest	$	27		$	102
Cash paid for income taxes	$	-		$	—
Non-cash Investing and Financing Activities:
Deconsolidation of VIE	$	-		$	9,494
Increase in marketable securities in trust account and Class A mandatory redeemable common shares	$	-		$	801
Transfer of preferred shares to common shares	$	-		$	1

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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ShiftPixy, Inc.

Notes to the Condensed Consolidated Financial Statements

~~(Unaudited)~~February 29, 2024

Note 1: Nature of Operations

ShiftPixy, Inc. (the “Company”) was incorporated on June 3, 2015, in the State of Wyoming. The Company is a specialized ~~Human Capital~~human capital service provider that provides solutions for large, contingent, part-time workforce demands, primarily in the light industrial, restaurant and hospitality service trades. The Company’s historic focus has been on the quick service restaurant (“QSR”) industry in Southern California, but the Company has expanded into other geographic areas and industries that employ temporary or part-time labor sources, ~~notably~~ including the healthcare industry.

The Company functions as an employment administrative services (“EAS”) provider primarily through its wholly owned subsidiary, ReThink Human Capital Management, Inc. (“HCM”), as well as a staffing provider through another of its wholly owned subsidiaries, ShiftPixy Staffing, Inc. (“Staffing”). These subsidiaries provide a variety of services ~~to our clients~~ typically as a co-employer through HCM and a direct employer through Staffing, including the ~~following:~~following functions: administrative services, payroll processing, human resources consulting, and workers’ compensation administration and coverage (as permitted and/or required by state law). The Company has built a human resources information systems (“HRIS”) platform to assist in ~~customer~~client acquisition that simplifies the onboarding of new clients into the Company’s closed proprietary operating and processing information system (the “ShiftPixy Ecosystem”). ~~The Company expects this HRIS platform to facilitate additional value-added services in future reporting periods.~~

In January 2020, the Company sold the assets of Shift Human Capital Management Inc. (“SHCM”), a wholly owned subsidiary of the Company, pursuant to which the Company assigned the majority of the Company’s billable clients at the time of the sale to a third party for cash. The continuing impact of this transaction on the Company’s condensed consolidated financial statements is described ~~below~~ in Note ~~3, Discontinued Operations.~~2.

Effective ~~September 1, 2022,~~October 14, 2023, the Company filed articles of amendment to the Company’s articles of incorporation to effect a ~~one-for-one hundred~~one-for-twenty-four (1:~~100)~~24) reverse split of the Company’s issued and outstanding ~~share~~shares of common stock. The reverse split became effective on ~~NASDAQ, September 1, 2022.~~Nasdaq October 16, 2023. All references to common stock, warrants and options except for the conditional preferred stock option granted in August 2023, to purchase common stock, including per share data and related ~~numbers~~information contained in ~~this Report on Form 10-Q give~~the condensed consolidated financial statements have been retroactively adjusted to reflect the effect ~~to this~~of the reverse ~~split.~~stock split for all periods presented.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying ~~unaudited~~ condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) ~~and~~. These consolidated condensed financial statements are presented in United States dollars. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the ~~rules of the Securities and Exchange Commission (“SEC��) applicable~~instructions to ~~interim reports of smaller reporting companies. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In~~Form 10-Q. All adjustments which are, in the opinion of management, ~~all adjustments (consisting of normal recurring accruals) considered~~ necessary for a fair presentation of the results of operations for the interim periods have been ~~included.~~ made and are of a recurring nature unless otherwise disclosed herein.

The results of ~~unaudited~~ condensed operations for the three and ~~nine~~six months ~~end May 31, 2023~~ending February 29, 2024, are not necessarily indicative of the results that may be expected for the full year ending August 31, ~~2023.~~

2024. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, ~~2022~~2023 (“Fiscal ~~2022”~~2023”), filed with the SEC on December ~~13, 2022, as amended by Forms 10-K/A, filed with the SEC on December~~ 14, ~~2022, February 3, 2023 and February 9, 2023, respectively.~~2023.

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Principles of Consolidation

The ~~unaudited~~accompanying condensed consolidated financial statements include the accounts of ~~ShiftPixy, Inc.,~~the Company and its wholly owned ~~subsidiaries.~~ subsidiaries listed below. All intercompany transactions and balances have been eliminated.

The ~~unaudited~~Company’s consolidated subsidiaries are as follows:

Name of Consolidated Subsidiaries or Entities	State or Other Jurisdiction of Incorporation or Organization	Attributable Interest
Shiftpixy Corporate Services, Inc.	Wyoming		100	%
Shiftpixy Staffing, Inc.	Wyoming		100	%
Shiftpixy Contracting Services, Inc.	Wyoming		100	%
Shiftpixy Productions, Inc.	Wyoming		100	%
Shiftpixy Investments, Inc.	Wyoming		100	%
Shiftpixy Labs, Inc.	Wyoming		100	%
Industrial Human Capital, Inc (until February 7, 2023)

The condensed consolidated financial statements previously included the accounts of Industrial Human Capital, Inc. (“IHC”), which was a special purpose acquisition company, or “SPAC,” for which our wholly owned subsidiary, ShiftPixy Investments, Inc., served as the financial sponsor, ~~(as described below),~~ and which SPAC was deemed to be controlled by usthe Company as a result of the Company’s 15% equity ownership stake, the overlap of three of our executive officers for a period of time as executive officers of IHC, and significant influence that the Company exercised over the funding and acquisition of new operations for an initial business combination (“IBC”). ~~(See Note 2, Variable Interest Entity). All intercompany balances have been eliminated in consolidation.~~ IHC was consolidated under the variable interest entity (“VIE”) model. On February 7, 2023, IHC was de-consolidated.

As of February 7, 2023, IHC was not a part of the Company’s operations, and consolidation. IHC was dissolved on November 14, 2022, and the Trustee released all the redemption funds from the Trust Account ~~See Note 4,~~ to the IHC shareholders on December 1, 2022, effectively liquidating the Trust. On February 7, 2023, three creditors of IHC filed an involuntary petition for liquidation under Chapter 7 against IHC in the US Bankruptcy Court for the Southern District of Florida. ~~See Note 4,~~ Pursuant to ASC 810-10-15, consolidation is precluded where control does not rest for a non-controlling interest in legal reorganization or bankruptcy. In addition, IHC did not meet the criteria of a ~~Variable Interest Entity (VIE), see~~variable interest entity. See Note 4.11 for disclosure related to the litigation with IHC.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include:

	·	Continuation as a going concern; management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and liquidation of all liabilities in the normal course of business,

	·	Liability for legal contingencies,
	·	Payroll tax and associated penalties and interest, and
	·	~~Useful lives~~Impairment of ~~property and equipment~~

	·	~~Deferred income taxes and related valuation allowance~~

	·	~~Projected development of workers’ compensation claims.~~long-lived assets.

These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties ~~attached~~ to these estimates or assumptions that are difficult to measure of value.

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Management regularly reviews the key factors and assumptions to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such a valuation, if deemed appropriate, those estimates are adjusted accordingly.

Liquidity, Capital Resources and Going Concern

Under the existing accounting guidance, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the unaudited condensed consolidated financial statements are issued. When substantial doubt is determined to exist, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans; however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date the unaudited condensed consolidated financial statements are issued, and (2) it is probable that the plans, when implemented, may mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. Therefore, management has concluded that there is substantial doubt in the Company’s ability to continue as a going concern for the next twelve months.

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As of ~~May 31, 2023,~~February 29, 2024, the Company had cash of less than $0.1 million and a working capital deficit of ~~$41.7~~$58.9 million. During the ~~nine~~six months ended ~~May 31, 2023,~~February 29, 2024, the Company used approximately ~~$6.7~~$2.1 million of cash ~~from its continuing~~in operations and incurred ~~recurring~~$10.3 million of losses, resulting in an accumulated deficit of ~~$211.4~~$236.6 million.

As of ~~May 31, 2023,~~February 29, 2024, the Company is delinquent with respect to remitting payroll tax payments to the ~~IRS.~~ IRS, States, and local jurisdictions for an aggregate amount of $34.4 million including penalties and interest. The Company does not have sufficient cash to meet its liquidity requirements for the following twelve months from the date of issuance of these consolidated condensed financial statements. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The Company has received delinquent notices and notices relating to liens from the IRS claiming it owes approximately $21.1 million for unpaid payroll tax liabilities, including penalties and interest. The balances reported on such notices do not represent the full payroll tax liability of the Company as of February 29, 2024. The Company expects its payroll tax liabilities, penalties and interest to increase in the future. Moreover, the IRS has threatened to take enforced collection against the Company and its subsidiaries. The Company has taken steps to preserve so-called “collection due process rights”:

	■	In October of 2023, the IRS issued to ShiftPixy a Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing, with respect to ShiftPixy's Form 941 and Form 940 for specific years. In November of 2023, ShiftPixy timely filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, with respect to ShiftPixy's Liability That Are Subject to Enforced Collection. That Form 12153 requested, among other things, an abatement of additions to tax and related interest for the failure to make required deposits and the failure to timely pay required tax that are included within ShiftPixy’s Liability That Are Subject to Enforced Collection.

	■	On December 12, 2023, the Company received a lien from the IRS. The IRS can levy the Company’s bank accounts. As a result of the appeal filed with the US Tax Court of Appeals, the tax lien is on stay.

	■	In January of 2024, ShiftPixy filed Form 12153, Request for a Collection Due Process or Equivalent Hearing, with respect to ShiftPixy's Liability That Are Subject to Enforced Collection

	■	The Company had a collection due process hearing with the IRS Independent Office of Appeals in October 2023. In October and November of 2023, the Company requested that the IRS Independent Office of Appeals (“Appeals”), among other things, abate additions to tax and related interest for the failure to make required deposits and the failure to timely pay required tax.

	■	In February 2024, the Company received a Notice of Determination from the IRS on our administrative claims wherein the IRS denied, entirely, our appeal for relief.

	■	The Company appealed to the US Tax Court of Appeals on March 25, 2024.

The IRS can, with limited notice, levy the Company’s bank accounts and subject it to enforced collection if the Company cannot obtain a resolution of the payroll tax issues. There is no assurance that the US Tax Court of Appeals will abate penalties and interest currently assessed against the Company by the IRS. If the Company is not successful in getting the outstanding penalties, and/or interest abated, including working out a payment plan with the IRS, it may cause the Company to file for bankruptcy protection in the near future.

The Company has retained tax counsel and has been in near constant communication with the IRS regarding ~~amounts owing in relation to~~processing its Employee Retention Tax Credits (“ERTCs”) ~~due. In addition, some~~. As of September 14, 2023, the IRS has a moratorium on processing new ERTC claims and many of the Company’s clients are seeking refunds. Recently, the Company has filed ERTC claims for its clients and has not received any acceptance from the IRS. Some clients have filed suits against the Company, demanding that the Company ~~take~~takes action to file for additional ERTCs for certain tax periods. Until the matter is concluded, and the taxes are paid, the IRS could, subject to its standard processes and the Company’s right to respond, implement collection actions, including such actions as levying against Company bank accounts, to recover the amounts that it calculates to be due and owing.

~~Historically, the Company’s principal source of financing has come through the sale of the Company's common stock, including in certain instances, warrants and the issuance of convertible notes.~~

On January 31, 2023, the Company filed a registration statement on Form S-3 and related prospectus for the sale of up to $100 million of the Company’s equity securities via a “shelf” or "at-the-market” (“ATM”) sales mechanism over a three-year period. The registration statement also included a prospectus supplement providing for the sale of up to $8,187,827 of the Company’s shares of common stock, which the Company proposed to effect pursuant to an ATM Issuance Sales Agreement (“Sales Agreement”) executed with A.G.P./Alliance Global Partners (the “Agent” or “AGP”). Under the Sales Agreement, the Company’s shares of common stock could be sold from time to time and at various prices at the Company’s sole control, subject to the conditions and limitations in the Sales Agreement with AGP. The ATM was scheduled to expire on January 31, 2026. For the nine-months ended May 31, 2023, the Company received $2.4 million in gross proceeds ($2.0 million, net of costs) from the sale of 439,429 shares of the Company’s common stock. On May 22, 2023, the Company terminated the Sales Agreement and concluded the ATM. There is a limitation on the amount of funds that the Company can access under the baby shelf rules which is the value of a company’s public float if less than $75 million, The Company can only raise ⅓ of its float value over the previous 12-month period.

On July 12, 2023, the Company priced a “best efforts” public offering for the sale by the Company of an aggregate of 1,166,667 shares of common stock, 900,000 pre-funded warrants, and 2,066,667 common warrants. The public offering price was $1.50 per share and accompanying common warrant, or $1.4999 per pre-funded warrant and accompanying common warrant. The pre-funded warrants are exercisable immediately, may be exercised at any time until all of the pre-funded warrants are exercised in full, and have an exercise price of $0.0001. The common warrants are exercisable immediately for a term of five years and have an exercise price of $1.50 per share. 1,100,000 shares, 900,000 pre-funded warrants and 2,000,000 common warrants under the offering were sold pursuant to a securities purchase agreement with an investor. A.G.P./Alliance Global Partners acted as placement agent for the offering and received a fee of 7% of the gross proceeds and reimbursement of $75,000 of expenses. The total estimated offering expenses were approximately $0.6millon and the net proceeds of approximately $2.5 million. The offering closed on July 14, 2023. Effective upon closing of the offering, the exercise price of an aggregate of 1,186,742 outstanding warrants the Company issued to an investor in 2020 and 2022 was reduced to $1.50 per share, subject to further adjustment as provided in the warrants, pursuant to a warrant amendment the Company entered into with the investor.

The Company’s plans and expectations for the next twelve months include raising additional capital to help fund expansion of the Company’s operations and strengthening of the Company’s sales force strategy by focusing on staffing services as the key driver to improve the Company’s margin and the continued support and functionality improvement of the Company’s information technology (“IT”) and HRIS platform. This expanded go-to-market strategy will focus on building a national account portfolio managed by a newly-formed regional team of senior sales executives singularly focused on sustained quarterly revenue growth and gross profit margin expansion. The Company expects to continue to invest in the Company’s HRIS platform, ShiftPixy Labs, and other growth initiatives, all of which have required and will continue to require significant cash expenditures.

The Company expects to raise capital from additional sales of its securities during this fiscal year either through registered public offerings or private placements, the proceeds of which the Company intends to use to fund its operations and growth initiatives. There can be no assurance that we will be able to sell securities on terms that the Company is seeking, or at all. Although management believes that its current cash position, along with its anticipated revenue growth and proceeds from future sales of its securities, when combined with prudent expense management, could alleviate substantial doubt, there is no assurance about its ability to continue as a going concern and to fund its operations for at least one year from the date these financials are available (even with the absence of any funded debt outstanding on its balance sheet). If these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months, it may need to curtail certain aspects of its operations or expansion activities, consider the sale of additional assets, or consider other means of financing. The Company can give no assurance that it will be successful in implementing its business plan and obtaining financing on advantageous terms, or that any such additional financing will be available. If the Company is not successful in obtaining the necessary financing, we do not currently have the cash resources to meet our operating commitments for the next twelve months. Therefore, management has concluded that there is substantial doubt in the Company's ability to continue as a going concern for the next twelve months.

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~~Reclassification~~

The Company ~~reclassified certain expenses~~has taken aggressive steps to ~~conform~~reduce its overhead expenses. The Company has plans and expectations for the next twelve months include raising additional capital which may help fund the Company’s operations and strengthening the Company’s sales force strategy by focusing on staffing services as the key driver towards its success. In addition, the Company is planning on acquisitions funded by stock and debt to attempt to generate future cash flows. There is no assurance that the Company can execute on obtaining additional equity or debt on the terms that the Company is seeking. In addition, there is no assurance that the Company can execute its contemplated acquisitions and on terms that are deemed appropriate to the ~~current year's presentation.~~Company. These condensed consolidated financial statements do not include any adjustments for these uncertainties. In addition, the Company needs to take additional steps to pay down its payroll taxes with the IRS, states and local tax authorities. If not, penalties and interest will continue to increase. There is a likelihood that the Company may file for bankruptcy in the near future.

Revenue and Direct Cost Recognition

The Company determines revenue recognition pursuant to Accounting Standards Codification (“ASC 606”) Revenue from contracts with customers, through the following steps:

	■	Identification of the contract, or contracts, with a customer.
	■	Identification of the performance obligation(s) in the contract.
	■	Determination of the transaction price.
	■	Allocation of the transaction price to the performance obligation(s) in the contract.
	■	Recognition of revenue when, or as the Company satisfies a performance obligation.

The Company’s revenues are primarily disaggregated into fees for providing staffing solutions and EAS/HCM services. The Company enters into contracts with its clients for Staffing ~~or EAS~~ based on a stated rate and price in the contract. Contracts generally have a term of 12 months, ~~however,~~ are cancellable at any time by either party with 30 days’ written notice.

The performance obligations in the agreements are generally combined into one performance obligation, as they are considered a series of distinct services, and are satisfied over time because the client simultaneously receives and consumes the benefits provided as the Company performs the services. ~~Payments for the Company’s services are typically made in advance of, or at the time that the services are provided.~~ The Company does not have significant financing components or significant payment terms for its ~~customers~~clients and consequently has no material credit losses. The Company uses the output method based on a stated rate and price over the payroll processed to recognize revenue, as the value to the client of the goods or services transferred to date appropriately depicts the Company’s performance towards complete satisfaction of the performance obligation.

Staffing Solutions

The Company records gross billings as revenues for its staffing solutions clients. The Company is primarily responsible for fulfilling the staffing solutions services and has discretion in establishing price. The Company includes ~~the~~ payroll costs in revenues with a corresponding increase to cost of revenues for payroll costs associated with these services. As a result, ~~we are~~the Company is the principal in this arrangement for revenue recognition purposes.

EAS Solutions / HCM

Employment administrative service or EAS solutions ~~revenue is~~“EAS” and Human Capital Management “HCM” revenues are primarily derived from the Company’s gross billings, which are based on (i) the payroll cost of the Company’s worksite employees (“WSEs”) and (ii) ~~a mark-up computed as a percentage of payroll costs for payroll taxes~~an administrative fee and ~~workers’ compensation premiums.~~(iii) if eligible, WSE can elect certain pass-through benefits.

Gross billings are invoiced to each EAS and HCM client, concurrently with each periodic ~~payroll of the Company’s WSEs, which coincides with the services provided and which is typically a fixed percentage of the payroll processed.~~payroll. Revenues ~~which exclude the~~are offset by payroll cost component ~~of gross billings~~ and ~~therefore consist solely of markup,~~pass-through costs which are ~~recognized ratably over the payroll period as~~presented on a net basis for revenue recognition. WSEs perform their services at the ~~client~~client's worksite. ~~Although the~~The Company assumes responsibility for processing and remitting payroll to the WSE and payroll related obligations, it does not assume employment-related responsibilities such as determining the amount of the payroll and related payroll obligations. As a result, the Company records revenue on a “net” basis in this arrangement for revenue recognition purposes. Revenues that have been recognized but not invoice are included in unbilled accounts receivable on the Company’s condensed consolidated balance sheets were $2.0 million and $2.1 million, as of May 31, 2023 and August 31, 2022, respectively.

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~~Consistent with the Company’s revenue recognition policy for EAS clients, direct costs do~~Revenues that have been recognized but not include the payroll cost of its WSEs. The cost of revenue associated with the Company’s revenue generating activities is primarily comprised of all other costs related to its WSEs, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.

The fees collected from the worksite employers for benefits (i.e. zero-margin benefits pass-through), workers’ compensation and state unemployment taxes are presented in revenues and the associated costs of benefits, workers’ compensation and state unemployment taxesinvoiced are included in ~~operating expenses for EAS~~unbilled accounts receivable on the Company’s condensed consolidated balance sheets were $0.7 million and $1.8 million, as of February 29, 2024, and August 31, 2023, respectively.

Payments received by clients in advance of the due date of an invoice are recorded as liability. As of February 29, 2024, and August 31, 2023. the Company ~~does retain risk~~recorded a liability for advance payments of $0.1 million and ~~acts as a principal with respect to this aspect of~~$0.2 million, respectively, is included in accounts payable and other accrued liabilities on the ~~arrangement. With respect to these fees, the Company is primarily responsible for fulfilling the service and has discretion in establishing price.~~condensed balance sheets.

Disaggregation of Revenue

The Company’s primary revenue streams include ~~HCM~~HCM/EAS and staffing services. The Company’s disaggregated revenues for the ~~nine~~three and six months ended ~~May 31,~~February 29, 2024, and ~~May 31, 2022, respectively,~~February 28, 2023, were as ~~follows:~~follows, in millions:

For the Three Months Ended

For the Nine Months Ended

Revenue (in thousands):

May 31, 2023

May 31, 2022

May 31, 2023

May 31, 2022

HCM¹

$ 111

$ 1,734

$ 1,521

$ 4,052

Staffing

3,877

7,909

12,312

24,969

For the Three Months Ended

For the Six Months Ended

Revenue:

February 29,
2024

February 28,
2023

February 29,
2024

February 28,
2023

EAS/HCM

$ 0.4

$ 1.6

$ 1.0

$ 3.0

Staffing

3.4

3.0

6.6

6.8

$ 3.8

$ 4.6

$ 7.6

$ 9.8

¹EAS/HCM revenue is presented net, ~~$8.3~~$4.1 million and ~~$30.7~~$12.0 million gross billings less WSE payroll costs of ~~$8.2~~$3.7 million and ~~$29.2~~$11.0 million for the three and ~~nine~~six months ended ~~May 31, 2023, respectively. Gross billings were $13.9~~February 29, 2024, and $12 million and ~~$39.4~~$23.6 million, respectively gross billings less WSE payroll costs of ~~12.2~~$10.4 million and ~~$35.3~~$20.6 million for the three and ~~nine~~six months ended ~~May 31, 2022,~~February 28, 2023, respectively.

For the three and ~~nine~~six months ended ~~May 31,~~February 29, 2024, and February 28, 2023, ~~and May 31, 2022, respectively,~~ the following geographical ~~regions~~States represented more than 10% of total revenues:

For the Three Months Ended

For the Nine Months Ended

For the Three Months Ended

For the Six Months Ended

Region:

May 31, 2023

May 31, 2022

May 31, 2023

May 31, 2022

February 29,
2024

February 28,
2023

February 29,
2024

February 28,
2023

California

33.1 %

49.0 %

42.5 %

52.2 %

27.0 %

43.6 %

26.6 %

46.3 %
Washington

15.5 %

14.9 %

12.8 %

13.7 %

7.1 %

11.1 %

12.8 %

11.7 %
New York

23.4 %

1.0 %

17.0 %

0.9 %
New Mexico

12.9 %

7.6 %

11.9 %

7.4 %

16.3 %

12.9 %

20.7 %

11.7 %

Incremental Cost of Obtaining a Contract

Pursuant to the “practical expedients” provided under Accounting Standards Update “ASC” No 2014-09, the Company expenses sales commissions when incurred because the terms of its contracts are cancellable by either party upon ~~30 day’'~~30-day notice. These costs are recorded in commissions in the Company’s unaudited condensed ~~consolidated statements~~Consolidated Statements of ~~operations.~~Operations.

12
Table of Contents

Discontinued Operations and Workers’ Compensation
On January 3, 2020, the Company entered into an asset purchase agreement with Shiftable HR Acquisition, LLC, a wholly owned subsidiary of Vensure, pursuant to which the Company assigned client contracts which were deemed significant to its revenues, including 100% of the Company’s then existing professional employer organization or PEO business. In connection with this transaction, the Company had a Note Receivable to be paid over four years.
Prior to Fiscal Year 2023, the Company determined that it was probable that all contractually required payments would not be collected and recorded a full reserve on the amount of the note receivable. Up until November 15, 2023, the company was in litigation with Vensure regarding payment of the aforementioned note receivable. On November 15, 2023, the Company won an arbitration for a total amount of $2.5 million, which was reported as gain from legal settlement in the condensed statement of operations during the six months ended February 29, 2024.
The Company had retained workers’ compensation reserves and workers’ compensation related liabilities, which arose from former WSEs of clients that were transferred to Shiftable HR Acquisition LLC in connection with the Vensure Asset Sale. The workers’ compensation obligations related to the programs in place with Everest and Sunz Insurance Solutions, LLC (“Sunz”). The programs calculated the final policy premium based on the Company’s loss experience during the term of the policy and the stipulated formula set forth in the policy.
The Vensure Asset Sale had previously met the criteria of discontinued operations set forth in ASC 205 and as such the retained workers’ compensation asset and liabilities were presented as a discontinued operation. Subsequent to the Vensure Asset sale, the Company entered into litigation with both Everest and Sunz, see Note 11 Contingencies. As of February 29, 2024, the Company has now executed settlement agreements with both programs (Everest and Sunz). The Company recognized approximately $2.3 million of legal settlement expense related to Sunz during the six months ended February 29, 2024. The Company has continued to make the required lump sum payments and monthly installments pursuant to the terms of both settlement agreements up to the filing date.
Segment Reporting

~~Prior to August 31, 2021, the~~The Company ~~operated~~operates as one reportable segment under Accounting Standards Codification “ASC” 280, Segment ~~Reporting~~.Reporting. The chief operating decision maker regularly reviews the financial information of the Company at a consolidated level in deciding how to allocate resources and in assessing performance.  Reporting and monitoring activities on a segment basis will allow the chief operating decision maker to evaluate operating performance more effectively. However, the Company is working on its systems to properly allocate to its business segments. However, the CEO is actively involved in the day to day business and is aware of the overall segment information.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. The Company had no cash equivalent as of ~~May 31, 2023~~February 29, 2024, and August ~~31, 2022.~~
~~Marketable Securities Held in Trust Account~~
As of August 31, 2022, substantially all of the assets held in the Trust Account were invested in U.S. Treasury securities with maturities of 180 days or less. These funds are restricted for use and may only be used for purposes of completing an initial business combination ("IB") or redemption of the public common shares of IHC. On December 1, 2022, the Company distributed $117.6 million to the shareholders of IHC. There were no assets held in the Trust Account as of May 31, 2023.

Concentration of Credit Risk

The Company maintains cash with a commercial bank, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company has deposits in this financial institution in excess of the amount insured by the FDIC. The Company has not experienced any losses related to these balances and believes its credit risk to be minimal. As of ~~May~~February 29, 2024, the Company’s balances exceeded federally insured limits by the FIDC by approximately $0.1 million. As of August 31, 2023, ~~and August 31, 2022, there was $0.0 million and $0.6 million, respectively, of~~the Company did not have any cash on deposit in excess of the amounts insured by the FDIC.
~~The following represents clients who have ten percent of total accounts receivable as of May 31, 2023 and August 31, 2022, respectively.~~

As of

May 31,
2023

August 31,
2022

Clients:

(Unaudited)

Client 1

57.8 %

—
%
Client 2

21.4 %

41.9 %
Client 3

9.6 %

13.7 %
Client 4

6.3 %

21.9 %
Client 5

—
%

20.7 %
~~Fixed Assets~~
Fixed assets are recorded at cost, less accumulated depreciation and amortization. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When fixed assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Leasehold improvements are amortized over the shorter of the useful life or the initial lease term.
Fixed assets are recorded at cost and are depreciated over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of property and equipment for purposes of computing depreciation are as follows:
~~Equipment:~~
~~5 years~~
~~Furniture & Fixtures:~~
~~5 – 7 years~~
~~Leasehold improvements~~
~~Shorter of useful life or the remaining lease term, typically 5 years~~

13
Table of Contents

~~Depreciation~~The following represents clients who have ten percent of total accounts receivable as of February 29, 2024, and ~~amortization expense~~August 31, 2023, respectively.

As of

February 29,
2024

August 31,
2023

Client 1

49.6 %

64.5 %
Client 2

39.2 %

23.6 %
The following represents clients who have ten percent of gross revenues for the six months ended February 29, 2024, and February 28, 2023:

February 29,
2024

February 28,
2023

Client 1

25.5 %

13.7 %
Client 2

13.6 %

12.1 %
The following represents clients who have ten percent of gross revenues for the three months ended ~~May 31, 2023~~February 29, 2024, and May 31, 2022 was $0.1 million and $0.1 million, respectively, and included on the unaudited condensed consolidated statements of operations. Depreciation and amortization expense for the nine months ended May 31, 2023 and May 31, 2022 was $0.4 million and $0.4 million, respectively.February 28, 2023:

~~Computer Software Development~~
Software development costs relate primarily to software coding, systems interfaces and testing of the Company’s proprietary employer information systems and are accounted for in accordance with Accounting Standards Codification “ASC” 350-40, ~~Internal Use Software~~.
Internal software development costs are capitalized from the time the internal use software is considered probable of completion until the software is ready for use. Business analysis, system evaluation and software maintenance costs are expensed as incurred. The capitalized computer software development costs are reported under the section fixed assets, net in the consolidated balance sheets and are amortized using the straight-line method over the estimated useful life of the software, generally three to five years from when the asset is placed in service.
The Company determined that there was no material capitalized internal software development costs for the nine months ended May 31, 2023 and August 31, 2022. All capitalized software recorded was purchased from third party vendors. Capitalized software development costs are amortized using the straight-line method over the estimated useful life of the software, generally three to five years from when the asset is placed in service.
The Company incurred research and development costs of $0.2 million and $0.7 million for the three and nine months ended May 31, 2023, respectively. During the three and nine months ended May 31, 2022, the Company incurred research and development costs of approximately $1.1 million and $5 million, respectively. All costs were related to internally developed or externally contracted software and related technology for the Company’s HRIS platform and related mobile application.
~~Lease Recognition~~
The Financial Accounting Standards Board "FASB" established Topic 842, Leases, by issuing ASU No. 2016-02 “ASC” 842, which required lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The standard established a right-of-use asset model (“ROU”) that required a lessee to recognize an ROU operating lease asset and lease liability on the condensed balance sheets for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the unaudited condensed consolidated statement of operations.
~~Impairment and Disposal of Long-Lived Assets~~
~~The Company periodically evaluates its long-lived assets for impairment in accordance with ASC 360-10,~~ ~~Property, Plant, and Equipment~~. ASC 360-10 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed not to be recoverable. If events or circumstances were to indicate that any of the Company’s long-lived assets might be impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, the Company may record an impairment loss to the extent that the carrying value of the asset exceeds the fair value of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset. The Company assessed impairment for the periods presented and no impairment charges were deemed necessary.
14
~~Table of Contents~~
~~Workers’ Compensation~~
~~Everest Program~~
Until July 2018, a portion of the Company’s workers’ compensation risk was covered by a retrospective rated policy through Everest National Insurance Company, which calculates the final policy premium based on the Company’s loss experience during the term of the policy and the stipulated formula set forth in the policy. The Company funded the policy based on standard premium rates on a monthly basis and based on the gross payroll applicable to workers covered by the policy. During the policy term and thereafter, periodic adjustments may involve either a return of previously paid premiums or a payment of additional premiums by the Company or a combination of both. If the Company’s losses under that policy exceed the expected losses under that policy, then the Company could receive a demand for additional premium payments. The Company became engaged in litigation regarding such a demand for additional premium payments; however, the Company has entered into a settlement agreement with Everest and Gallagher Bassett, concluding the litigation. See Note 9, ~~Contingencies~~~~, Everest Litigatio~~n~~, below and Note 10 subsequent events. The Company has accrued for this settlement as of May 31, 2023.~~
~~Sunz Program~~
From July 2018 through February 28, 2021, the Company’s workers’ compensation program for its WSEs was provided primarily through an arrangement with United Wisconsin Insurance Company and administered by Sunz Insurance Solutions, LLC (“Sunz”). Under this program, the Company has financial responsibility for the first $0.5 million of claims per occurrence. The Company provides and maintains a loss fund that is earmarked to pay claims and claims related expenses. The workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim loss funds”). The level of claim loss funds is primarily based upon anticipated WSE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year were recorded as Deposit - workers’ compensation, a short-term asset, while the remainder of claim funds were included in Deposit - workers’ compensation, a long-term asset in our condensed consolidated balance sheets. The Company is currently engaged in litigation regarding demands by Sunz for additional claims loss funds, which we believe to be without merit, as discussed at Note 9, ~~Contingencies, Sunz Litigation~~~~, below.~~
Under the Everest and Sunz programs, the Company utilized a third party to estimate its loss development rate, which was based primarily upon the nature of WSEs’ job responsibilities, the location of WSEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the assumptions resulting from changes in actual claims experience and other trends are incorporated into its workers’ compensation claims cost estimates.
~~There were no workers compensation deposits related to these programs as of May 31, 2023, and as of August 31, 2022, respectively.~~
~~Current Program~~
Effective March 1, 2021, the Company migrated its clients to a guaranteed cost program. Under this program, the Company’s financial responsibility is limited to the cost of the workers’ compensation premium. The Company funds the workers’ compensation premium based on standard premium rates on a monthly basis and based on the gross payroll applicable to workers covered by the policy. Any final adjustments to the premiums are based on the final audited exposure multiplied by the applicable rates, classifications, experience modifications and any other associated rating criteria.
With regard to the prior programs, which continue until fully concluded, the Company’s estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while its estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on its consolidated balance sheets. As of May 31, 2023 and August 31, 2022, the Company had short term accrued workers’ compensation costs of $0.4 million and $0.6 million, and long-term accrued workers’ compensation costs of $0.9 million and $1.2 million, respectively.
The Company retained workers’ compensation asset reserves and workers’ compensation related liabilities for former WSEs of clients transferred to Shiftable HR Acquisition, LLC, a wholly owned subsidiary of Vensure Employer Services, Inc. (“Vensure”), in connection with the Vensure Asset Sale described in Note 3, Discontinued Operations, below. As of May 31, 2023, the retained workers’ compensation assets and liabilities are presented as a discontinued operation net asset or liability. As of May 31, 2023 and August 31, 2022, the Company had $1.8 million and $1.4 million in short-term liabilities, and $4.1 million and $3.3 million in long-term liabilities, respectively. The Company had no related worker's compensation assets as of May 31, 2023 and as of August 31, 2022, respectively.
15
~~Table of Contents~~
Because the Company bears the financial responsibility for claims up to the level noted above, such claims, which are the primary component of its workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore require a significant level of judgment. In estimating ultimate loss rates, the Company utilizes historical loss experience, exposure data, and actuarial judgment, together with a range of inputs that are primarily based upon the WSE’s job responsibilities, their location, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into the Company’s workers’ compensation claims cost estimates. The estimated incurred claims are based upon: (i) the level of claims processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan.
The Company has had very limited and immaterial COVID-19 related claims between March 2020 through the date of this Quarterly Report, although there is a possibility of additional workers’ compensation claims being made by furloughed WSEs as a result of the employment downturn caused by the pandemic. On May 4, 2020, the State of California indicated that workers who become ill with COVID-19 would have a potential claim against workers’ compensation insurance for their illnesses. There is a possibility that additional workers’ compensation claims could be made by employees required to work by their employers during the COVID-19 pandemic, which could have a material impact on the Company's workers’ compensation liability estimates. While the Company has not seen significant additional expenses as a result of any such potential claims to date, which would include claims for reporting periods after May 31, 2023, we continue to monitor closely all workers’ compensation claims made in relation to the COVID-19 pandemic.

February 29,
2024

February 28,
2023

Client 1

36.1 %

13.8 %
Client 2

10.6 %

10.7 %

Fair Value of Financial Instruments

The Company adopted the provisions of FASB Accounting ~~Standard~~Standards Codification ~~"ASC"~~(“ASC”) 820 ~~Fair~~(the “Fair Value ~~Measurement~~~~, requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for~~Topic”) which ~~it is practical to estimate fair value. ASC 820~~ defines fair value, ofestablishes a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of May 31, 2023 and August 31, 2022, the carrying value of certain financial instruments (cash, accounts receivable and payable) approximatedframework for measuring fair value ~~due to the short-term nature of the instruments. Notes Receivable is valued at the Company's estimate of expected collections~~under U.S. GAAP, and expands disclosures about fair value ~~as described below, See Note 3, Discontinued Operations.~~measurements.

The Company measures fair value under a framework that utilizes a hierarchy prioritizing the inputs to relevant valuation techniques. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs used in measuring fair value are:

·■
Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company ~~has~~as the ability to access.

·■
Level 2: Inputs to the valuation methodology ~~include~~include:

·o
Quoted prices for similar assets or liabilities in active ~~markets~~
markets.

·o
Quoted prices for identical or similar assets or liabilities in inactive ~~markets~~
markets.

·o
Inputs other than quoted prices that are observable for the asset or ~~liability~~
liability.

·o
Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

·o
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or ~~liability~~liability.

·■
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value ~~measurement~~measurement.
16
~~Table of Contents~~
Funds held in Trust Account represent U.S. treasury bills that was restricted for use and may only be used for purposes of completing an IBC or redemption of the public shares of common stock of the SPACs as set forth in their respective trust agreements. The funds held in trust are included within Level 1 of the fair value hierarchy and included in cash and marketable securities held in Trust Account in the accompanying condensed consolidated balance sheets. The Trustee distributed all the funds in the Trust Account to the shareholders of IHC on December 1, 2022.

When the Company changes its valuation inputs for measuring financial assets and liabilities at fair value, either due to changes in current market conditions or other factors, it could be required to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfers occur. The development and determination of the unobservable inputs for Level 3 fair value measurements and the fair value calculations are the responsibility of the Company’s chief financial officer and are approved by the chief executive officer. There were no transfers out of Level 3 for the ~~nine~~three and six months ended ~~May 31, 2023~~February 29, 2024.
14
Table of Contents
As of February 29, 2024, and August 31, ~~2022.~~2023, the carrying value of certain financial instruments (cash, accounts receivable, unbilled accounts receivable, and accounts payable and other accrued liabilities) approximated fair value due to the short-term nature of the instruments.
Level 1 assets consisted of cash as of February 29, 2024, and August 31, 2023. The Company did not have any Level 2 or 3 assets or liabilities as of February 29,2024, and August 31, 2023.

Advertising Costs

The Company expenses all advertising as incurred. ~~Advertising expense~~The Company incurred advertising costs totaling $0.4 million and $1.2 million for the three and six months ended ~~May 31, 2023~~February 28, 2024, and ~~May 31, 2022 was $0.8 million and $0.4 million, respectively. Advertising expense for the nine months end May 31, 2023 and May 31, 2022 was $2.0~~$0.6 million and $1.4 million for the three and six months ended February 28, 2023, respectively. Advertising expenses include salaries and external costs.

Income Taxes

The Company accounts for income taxes pursuant to ASC 740, Income Taxes. Under ASC 740, deferred income taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The provision for income taxes represents the tax expense for the period, if any, and the change during the period in deferred tax assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. ASC 740 also provides criteria for the recognition, measurement, presentation, and disclosure of uncertain tax positions. Under ASC 740, the impact of an uncertain tax position on the income tax return may only be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. A full valuation allowance was recorded as of ~~May 31, 2023~~February 29, 2024, and August 31, ~~2022, respectively,~~ 2023.
Stock-Based Compensation

The Company has one stock-based compensation plan under which the Company may issue awards, as described in Note 8, Stock Based Compensation, below. The Company accounts for the Plan under the recognition and measurement principles of ASC 718, Compensation-Stock Compensation, which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated statements of operations at their fair values.
The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, the Company recognizes expense on an accelerated basis over the employee’s requisite service period, which is generally the vesting period of the equity grant.
The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. The expected volatility is based on the historical volatility of the Company’s common stock since the Company’s initial public offering. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
The Company elects to account for forfeitures as they occur. As such, compensation cost previously recognized for an unvested award that is forfeited because of the failure to satisfy a service condition is revised in the period of forfeiture.
15
Table of Contents
~~Income (Loss) Per Share~~Fixed Assets, net

Fixed assets are recorded at cost, less accumulated depreciation and amortization. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When fixed assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.
Fixed assets are depreciated over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of property and equipment are as follows:
Equipment:
5 years
Furniture & Fixtures:
5 - 7 years
Leasehold improvements
Shorter of useful life or the remaining lease term, typically 5 years
Net Loss Per Share
The Company computes basic and diluted earnings (loss) per share amounts pursuant to Section 260-10-45 of FASB ASC. Basic net ~~income or net (loss)~~loss per common share is computed by dividing net ~~income or net (loss)~~loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the ~~reporting period. Common stock outstanding for purposes~~period, excluding the effects of ~~net income or net (loss) per share calculations include options, warrants, shares of common stock to be issued to directors for services provided and Preferred Option.~~ potentially dilutive securities.
Diluted net ~~income or and net (loss)~~loss per share is computed similar to basic ~~income or net (loss)~~loss per share except that the denominator is increased to include additional common stock equivalents available upon exercise of stock options, warrants, shares of common stock to be issued to directors for services ~~provided and Preferred Option using the treasury stock method.~~ provided.
Dilutive common stock equivalents include the dilutive effect of in-the-money stock equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any common stock equivalents if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive common stock shares are considered anti-dilutive and thus are excluded from the calculation. ~~Securities that are excluded from~~
The following potentially dilutive securities were not included in the calculation of ~~weighted average dilutive~~diluted net loss per share attributable to common ~~stock,~~shareholders of the Company because their ~~inclusion~~effect would ~~have been~~be antidilutive ~~are:~~for the periods presented:

Three Months Ended

Nine Months Ended

May 31,
2023

May 31,
2022

May 31,
2023

May 31,
2022

Options (See Note 5)

10,003

15,498

10,003

15,498

Warrants (See Note 5)

1,252,749

224,402

1,252,749

224,402

Shares of common stock to be issued to directors for services provided, (See Note 7)

59,040

—

59,040

—

Preferred Option (Note 5)

37,570

—

37,570

—

Total potentially dilutive shares

1,359,362

239,900

1,359,362

239,900

For the Three and Six Months Ended

February 29,
2024

February 28,
2023

February 29,
2024

February 28,
2023

Options

242

417

242

417

Warrants

232,679

52,198

232,679

52,198

Shares of common stock to be issued to the directors for services provided, (See Note 7)

21,137

2,460

21,137

2,460

Preferred Option

-

1,565

-

1,565

Total potentially dilutive shares

254,058

56,640

254,058

56,640

Reclassification
The Company reclassified certain expenses to conform to the current year's presentation, specifically for interest expense that are included with the payroll penalties under general and administrative expenses which was previously included in interest expense in the other income (expenses). Accrued workers’ compensation has been reclassified to accounts payable and other accrued liabilities. The resulting changes from the condensed balance sheets impacted the presentation of such items in the condensed consolidated statements of cash flows for the three and six months ended February 28, 2023.
Recent Accounting Guidance
New accounting rules and disclosure requirements can significantly affect our reported results and the comparability of our financial statements. We believe the following new accounting guidance is relevant to the readers of our condensed financial statements.
16
Table of Contents
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Although the new standard, known as the current expected credit loss (“CECL”) model, has a greater impact on financial institutions, most other organizations with financial instruments or other assets (trade receivables, contract assets, lease receivables, financial guarantees, loans and loan commitments, and held-to-maturity (HTM) debt securities) are subject to the CECL model and will need to use forward-looking information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was originally effective for public companies for fiscal years beginning after December 15, 2019. In November of 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company adopted ASU 2016-13 on September 1, 2023, which did not have a material impact on the Company's financial position, results of operations and liquidity.
New Accounting Pronouncements Not Yet Adopted
In November 2023, the Financial Account Standard Board “FASB” issued Accounting Standards Update “ASU” 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which modifies the disclosure and presentation requirements of reportable segments. The amendments in the update require the disclosure of significant segment expenses that are regularly provided to the chief operating decision maker “CODM” and included within each reported measure of segment profit and loss. The amendments also require disclosure of all other segment items by reportable segment and a description of its composition. Additionally, the amendments require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. This update is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on the presentation of its consolidated financial statements and accompanying notes.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in an entity’s income tax rate reconciliation table and disclosures regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2025. The Company is currently evaluating the impact that this guidance will have on the presentation of its consolidated financial statements and accompanying notes.
Note 3: Accounts Receivable, Unbilled Receivable and Advanced Payments
The Company’s accounts receivable represents outstanding gross billings to clients, net of an allowance for estimated credit losses. The Company in some instances may require its clients to prefund payroll and related liabilities before payroll is processed or due for payment. If a client fails to fund payroll or misses the funding cut-off, at our sole discretion, the Company may pay the payroll and the resulting amounts due to us are recognized as accounts receivable. When client payment is received in advance of the Company’s performance under the contract, such amount is recorded as client deposits in the liability section of the condensed consolidated balance sheet. The Company establishes an allowance for credit losses based on the credit quality of clients, current economic conditions, the age of the accounts receivable balances, historical experience, and other factors that may affect clients’ ability to pay, and charge-off amounts against the allowance when they are deemed uncollectible. The allowance for credit losses was $0.4 million and $0.2 million as of February 29, 2024, and August 31, 2023, respectively.
The Company recognizes unbilled revenue when work site employee payroll and payroll tax liabilities in the period in which the WSEs perform work. When clients’ pay periods cross reporting periods, the Company accrues the portion of the unpaid WSE payroll where the Company assumes, under state regulations, the obligation for the payment of wages and the corresponding payroll tax liabilities associated with the work performed prior to period-end. These estimated payroll and payroll tax liabilities are recorded in accrued wages. The associated receivables, including estimated revenues, offset by advance collections from clients and an allowance for credit losses, are recorded as unbilled revenue. As of February 29, 2024, and August 31, 2023, advance collections included in unbilled revenue were $0.7 million and $1.8 million, respectively.
Payments received by clients in advance of the due date of an invoice are recorded as liability. As of February 29, 2024, and August 31, 2023. the Company recorded a liability for advance payments of $0.1 million and $0.2 million, respectively, is included in accounts payable and other accrued liabilities on the condensed balance sheets.

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Table of Contents

~~For~~Note 4: Fixed Assets, net
Fixed assets consisted of the ~~table above, “Options” represent all options granted under~~following as of February 29, 2024, and August 31, 2023, in thousands:

February 29,
2024

August 31,
2023

Equipment

$ 2,140

$ 2,182

Furniture and fixtures

614

614

Leasehold improvements

604

604

3,358

3,400

Accumulated depreciation and amortization

(2,028 )

(1,778 )
Fixed assets, net

$ 1,330

$ 1,622

Depreciation and amortization expense was $0.1 million and $0.3 million for the ~~Company’s 2017 Stock Option/Stock Issuance Plan (the "Plan"), as described in Note 5, Stock Based Compensation~~, ~~below.~~three and six months ended February 29, 2024, respectively. Depreciation and amortization expense was $0.2 million and $0.3 million for the three and six months ended February 28, 2023, respectively.

~~Stock-Based Compensation~~Note 5: Accounts Payable and Other Accrued Liabilities

~~The Company has one stock-based compensation plan under which~~Accounts payable and other accrued liabilities consisted of the ~~Company may issue awards,~~following as ~~described~~of February 29, 2024, and August 31, 2023, in ~~Note 5, Stock Based Compensatio~~n~~, below. The Company accounts for the Plan under the recognition and measurement principles of ASC 718,~~ ~~Compensation-Stock Compensation~~, which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the unaudited condensed consolidated statements of operations at their fair values.thousands:

The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, the Company recognizes expense on an accelerated basis over the employee’s requisite service period (generally the vesting period of the equity grant).

February 29,
2024

August 31,
2023

Accounts payable (1)

$ 9,698

$ 6,527

Contingent lease liability

3,761

3,761

Operating lease liability

916

874

Legal settlement

5,685

1,610

Shares owed to directors for services

838

756

Workers’ compensation

9

1,219

ERTC owed to clients

1,089

1,089

Due to IHC

600

600

Financed insurance policies

128

335

Business tax

788

150

Other

1,008

990

Total

$ 24,520

$ 17,911

The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. The expected volatility is based on the historical volatility of the Company’s common stock since the Company's initial public offering. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
The Company elects to account for forfeitures as they occur. As such, compensation cost previously recognized for an unvested award that is forfeited because of the failure to satisfy a service condition is revised in the period of forfeiture.
The methods and assumptions used in the determination of the fair value of stock-based awards are consistent with those described in the Company's Annual Report on Form 10-K for the year ending August 31, 2022, filed with the SEC on December 13, 2022, and the amendments thereto on Forms 10-K/A filed with the SEC on December 14, 2022, February 3, 2023 and February 9, 2023, respectively, which include a detailed description of the Company's stock-based compensation awards, including information related to vesting terms, service and performance conditions, payout percentages, and process for estimating the fair value of stock options granted.
~~Recently Adopted Accounting Standards~~
In June 2016, the Financial Accounting Standards Board "FASB" issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This standard requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, each reporting entity should estimate an allowance for expected credit losses, which is intended to result in more timely recognition of losses. This model replaces multiple existing impairment models in current. GAAP, which generally requires a loss to be incurred before it is recognized. The new standard applies to trade receivables arising from revenue transactions such as contract assets and accounts receivable. Under ASC 606, revenue is recognized when, among other criteria, it is probable that an entity will collect the consideration it is entitled to when goods or services are transferred to a customer. When trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. For the three months ended May 31, 2023, the Company adopted this guidance, and it was not material to the results of operations.
(1)
Includes the $3.5 million default penalty related to the Sunz litigation settlement as of February 29, 2024

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Table of Contents

~~Variable Interest Entity~~Note 6: Payroll tax and related liabilities

Payroll tax related liabilities consisted of the following as of February 29, 2024, and August 31, 2023, in thousands:

February 29,
2024

August 31,
2023

Payroll taxes liabilities

$ 24,819

$ 22,840

Payroll related liabilities

82

237

Accrued penalties and interest

9,542

6,518

Total

$ 34,443

$ 29,595

Payroll tax liabilities and payroll related liabilities are associated with the Company’s WSEs as well as its corporate employees. The Company has ~~been involved~~recorded approximately $9.5 million and $6.5 million in ~~the formation of various entities considered to be Variable Interest Entities (“VIEs”). The Company evaluates the consolidation of these entities as required pursuant to ASC Topic 810 relating~~interest and penalties on approximately $24.8 million and $22.8 million on delinquent outstanding payroll taxes to the ~~consolidation of VIEs. These VIEs are SPACs.~~
~~The Company’s determination of whether it is the primary beneficiary of a VIE is based in part on an assessment of whether or not the Company~~IRS, States, and its related parties are exposed to the majority of the risks and rewards of the entity. Typically, the Company is entitled to substantially all or a portion of the economics of these VIEs. The Company is the primary beneficiary of the VIE entities.
~~Through November 30, 2022, only one of the four SPAC companies existed, See Note 4Special Purpose Acquisition Company Sponsorship that has more information regarding the remaining SPAC company. There are no SPAC companies~~local authorities as of February ~~7, 2022.~~29, 2024, and August 23, 2023, respectively.

In ~~connection with the IPO in October 2021,~~addition, the Company ~~purchased, through its wholly owned subsidiary, ShiftPixy Investments, Inc. ("Investments"~~has received notices from the IRS for unpaid tax liabilities including penalties and interest. The IRS can levy the Company’s bank accounts and is subject to enforcement collections. The Company has requested a collection due process or ~~the "Sponsor"), 4,639,102 private placement warrants ("Placement Warrants") at a price of $1.00 per warrant,~~equivalent hearing, that are subject to enforced collection. The Company has also filed for an ~~aggregate purchase price~~abatement of ~~$4,639,102,~~additions to tax and related interest for the failure to make required deposits and the failure to timely pay required tax that are subject to enforced collection. On February 28, 2024, the Company ~~currently own 2,110,000 Founder Shares~~received a Notice of ~~IHC common~~Determination from the IRS on the Company’s administrative claims wherein the IRS denied entirely our appeal for relief. The Company appealed to the US Tax Court on March 25, 2024.
In January 2024, the Company was informed by the IRS it was being audited for its August 31, 2022, corporate tax return. If there are any adjustments resulting from the audit, the net operating loss will be adjusted.
Note 7: Stockholders’ Deficit
On October 11, 2023, the Company filed its articles of correction to the Company’s articles of incorporation to effect a one-for-twenty-four reverse stock ~~representing approximately 15%~~split (1:24) of the Company’s issued and outstanding shares of common stock of IHC. Before the closing of the IPO, the Sponsor transferred 15,000 Founder Shares to IHC's independent directors, reducing its shareholdings from 2,125,000 to 2,110,000. Each Placement Warrant was identicalstock. All share and per share related numbers in these condensed consolidated financial statements give effect to the ~~warrants sold in~~reverse stock split, which was effective on October 15, 2023.
Preferred Stock Series A
For the ~~IPO, except as described in the IPO registration statement~~three and prospectus. Following the completion of IHC's IPO, the Company determined that IHC was a VIE in which the Company had a variable interest because IHC did not have enough equity at risk to finance its activities without additional subordinated financial support. The Company had also determined that IHC's public stockholders did not have substantive rights, and their equity interest constitutes temporary equity, outside of permanent equity, in accordance with ASC 480-10-S99-3A, at such time. As such, the Company concluded that they were the primary beneficiary of IHC as a VIE, as the Company had the right to receive benefits or the obligation to absorb losses of the entity, as well as the power to directsix months ended February 29, 2024
On August 21, 2023, a majority of the ~~activities that significantly impact IHC's economic performance. Since~~shareholders approved the Company was the primary beneficiary, IHC to be consolidated into the Company's unaudited condensed consolidated financial through February 7, 2023. See Note 4, for the dissolution of IHC and entire amount from the Trust Account to IHC shareholdersfollowing: (i) a 1-for-24 reverse split which became effective on December 1, 2022. As of December, 1, 2021, the Company determined that IHC was not a VIE. The Company did not have the power to direct the operations of IHC since IHC was dissolved on November 14, 2022 and the assets of the Trust Account was distributed to its shareholders on December 1, 2022. The Company lost its voting rights, and there is no possibility of recouping its investment. As a result, the Company determined that IHC will not be consolidated into the unaudited condensed financial statements as of December 1, 2022 See Note 4 regarding three of IHC creditors forcing them into bankruptcy. As a result of the deconsolidation of the VIE on February 7, 2023, the Company recorded the elimination of $9.4 million of the non-controlling interest to additional paid-in capital as it was originally recorded. The net liabilities of IHC were $0.6 million as of February 7, 2023 that resulted in the Company recorded $0.6 million to other income and $0.5 million to non-controlling or, 85% of its non- ownership interest in IHC.
~~Subject to Possible Redemption~~
The Company previously accounts for its common stock holdings in its sponsored SPACs (which were consolidated in the Company's unaudited condensed consolidated financial statements) through February 7, 2023, which was previously subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Shares of common stock subject to mandatory redemption are classified as a liability instrument and are measured at fair value. Conditionally redeemable shares of common stock were classified as a current liability since the shares were redeemed as of August 31, 2022. Each sponsored SPAC's shares of common stock feature certain redemption rights that are considered to be outside of the SPAC's control and subject to occurrence of uncertain future events. However, since the common stock subject to redemption were paid to IHC shareholders on December 1. 2022, the fair market value as of August 31, 2022 was classified as a current liability. The Company has recorded increases or decreases in the carrying amount of the redeemable common stock are affected by charges against additional paid in-capital and accumulated deficit.
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~~Table of Contents~~
~~Note 3: Discontinued Operations~~
On January 3, 2020, the Company entered into an asset purchase agreement with Shiftable HR Acquisition, LLC, a wholly owned subsidiary of Vensure, pursuant which was the assigned client contracts was significant to its revenues for the three months ended November 30, 2019, including 100% of the Company's existing PEO business. In connection with this transaction, the Company had a Note Receivable to be paid over four years.
For Fiscal 2020, the Company estimated the value of the Note Receivable at fair value as discussed in Note 2, Summary of Significant Accounting Policies, above. The Company recorded the Note Receivable based on the Company's estimate of expected collections which, in turn, was based on additional information obtained through discussions with Vensure and evaluation of the Company's records. On March 12, 2021, the Company received correspondence from Vensure proposing approximately $10.7 million of working capital adjustments under the terms of the Vensure Asset Sale agreement which, if accepted, would have had the effect of eliminating any sums owed to the Company under the Note Receivable. As indicated in the reconciliation table below, the Company has recorded $2.6 million of working capital adjustments, subject to final review and acceptance, and has provided for an additional reserve of $2.9 million for potential claims. By letter dated April 6, 2021, the Company disputed Vensure’s proposed adjustments and maintains that the amount Vensure owes the Company pursuant to the Note Receivable is as much as $9.5 million. The Company assessed the collectability of this note receivable during the reporting of its Fiscal Year End as of August 31, 2022, and determined that it was probable that all contractually required payments will not be collected and recorded a reserve on collectability of approximately $4 million. The disputes between the Company and Vensure regarding working capital adjustments under the Vensure Asset Sale agreement are currently the subject of litigation pending in the Delaware Chancery Court, as discussed at Note 9, ~~Contingencies~~~~, Vensure Litigation, below.~~
~~The following reconciliation of the gross proceeds to the net proceeds from the Vensure Asset Sale is presented in the condensed consolidated balance sheets as of May 31,~~October 15, 2023, and ~~August 31, 2022.~~

As of

May 31, 2023
(Unaudited)

August 31,
2022

Gross proceeds

$ 19,166,000

$ 19,166,000

Cash received at closing – asset sale

(9,500,000 )

(9,500,000 )
Cash received at closing – working capital

(166,000 )

(166,000 )
Gross note receivable

$ 9,500,000

$ 9,500,000

Less:  Transaction reconciliation – estimated working capital adjustments

(2,604,000 )

(2,604,000 )
Adjusted Note Receivable

6,896,000

6,896,000

Reserve for estimated potential claims

(2,892,000 )

(2,892,000 )
Reserve for potential collectability concerns

$ (4,004,000 )

$ (4,004,000 )
Long-term note receivable, estimated net realizable value

$ —

$ —

~~As of May 31, 2023 and August 31, 2022, as discussed above,~~(ii) the ~~note receivables asset has been impaired~~grant to ~~adjust the net realizable value of the long-term note receivable to zero and zero, respectively.~~
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~~Table of Contents~~
The Vensure Asset Sale generated a gain of $15.6 million for during the fiscal year end August 31, 2020. The Company expected a minimal tax impact from the Vensure Asset Sale as it utilized its net operating losses accumulated since inception to offset the gain resulting from discontinued operations tax provision with a corresponding offset to the valuation allowance.
The Vensure Asset Sale met the criteria of discontinued operations set forth in ASC 205 and as such the Company has reclassified its discontinued operations for all periods presented and has excluded the results of its discontinued operations from continuing operations for all periods presented.
The terms of the Vensure Asset Sale call for adjustments to the Note Receivable either for: (i) working capital adjustments or (ii) in the event that the gross wages of the business transferred is less than the required amount.
~~(i)~~ ~~Working capital adjustments:~~ Through May 31, 2023,, the Company has identified $2.6 million of likely working capital adjustments, including $88,000 related to lower net assets transferred at closing, and $2.5 million of cash remitted to the Company’s bank accounts, net of cash remitted to Vensure’s bank accounts. Under the terms of the Vensure Asset Sale, a reconciliation of the working capital was to have been completed by April 15, 2020. Due to operational difficulties and quarantined staff caused by the outbreak of COVID-19, Vensure requested a postponement of the working capital reconciliation that was due in Fiscal 2020. Although Vensure provided the Company with its working capital reconciliation on March 12, 2021, it failed to provide adequate documentation to support its calculations. Accordingly, the working capital adjustment recorded as of May 31, 2023, represents the Company’s estimate of the reconciliation adjustment by using Vensure’s claims and the limited supporting information Vensure provided as a starting point, and then making adjustments for amounts in dispute based upon the Company's internal records and best estimates. There is no assurance that the working capital change identified as of May 31, 2023 , represents the final working capital adjustment.
~~(ii)~~ ~~Gross billings adjustment:~~ Under the terms of the Vensure Asset Sale, the proceeds of the transaction are reduced if the actual gross wages of customers transferred for Calendar 2020 are less than 90% of those customers’ Calendar 2019 gross wages. The Company has prepared an estimate of the Calendar 2020 gross wages based on a combination of factors including reports of actual transferred client billings in early Calendar 2020, actual gross wages of continuing customers of the Company, publicly available unemployment reports for the Southern California markets and the relevant COVID-19 impacts on employment levels, and other information. Based on the information available, the Company estimated that it would receive additional consideration below the required threshold and reduced the contingent consideration by $1.4 million. Vensure has not identified any such adjustments to date. Based on the information available, the Company reclassified the previously recorded gross wages claim to a general potential claims reserve for Fiscal 2021. No additional adjustments were made during the three and nine months ended May 31, 2023 and May 31, 2022.
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~~Table of Contents~~
~~The carrying amounts of the classes of assets and liabilities from the Vensure Asset Sale included in discontinued operations are as follows:~~

As of

May 31,
2023

August 31,
2022

(Unaudited)

Deposits – workers’ compensation

—

—

Total current assets

—

—

Deposits – workers’ compensation

—

—

Total assets

$ —

$ —

Accrued workers’ compensation cost

1,765,000

1,362,000

Total current liabilities

1,765,000

1,362,000

Accrued workers’ compensation cost

4,133,000

3,269,000

Total liabilities

5,898,000

4,631,000

Net liability

$ (5,898,000 )

$ (4,631,000 )
~~Reported results for the discontinued operations by period were as follows:~~

For the Three Months Ended

For the Nine Months Ended

May 31,
2023

May 31,
2022

May 31,
2023

May 31,
2022

Revenues

$ —

$ —

$ —

$ —

Cost of revenues

460,000

132,000

1,267,000

283,000

Gross profit (loss)

(460,000 )

(132,000 )

(1,267,000 )

(283,000 )

Total operating expenses

—

—

—

—

Loss from discontinued operations

$ (460,000 )

$ (132,000 )

$ (1,267,000 )

$ (283,000 )
~~Note 4: Special Purpose Acquisition Company ("SPAC") Sponsorship~~
IHC closed on its IPO effective October 2021, and its net proceeds of $116.7 million, the funds were placed in a trust account (the “Trust Account”), and was invested in U.S. government securities. The Company owned approximately 15% of its issued and outstanding stock. Furthermore, we anticipated that IHC would operate as a separately managed, publicly traded entity following the completion of its IPO. The operations of IHC have been consolidated in the accompanying unaudited condensed financial statements through November 30, 2022.
22
~~Table of Contents~~
On October 14, 2022, the stockholders of IHC approved the proposed action to file an amended and restated certificate of incorporation to extend the date by which the Company has to consummate a Business Combination from October 22, 2022, to April 22, 2023, or a such earlier date as determined by the board of directors. The Company accordingly filed the Amendment with the Secretary of State of Delaware. In connection with the meeting, however, shareholders holding 11,251,347 Public Shares exercised their right to redeem their shares for a pro rata portion of the funds in the Trust Account, leaving 248,653 of the Company’s remaining Public Shares outstanding and the Trust Account substantially below the $5 million minimum net tangible asset amount required by IHC's Amended and Restated Certificate of Incorporation to be available upon consummation of such Business Combination. IHC's efforts to secure the decisions of some shareholders to reverse their redemptions were unsuccessful, and IHC accordingly declined to fund the extension, cancelled the Amendment as filed with the Secretary of State of Delaware, and proceeded to cease operations, dissolve and unwind. The board of directors of IHC accordingly adopted resolutions to liquidate, dissolve and unwind the entity. IHC was dissolved on November 14, 2022, and the Trustee released all the redemption funds from the Trust Account to IHC shareholders on December 1, 2022, effectively liquidating the Trust. The Class A common shares subject to redemption were, however, classified as a current liability as of August 31, 2022 and through November 30, 2022. In view of the actions taken in November and December of 2022, the Company has concluded that as of February 7, 2023, the operations of IHC shall not be included in the Company's consolidation as IHC did not meet the criteria of a VIE. A net liability of $0.6 million was recorded to other income, and $0.5 million was recorded for the non-controlling interest, applicable to the 85% interest that the Company did not own of IHC.
On February 7, 2023, three creditors of IHC filed an involuntary petition for liquidation under Chapter 7 against IHC in the US Bankruptcy Court for the Southern District of Florida. The matter is proceeding, and the Company and its subsidiary, ShiftPixy Investments, Inc., are listed as two significant creditors of IHC. However, there can be no assurance that either the Company or ShiftPixy Investments, Inc. will recover any of the amounts owed to them by IHC from the bankruptcy estate.
~~Note 5: Stockholders’ Deficit~~
~~Preferred Stock~~
In September 2016, the founding shareholders of the Company were granted options to acquire preferred stock of the Company (the “Preferred Options”). The number of Preferred Options granted was based upon the number of shares held at the time of the grant. These Preferred Options are nontransferable and forfeited upon the sale of the related founding shares of common stock held by the option holder. Upon the occurrence of certain specified events, such founding shareholders can exercise each Preferred Option to purchase one share of preferred stock of the Company at an exercise price of $0.0001 per share. The preferred stock underlying the Preferred Options does not include any rights to dividends or preference upon liquidation of the Company and is convertible into shares of the Company’s common stock on a one-for-one basis. Upon consummation of the Vensure Asset Sale in January 2020, a total of 24,634,560 Preferred Options became exercisable and exchangeable into an equal number of shares of the Company's common stock.
~~On June 4, 2020, Scott W. Absher,~~ the Company’s Chief Executive Officer ~~exercised 12,500,000 Preferred Options~~of an option agreement providing a conditional right to ~~purchase 12,500,000~~receive 4,744,234 shares of the ~~Company's~~Company’s preferred stock ~~for an aggregate purchase price of $1,250 per share, Immediately following the exercise of the Preferred Options, Mr. Absher elected to convert the 12,500,000~~series A. The Chief Executive Officer exercised such option on October 17, 2023, and converted 4,744,234 shares of preferred stock series A into ~~12,500,000 shares of common stock, which were subject to a 24-month lock-up period during which such shares could not be traded. Between July 20, 2020 and November 30, 2020,~~ an ~~additional 294,490 Preferred Options were exercised and converted into 294,490 shares of common stock, which are freely tradable.~~
~~On October 22, 2021, the Company’s board of directors canceled 11,790,000 Preferred Options previously issued to its co-founder, J. Stephen Holmes. As noted in Note 9,~~ ~~Contingencies~~, the trustee of the bankruptcy estate of Mr. Holmes is now asserting rights to these preferred options. Were the trustee to be successful in its claim, the Company would be obligated to issue up to 12,500,000 restricted shares of the Company's common stock to the trustee, which issuance would materially dilute the share ownership of the existing shareholders and could cause a material decline in the price per share of the Company's common stock. A total of 37,570 Preferred Options, in excess of the options claimed by the trustee of the bankruptcy estate of Mr. Holmes and issued pursuant to the September 2016 grant and triggered by the Vensure Asset Sale remain unexercised. The Preferred Options expire on December 31, 2023.
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~~Table of Contents~~
~~The number of Preferred Options, and the number of shares of preferred stock issuable upon exercise of such options, is based upon the~~equivalent number of shares of common ~~stock held by~~stock. Upon the ~~option holders at the time the Preferred Options were issued in September 2016. Accordingly, in order to confirm the original intent~~conversion of the ~~granting of up~~preferred stocks series A to 25,000,000 Preferred Options to Mr. Absher, it has always been the Company’s intent to adopt a second grant of an additional 12,500,000 Preferred Options to Mr. Absher, whereby each option permits the holder to acquire one share of the Company’s preferred stock for $0.0001 per share. On August 13, 2021, consistent with this intent, the Company granted 12,500,000 Preferred Options to Mr. Absher to purchase shares of Preferred Stock, par value $0.0001 for consideration of $0.0001 per share. Each Preferred Option is exercisable for a period of twenty-four months upon (i) the acquisition of a Controlling Interest (as defined below) in the Company by any single shareholder or group of shareholders acting in concert (other than Mr. Absher), or (ii) the announcement of (x) any proposed merger, consolidation, or business combination in which the Company’s Common Stock is changed or exchanged, or (y) any sale or distribution of at least 50% of the Company’s assets or earning power, other than through a reincorporation. Each share of Preferred Stock is convertible into Common Stock on a one-for-one basis. “Controlling Interest” means the ownership or control of outstanding voting shares of the Company sufficient to enable the acquiring person, directly or indirectly and individually or in concert with others, to exercise one-fifth or more of all the voting power of the Company in the election of directors or any other business matter on which shareholders have the right to vote under the Wyoming Business Corporation Act.
On July 14, 2022, the Board of the Company approved the issuance to the Company’s founder and principal shareholder, Scott Absher, of 12,500,000 shares of the Company’s Preferred Class A Stock ("Preferred Shares"), par value $0.0001 per share, in exchange for (a) the surrender by Mr. Absher of his options to acquire 12,500,000 Preferred Shares, which Preferred Options provide for exercise upon certain triggering events as described above, and as detailed in the Company's prior filings, and (b) the tender of payment by Mr. Absher of the sum of $5,000, representing four times the par value for such Preferred Shares. The Company evaluated the Preferred Shares on the same date using Level 2 inputs based on the closing market price of the Company’s common stock. The resulting allocated common share price was then discounted for a lack of marketability of shares, which yielded a fair value of $0.2322 per preferred share. The Company used the following assumptions to value the expense related to the Preferred Shares: (i) life of 10 years; (ii) risk free rate of 3.1%; (iii) volatility of 125.7%; (iv) exercise price of $0.0001 per share; and (v) a fair value of $0.3 per share of the Company’s common stock. These were recorded as compensation expense in the general and administrative expenses during the fiscal year August 31, 2022.
On August 12, 2022, the Company entered into an agreement with Mr. Absher whereby he waived claims to certain unpaid compensation due to him through July 31, 2022, totaling $0.82 million, in exchange for an option to receive 4,100,000 shares of the Company's Preferred Class A Stock. The Company evaluated the Preferred Shares on the same date using Level 2 inputs based on the closing market price of the Company’s common stock. The resulting allocated common share price was then discounted for a lack of marketability of shares, which yielded a fair value of $0.2025 per Preferred Share. The Company used the following assumptions to value the expense related to the Preferred Shares: (i) life of 10 years; (ii) risk free rate of 3.0%; (iii) volatility of 125.7%; (iv) exercise price of $0.0001 per share; and (v) a fair value of $0.23 per share of the Company’s common stock. Pursuant to Rule 144, these 4,100,000, when converted into shares of common stock, are subject to a six-month holding period during which they may not be sold in the marketplace. All of the 8,600,000 preferred shares were converted into common stock on September 1, 2022, after the Company's reverse stock split had taken effect. As of November 30, 2022, there were no preferred shares options or preferred shares outstanding. As a result of this transaction, the Company recorded a preferential dividend on the preferred series A in the aggregate amount of ~~$127.1 million~~$67.4 million. This was based upon the incremental value of the stock that was held prior to the reverse stock split and the date of preferred stock conversion to common stock. ~~In addition, this~~The preferential dividend had no effect on the Company’s stockholders' deficit.

~~Prior to~~For the shareholder vote to approve the reverse stock split, the Company on August 2, 2022, amended its Articles of Incorporation to state that only the common stock is affected if the reverse stock split is effectuated with no intention to affect the preferred stock of the company. The reverse stock split was subsequently approved by the shareholders,three and effectively the terms and conditions of the preferred stock were “deemed modified” and treated as an extinguishment (in accordance with ASC 470-50 and ASC 260-10-S99-2 for the disproportionate value received (the carrying value compared to the fair value received).six months ended February 28, 2023

On September 1, 2022, ~~Mr. Absher~~the Chief Executive Officer converted ~~8,600,000 Preferred Shares to 8,600,000~~358,333 shares of preferred series A into 358,333 shares of the Company’s common stock. ~~Pursuant to Rule 144, these 8,600,000 shares of common stock are subject to a six-month holding period during which they may not be sold in the marketplace.~~ All of the ~~8,600,000~~358,333 shares of Series A preferred ~~shares~~stock were converted into common shares on September 1, 2022, after the Company's reverse stock split had taken effect. Accordingly, no preferred stock series A shares are issued and outstanding as of ~~May~~February 29, 2024 and August 31, 2023. ~~As noted in Note 9~~ ~~Contingencies~~~~, however, the trustee of the bankruptcy estate of Mr. Holmes is now asserting rights to preferred options and has attempted to convert preferred options into shares of preferred stock.~~

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There are no preferred stock series A issued and outstanding as well as no options to issue Series A preferred stock as of February 29, 2024.
Common Stock and Warrants

~~As reported~~Activity for the six months ended February 29, 2024
On October 5, 2023, the Company entered into a securities purchase agreement with an institutional investor, pursuant to which the Company issued and sold to the investor in ~~our 8-K filed on September 23, 2022, on~~a registered direct offering 56,250 shares of common stock at a price of $26.40 per share, and pre-funded warrants to purchase up to 38,125 shares of common stock at a price of $26.3976 per pre-funded warrant, and (ii) in a concurrent private placement, common stock purchase warrants (“October 2023 warrants”), exercisable for an aggregate of up to 94,375 shares of common stock. The pre-funded warrants had an exercise price of $0.0024 and were immediately exercised.
The October 2023 warrants are exercisable for a period of five-year years commencing six months from issuance. On October 16, 2023, the Company entered into an amendment to common stock purchase with the holder of the October 2023 Warrants. Pursuant to the amendment, the exercise price of the October 2023 warrants was increased from $26.40 to $30.504, resulting from a NASDAQ notice of failure to satisfy a continued listing rule. The Company reviewed the accounting for the modification and determined that no adjustment was needed for the three and six months ended February 29, 2024. The net proceeds of this offering were $2.0 million.
Subsequent to February 29, 2024, the Company executed an amendment to the October 2023 warrants concurrently with a registered offering, pursuant to which the exercise price was further reduced to $4.25 (see note 12).
Activity for the six months ended February 28, 2023
On September 20, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a large institutional investor (the “Purchaser”) pursuant to which the Company sold to the Purchaser an aggregate of ~~416,667~~17,361 shares ~~(the “Shares”)~~ of its common stock together with warrants (the “Warrants”) to purchase up to ~~833,334~~34,722 shares of common stock (collectively, the “Offering”). Each share of common stock and two accompanying Warrants were sold together at a combined offering price of ~~$12.00.~~$288. The Warrants are exercisable for a period of seven years commencing upon issuance at an exercise price of ~~$12.00,~~$288, subject to antidilution adjustment. The private placement closed on September 23, 2022. The net proceeds to the Company from the Offering were ~~$4,378,000.~~$4.4 million.

In connection with the Purchase Agreement, the Company and the ~~Purchaser~~purchaser entered into Amendment No. 1 to Warrants (the “Warrant Amendment”). Pursuant to the Warrant Amendment, the exercise price of (i) ~~25,233~~1,051 warrants issued on September 3, 2021, and (ii) ~~98,969~~4,124 warrants issued on January 28, 2022, was reduced to ~~$0.01.~~$0.24. As a result of the warrant modification due to the change in the exercise price, for the six months ended February 28, 2023, the Company recorded an expense of $106,000. The incremental change in the fair market values was based upon the Black- Scholes option pricing model with the following inputs. The risk free interest of 3.7%, expected volatility of 149.4%, dividend yield of 0% and expected term of 6.7 to 6.8 years.$0.1 million.

A.G.P./Alliance Global Partners (the “Placement Agent” or "AGP") acted as the exclusive placement agent in connection with the Offering pursuant to the terms of a Placement Agent Agreement, dated September 20, 2022, between the Company and the Placement Agent (the “Placement Agent Agreement”). Pursuant to the Placement Agent Agreement, the Company paid the Placement Agent a fee equal to 7.0% of the aggregate gross proceeds from the Offering. In addition to the cash fee, the Company issued to the Placement Agent warrants to purchase up to ~~20,833~~868 shares of common stock (5% of the number of shares sold in the Offering (the “Placement Agent Warrants”). The Placement Agent Warrants are exercisable for a period commencing six months from issuance, will expire four years from the effectiveness of a registration statement for the resale of the underlying shares, and have an initial exercise price of ~~$13.20~~$316.80 per share.
On January 31, 2023, the Company filed a S-3 registration statement on Form S-3 for $100 million for the sale of up to $100 million of equity securities over a three year period. The SEC declared the S-3 effective on February 2, 2023. There is a limitation on the amount of funds that the Company can access under the baby shelf rules which is the value of a company’s public float if less than $75 million, The Company can only raise ⅓ of its float value over the previous 12-month period.

On January 31, 2023, the Company entered into an ATM Issuance Sales Agreement ~~which was~~and filed a ~~part of the~~ registration statement on Form S-3 and prospectus ~~supplement. The~~supplement for an at the market offering ~~was for~~of up to $8.2 million in shares of its common stock ~~could be sold~~ from time to time and at various prices at the Company’s sole control, subject to the conditions and limitations in the sales agreement with AGP. The ATM expires on January 31, 2026. For the three and ~~nine~~six months ended ~~May 31,~~February 28, 2023, the Company received $1.9 million in gross proceeds ($1.4 million, net ~~proceeds~~ of ~~$0.5 million and $2.0 million~~costs) from the sale of ~~133,988 and 439,328~~12,723 shares of the Company’s common ~~stock, respectivily. On May 22, 2023, the Company terminated the ATM.~~
On May 17, 2021, the Company issued warrants to purchase up to an aggregate of 49,484 shares of our common stock, with an exercise price of $242.50 (the "Existing Warrants"). The Existing Warrants were immediately exercisable and expire on June 15, 2026. On January 26, 2022, we entered into a Warrant Exercise Agreement ("the Exercise Agreement") with the holder of the Existing Warrants (the "Exercising Holder"). Pursuant to the Exercise Agreement, the Exercising Holder and the Company agreed that, subject to any applicable beneficial ownership limitations, the Exercising Holder would cash exercise up to 49,484 of its Existing Warrants (the "Investor Warrants") into shares of our common stock underlying such Existing Warrants (the "Exercised Shares"). To induce the Exercising Holder to exercise the Investor Warrants, the Exercise Agreement (i) amended the Investor Warrants to reduce their exercise price per share to $120.00 and (ii) provided for the issuance of a new warrant to purchase up to approximately 98,969 shares of our common stock (the “January 2022 Common Warrant”), with such January 2022 Common Warrant being issued on the basis of two January 2022 Common Warrant shares for each share of the Existing Warrant that was exercised for cash. The January 2022 Common Warrant is exercisable commencing on July 28, 2022, terminates on July 28, 2027, and has an exercise price per share of $155.00. The Exercise Agreement generated aggregate proceeds to the Company of approximately $5.9 million, prior to the deduction of $0.5 million of costs consisting of placement agent commissions and offering expenses payable by the Company. As a result of the warrant modification, which reduced the exercise price of the Existing Warrants, as well as the issuance of the January 2022 Common Warrants, the Company recorded approximately (i) $0.64 million for the increased fair value of the modified warrants; and (ii) $12.6 million as the fair value of the January 2022 Common Warrants on the date of issuance. We recorded approximately $5.5 million as issuance costs that offset the $5.5 million of additional paid-in capital the received for the cash exercise of the existing Warrants at the reduced exercise price, while the remaining $7.7 million was recorded as a deemed dividend on the unaudited condensed consolidated statements of operations, resulting in a reduction of income available to common shareholders in our basic earnings per share calculation.stock.

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Table of Contents

During the ~~three~~six months ended ~~May 31, 2022, certain prefunded warrant holders exercised their right to purchase 4,673,321~~February 28, 2023, the Company issued 5,175 shares of common stock following the ~~Company’s Common Stock at an~~ exercise ~~price~~ of ~~$0.0001 totaling $467, all~~prefunded warrants for net cash consideration of ~~which was received by the Company in May 2022.~~$1,000.
Warrants

The following table summarizes the changes in the Company’s ~~common stock and prefunded~~ warrants ~~for the period ended May~~from August 31, ~~2023.~~2023, to February 29, 2024:

Number of
shares

Weighted
average
remaining
life
(years)

Weighted
average
exercise
price

Warrants outstanding, August 31, 2022

522,786

7.2

47.99

Issued

854,166

6.3

12.02

Exercised

(124,203 )

—

—

Warrants outstanding and exercisable, May 31, 2023

1,252,749

6.4

$ 35.68

Number
of
shares

Weighted
average
remaining
life
(years)

Weighted
average
exercise
price

Warrants outstanding, August 31, 2023

138,309

5.6

$ 208.78

Issued

94,375

5.1

30.50

Forfeited

(5 )

—

—

Warrants outstanding, February 29, 2024

232,679

4.9

$ 131.5

Warrants exercisable, February 29, 2024

138,304

4.9

$ 200.4

The following ~~table summarizes~~tables summarize the Company’s issued and outstanding warrants outstanding as of ~~May 31, 2023:~~February 29, 2024:

Warrants
Outstanding

Weighted Average Life of Outstanding Warrants
(In years)

Exercise
price

September 2022 Common Warrants (Note 10)

833,334

6.3

$ 12.00

September 2022 Underwriter Warrants

20,833

3.9

13.20

July 2022 Common Warrants (Note 10)

348,408

7.1

26.00

Sep 2021Underwriter Warrants

3,762

5.9

175.00

May 2021Underwriter Warrants

2,474

3.0

243.00

October 2020 Common Warrants (1)

23,000

2.4

330.00

October 2020 Underwriter Warrants

2,000

2.4

330.00

May 2020 Common Warrants

12,776

2.0

540.00

May 2020 Underwriter Warrants

1,111

2.0

540.00

March 2020 Exchange Warrants

4,237

2.3

1,017.00

Amended March 2019 Warrants

663

0.8

4,000.00

March 2019 Services Warrants

34

0.8

7,000.00

June 2018 Warrants

63

0.5

9,960.00

June 2018 Services Warrants

54

0.5

9,960.00

1,252,749

6.4

$ 35.68

~~(1)     See Note 10~~ ~~Subsequent Events~~ ~~as 5,000 of the 23,000 warrants had change in the exercise price to $1.50 per share.~~

Warrants
Outstanding

Weighted
Average
Life of
Outstanding Warrants
(In years)

Exercise
Price

October 2023 Common Warrants

94,375

5.1

$
30.5

July 2023 Common Warrants

86,111

4.4

36.0

October 2023 Common Warrants

34,722

5.6

36.0

September 2022 Underwriter Warrants

868

3.1

316.8

July 2022 Common Warrants

14,517

6.4

36.0

September 2021Underwriter Warrants

157

5.2

4,210.8

May 2021Underwriter Warrants

103

2.2

5,820.0

October 2020 Common Warrants

750

1.6

7,920.0

October 2020 Underwriter Warrants

208

1.6

36.0

May 2020 Common Warrants

83

1.6

7,960.0

May 2020 Underwriter Warrants

532

1.2

12,960.0

March 2020 Common Warrant

178

1.6

24,408.0

March 2020 Exchange Warrants

46

1.2

12,960.0

Amended March 2019 Warrants

28

0.0

96,000.0

March 2019 Services Warrants

1

0.0

168,000.0

Total warrants issued and outstanding

232,679

4.9

$
131.5

Total warrants exercisable

138,304

4.9

$
200.4

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Table of Contents

Note 6:8: Stock Based Compensation

Employee Stock Option Plan ~~Increase~~

In March 2017, the Company adopted its 2017 Stock Option/Stock Issuance Plan (the “Plan”). The Plan provides incentives to eligible employees, officers, directors and consultants in the form of incentive stock options (“ISOs”), non-qualified stock options (“~~NQs”~~NQSOs”) ~~(each~~, each of which is exercisable into shares of common ~~stock)~~stock (collectively, “Options”)~~, or shares of common stock (“Share Grants”)~~. ~~On March 31, 2021, the Shareholders approved an increase in the number of shares of common stock issuable under the Plan from 2,500 to 30,000.~~
On March 6, 2023, the shareholders approved an increase in the number of shares of common stock issuable under the Plan from ~~30,000~~1,250 to ~~750,000. As~~31,250. Under the terms of ~~May 31, 2023, there are 749,997 shares available under~~ the ~~Plan.~~
~~For all~~Plan, options ~~to purchase common stock~~ granted prior to July 1, 2020, each option has a term of service vesting provision over a period of time as follows: 25% vest after a 12-month service period following the award, with the balance vesting in equal monthly installments over the succeeding 36 months. Options granted on or after July 1, 2020, typically vest over four years, with 25% of the grant vesting one year from the grant date, and the ~~remainder~~remainer in equal quarterly installments over the succeeding 12 quarters. All options granted to ~~purchase common stock~~date have a ~~ten year~~stated ten-year term.

Stock grants are issued at fair value, considered to be the market price on the grant date. The fair value of option awards is estimated on the grant date using the Black-Scholes stock option pricing ~~model.~~
~~Following its adoption~~model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of ~~ASU 2016-9,~~ the stock options and future dividends. The Company elected to account for forfeitures under the Plan as they occur. Any compensation cost previously recognized for an unvested award that is forfeited because of a failure to satisfy a service condition is reversed in the period of the forfeiture. As of February 29, 2024, there are 31,008 shares available under the Plan.

~~Stock-based compensation expense was~~The Company did not issue any stock options during the three and six months ended February 29, 2024, and 2023.
The Company recognized approximately $0.2 million and ~~$0.7~~$0.4 million. of stock-based compensation expense that is recorded in general and administrative expenses in the condensed statement of operations, for the three and six months ended February 29, 2024, respectively. The Company recognized approximately $0.2 million and $0.5 million. of stock-based compensation expense that is recorded in general and administrative expenses in the condensed statement of operations, for the three and six months ended February 29, 2023, respectively.
The Company compensates its board members through grants of common stock for services performed. These services have been accrued within accounts payable and other accrued liabilities in the condensed consolidated balance sheets. The Company has incurred $0.04 million and $0.08 million for the three and ~~nine~~six months ended ~~May 31, 2023,~~February 29, 2024, respectively. ~~Stock-based compensation was approximately $0.3~~The Company has incurred $0.06 million and ~~$1.1~~$0.1 million ~~of compensation expense~~ for the three and ~~nine~~six months ended ~~May 31, 2022,~~February 28, 2023, respectively. See Note 9 Related Parties.

The following table summarizes the Company’s option activity ~~for the nine months ended May~~from August 31, ~~2023.~~2023, through February 29, 2024:

Options Outstanding and Exercisable

Number
of
Options

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

(In years)

Balance outstanding as of August 31, 2022

11,753

8.1

$ 733.00

Forfeited

(1,750 )

8.3

2.70

Balance outstanding expected to be exercisable as of May 31, 2023

10,003

7.2

$ 813.70

Options Outstanding and Exercisable

Number
of
Options

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

(In years)

Options Outstanding as of August 31, 2023

417

7.0

$ 19,529

Granted

-

-

-

Exercised

-

-

-

Forfeited - Cancelled

(175 )

-

-

Options Outstanding as of February 29, 2024

242

6.5

$ 11,495

Options Exercisable as of February 29, 2024

162

6.6

$ 11,495

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Table of Contents

As of ~~May 31, 2023,~~February 29, 2024, the total unrecognized deferred share-based compensation of $0.3 million expected to be recognized over the remaining weighted average vesting periods of ~~1.5 years for outstanding grants was $918,000.~~0.5 years. There was no intrinsic value for outstanding stock options as of ~~May 31, 2023.~~February 29, 2024.
~~The following table summarizes the vested options for the nine months ended May 31, 2023.~~
Options Vested

Number
of
Options

Weighted
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

(In years)

Balance, August 31, 2022

5,269

8.1

$ 1,146

Vested

2,290

7.7

442

Forfeited

(716 )

8.1

293

Balance, May 31, 2023

6,843

7.4

$ 998

The following table summarizes information ~~of all~~about stock options outstanding and vested as of ~~May 31, 2023:~~February 29, 2024:

Options Outstanding

Options Vested

Exercise Prices

Number of
Options
Exercisable

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number
of
Options

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

(In Years)

(In Years)

$50.00 - 1,000.00

9,641

7.6

$ 453

6,483

7.1

$ 466

$1,001.00 - $4,000.00

20

6.3

1,895

19

6.0

1,896

$4,001.00 - $8,000.00

121

6.1

5,121

120

5.1

5,120

$8,001.00 - $12,000.00

101

5.2

10,298

101

4.1

10,298

$12,001.00 - $16,000.00

109

4.4

15,584

109

4.0

15,584

$16,001.00 - $39,160.00

11

4.4

39,160

11

4.0

39,160

10,003

7.6

$ 814

6,843

7.4

$ 998

Options Outstanding

Options Vested

Exercise
Prices

Number
of Options Outstanding

Number
of Options
Exercisable

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price $

Number
of
Options

Weighted
Remaining
Contractual
Life

Weighted
Average
Exercise
Price $

(In years)

(In years)

$2,520-$5,000

8

6

7.6

3,078

6

7.6

3,078

$5,001- $10,000

38

25

6.8

7,413

25

6.8

7,413

$10,001-$12,960

196

131

6.4

12,631

131

6.4

12,631

242

162

6.5

11,495

162

6.5

11,495

Note 7:9: Related Parties ~~and Certain Directors and Officers~~

~~Director~~Management and Directors Compensation

Scott Absher – Chief Executive Officer and Chairman of the Board

~~On October 22, 2021, our Board approved raising Mr. Absher’s annual salary~~The Company paid an aggregate amount of $0.1 million and $0.2 million of gross compensation for the three and six months ended February 29, 2024, respectively. The Company paid an aggregate amount of $0.03 million and $0.2 million of gross compensation for the three and six months ended February 28, 2023, respectively. Such compensation is reported under salaries, taxes and benefits in the condensed consolidated statements of operations. Scott Absher does not have any compensation for his position of Chairman of the Board.
The Company has accrued unpaid compensation for an aggregate amount of $0.6 million and $0.4 million as of February 29, 2024, and August 31, 2023, respectively. The unpaid compensation is presented under payroll related liabilities as of February 29, 2024, and August 31, 2023
During the fiscal year 2023, the Company granted its Chief Executive Officer a conditional right to ~~$1M, effective January 1, 2022, and~~receive 4,744,234 shares of the Company’s preferred stock Series A. Such a grant was also approved by the ~~payment~~shareholders. The Chief Executive Officer exercised the option agreement on October 17, 2023, and converted 4,744,234 shares of ~~a $0.5 million bonus~~preferred stock Series A to ~~Mr. Absher, 50%~~an equivalent number of ~~which was payable upon Board approval, and~~shares of common stock. Upon the ~~remainder~~conversion of which was payable on January 1, 2022. As of August 31, 2022, Mr. Absher received payment of 50% of his bonus, or $0.3 million, in March 2022. Furthermore, as discussed in Note 5, Stockholders' Deficit on August 12, 2022,the preferred stock Series A to common stock, the Company entered into an agreement with Mr. Absher whereby he waived claims to certain unpaid compensation due to him through July 31, 2022, totaling $0.8 million, in exchange for an option to receive $4.1 million Company Preferred Shares. The agreement settled,recorded a preferential dividend on the ~~deferred payment~~preferred Series A of ~~his~~$67.4 million. This was based on the incremental ~~base salary, his outstanding personal time off or PTO as~~value of ~~July 31, 2022, and~~ the ~~remaining 50% of his approved bonus. As of January 1, 2023, Mr. Absher's salary~~stock that was ~~adjusted back to the level applicable~~held prior to the ~~time~~reverse split and the date of ~~the adjustment effective January 1, 2022. Mr. Absher salary~~preferred stock conversion to common stock.
Amanda Murphy - Former Chief Operating Officer and a former Director
The Company paid an aggregate amount of $0.07 million and $0.13 million of gross compensation for the three ~~months~~ and ~~nine~~six months ended ~~May 31, 2023 was $0.2~~February 29, 2024, respectively. Such compensation is reported under salaries, taxes and benefits in the condensed consolidated statements of operations. The Company paid an aggregate amount of $0.07 million and ~~$0.6~~$0.13 million ~~respectively. Mr. Absher salary~~of gross compensation for the three ~~months~~ and ~~nine~~six months ended ~~May 31, 2022 was $0.4 million~~February 28, 2023, respectively. Amanda Murphy does not collect any compensation for her position as a director of the board. The Company has accrued her salary and ~~$0.8 million, respectively. Accrued salary~~paid time off as of ~~May 31, 2023~~February 29, 2024, and August 31, ~~2022~~2023, which was ~~$0.3 million and $0.8 million, respectively.~~$0.5 million. Refer to note 12 subsequent events for further disclosure.

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Table of Contents

~~Amanda Murphy~~Other Directors

~~On February 10, 2020, Amanda Murphy was appointed~~Pursuant to our Board. Ms. Murphy was our Director of Operations at the time of her appointment. Ms. Murphy received salary compensation of $0.3 million for Fiscal 2022, respectively. On October 22, 2021, our Board approved the promotion of Ms. Murphyexecuted agreements, each director is entitled to the position of Chief Operating Officer, as well as an increase in her annual salary to $0.5 million, all of which were effective January 1, 2022. As of August 31, 2022, Ms. Murphy has deferred payment related to her salary increase of approximately $0.2 million. The deferred payment salary is recorded in the accrued liabilities on the condensed consolidated balance sheets. As of January 1, 2023, Ms. Murphy's salary was adjusted back to the level applicable prior to the timea monthly cash retainer and $75,000 worth of the ~~adjustment effective January 1, 2022. Ms. Murphy salary for~~Company’s common stock each year. During the three ~~months~~ and ~~nine~~six months ended ~~May 31, 2023 was $66,000 and $0.5~~February 29, 2024, the Company incurred $0.1 million ~~respectively. MS Murphy salary for the three months and nine months ended May 31, 2022 was $66,000~~ and $0.2 million of fees, respectively. Accrued ~~salary~~monthly retainers were $0.3 million and $0.2 million as of ~~May~~February 29, 2024, and August 31, 2023, ~~was $0.3 million.~~respectively, and is reported in accounts payable and other accrued liabilities.

~~J. Stephen Holmes~~
~~J. Stephen Holmes formerly served as a non-employee sales manager, advisor~~The Company accrued directors’ fees related to ~~and significant shareholder~~shares of common stock to be issued for services provided to three of the ~~Company.~~Company’s directors. The Company incurred $0.04 million and $0.08 million of expenses related to the fair value of the shares to be issued to the directors in the three and six months ended February 29, 2024. The balance owed was $0.8 million as of February 29, 2024, and August 31, 2023, and is reported in ~~professional fees for services provided by Mr. Holmes during Fiscal 2021. On October 22, 2021, the Company severed all ties with Mr. Holmes, effective immediately,~~accounts payable and ~~cancelled Preferred Options that had previously~~other accrued liabilities.
No shares of common stock have been issued as of February 29, 2024, and August 31, 2023, respectively. As of February 29, 2024, and August 31, 2023, there are 21,137 and 1,208 shares of common stock to ~~him but had not been exercised. As a result of these actions, the Company no longer has any financial obligation~~be issued to ~~Mr. Holmes, and believes that he is no longer a significant shareholder~~directors, respectively. The Chair of the ~~Company, see Note 5, Stockholders’ Deficit~~Audit Committee resigned in July 2023, and ~~Note 9,~~ ~~Contingencies.~~was replaced in January 2024.

Related Persons to Scott Absher

Mark Absher, the brother of Scott Absher, was hired by the Company as Deputy General Counsel – Special Projects, ~~for an annual~~but Mark Absher resigned from his position with the Company on October 5, 2023. Mark Absher’s salary ~~of $0.2 million. Mr. Absher's compensation~~ for the three and ~~nine month period ending May 31, 2023,~~six months ended February 29, 2024, was ~~$60,000~~$0.00 million and ~~$0.2~~$0.07 million, respectively. ~~His compensation~~Mark Absher’s salary for the three and ~~nine month period ending May 31, 2022,~~six months ended February 28, 2023, was ~~$60,000~~$0.06 million and ~~$0.1~~$0.12 million, respectively.

David May, a member of our business development team, is the son-in-law of Mr. Absher. Mr. ~~May's compensation for the three month and nine month period ending May 31, 2023,~~May’s salary was ~~$38,000 and $0.1 million, respectively. His compensation~~ for the three and ~~nine month period ending May 31, 2022,~~six months ended February 29, 2024, $0.04 million and $0.07 million, respectively. Mr. May’s salary was ~~$43,000~~for the three and ~~$0.1~~six months ended February 29, 2024, $0.04 million and $0.08 million, respectively.

Phil Eastvold, the Executive Producer of ShiftPixy Productions, Inc., is the son-in-law of Mr. Absher. Mr. Eastvold ~~received compensation of approximately $56,000 and $0.2 million~~salary for the three and ~~nine~~six months ended ~~May 31, 2023, respectively. His compensation remained the same~~February 29, 2024, was $0.05 million and $0.1 million. Mr. Eastvold salary for the three and ~~nine month period ending May 31, 2022.~~six months ended February 29, 2024, was $0.06 million and $0.1 million,

Jason Absher, a member of the ~~Company's~~Company’s business development team, is the nephew of Scott Absher and the son of Mark Absher. Mr. ~~Absher's compensation~~Absher’s salary was for the three ~~month period~~ and ~~nine month period ending May 31, 2023,~~six months ended February 29, 2024, $0.03 million and $0.06 million, respectively. Mr. Absher’s salary was ~~$30,000 and $90,000 respectively, His compensation~~ for the three ~~month period~~ and ~~nine month period ending May 31, 2022 remained the same.~~six months ended February 29, 2024, $0.03 million and $0.06 million, respectively.

Connie Absher, (the spouse of Scott Absher), Elizabeth Eastvold, (the daughter of Scott and Connie Absher and spouse of Mr. Eastvold), and Hannah Woods, (the daughter of Scott and Connie Absher), are also employed by the Company. These individuals, as a group, ~~received compensation~~salaries were for the three and ~~nine month period ending May 31, 2023, of $56,000~~six months ended February 29, 2024, $0.04 million and ~~$0.2~~$0.08 million, respectively. ~~Compensation~~These individuals, as a group, ~~for these individuals~~salaries were for the three ~~month period~~ and ~~nine month period ending May 31, 2022 was $53,000~~six months ended February 23, 2023, $0.04 million and ~~$0.2~~$0.09 million, respectively.
Quelliv, Inc (Scott Absher is the co-founder, acting Chief Financial Officer)
Scott Absher, the Company’s Chief Executive Officer, is a founding shareholder and Chief Financial Officer in Quelliv, Inc. (“Quelliv”). Quelliv seeks to provide a non-invasive, alternative approach to wellness using laser biomodulation / LLLT, activating the body’s restorative and regenerative processes.
The Company functions as a payroll administrative service only (“ASO”) service provider providing payroll and related employment tax processing, human resources and employment compliance, employment related insurance and employment administrative services. The Company earns a three percent (3%) administrative fee for processing the payroll on behalf of Quelliv.

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The Company ~~has accrued stock-based compensation related to shares~~billed an aggregate amount of ~~common stock to be issued for services provided by three directors. Stock-based compensation expense~~approximately $10,000 and $4,000 of administrative fees for the three and six months ended May 31, 2023 and May 31, 2022 was $0.2 million and $0.3 million, respectively. Stock-based compensation expense for the nine months ended May 31, 2023 and 2022 was $0.7 million and $1.1 million, respectively. The Company has agreements with three directors to receive shares of common stock was valued at $0.1 million per year. No shares of common stock have been issued as of August 31, 2022 and May 31, 2023,February 29, 2024, respectively. As of ~~May~~February 29, 2024, and August 31, 2023, ~~there are 59,040 shares of common stock to be issued to directors.~~
~~As of May 31, 2023 and August 30, 2022,~~ the Company has ~~accrued $0.7~~a gross receivable balance of approximately $0.4 million and ~~$0.6~~$0.2 million, respectively, for ~~stock-compensation related to shares to be issued~~the payroll processed by the Company but not funded by Quelliv. The balance has been fully reserved as of February 29, 2024. The Company recognized $0.2 million of allowance for ~~services to certain directors.~~credit losses in the three and six months ended February 29, 2024.

Note 8:10: Commitments

Operating Leases ~~& License Agreements~~

Effective August 13, 2020, the Company entered into a non-cancelable seven-year lease for office space located in Miami, Florida, to house its principal executive offices commencing October 2020, and continuing through September 2027. The lease contains escalation clauses relating to increases in real property taxes as well as certain maintenance costs. The monthly rent expense under this lease is approximately $57,000. The Company has not made payments under the lease agreement since June 2022, see Note 911 Contingencies related to the legal case with the litigation with the landlord, Courvoisier Centre. The Company has accrued a contingent liability of $3.7 million as of February 29, 2024, and August 31, 2023, respectively that is included in accounts payable and other accrued liabilities in the condensed consolidated balance sheets. In addition, the Company recorded an impairment expense of $3.7 million for the right of use asset during the fiscal year 2022.

On October 1, 2020, the Company entered into a non-cancelable ~~64-month~~sixty-four-month lease for industrial space located in Miami, Florida, to house ghost kitchens, production facilities, and certain marketing and technical functions, including those associated with ShiftPixy Labs. The lease ~~contains~~contained escalation clauses relating to increases in real property taxes as well as certain maintenance costs. The monthly rent expense under this lease is approximately $35,000. The Company relocated its corporate office to this industrial space due to the litigation noted above.

On June 7, 2021, the Company entered into a non-cancelable sublease agreement with Verifone, Inc. to sublease premises consisting of approximately 8,000 square feet of office space located in Miami, Florida, that the Company ~~anticipates~~anticipated using for its sales and operations workforce. The lease has a term of three years expiring on May 31, 2024. The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the sublease. ~~Monthly~~The monthly rent expense under this lease is approximately $27,000.

On June 21, 2021, the Company entered into a non-cancelable ~~77-month~~seventy-seven-month lease for premises for office space located in Sunrise, Florida, that the Company anticipates using primarily to house its operations personnel and other elements of its workforce. The Company took possession of the lease ~~had possession date of~~on August 1, 2022. The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the lease. ~~Monthly~~The monthly rent expense under this lease is approximately $27,000. During the fourth fiscal quarter of 2023, the Company stopped paying the lease and abandoned this property. The Company is obligated to pay its lease obligation. The Company recorded an impairment expense of $1.5 million for the remaining value of the right of use asset during the fiscal year 2023.

On May 2, 2022, the Company entered into a non-cancelable ~~60-month~~sixty-month operating lease, as constituted in an amendment to a prior lease, commencing on July 1, 2022, for office space in Irvine, California, which the Company anticipates using primarily for its IT, operations personnel, and other elements of its workforce. The base rent is paid monthly and escalates annually according to a schedule outlined in the lease. The monthly rent expense under this lease is approximately $24,000. As an incentive, the landlord provided a rent abatement of 50% of the monthly rent for the first four months, with a right of recapture in the event of default. During the fourth quarter of 2023, the Company stopped paying the lease and abandoned this property. The Company is obligated to pay its lease obligation. The Company recorded an impairment expense during the 2023 fiscal year of $1.0 million based upon the remaining value of the right-of use asset.
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On August 31, 2022, the Company decided to formally abandon the leases for its offices in the Courvoisier Center, including a sublease on the second floor with Verifone. The determination was based on its inability to utilize the premises as they were under extensive construction renovation by the landlord, resulting in a significant negative impact on the Company’s ability to conduct business and the health and well-being of the Company’s employees and guests. The Company formally notified the landlord of its intention to vacate the premises and has not been legally released from the Company's primary obligations under the leases. The Company received a formal complaint from the landlord, and the matter is in litigation. The Company intends to vigorously defend the lawsuit and counterclaim for relocation costs, see Note 9,11, Contingencies. As a result of the abandonment, the Company evaluated the ~~ROU assets~~right of-use asset for impairment, ~~as of August 31, 2022,~~ and recorded an impairment charge of ~~$3.9~~$3.8 million, within the impairment loss line item ~~for~~during the fiscal year ~~ended.~~2022. Furthermore, the Company released the corresponding lease liability and evaluated the need for a loss contingency in accordance with ASC 450, recording a contingent liability of $3.8 million, included within accrued ~~expenses~~liabilities of the condensed consolidated balance sheets as of ~~May 31, 2023~~February 29, 2024, and August 31, ~~2022,~~2023, respectively.
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The components of lease expense are as ~~follows:~~follows, in thousands:

Three Months
Ended May 31, 2023

Nine Months
Ended May 31,
2023

Operating Lease Cost

$ 260,000

$ 824,000

Three
Months
Ended
February 29,
2024

Six
Months
Ended
February 29,
2024

Operating lease cost

$ 135

$ 271

Future minimum lease ~~and licensing payments~~ under non-cancelable operating leases as of ~~May 31, 2023,~~February 29, 2024, are as ~~follows:~~follows, in thousands:

Minimum lease commitments

Minimum
lease
commitments

2024

$ 1,047,000

$ 1,073

2025

1,081,000

1,033

2026

928,000

688

2027

694,000

483

2028

403,000

319

Thereafter

225,000

-

Total minimum payments

4,378,000

3,596

Less: present value discount

508,000

359

Lease liability

3,870,000

$ 3,237

Weighted-average remaining lease term - operating leases (months)

49

Weighted-average remaining lease term - operating leases (years)

3.6

Weighted-average discount rate

5.54 %

5.54 %

The current portion of the operating lease liability is included within our accounts payable and other accrued liabilities in ~~our~~the accompanying condensed consolidated balance sheets.

~~Special Purpose Acquisition Company Sponsorship~~
On April 29, 2021, the Company announced its sponsorship, through a wholly owned subsidiary, of four SPAC IPOs. The Company purchased founder shares in each SPAC (the "Founder Shares"), through its wholly owned subsidiary, for an aggregate purchase price of $25,000 per SPAC. The number of Founder Shares issued was determined based on the expectation that such Founder Shares would represent 15% of the outstanding shares of each SPAC after its IPO (excluding the private placement warrants described below and their underlying securities).
The registration statement and prospectus covering the IPO of IHC, was declared effective by the SEC on October 19, 2021, and IHC units (the “IHC Units”), consisting of one share of common stock and an accompanying warrant to purchase one share of IHC common stock, began trading on the NYSE on October 20, 2021. The IHC IPO closed on October 22, 2021, raising gross proceeds for IHC of $115 million. In connection with the ~~IHC IPO,~~abandonment of the leases, the Company ~~purchased, through~~applied part of its ~~wholly owned subsidiary, 4,639,102 placement warrants at a price of $1.00 per warrant, for an aggregate purchase price of $4.6 million. Each private placement warrant was exercisable~~security deposits to ~~purchase one whole share of common stock in IHC at $11.50 per share. Inasmuch as IHC was dissolved on November 14, 2022, and~~it the ~~Trust released all the redemption funds~~amount owed to ~~shareholders on December 1, 2022, effectively liquidating the Trust Account, (See Note 4:~~ ~~Special Purpose Acquisition Company ("SPAC") Sponsorship~~~~), the private placement warrants have been deemed worthless.~~
~~The investment amounts set forth above do not include loans that the Company's subsidiary, ShiftPixy Investments, Inc., has extended to IHC in an amount not to exceed $0.5 million, in~~ its role as sponsor. Nor do they include sums advanced by the Company to IHC to enable it to conduct its activities. As of May 31, 2023, the Company had advanced, through its wholly owned subsidiary, an aggregate of approximately $0.9 million to the SPACs for payment of various expenses in connection with the SPAC IPOs, principally consisting of SEC registration, legal and auditing fees. The Company previously disclosed that it anticipates that the SPAC will repay these advanced expenses from when its IBC is completed. As of May 31, 2023, the Company had an outstanding balance of $0.7 million from advances, which are considered uncollectible with the dissolution of IHC.landlords.
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Note 9:11: Contingencies

Certain conditions may exist as of the date the condensed financial statements are issued, which may result in a loss to the Company, but which will be resolved only when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.

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~~During~~
Legal
The Company is currently a party to legal actions other than those described below arising from the ~~ordinary~~normal course of business, ~~the Company is subject~~none of which are expected to ~~various claims and litigation. Management believes that after consulting legal counsel the outcome of such claims or litigation will not~~ have a material adverse effect on ~~the Company’s financial position,~~our business, results of operations, or ~~cash flow. Some of the matters are detailed below.~~
~~Splond Litigation~~
On April 8, 2019, claimant, Corey Splond, filed a class action lawsuit, on behalf of himself and other similarly situated individuals in the Eighth Judicial District Court for the State of Nevada, Clark County, naming the Company and its client as defendants, and alleging violations of certain wage and hour laws. The Company denies any liability. Discovery is proceeding in the case, and no trial date has been set. Even if the plaintiff ultimately prevails, the potential damages recoverable will depend substantially upon whether the Court determines in the future that this lawsuit may appropriately be maintained as a class action. Further, in the event that the Court ultimately enters a judgment in favor of the plaintiff, the Company believes that it would be contractually entitled to be indemnified by its client against at least a portion of any damage award.financial condition.

Everest Litigation

On December 18, 2020, the Company was served with a Complaint filed in the United States District Court for the Central District of California by its former workers’ compensation insurance carrier, Everest National Insurance Company. The Complaint asserts claims for breach of contract, alleging that the Company owes certain premium payments to plaintiff under a retrospective rated policy, and seeks damages of approximately $0.6 million, which demand has since increased to approximately $1.6 million. On February 5, 2021, the Company filed an Answer to Plaintiff’s Complaint denying its claims for relief, and also filed a cross-claim against the third party claims administrator, Gallagher Bassett Services, Inc., for claims sounding in breach of contract and negligence based upon its administration of claims arising under the policy. By order dated April 7, 2021, the Court dismissed the Company’s complaint against Gallagher Bassett without prejudice to re-filing in another forum. On May 17, 2021, the Company refiled its complaint against Gallagher Basset in the Circuit Court of Cook County, Illinois. Everest subsequently filed a complaint against Gallagher Bassett in New Jersey. Discovery proceeded in the cases, and the California Court set a trial date in the Everest case of August 8, 2023, while no trial date has been set in either of the related Illinois or New Jersey cases, which are in preliminary stages. Mediation in the matter was conducted on December 14, 2022, and the matter was kept open until further notice as the parties endeavored to settle the case. As noted below in Note 10: ~~Subsequent Events~~~~, on~~ or about June 28, 2023, the Company entered into a confidential settlement agreement with Everest National Insurance Company and Gallagher Bassett, resolving the litigation amongst the parties. The Company ~~accrued for~~has made the required payments pursuant to the settlement agreement up to the report’s release date. The liability owed is $0.2 million, which is recorded and presented in accounts payable and other accrued liabilities in the condensed consolidated balance sheet as of ~~May 31, 2023.~~February 29, 2024.

Sunz Litigation

On March 19, 2021, the Company was served with a Complaint filed in the Circuit Court for the 11th Judicial Circuit, Manatee County, Florida, by its former workers’ compensation insurance carrier, Sunz Insurance Solutions, LLC. The Complaint asserts claims for breach of contract, alleging that the Company owes payments for loss reserve funds totaling approximately $10 million, which represents approximately 200% of the amount of incurred and unpaid claims. The Company denies the plaintiff’s allegations and is defending the lawsuit vigorously. On May 12, 2021, the Company filed a motion to dismiss the complaint, and Sunz filed an amended complaint in response. Discovery is proceeding in the matter and no trial date has been set. On June 21, 2022, the Court granted Plaintiff’s partial motion for summary judgment, holding that Defendant is liable under the contract, but further finding that the ~~amount~~number of damages, if any, to which Plaintiff is entitled should be determined at trial. We believe that partial summary judgment was improvidently granted, and therefore appealed the Court’s Order by filing a petition for writ of certiorari with the Court of Appeal, which appeal is now pending. On or about November 14, 2022, a court granted Sunz’ motion for summary judgment on a contractual issue—holding that the Company waived claims regarding Sunz’ management of claims to the extent that the Company did not complain about such management within 6 months of the alleged mismanagement of the claims. This ruling may limit the scope of the Company’s counterclaim. Trial in the case ~~has been~~was set for February 2024.

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The Company and Sunz agreed to a settlement on January 5, 2024, for $3,500,000 to be paid as follows: $350,000 cash payment on or before March 1, 2024, and $75,000 per month payments until the balance of is paid in full. There is a 15% discount to be applied to a full balance payment if paid before the final due payment. There is a default provision if the payment if the Company does not pay according to the terms of the settlement agreement and the default payment can go up to $7.8 million. The parties have agreed to stay all litigation in Florida and dismiss all California litigation and a Stipulated Judgment will be held by Sunz, unfiled, until the amount is paid in full. The Company has made all of the required payments up to the report’s release date.
~~Table of Contents~~

The liability owed to Sunz was $7.8 million and $5.6 million as of February 29, 2024, and August 31, 2023, respectively. Such liability is presented in accounts payable and other accrued liabilities in the consolidated condensed balance sheets as of February 29, 2024, and August 31, 2023.
Vensure Litigation

On September 7, 2021, Shiftable HR Acquisition, LLC, a wholly owned subsidiary of Vensure, filed a complaint against the Company in the Court of Chancery of the State of Delaware asserting claims arising from the Asset Purchase Agreement (the “APA”) governing the Vensure Asset Sale described above. The APA provided for Vensure to purchase, through its wholly owned subsidiary, certain of the Company’s assets for total consideration of $19 million in cash, with $9.5 million to be paid at closing, and the remainder to be paid in 48 equal monthly installments (the “Installment Sum”). The Installment Sum was subject to certain adjustments to account for various post-closing payments made by the parties, and the APA provided for ~~the following~~a procedure to determine the final amount of the Installment Sum: (i) Within 90 days of the effective date, Vensure was required to provide the Company with a “Proposed Closing Statement”, which must detail any adjustments; (ii) Within 30 days of its receipt of Vensure’s Proposed Closing Statement, the Company had the right to challenge any of the proposed adjustments contained therein; and (iii) If the Company disputed Vensure’s Proposed Closing Statement, a 30-day period ensued for the parties to attempt to resolve the dispute, with the Company entitled to examine “such Books and Records of [Vensure] as relate to the specific items of dispute.”installment sum.

Vensure resisted the Company’s repeated efforts to obtain the Proposed Closing Statement for over one year after the closing of the transaction. Finally, on March 12, 2021, under threat of legal action by the Company, Vensure provided its Proposed Closing Statement, in which it contended for the first time that it owes nothing to the Company, and that the Company actually owes Vensure the sum of $1.5 million. By letter dated April 6, 2021, the Company provided Vensure with its objections to the Proposed Closing Statement, which included Vensure’s gross overstatement of payments it purportedly made on the Company’s behalf, as well as its bad faith actions in obstructing the Company’s efforts to make these payments.
From April 2021 through August 2021, Vensure and the Company engaged in the “30-day negotiation period” referred to above, which was extended multiple times at Vensure’s request to provide Vensure an opportunity to provide evidence supporting its assertions. Over the course of these negotiations, Vensure withdrew its claim for approximately $1.5 million from the Company, and acknowledged that Vensure owed ShiftPixy some portion of the Installment Fund. Nevertheless, in In early September 2021, ~~without warning and contrary to the dispute resolution provisions of the APA,~~ Vensure filed suit against the Company in Delaware Chancery Court for breach of contract and declaratory judgment, seeking unspecified damages. The Company vigorously ~~disputes~~disputed and ~~denies~~denied each of Vensure’s claims. Accordingly, on November 4, 2021, the Company filed its Answer and Counterclaim to Vensure’s Complaint, in which it not only denied Vensure’s claims, but also asserted counterclaims for breach of contract and tortious interference with contract. The counterclaim seeks damages from Vensure totaling approximately $9.5 million – the full amount due under the APA - plus an award of attorneys’ fees and expenses. The case is ~~proceeding,~~now settled for $2.5 million, and ~~no trial date has been set.~~the Company received the funds on November 22, 2023. Such amount is presented as gain from legal settlement in the condensed consolidated statement of operations in the six months ended February 29, 2024. This resolves all claims, and the case was dismissed.
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Courvoisier Centre Litigation

On August 24, 2022, the landlord of our former headquarters offices, Courvoisier Centre, LLC, filed a complaint against the Company in the Eleventh Judicial Circuit Court (Miami-Dade County, Florida) alleging breach of the lease. The Company vacated the offices and ceased payments under the lease in July of 2022, after repeatedly complaining to the landlord regarding the impact of its extensive renovations of the campus and building in which the Company's offices were situated, citing substantial impairments to the Company's ability to conduct business as well as concerns regarding the health and well-being of the Company’s employees and guests, and the ~~Landlord’s~~landlord’s inability and refusal to provide any adequate relief. On or about October 10, 2022, the Company filed our answer to the complaint and the Company's counterclaim. The Company intends to vigorously defend the lawsuit and seek recovery for its costs of relocation. The parties attended a mediation on January 31, 2024. The Company has accrued approximately $3.8 million as of February 29, 2024, and August 31, 2023, respectively.
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Certified Tire Litigation

On June 29, 2020, the Company was served with a complaint filed by its former client, Certified Tire, in the Superior Court of the State of California, Orange County, naming the Company, two of its officers, and one of its former subsidiaries as defendants. The Complaint asserts multiple causes of action, all of which stem from the former client’s claim that the Company is obligated to reimburse it for sums it paid in settlement of a separate lawsuit brought by one of its employees pursuant to Private Attorney General Act or PAGA. This underlying lawsuit alleged the Company's former client was responsible for multiple violations of the California Labor Code. The Company and the officers named as defendants deny the former client’s allegations, and the Company is defending the lawsuit vigorously based primarily on the Company's belief that the alleged violations that gave rise to the underlying lawsuit were the responsibility of Certified Tire and not the Company. ~~Trial in the matter~~Substantial discovery has ~~been~~taken place; trial was initially set for September 5, ~~2023.~~2023, but was postponed to a later date not yet defined. The Company’s dispositive motion for summary judgment was denied by the court because of its determination that factual disputes exist.

In Re John Stephen Holmes Bankruptcy Litigation

On November 8, 2022, the Chapter 7 trustee of the bankruptcy estate of John Stephen Holmes filed an action against the Company, asserting that the cancellation by the Company of Mr. Holmes' ~~11,790,000~~491,250 preferred options on October 22, 2021, violated the automatic stay applicable to Mr. Holmes' Chapter 7 proceedings. After the Company filed a motion to dismiss the trustee's complaint, the trustee endeavored to exercise an option ~~(for 12,500,000~~520,833 preferred shares) that had been issued in the early stages of the Company but that was later superseded by a modified option that did not provide for convertibility of the preferred shares to common stock and which modified option was in effect at the time that Mr. Holmes filed for bankruptcy. The trustee insists that it has a right to exercise the option for ~~12,500,000~~520,833 preferred shares series A and convert the shares to common stock, notwithstanding (a) the fact that the preferred shares were not convertible to common stock at the time Mr. Holmes filed his bankruptcy petition, (b) the lapse of more than 3 years' time during which the trustee failed to take any action in relation to the option, (c) the connection of the option to Mr. Holmes, who now competes with and is believed to have taken clients from the Company, (d) the intervening 1-for-100 reverse stock split and extensive corporate governance actions and (e) the negative impact that the issuance of up to ~~12,500,000~~520,833 shares would have on the Company and its shareholders. Were the trustee to be successful in its claim, the Company would be obligated to issue up to ~~12,500,000~~520,833 restricted shares of the Company's common stock to the trustee, which issuance would materially dilute the share ownership of the existing shareholders and could cause a material decline in the price per share of the Company's common stock. The Company has asserted a number of defenses and intends to vigorously defend itself against the claim. Another mediation in this case was set for December 8^th, 2023. The parties have engaged in mediation and are continuing their settlement discussions. The trustee has also named the Directors in a new amended complaint; the E&O carrier responded with the assignment of counsel; a second mediation was held on December 8, 2023, and the parties have agreed to a settlement of $550,000 in stock ($500,000 if paid off early) but the final Agreement has not been received to be signed. This is included accounts payable and accrued liabilities as of February 29, 2024, and August 31, 2023, in the condensed consolidated balance sheets. Subsequent to February 29, 2024, the Company issued 181,518 shares of restricted stock to the trustee of the bankruptcy estate pursuant to the settlement agreement (note 12).
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Employee Retention Tax Credit (“ERTCs”) Claims

The Company has filed various ERTCs claims with the IRS on behalf of its clients that have otherwise failed to obtain the related benefits afforded to them pursuant to the filing of Form 7200—the time for the filing of which has expired. To date, the Company has received ERTCs amounting to ~~$1,152,000, and based on pending claims submissions, it expects to receive an additional $2,985,000, for a total of $4,137,000 in ERTCs submitted to date.~~$2.8 million. In addition, the Company anticipates filing additional ERTCs claims as clients continue to request that the Company complete the submission thereof to the IRS. Because of the Company’s currently existing payroll tax liability, the Company presently receives ERTCs from the IRS in the form of a credit to the Company’s outstanding payroll tax liability. The Company is not presently able to remit the ERTCs to its clients and plans to offer its clients restricted shares of the Company’s common stock in payment of the ERTCs applicable to such clients. If a client rejects the payment of its respective ERTCs in the form of the restricted shares of the Company’s common stock as proposed by ~~ShiftPixy,~~the Company, such client may seek to enforce its rights to recover its ERTCs by filing lawsuits against the Company.

Apizza, LLC v. Rethink Human Capital Management, Inc. D/B/A “Shiftpixy,” et al., Orange County Superior Court.
On March 8, 2024, a complaint was filed in the Superior Court of the State of California, Orange County No. 30-2024-01385218-CU-BT-CJC by its former client Apizza, LLC, against the Company, certain of its subsidiaries and affiliates and current and former officers. In Plaintiff’s complaint, Plaintiff alleges damages “in excess of $2,287,269.15” arising from the Company’s alleged failure to assist Plaintiff in obtaining Employee Retention Credits. All defendants have been served the complaint except Scott W. Absher. Pursuant to stipulation between the parties, the served defendants’ (i.e., all defendants except Mr. Absher) response to the complaint is due May 9, 2023. At this point, it is too early to assess whether an unfavorable outcome for the Company is probable or remote.
Capistrano Catering, Inc. v.ShiftPixy, Inc.
On June 13, 2022, a Complaint was filed in the Superior Court of the State of California, Orange County, Case No. 30-2022-01264583, by its former client, Capistrano Catering, Inc., asserting claims for specific performance, breach of contract, and breach of the covenant of good faith. Plaintiff’s complaint alleges that we violated our client services agreement by not applying for an employee retention tax credit (“ERTC”) on behalf of Capistrano Catering pursuant to Section 3134 of the Internal Revenue Code and seeks damages of “at least $0.5 million plus prejudgment interest thereon at the legal rate.” The Company initially maintained that it has no legal basis to apply for the ERTC on behalf of Plaintiff, and that the claim is therefore without merit. However, the Company has changed its position, based on its understanding of applicable law and is now actively offering to file for the credit on the client’s behalf. The parties have entered into a stipulation providing for the submission to the IRS by the Company of ERTC claims on behalf of Capistrano Catering and remittance to Capistrano Catering of any credit amounts received from the IRS in response thereto by the Company. The IRS has announced a suspension of accepting further ERTC claims until 2024, so the Company is unable to affect the subject submission until permitted by the IRS. The Court has set a status conference for February 15, 2024, to assess the status of the Company’s filing of ERTC claims on behalf of Capistrano Catering. The Company intends to remit to Capistrano Catering the full amount of any credits received from the IRS, although the Company may request a reasonable fee for its processing services. The Company has offered to issue to plaintiff shares of the Company’s stock in payment of the ERTC in the event that the Company receives the credit from the IRS and is unable at such time to forward the payment to plaintiff, provided, however, Capistrano Catering has not indicated whether it will accept the offer of shares, and it may insist on receiving cash in such event.
Foundry ASVRF Sawgrass, LLC v. ShiftPixy, Inc.
On or around October 16, 2023, the company received a variety of legal proceedings documents as filed in the County Court of the 17th Judicial Circuit in and for Broward County, Florida, as case No. COWE-23-003124, arising out of the Company’s abandonment of a lease of premises at Suite 650, 13450 W. Sunrise Blvd., Sunrise, Florida 33323. Most of the Company’s $0.3 million security deposit has been applied to the cost of unpaid improvements and rent past due for the months of June, July, August and September of 2023 (as well as unreplenished security deposit amounts for prior months). Rent and operating costs per month were approximately $0.1 million. The lease term continues until December 31, 2028. The Landlord has sued for eviction, replenishment of the security deposit and damages for future payments under the lease. Although the plaintiff will claim damages equal to the full value of the lease, the Company has defenses in the nature of the plaintiff’s duty to mitigate damages by securing one or more replacement tenants. The parties are anticipated to engage in mediation wherein the parties are expected to settle plaintiff’s claims. The Company has recorded the value of its lease obligation. Given the early stage of the matter, it is too early to assess the anticipated amount to which the plaintiff will be entitled; however, the plaintiff will likely be entitled to damages approximately equal to the amount of the monthly lease payment due times the number of months it would reasonably take the plaintiff to secure one or more replacement tenants, plus costs associated with the preparation of the premises for such new tenant(s), plus costs associated with the brokerage fee associated with securing the new tenant. The Parties are in active negations to settle this claim.

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~~Note 10: Subsequent Events~~Golden West Wings LLC v. ShiftPixy, Inc.

On ~~June 5,~~September 21, 2022, another of ShiftPixy’s clients, including a number of affiliates, filed suit in U.S. District Court, Southern District of California (San Diego), Case No. 822CV1834ADS, asserting claims for specific performance, breach of contract, and breach of the covenant of good faith. Plaintiff’s complaint alleges that the Company violated its client services agreement by not applying for an employee retention tax credit ERTC on behalf of client pursuant to Section 3134 of the Internal Revenue Code and seeks damages of at least $2.3 million plus prejudgment interest thereon at the legal rate. The Company was served with the complaint and summons in this matter on October 21, 2022, and the Company has filed a motion to dismiss. Plaintiffs amended their complaint to allege a claim of fraud against the CEO, Scott Absher. The Company initially maintained that it has no legal basis to apply for the ERTC on behalf of Plaintiff, and that the claim is therefore without merit. However, the Company changed its position, based on its understanding of applicable law and filed the ERTC claims on behalf of the client in July of 2023, and intends to remit to the client the full amount of the credit if and as received from the IRS. Golden West Wings voluntarily dismissed their entire complaint against all Parties on November 10, 2023.
Olen Commercial Realty Corp. v. ShiftPixy, Inc.
In late August of 2023, the Company abandoned its leased premises at 1 Venture, Suite 150, Irvine, CA 92618. The monthly rent is approximately $24,500. The lease term continues until June 30, 2027. The landlord has demanded approximately $1.2 million for the balance of payments due under the lease, including miscellaneous expenses as offset by security deposit funds. While the landlord has not filed suit, it is anticipated that the landlord may file suit within the next few months. In the event the landlord does file suit, the Company will assert rights of offset as a consequence of the landlord’s failure to mitigate its damages. Given the early stage of the matter, it is too early to assess the anticipated amount to which the landlord will be entitled; however, the landlord will likely be entitled to damages approximately equal to the amount of the monthly lease payment due times the number of months it would reasonably take the landlord to secure one or more replacement tenants, plus costs associated with the preparation of the premises for such new tenant(s), plus costs associated with the brokerage fee associated with securing the new tenant. It is anticipated that the parties will negotiate and endeavor to settle the claims.
The Company has accrued the lease liability in the aggregate amount of $1 million, of which $0.7 million is non-current and presented in operating lease liability, non-current and $0.3 million is current and presented in accounts payable and other accrued liabilities in the condensed consolidated balance sheet as of February 29, 2024, and August 31, 2023.
Robert Angueira, as US Chapter 7 Trustee v. Shiftpixy, Inc, Shiftpixy Investments,
On December 14, 2023, the Officers and Directors received notice of an Adversarial proceeding in a bankruptcy case, captioned Robert Angueira, as US Chapter 7 Trustee v. Shiftpixy, Inc, Shiftpixy Investments, Inc et al. The case is related to Industrial Human Capital, “IHC”, a company that was an attempted SPAC in 2022, the Company was unable to finish the listing requirements and $117.6 million was returned to the investors on December 1, 2022. Because some creditors were unpaid after the IHC was closed due to insolvency, some IHC creditors filed an involuntary bankruptcy in the Southern District of Florida.
The Company was owed a substantial sum of money related to IHC SPAC’s sponsorship and transferred $600,000 to Shiftpixy from IHC in partial repayment of that money. The Chapter 7 Bankruptcy Trustee asserted a claim against that transfer and the Company is working to make arrangements for payment to the Trustee.
In relation to the recent filing by the Chapter 7 Trustee, the Trustee asserts, amongst other things, that some Officers and Directors of ShiftPixy acted inappropriately in transferring those funds back to the investors in IHC and subsequent to the filing of the involuntary bankruptcy. These claims forced the Company to put ShiftPixy’s director and officer carrier on notice and the Company is waiting for their decision on the matter(s).
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The Chapter 7 Trustee claims to be entitled to the $117 million dollars from the investors, shareholders, officers, and directors and Shiftpixy, Inc, for a bankruptcy estate with claims totaling $1.8 million ($282,000 of which are claims by the Company). Given the early stage of the litigation, it is too early to assess whether an unfavorable outcome for the Company is either probable or remote. The Company recorded $0.6 million in accounts payable and other accrued liabilities as of February 29, 2024, and August 31, 2023. There is a Judicial Conference schedule for April 30th, 2024, involving all parties.
Other Matters
Amanda Murphy v. Shiftpixy, Inc., Scott Absher and Connie Absher
On April 6, 2024, Amanda Murphy (“Murphy”), the Company’s former Chief Operating Officer and a former Director, filed a complaint of employment discrimination before the State of California Civil Rights Department (“CRD”) under the provisions of the California Fair Employment and Housing Act (“FEHA”), alleging several violations and discriminations. Given the early stage of the proceedings, it is too early to assess whether an unfavorable outcome is either probable or remote. The Company recorded $0.5 million in payroll related liabilities as of February 29, 2024,
Washington Dept of Rev v. ShiftPixy Staffing, Inc.
On or about April 25, 2023, the State of Washington Dept. of Rev. issued a tax warrant against a subsidiary of the Company claiming that (a) its prior communications were unanswered, and (b) asserting that the Company owes $0.7 million in Business & Occupation (“B&O”) Taxes and interest for periods from June 2018 to December 2021. The state essentially claims that such a subsidiary owes B&O Taxes as a consequence of its having conducted staffing services in Washington. The Company has responded, indicating that the subject services provided were actually in the nature of professional employer organization or PEO services (as defined under applicable law) and not staffing services (as defined under applicable law) and that the subsidiary’s tax obligation, if any, pursuant to the state’s own Excise Tax Advisory ETA 3192.2014 would be a small fraction of the amount claimed by the state. The Company further argued that the assessment is improperly made because that entity did not even exist until January of 2021, and it did not start billing a client in the State of Washington until calendar year 2022. The state reviewed documentation submitted by the Company in support of its position and issued a modified tax adjustment, asserting that the sum of $0.3 million is due for the period June 2018 to December 2020. Additionally, the State of Washington assessed another subsidiary of ShiftPixy for approximately $0.5 million with respect to excise tax. The Company filed a request for an administrative hearing on both matters. The Company was informed that the amount due must be paid prior to any appeal. The Company has recorded approximately $0.8 million and $0.2 million in accounts payable and other accrued liabilities in the condensed consolidated balance sheets as of February 29, 2024, and August 31, 2023, respectively.
NASDAQ
On August 2, 2023, ShiftPixy received a letter (the ~~“Nasdaq~~“August 2023 NASDAQ Letter”) from the staff of the Listing Qualifications Department of NASDAQ, which notifies the Company that, in view of the recent resignation of an independent director who was a member of the Company’s audit committee, the Company does not presently comply with NASDAQ’s Listing Rule 5605, which requires that a majority of the Company’s board of directors be comprised of independent directors, and that the Company has an audit committee comprised of at least three independent directors, one of which “has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. On January 16, 2024, the Company added an independent director to the audit committee and board of directors and as a result regained compliance with the above rule.
On September 15, 2023, the Company received a letter (the ~~“Staff”~~“September 2023 NASDAQ Letter”) from the staff of the Listing Qualifications Department of Nasdaq, which notifies the Company that, for the previous 30 consecutive business days, the bid price for the Company’s common stock had closed below the minimum $1.00 per share requirement for continued listing on The Nasdaq ~~Stock~~Capital Market ~~LLC (“Nasdaq”~~under Nasdaq’s Listing Rule 5550(a)(2). On October 11, 2023, the Company filed articles of amendment to the Company’s articles of incorporation to effect a one-for-twenty four (1:24) reverse split of the Company’s issued and outstanding shares of common stock, which became effective on October 14, 2023. The reverse stock split was effective on Nasdaq on October 16, 2023. On October 30, 2023, the Company received a letter from the Staff notifying the Company that for the last 10 consecutive business days, from October 16 to October 27, 2023, the closing bid price of the Company’s common stock has been at $1.00 per share or greater and accordingly, the Company has regained compliance with Listing Rule 5550(a)(2).
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On October 18, 2023, the Company received a letter (the “October 2023 NASDAQ Letter”), from the staff of the Listing Qualifications Department of Nasdaq, which notified the Company that, in connection with the Company’s private placement that closed on October 10, 2023, the Company failed to comply with Nasdaq’s shareholder approval requirements set forth in Listing Rule 5635(d)1, which requires prior shareholder approval for transactions, other than public offerings, involving the issuance of 20% or more of the pre-transaction shares outstanding at less than the Minimum Price. The Company executed an amendment to the common stock purchase warrant agreement, pursuant to which the strike price of the warrants was increased to a price higher than the minimum price. As a result of this amendment, the Company regained compliance with the above rule.
On February 26, 2024, the Company received a letter from the Staff of the Listing Qualifications Department of Nasdaq, which notifies the Company that it does not ~~presently~~ comply with Nasdaq’s Listing Rule 5550(b)(2), which requires that the Company ~~maintain~~maintains a ~~Market Value~~market value of ~~Listed Securities (“MVLS”)~~listed securities of $35 million, and that the Company does not otherwise satisfy the requirements of Listing ~~Rules~~Rule 5550(b)(1) of a stockholders’ equity of at least $2.5 million or Listing Rule 5550(b)(3)~~. The Staff calculates MVLS based upon~~ of net income from continuing operations of $500,000 in the most recent ~~Total Shares Outstanding (TSO), multiplied by the closing bid price.~~completed fiscal year or in two of three most recent completed fiscal years. The Nasdaq Letter does not have any immediate effect on the listing of the Company’s common stock on the Nasdaq Capital Market, and the Company has 180 calendar days from the date of the Nasdaq Letter ~~(the “Compliance Period”)~~ to regain compliance. If at any time during the Compliance Period the Company’s MVLS closes at $35 million or more for a minimum of ten (10) consecutive business days, Nasdaq will provide the Company with written confirmation of compliance, and this matter will be closed. If the Company does not achieve compliance within the Compliance Period, it will receive written notice from Nasdaq that its securities are subject to delisting, which is a determination that the Company could appeal to the Nasdaq Hearings Panel.
On or about June 28, 2023, the Company entered into a confidential settlement agreement with Everest National Insurance Company and Gallagher Bassett, resolving the litigation amongst the parties, see Note 9: Contingencies. The Company ~~has accrued for this settlement as of May 31, 2023.~~
~~On July 12, 2023, the Company priced a “best efforts” public offering for the sale by the Company of an aggregate of 1,166,667~~intends to issue additional shares of common stock ~~900,000 pre-funded warrants,~~through private placement and ~~2,066,667 common warrants. The public offering price was $1.50 per share and accompanying common warrant,~~ or ~~$1.4999 per pre-funded warrant and accompanying common warrant. The pre-funded warrants are exercisable immediately, may be exercised at any time until all~~registered offering.
On March 28, 2024, the Company received a letter (the “March 2024 NASDAQ Letter”) from the Staff of the ~~pre-funded warrants are exercised~~Listing Qualifications Department of Nasdaq, which notifies the Company that it failed to comply with NASDAQ shareholder approval requirements set forth in ~~full, and have an exercise price~~Listing Rule 5635(d), which requires prior shareholder approval for transactions, other than public offerings, involving the issuance of $0.0001. The common warrants are exercisable immediately for a term of five years and have an exercise price of $1.50 per share. 1,100,000 shares, 900,000 pre-funded warrants and 2,000,000 common warrants under the offering were sold pursuant to a securities purchase agreement with an investor. A.G.P./Alliance Global Partners acted as placement agent for the offering and received a fee of 7%20% or more of the ~~gross proceeds and reimbursement of $75,000 of expenses.~~pre-transaction shares outstanding at less than the minimum price. The ~~total estimated offering expenses were approximately $0.6millon and net proceeds of approximately $2.5 million. The offering closed on~~deficiency letter relates to the July ~~14, 2023. Effective upon closing of the offering, the exercise price of outstanding warrants~~2023 financing. Under Nasdaq Rules, the Company ~~issued~~has 45 calendar days to submit a plan to regain compliance and if accepted, Nasdaq can grant an ~~investor in 2020 and 2022 was reduced~~extension of up to ~~$1.50 per share, subject~~180 calendar days to ~~further adjustment as provided in~~evidence compliance. The Company retained legal counsel to draft a plan to regain compliance, which has not yet been finalized at the warrants, pursuant to a warrant amendment the Company entered into with the investor. The change in the exercise price will result in a non-cash warrant modification expense for the three months ended August 31, 2023.filing date.

~~Management~~Note 12: Subsequent Events
The Company has evaluated events that have occurred ~~subsequent to~~after the date of these condensed consolidated financial statements though the date that the condensed consolidated financial statements were issued, and has determined that, other than those listed below, no such reportable subsequent events exist through the date the condensed consolidated financial statements were issued in accordance with FASB ASC Topic 855, ~~"Subsequent~~“Subsequent Events."”
On March 6, 2024, the Company terminated the employment of the Company’s Chief Financial Officer and Chief Operating Officer. On March 7, 2024, the Company executed an offer of employment to the Company’s New Chief Financial Officer.
On March 19, 2024, the former Chief Operating Officer resigned from her position as director of the board of directors.
On March 19, 2024, the Company entered into a securities purchase agreement for a private placement with an institutional investor, The transaction closed on March 21, 2024 and the Company issued and sold to the investor (i) in a registered direct offering, 590,000 shares of common stock at a price of $4.25 per share, 586,470 pre-funded warrants to purchase up to 586,470 shares of common stock at a price of $4.2499 per pre-funded warrant, and (ii) 1,176,470 common stock purchase warrants, exercisable for an aggregate of up to 1,176,470 shares of common stock. The pre-funded warrants had an exercise price of $0.0001 and were immediately exercised. The common stock purchase warrants are immediately exercisable for a period of five-year years at an exercise price of $4.25. The net proceeds of this offering were approximately $4.2 million. Concurrently with the above transaction, the Company also executed an amendment to the previously issued common stock purchase warrants, under which the exercise price of an aggregate of 192,225 outstanding warrants previously issued to the institutional investor was reduced to $4.25.
On March 22, 2024, the Company entered into an Asset Purchase Agreement with the owners of Neozene, Inc. (the “Principals”) and affiliated seller entities (collectively the “sellers”), pursuant to which the Company will be acquiring substantially all of the assets but not limited to the intellectual property rights, client contracts, leasehold interest, trade names, business and other licenses, operational data, marketing information, contractual rights, customer information and certain tangible assets which are owned in whole or in part by the Sellers. The aggregate consideration to be paid for the assets will be $16,500,000. The closing is subject to customary closing conditions and the securement of the underlying debt financing.
On March 28, 2024, the Company issued 181,518 shares of restricted stock to the trustee of the bankruptcy estate of Steve Holmes pursuant to a court approved settlement agreement.
On March 29, 2024, the Company entered into a non-binding asset purchase agreement pursuant to which the Company is to acquire substantially all of the assets of an undisclosed staffing company (“Seller”), including but not limited to all of the intellectual property and property rights, client contracts, leasehold interests, trade names, business and other licenses, operational data, marketing information, customer information, contractual rights and all other tangible and intangible assets, which are beneficially owned, in whole or in part by the Seller. Though the identity of the Seller must remain confidential due to contractual terms, the scope of the contemplated transaction was deemed significant. The seller is a regional leader in providing staffing and recruiting solutions across the Western United States. The aggregate consideration to be paid for the assets will be $25,000,000. The closing is subject to customary closing conditions and the securement of the underlying debt financing.

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PART I — FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes, and other financial information included in this Quarterly Report, as well as the information contained in our Annual Report on Form 10-K ~~and Forms 10-K/A~~ for the fiscal year ended August 31, ~~2022~~2023 (“Fiscal ~~2022”~~2023”), filed with the SEC on December ~~13, 2022, December~~ 14, ~~2022, February 3,~~ 2023, ~~and February 9, 2023, respectively.~~

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND INFORMATION

This Quarterly Report, the other reports, statements, and information that we have previously filed or that we may subsequently file with the SEC, and public announcements that we have previously made or may subsequently make, contain “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. Unless the context is otherwise, the forward-looking statements included or incorporated by reference in this Quarterly Report and those reports, statements, information and announcements address activities, events or developments that we expect or anticipate will or may occur in the future. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about:

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~~our~~Our future financial performance, including our revenue, ~~costs~~cost of revenue and operating expenses;

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~~our~~Our ability to achieve and grow profitability;

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~~the~~The sufficiency ofor our cash, cash equivalents and investments to meet our liquidity needs;

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~~our~~Our predictions about industry and market trends;

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~~our~~Our ability to expand successfully internationally;

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~~our~~Our ability to manage effectively our growth and future ~~expenses, including our growth and expenses associated with our sponsorship of various special purpose acquisition companies;~~expenses;

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~~our~~Our estimated total addressable market;

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~~our~~Our ability to maintain, protect and enhance our intellectual property;

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~~our~~Our ability to comply with modified or new laws and regulations applying to our business;

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~~the~~The attraction and retention of qualified employees and key personnel;

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~~the effect that the novel coronavirus disease (“COVID-19”) or other public health issues could have on our business, financial condition and the economy in general;~~
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~~our~~Our ability to be successful in defending litigation brought against us;
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Our ability to pay the outstanding delinquent payroll taxes, including penalties and interest. If the IRS or states and local jurisdictions pursues collection efforts beyond what the Company can afford to pay, the IRS can freeze our bank accounts and the Company may be forced to file for bankruptcy, and

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~~our~~Our ability to continue to meet the listing requirements of Nasdaq.

~~We caution you that the forward-looking statements highlighted above do not encompass all of the forward-looking statements made in this Quarterly Report.~~

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We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled “Risk Factors” in ~~this report and in~~ our Annual Report on Form 10-K ~~and Forms 10-K/A~~ for Fiscal ~~2022,~~2023, filed with the SEC on December ~~13, 2022, December~~ 14, ~~2022, February 3,~~ 2023, ~~and February 9, 2023, respectively,~~ which ~~are~~is expressly incorporated herein by reference, and elsewhere in this Quarterly Report. Moreover, the Company operates in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made herein to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, other strategic transactions or investments we may make or enter into.

The risks and uncertainties the Company currently face are not the only ones we will face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that that the Company currently believe are immaterial to our business. In addition, the Company cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Our business, operating results, liquidity, and financial condition could be materially affected in an adverse manner as a result of these risks.

The industry and market data contained in this Quarterly Report are based either on our management’s own estimates or, where indicated, independent industry publications, reports by governmental agencies or market research firms or other published independent sources and, in each case, are believed by our management to be reasonable estimates. However, industry and market data are subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market shares. The Company has not independently verified market and industry data from third-party sources. In addition, consumption patterns and customer preferences can and do change. As a result, you should be aware that market share, ranking and other similar data set forth herein, and estimates and beliefs based on such data, may not be verifiable or reliable.

The ShiftPixy logo and other trademarks or service marks of ShiftPixy, Inc. appearing in this Quarterly Report on Form 10-Q are the property of ShiftPixy, Inc. This Form 10-Q also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this Form 10-Q appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names.

~~Overview~~
Our current business, and the primary source of our revenues to date, has been providing human resources, employment compliance, employment related insurance, payroll, and operational employment services solutions for our business clients using a comprehensive HRIS platform under a human capital fee-based business model. The Company has developed a comprehensive human resources information system or "HRIS" platform designed to provide real-time, agile business intelligence information for our clients as well as an employment marketplace designed to match client opportunities with a large workforce under a digital umbrella. Our market focus is to use this traditional approach, coupled with developed technology, to address underserved markets containing predominately lower wage employees with high turnover, beginning with light industrial, services, and food and hospitality markets. The Company provides human resources, employment compliance, insurance-related, payroll, and operational employment services solutions for our clients and shift work or gig opportunities for worksite employees (WSEs or shifters). As consideration for providing these services, the Company receive administrative or processing fees, typically as a percentage of a client’s gross payroll, process and file payroll taxes and payroll tax returns, provide workers’ compensation insurance, and provide employee benefits. Our losses were driven primarily by substantial investments in our technology platform, our SPAC sponsorships and our ShiftPixy Labs growth initiative, as well as by necessary upgrades to our back-office operations to facilitate servicing a large WSE base under a traditional staffing model.

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~~For most~~Overview
Business Overview
ShiftPixy is dedicated to providing a comprehensive Human Capital Management “HCM” and Engagement platform that addresses the complete spectrum of ~~the fiscal year ending August 31, 2022,~~employment needs. Our services encompass recruitment, staffing, payroll and ~~continuing through the nine months ended May 31, 2023, the Company's primary focus was~~related employment tax processing, human resources, employment compliance, employment-related insurance, and administrative solutions. We cater to various business clients, primarily focusing on ~~clients in the restaurant and hospitality industries, (market segments typically~~sectors characterized by high employee turnover and ~~low pay rates),~~dynamic staffing requirements. Connecting both workers and ~~healthcare industries typically employing specialized personnel~~those that ~~command higher pay rates. The Company believes~~manage them through an elegant AI-powered, cloud based, mobile architecture that ~~these industries are better served by our HRIS platform~~navigates and related mobile application, which provide payroll and human resources tracking for our clients, and which we believe result in lower operating costs, improved customer experience and revenue growth acceleration. California continued to be our largest market duringmoves all stakeholders through the ~~three-months ended May 31, 2023, accounting for approximately 33.1%~~daily duties of our gross billings. Washington and New Mexico represented our other significant markets during the three-months ended May 31, 2023, representing approximately 28.4% of our total gross billings. For the nine-months ended May 31, 2023, California represented 42.5% of our gross billings with Washington and New Mexico accounting for approximately 24.7% of our gross billings. Our other locations did not contribute revenue to a material degree. All of our clients enter into client services agreements ("CSAs") with us or one of our wholly owned subsidiaries.hourly labor.

~~The Company's~~Initially, our core business ~~focus during~~targeted the ~~fiscal year ending August 31, 2022,~~restaurant and ~~continuing~~hospitality sectors, industries known for their high turnover rates and part-time, flexible employment structures. However, recognizing the evolving market demands and opportunities, we have strategically shifted towards light industrial staffing solutions. This pivot aligns with our goal to broaden our market reach and address the substantial needs of warehouses, manufacturing units, logistics, and similar sectors experiencing rapid growth and increasing reliance on flexible staffing solutions. This shift also brings our business into the quarter ending May 31, 2023, was to complete our HRIS platform and to expand that platform to position the Company for rapid billings growth as well as to expand our product offerings to increase our monetization of our payroll billings. Now we believe that our HRIS platform is at completion stage and our IT development cost has started to stabilizebetter margin engagements with a significant cost reduction year over year, we are focused in the maintenance and minor functionality improvements to keep our technology at a top level of excellence in functionality. To that end, we identified and began to execute on various growth strategies, and expect that our execution of these strategies, if successful, will yield significant customer growth driven by widespread adoption of our technology offerings, which we believe represents a substantial value proposition to our clients as a valuable source of agile human capital business intelligence.large national clients.

~~The Company's revenues consisted of: (i) staffing solutions revenues equal to gross billings for staffing solutions clients; and (ii) EAS solutions revenues which consist of~~We earn our income through the administrative or processing fees ~~calculated~~we receive as a percentage of a client's gross payroll. These fees vary depending on the level and complexity of services provided, ranging from essential payroll ~~processed, payroll taxes due on WSEs billed~~processing to ~~the client~~an extensive suite of HRIS technology and ~~remitted to the taxation authority, and workers’ compensation premiums billed to the client for which we facilitate coverage for our clients.~~staffing solutions. Our costs of revenues for EAS solutions revenues consist of the accrued and paid payroll taxes and our costs to provide the workers’ compensation coverage and administration related services, including premiums and loss reserves. For staffing solutions revenues, our cost of revenues also included the gross payroll paid to staffing solutions employees. A significant portion of our liabilities is for our projected workers’ compensation claims attributable to prior programs, carried as liabilities. We provided a self-funded workers’ compensation policy up to $500K and purchased reinsurance for claims in excess of that limit through February 28, 2021, after which we changed to a direct cost premium only workers’ compensation program.
~~We believe that our customer value proposition~~commitment is to provide adaptable, scalable, and cost-effective human capital solutions that align with the unique needs and goals of our clients.
Technology Updates
In Fiscal 2023 and the first half of Fiscal 2024, the Company has made substantial strides in advancing our technological capabilities, further cementing our leadership in the staffing and human capital management industry. These developments are a ~~combination of overall net cost savings~~testament to our ~~clients, for which they are willing~~unwavering commitment to ~~pay increased administrative fees, as follows:~~
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~~Payroll tax compliance and management services;~~
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~~Governmental HR compliance services, such as compliance with the Affordable Care Act (“ACA”);~~
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~~Reduced client workers’ compensation premiums or enhanced coverage; and~~
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~~Access to an employee pool of potential applicants to reduce turnover costs.~~
~~We have invested heavily~~innovation and excellence in ~~a robust, cloud-based HRIS platform (the ShiftPixy “Ecosystem”) in order to:~~
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~~Reduce WSE management costs;~~
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~~Automate new WSE and client onboarding; and~~
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~~Provide value-added services for our business clients resulting in additional revenue streams to the Company.~~
Our cloud-based HRIS platform captures, holds, and processes HR and payroll information for clients and WSEs through an easy-to-use customized front-end interface coupled with a secure, remotely hosted database. The HRIS platform can be accessed by either a desktop computer or an easy to use smartphone application designed with legally binding HR workflows in mind. Once fully implemented, we expect to reducemeeting the time, expense, and error rate for on-boarding WSEs into our ecosystem. This allows our HRIS platform to serve as a “gig” marketplace for WSEs and clients and for client businesses to better manage their human capital needs.
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We see our technology platform as a key competitive advantage and differentiator to our competitors and one that will allow us to expand our human capital business beyond our current focus of low-wage employees and healthcare workers. We believe that providing this baseline business, coupled with a technology solution to address additional concerns such as employee scheduling and turnover, will provide a unique, cost effective solution to the HR compliance, staffing, and scheduling problems that these businesses face. We are completing additional features that we expect to generate additional revenue streams, enhance and expand our product offering, increase our client customer and WSE counts, and increase our revenues and profit per existing WSE.
~~Off-Balance Sheet Arrangements~~
~~During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations~~dynamic needs of the ~~SEC.~~
~~Critical Accounting Estimates and Policies~~
A critical accounting policy and related estimates are both important to the portrayal of a company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Refer to the Company's Annual Report for a complete listing of the critical accounting estimates. Below summarizes a few significant accounting policies for your reference.
Our unaudited condensed consolidated financial statements are presented in accordance with U.S. GAAP, and all applicable U.S. GAAP accounting standards effective as of May 31, 2023 have been taken into consideration in preparing the unaudited consolidated financial statements. The preparation of unaudited consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect our unaudited consolidated financial statements:labor market.

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~~Assumption as a going concern; management assumes that~~Instant Interview – In July 2023, the Company ~~will continue as~~announced the "Instant Interview" feature - a ~~going concern, which contemplates continuity~~transformative addition to our application suite. This technology facilitates a rapid interviewing process by capturing video responses from candidates to predetermined questions. This enables recruiters and client managers to expedite the hiring process, allowing for a more agile and responsive assessment of ~~operations, realization of assets and liquidation of all liabilities in the normal course of business;~~potential candidates.

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~~Liability for legal contingencies;~~AI Recruiting Technology: In March 2023, the Company introduced its "AI Recruiting" technology. Leveraging Open AI's open API, this platform is designed to bridge the gap in opportunity matching and enhance recruitment efficiency. "AI Recruiting" utilizes AI-driven candidate outreach in natural language conversations and matching algorithms to connect the right candidates with the right opportunities, streamlining the talent acquisition process and providing “Fast-Fill” staffing capabilities.

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~~Useful lives of property~~Robust HRIS Platform: Our cloud-based HRIS platform captures, holds, and ~~equipment;~~
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~~Deferred income taxes~~processes HR and ~~related valuation allowance;~~
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~~Projected development of workers’ compensation claims.~~payroll information through a secure and user-friendly interface. This technology not only reduces the administrative burden on our clients but also provides valuable business intelligence that can inform strategic decision-making.
~~Growth Initiatives~~
Through November, 20, 2022, the Company concluded activities associated with our SPAC-related growth initiative, and we continued to execute on our other primary growth initiative, which is designed to leverage our technology solution, knowledge, and expertise to provide for significant future revenue growth for the human capital management services we provide to our clients. Further, we have emphasized sales growth in the staffing division of our business, which has historically tended to present less risk and greater margin than the HCM division of our business. Our R&D work under our SPAC project has opened additional market opportunities into which we intend to leverage our technology.
~~Transformative Sales Growth Strategy~~
ShiftPixy's agile business development plan for organic growth has always been focused on building scalable long-term revenue creation with a goal to become the market leader in U.S. contingent labor through increasingly diverse service offerings. Our new market opportunities open doors for us with Fortune 1000 companies to rethink human capital, ShiftPixy’s novel technology and proprietary sourcing tools are designed to disrupt not only traditional thinking about staffing, but also provide a cure to toxic employee turnover and thus provide labor cost certainty.

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~~This new~~The deployment of "Instant Interview" and ~~compelling go-to-market strategy is prepared~~"AI Recruiting" technologies exemplifies ShiftPixy's dedication to ~~leverage the recently expanded staffing platform on the ShiftPixy Human Resources Information System (“HRIS”)~~technological innovation that ~~offers clients an industry-leading digital and mobile technology~~elevates stakeholder engagement. These tools not only facilitate a more efficient job placement process but also significantly broaden access to handle the duties and demands of human capital management at significant scale. An enhanced value proposition will offer clients automation, acceleration, liberation, and some indemnification, which we believe will drive growth and deliver value to stakeholders while also increasing our market share. Successful execution of this sales growth plan will leave ShiftPixy strategically positioned for secular growth in the $123 billion temporary and contract employment staffing market in the U.S.
The Company’s transformative sales growth strategy will capitalize on several economic developments in attractive vertical markets including retail, skilled trades, logistics, manufacturing, healthcare, and hospitality. A sustained surge in e-commerce is driving the need for supply chain expansions that require additional warehouses and the labor necessary to expedite delivery and returns. Likewise, a re-focus on domestic manufacturing capacity expansion for critical technology and an acute labor supply gap is anticipated to spur demand for ShiftPixy’s contingent and flexible skilled labor pool. Additional tailwinds supporting our growth strategy include positive demographic trends as the labor market ~~prioritizes flexibility, control,~~for our clients. By optimizing the connection between job seekers and ~~access~~employers in today’s market, aligning with our ambitious national sales expansion plan, ShiftPixy is leading the way in transforming the world of work, making it more accessible, flexible, and responsive to ~~job opportunities anywhere and anytime.~~the needs of today's fast-paced economy.

~~ShiftPixy’s business~~ShiftPixy remains committed to leveraging these technological advancements to unlock new levels of efficiency during the integration of staffing acquisitions and to drive our effectiveness within the staffing services sector, ensuring that our clients can navigate the contingent labor market with unparalleled ease and success.
Corporate Development: Technology-driven Acquisition Strategy
After unwinding the SPAC sponsorship of AXH in November 2022, our corporate development ~~plan offers immediate solutions~~strategy pivoted to ~~critical workflow challenges for~~a direct acquisition model with acquisition activities re-focused on human capital consolidation opportunities. To capitalize on robust market relationships with staffing operators, our acquisition ~~talent management, labor force retention, worker supply chain disruptions,~~team began executing a roll-up of staffing companies with the end goal of creating a national footprint that could leverage our best-in-class technology as a consolidation point and ~~runaway hiring~~value creator. This technology-driven acquisition strategy will equip strategic acquisition targets with proprietary systems and a best-in-market staffing service delivery platform to deliver high revenue growth, margin improvement, and lower SG&A (“Selling General & Administrative”) costs. ShiftPixy’s continuous improvement of its client and candidate experience elevates engagement and satisfaction for neglected contingent and temporary workers. The completion of the Company’s current sales growth strategy is expected by management to create one of the largest employers in the U.S. and build the fastest growing flexible labor force to meet the demands of a fast-changingBy delivering real-time human capital ~~market while ushering significant enterprise value creation~~business intelligence to staffing buyers and ~~recurring revenue growth~~creating real-time connections between flex workers and un-filled jobs, this strategy will solve our clients’ contingent workforce challenges and create valuable opportunities for our shareholders.

~~ShiftPixy Labs~~
~~On July 29, 2020, we announced~~After curating several potential acquisition targets across various staffing verticals, the ~~launch~~field was narrowed to a prospective initial business combination of ~~ShiftPixy Labs, which includes~~firms with common traits: have developed well-entrenched leading market positions over a substantive operating history, are currently servicing the ~~development~~fastest growing markets and sectors with minimal overlap, have built a diversified client base via direct sales with negligible concentration issues, have draft unaudited financials showing performance and high growth, and bring to the table a meaningful volume of ~~ghost kitchens~~clients served and worksite employees on active assignment. Acquisition targets currently under exclusive letters of intent represent exponential growth in ~~conjunction with~~ our ~~wholly owned subsidiary, ShiftPixy Labs, Inc. Through this initiative, we intend~~current recurring revenue, significant gross profit improvement, margin expansion opportunities, a blue-chip client base, cyclical tailwinds, and a tenured sales and operational staff excited and ready to ~~bring various food delivery concepts to market that will combine with~~execute our ~~HRIS platform to create an easily replicated, comprehensive food preparation and delivery solution. The initial phase~~rapid growth plan for 2024 onwards. Execution of this ~~initiative is being implemented~~acquisition strategy forges a national footprint with worksite employees or WSEs and clients in our dedicated kitchen facility located in close proximity to our Miami headquarters, which we are already showcasing through the distribution of video programming on social media produced and distributed by our wholly owned subsidiary, ShiftPixy Productions, Inc. If successful, we intend to replicate this initiative in similarly constructed facilities throughout the United States and in selected international locations. We also intend to provide similar services via mobile kitchen concepts, all of which will be heavily reliant on our HRIS platform and which we believe will capitalize on trends observed during the COVID-19 pandemic toward providing customers with a higher quality prepared food delivery product that is more responsive to their needs.
~~The idea of ShiftPixy Labs originated~~50 states serviced from discussions with our restaurant clients, combined with our observations of industry trends that appear to have accelerated during the pandemic. Beginning in calendar 2020, we recognized a significant uptick in the use of mobile applications to order take-out food either for individual pickup or third-party delivery, which grew even more dramatically as the pandemic took hold. Not surprisingly, the establishment of fulfillment kitchens for third party delivery also spread rapidly during this time period, initially among national fast food franchise chains but then among smaller quick service restaurants or "QSR".
We believe that the restaurant industry is in the midst of a food fulfillment paradigm shift that will ultimately result in the widespread use of “ghost kitchens” in a shared environment. Similar to shared office work locations, a shared kitchen can provide significant cost efficiencies and savings compared to the cost of operating multiple retail restaurant locations. Coupled with ShiftPixy’s technology stack, which includes order delivery and dispatch, we believe that the ghost kitchen solutions that emerge from ShiftPixy Labs will provide a robust and effective delivery order fulfillment option for our clients.80 offices nationwide.

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~~Table of Contents~~
We have also observed the growing impact of social media platforms over the past five years, a trend which has accelerated through the pandemic. As this trend has gained steam, many social media influencers have successfully capitalized on their popularity by establishing new business concepts in a variety of industries, including within the QSR space. Some of these QSRs are identified as “virtual” restaurants with delivery-only service fulfilled by centralized ghost kitchens. We intend to capitalize on this trend by creating an extensive social media presence for ShiftPixy Labs.
Many restaurant entrepreneurs have also become successful during the pandemic by moving outside through the use of mobile food trucks, which can be used as a launching point for restaurants and ultimately expanded to traditional indoor dining locations. We have researched this phenomenon and, coupled with our experience in the restaurant industry, believe a significant business opportunity exists to assist with the fulfillment of new restaurant ideas and rapidly expand those ideas across a broad geographic footprint utilizing centralized ghost kitchen fulfillment centers. Again, we believe that ShiftPixy Labs will provide solutions that will facilitate the rapid growth of these new businesses, through a combination of centralized ghost kitchens and an available pool of human capital resources provided through our HRIS platform, as well as though other business assistance provided by our management team.
During Fiscal 2021, we established an industrial facility in Miami that we expect to be fully completed and operational during Fiscal 2023. During Fiscal 2022, we equipped this facility with ten standardized kitchen stations in both single and double kitchen configurations built within standard cargo container shells and ordered a food truck for mobile operation. We expect this facility, upon completion, to function as a state-of-the-art ghost kitchen space that will be used to incubate restaurant ideas through collaboration and partnerships with local innovative chefs, resulting in sound businesses that provide recurring revenue to us in a variety of ways, both through direct sales and utilization of the ShiftPixy Ecosystem, our HRIS platform, and other human capital services that we provide. To the extent that this business model is successful and can be replicated in other locations, it has the potential to contribute significant revenue to us in the future.
We may also take equity stakes in various branded restaurants that we develop and operate with our partners through ShiftPixy Labs. Such ownership interests will be held to the extent that it is consistent with our continued existence as an operating company, and to the extent that we believe such ownership interests have the potential to create significant value for our shareholders.
~~The Company anticipates that it will spin off Labs and have them as a client to use our HRIS platform providing the access to fulfill their workforce needs.~~
~~Workers’ Compensation Insurance~~
During Fiscal 2021, the Company made a strategic decision to change its approach to securing workers’ compensation coverage for our clients. This was primarily due to rapidly increasing loss development factors stemming in part from the COVID-19 pandemic. The combination of increased claims from WSEs, the inability of WSEs to obtain employment quickly and return to work after injury claims and increasing loss development factor rates from our insurance and reinsurance carriers resulted in significantly larger potential loss exposures, claims payments, and additional expense accruals. Starting on January 1, 2021, we began to migrate our clients to our new direct cost program, which we believe significantly limits our claims exposure. Effective March 1, 2021, all of our clients had migrated to the direct cost program.
For the three and nine months ended May 31, 2023 and May 31, 2022, primarily all the recorded in the discounted operations as disclosed in the accompany unaudited condensed statements of operations. The claims estimate increases relating to loss reserves activity for the legacy Sunz and Everest programs. These claims estimates are the subject of ongoing litigation with our former workers’ compensation insurance providers, Sunz and Everest, as described in Note 9, ~~Contingencies,~~ ~~above. We are currently re-evaluating our workers’ compensation liability estimates under our legacy Sunz and Everest programs.~~
~~Following the close of the period ended May 31, 2023, the Everest matter was liquidated. See Note 9,~~ ~~Contingencies~~~~, Everest Litigation and Sunz Litigation, and Note 10 Subsequent Events.~~
~~Vensure Asset Sale Note Receivable Reconciliation~~
On January 3, 2020, the Company entered into an asset purchase agreement with Shiftable HR Acquisition, LLC, a wholly owned subsidiary of Vensure, pursuant which the assignment of client contracts significantly impacted the Company’s quarterly revenue as of November 30, 2019, including 100% of the Company's existing PEO business. In connection with this transaction, the Company had a Note Receivable to be paid over four years. In the Company's third quarter of Fiscal 2022 we recorded an asset impairment to adjust the net realizable value of the long-term note receivable to zero. As of May 31, 2023, Vensure and the Company were engaged in litigation regarding the amount owed to the Company pursuant to the Note Receivable, as described in Note 9, ~~Contingencies.~~
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Results of Operations

The following table summarizes the unaudited condensed consolidated results of our operations for the three ~~and nine~~ months ended ~~May 31, 2023~~February 29, 2024, and ~~May 31, 2022.~~February 28, 2023:

For the Three Months Ended

For the Nine months ended

May 31,
2023

May 31,
2022

May 31,
2023

May 31,
2022

Revenues (See Note 2)

$ 3,988,000

$ 9,643,000

$ 13,833,000

$ 29,021,000

Cost of revenues

3,788,000

9,039,000

12,623,000

27,782,000

Gross profit

200,000

604,000

1,210,000

1,239,000

Operating expenses:

Salaries, wages, and payroll taxes

2,621,000

3,254,000

7,477,000

10,796,000

Professional fees

752,000

2,680,000

2,817,000

6,094,000

Software development

50,000

4,291,000

229,000

6,525,000

Depreciation and amortization

148,000

133,000

447,000

386,000

General and administrative

3,074,000

2,967,000

6,609,000

7,718,000

Total operating expenses

6,645,000

13,325,000

17,579,000

31,519,000

Operating loss

(6,445,000 )

(12,721,000 )

(16,369,000 )

(30,280,000 )

Other (expense) income:

Interest expense

(550,000 )

(1,000 )

(1,007,000 )

(2,000 )
Other income

—

27,000

536,000

43,000

SPAC offering costs

—

—

—

(515,000 )
Total other expense

(550,000 )

26,000

(471,000 )

(474,000 )
Net loss from continuing operations

(6,995,000 )

(12,695,000 )

(16,840,000 )

(30,754,000 )

Loss from discontinued operations, net of tax

(460,000 )

(132,000 )

(1,267,000 )

(283,000 )
Non-controlling interest

—

—

(540,000 )

—

Net loss attributable to Shift Pixy, Inc.

$ (7,455,000 )

$ (12,827,000 )

$ (18,647,000 )

$ (31,037,000 )
Preferred stock preferential dividend and deemed dividend from changes in fair value from warrant modification

—

—

(127,145,000 )

—

Deemed dividend from change in fair value from warrants modification

—

$ —

$ —

$ (7,731,000 )
Net loss attributable to common shareholders

$ (7,455,000 )

$ (12,827,000 )

$ (145,792,000 )

$ (38,768,000 )

Net loss per share, basic and diluted

Continuing operations - basic and diluted

$ (0.70 )

$ (33.08 )

$
(14.84
)

$
(101.72
)
Discontinued operations - basic and diluted

(0.05 )

(0.34 )

(0.13 )

(0.75 )
Net loss per common share – basic and diluted

$ (0.75 )

$
(33.42
)

$
(14.97
)

$
(102.47
)

Weighted average common shares outstanding – basic and diluted

10,057,177

383,726

9,739,578

378,349

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~~We report our revenues as gross billings, net of related direct labor costs for the Company's EAS/HCM clients and revenues without reduction of labor costs for staffing services clients.~~
~~The following table presents certain information related to the gross profit components in thousands, (unaudited):~~

For the Three Months Ended

For the Nine months ended

May 31,
2023

May 31,
2022

May 31,
2023

May 31,
2022

Gross Billings for HCM

$ 8,335

$ 13,924

$ 30,696

$ 39,356

Gross Wages for HCM

(8,224 )

(12,190 )

(29,175 )

(35,304 )
Total Net Revenue for HCM

111

1,734

1,521

4,052

Revenue for Staffing

3,877

7,909

12,312

24,969

Total Net Revenues (in thousands)

$ 3,988

$ 9,643

$ 13,833

$ 29,021

Increase (Decrease), Quarter over Quarter (in thousands)

(5,655 )

7,500

(15,188 )

14,600

Percentage Increase (Decrease), Quarter over Quarter

(58.6 )%

375.0 %

(52.3 )%

101.4 %

Cost of Revenues (in thousands)

$ 3,788

$ 9,039

$ 12,623

$ 27,782

Increase (Decrease), Quarter over Quarter (in thousands)

(5,251 )

(9,000 )

(15,159 )

13,800

Percentage Increase (Decrease), Quarter over Quarter

(58.1 )%

(9.1 )%

(54.6 )%

98.6 %

Gross Profit (in thousands)

$ 200

$ 604

$ 1,210

$ 1,239

Increase (Decrease), Quarter over Quarter (in thousands)

(404 )

1,000

(29 )

800

Percentage Increase (Decrease), Quarter over Quarter

(66.9 )%

(250.0 )%

(2.3 )%

200 %
Gross Profit Percentage

5.0 %

6.3 %

8.7 %

4.1 %
(In Thousands)

For the Three Months Ended

February 29,
2024

February 28,
2023

Revenues

$ 3,813

$ 4,579

Cost of revenues

3,591

4,095

Gross profit

222

484

Operating expenses:

Salaries, taxes and benefits

1,303

2,599

Professional fees

465

870

Software development

1

119

Depreciation and amortization

140

150

General and administrative

3,017

2,010

Total operating expenses

4,926

5,748

Operating loss

(4,704 )

(5,264 )

Other income:

Other income

-

642642

Total other income

-

642

Net loss attributable to ShiftPixy, Inc

(4,704 )

(4,622 )

Loss from discontinued operations, net of tax

-

(607 )

Non-controlling interest

-

(540 )

Net Loss

$ (4,704 )

$ (5,769 )

~~Three mon~~~~ths ended May 31, 2023 as compared to the three months ended May 31, 2022~~
Net revenues for the HCM services exclude the payroll cost component of gross billings. With respect to staffing services, employer payroll taxes, employee benefit programs, and workers’ compensation insurance, we believe that we are the primary obligor, and we have latitude in establishing price, selecting suppliers, and determining the service specifications. As such, the billings for those components are included as revenue. Revenues are recognized ratably over the payroll period as WSEs perform their services at the client worksite. See also non-GAAP Financial Measures below.
~~Net Revenues~~Revenue decreased ~~approximately $5.7~~$0.8 million or 16.7%, from $9.6 million to $4.0 million and for the three months ended May 31, 2023. This decrease is related to the loss of clients during the end of Fiscal 2022 due to executives who focused their time on the SPAC which its impact is fully reflected in the second quarter of Fiscal 2023. The Company expected clients from the SPAC transaction.
~~Cost of Revenues~~ includes the Company's costs associated with employer taxes, workers’ compensation insurance premiums, and the gross wages paid for our staffing clients. Cost of revenues for the three months ended May 31, 2023, decreased by $5.3 million to $3.8 million from $9.0$ 4.6 million for the three months ended ~~May 31, 2022. This~~February 28, 2023, to $ 3.8 million for the three months ended February 29, 2024. The decrease primarily relates to increased competition, increased attrition rate and resulting decrease in billable WSE’s. The Company’s plan is ~~related~~to be very active in Mergers & Acquisitions (“M&A”) in the coming fiscal quarters by acquiring large regional and national staffing companies to implement its roll-up of staffing companies, with the end goal of creating a national footprint that could leverage our best-in-class technology as a consolidation point and value creator.
Gross Profit for the three months ended February 29, 2024, was 5.8% compared to 10.6% for the three months February 28, 2023. The decrease in gross profit mainly relates to decrease in administrative fees charged to the ~~loss of~~Company’s clients ~~during~~based on gross wages and decrease in profit from the ~~end of Fiscal 2022, for which its impact is fully reflected in the second quarter of Fiscal 2023.~~Company’s workers’ compensation program.

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Operating expenses decreased by $0.8 million or 14.3% from $5.7 million for the three months February 28, 2023, to $4.9 million for the three months ended February 29, 2024. The components of operating expenses for such periods are as follows:
~~Gross Profit~~ Salaries, taxes and benefitsdecreased by $1.3 million or 49.9% from $2.6 million for the three months ended February 28, 2023, to $1.3 million for the three months ended February 29, 2024. The Company has significantly reduced its workforce in order to preserve cash and adapt the staffing level to the current required level of operations.
Professional fees primarily consist of legal, accounting, consulting and board fees. Professional fees decreased by $0.4 million or 46.6%, from $0.9 million for the three months ended February 28, 2023, to $0.5 million for the three months ended February 29, 2024. The decrease is primarily related to a decrease of approximately $0.3 million related to accounting and auditors’ fees and approximately $0.1 million in legal fees.
General and administrativeexpenses consist of office rent and related overhead, software licenses, insurance, stock- based compensation, insurance. marketing, travel and entertainment, penalty and interest on payroll and other general business expenses. The Company presents the penalties and interest on its balance of unpaid payroll tax liability in general and administrative. Penalties and interest expenses are calculated based upon the outstanding obligations to the Internal Revenue Services, States and local authorities.
General and administrative expenses increased by $1 million or 50.1% from $2 million for the three months ended February 28, 2023, to $3 million for the three months ended February 29, 2024.
The increase primarily relates to an increase in penalty and interest on payroll for approximately $1.3 million as a direct result of the increased balance in payroll tax liability, offset by a decrease in rent by approximately $0.2 million as the Company vacated previously leased locations, decrease of approximately $0.2 million in marketing.
Other incomedecreased by $0.6 million or 100% from $0.6 million for the three months ended February 28, 2023, to $0 for the three months ended February 29, 2024. Other income consisted of the net liability of IHC at the time of deconsolidation on February 7, 2023.
Loss from discontinued operations represents the reassessment of the workers' compensation claims reserve associated with our former clients that the Company transferred to Vensure as part of the Vensure Asset Sale. Discontinued operations were not recorded for the three months ended February 29, 2024, due to the Everest litigation settlement in June 2023 and Sunz’s settlement in January 2024.
Non-controlling interest represented the 85% of IHC (previous SPAC) that the Company did not own. IHC was dissolved on November 14, 2022, and the Trustee released all the redemption funds from the Trust Account to IHC shareholders on December 1, 2022, effectively liquidating the Trust.
Net loss for the three months ended ~~May 31, 2023~~February 29, 2024, was ~~$0.2~~$4.7 million as compared to ~~a gross profit of $0.6~~$5.8 million ~~or 5.0.%~~ for the three months ended ~~May 31, 2022.~~February 28, 2023, a decrease of $1.1 million based upon the above factors.
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Table of Contents
The following table summarizes the unaudited condensed consolidated results of our operations for the six months ended February 29, 2024, and February 28, 2023:
(In Thousands)

For the Six Months Ended

February 29,
2024

February 28,
2023

Revenues

$ 7,587

$ 9,844

Cost of revenues

6,915

8,941

Gross profit

672

903

Operating expenses:

Salaries, taxes and benefits

2,664

4,856

Professional fees

1,279

2,065

Software development

1

179

Depreciation and amortization

281

299

General and administrative

9,181

3,991

Total operating expenses

13,406

11,390

Operating loss

(12,734 )

(10,487 )

Other (expense) income:

Gain from legal settlement

2,500

-

Other income (expense)

(18 )

642

Total other income

2,482

642

Net loss attributable to ShiftPixy, Inc

$ (10,252 )

$ (9,845 )

Loss from discontinued operations, net of tax

-

(807 )

Non-controlling interest

-

(540 )

Net Loss

$ (10,252 )

$ (11,192 )
Revenue decreased by $2.2 million or 22.9%, from $9.8 million for the six months ended February 28, 2023, to $7.6 million for the six months ended February 29, 2024. The decrease ~~correlates~~primarily relates to increased competition and the resulting decrease in billable WSE. The Company’s plan is to be very active in M&A in the coming fiscal quarters by acquiring large regional and national staffing companies to implement its roll-up of staffing companies, with the end goal of creating a national footprint that could leverage our best-in-class technology as a consolidation point and value creator.
Gross Profit for the six months ended February 29, 2024, was 8.9% compared to 9.2% for the six months February 28, 2023. The slight decrease in gross ~~wages due~~profit mainly relates to ~~the loss of clients previously mentioned~~a decrease in WSE and the ~~mix of clients for~~resulting administrative fees earned, along with a decrease in the ~~change in~~ gross profit ~~percentage.~~on workers’ compensation.

Operating expenses ~~decreased~~increased by $2.0 million or 17.7% from $11.4 million for the ~~three~~six months February 28, 2023, to $13.4 million for the six months ended ~~May 31, 2023, by $6.7 million, compared to the three months ended May 31, 2022.~~February 29, 2024. The components of operating expenses change for such periods are as follows:

Salaries, ~~wages~~taxes and ~~payroll taxes~~benefits decreased by $2.2 million or 45.1% from $4.9 million for the ~~three~~six months ended ~~May 31,~~February 28, 2023, ~~by approximately $0.6~~to $2.7 million ~~as compared~~for the six months ended February 29, 2024. The Company has significantly reduced its workforce in order to preserve cash and adapt the staffing level to the ~~three months ended May 31, 2022. The decrease is directly related to the reduction in employees during the Fiscal 2022, including C-suite salary employees. The Company experience a reduction~~current level of ~~approximately 14 employees when compared period over period or a reduction from 82 employees as of May 31, 2022 to 68 corporate employees as of May 31, 2023.~~operations.

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Table of Contents
Professional fees primarily consist of legal, ~~fees,~~ accounting, ~~and public company costs,~~ board fees, and consulting fees. ~~professional~~Professional fees decreased by $0.8 million or 38.1%, from $2.1 million for the ~~three~~six months ended ~~May 31,~~February 28, 2023, ~~decreased by $1.9~~to $1.3 million ~~compared to three~~for the six months ended ~~May 31, 2022.~~February 29, 2024. The decrease is ~~directly~~primarily related to ~~the ceased operations of our sponsored SPAC for which the Company is no longer incurring expenses. In addition, the company experienced~~a $0.4 million decrease in ongoing legal costs litigation, and a decrease ~~in legal~~of $0.2 million related to consulting fees and a decrease of ~~$0.5 million.~~$0.2 million related to accounting and auditors’ fees.

~~Software development~~ consists of costs associated with research and development outsourced to third parties. Software development costs decreased by $4.2 million for the three months ended May 31, 2023, respectively, compared to the three months May 31, 2022. The decrease is related to the reduction of external IT consultants as the application was essentially completed during the second half of Fiscal 2022. In addition, the company recorded a $4.0 million charge related to an impairment of a software asset. This transaction is related to a legal dispute noted in our legal support documentation.
General and administrative expenses ~~expenses~~ consist of office rent and related overhead, software licenses, insurance, ~~penalties,~~ stock- based compensation, insurance. marketing, travel and entertainment, penalties and interests on payroll, and other general business expenses.
General and administrative expenses increased by $5.2 million or 130% from $4.0 million for the ~~three~~six months ended ~~May 31,~~February 28, 2023, to $9.2 million for the six months ended February 29, 2024.
The increase primarily relates to an increase in penalties and interest on payroll due to the IRS, State and local authorities for approximately $2.1 million as a direct result of the increased bybalance in payroll tax liability. Further, the Company also experienced an increase in legal settlement fees of approximately $2.1 million, most of which is attributable to the Sunz settlement. Indeed, the Sunz litigation was settled for $3.5 million with an upfront payment of $0.4 million and monthly payments of $0.1 million until the balance is fully paid. Finally, there was an increase of $0.2 million ~~compared to the three months ended May 31, 2022. The increase is~~in bad debt related to ~~reduced short-term leases, travel & entertainment,~~a related party receivable, and an increase of $0.7 million in insurance and miscellaneous expense being offset in part by a $1.0 million increase in expense from penalties related to payroll obligations owed to the Internal Revenue Service "IRS" and state taxing authorities.expenses.

Other ~~incom~~income~~e for the three months ended May 31, 2023 was zero compared to $0.03~~increased by $1.8 million or 286.6% from $0.6 million for the ~~three~~six months ended ~~May 31, 2022.~~February 28, 2023, to $2.5 million for the six months ended February 29, 2024. The ~~decrease is~~Company recognized $2.5 million in other income from a legal settlement with Vensure in the six months ended February 29, 2024.
Loss from discontinued operations represents the reassessment of the workers' compensation claims reserve associated with our former clients that the Company transferred to Vensure as part of the Vensure Asset Sale. Discontinued operations were not recorded for the six months ended February 29, 2024, due to the ~~elimination~~Everest litigation settlement in June 2023 and Sunz settlement in January 2024.
Net loss for the six months ended February 29, 2024, was $10.3 million as compared to $11.2 million for the six months ended February 28, 2023, a decrease of $0.9 million based upon the above factors.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
As of February 29, 2024, the Company had cash of less than $0.1 million and a working capital deficit of $58.9 million. During the six months ended February 29, 2024, the Company used approximately $2.1 million of cash in operations and incurred $10.3 million of losses, resulting in an accumulated deficit of $236.6 million.
As of February 29, 2024, the Company is delinquent with respect to remitting payroll tax payments to the IRS, States, and local jurisdictions for an aggregate amount of $34.4 million including penalties and interest. The Company does not have sufficient cash to meet its liquidity requirements for the following twelve months from the date of issuance of these consolidated condensed financial statements. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company has received delinquent notices and notices relating to liens from the IRS claiming it owes approximately $21.1 million for unpaid payroll tax liabilities, including penalties and interest. The balances reported on such notices do not represent the full payroll tax liability of the ~~IHC SPAC.~~Company as of February 29, 2024. The Company expects its payroll tax liabilities, penalties and interest to increase in the future. Moreover, the IRS has threatened to take enforced collection against the Company and its subsidiaries. The Company has taken steps to preserve so-called “collection due process rights:
■
In October of 2023, the IRS issued to ShiftPixy a Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing, with respect to ShiftPixy's Form 941 and Form 940 for specific years. In November of 2023, ShiftPixy timely filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, with respect to ShiftPixy's Liability That Are Subject to Enforced Collection. That Form 12153 requested, among other things, an abatement of additions to tax and related interest for the failure to make required deposits and the failure to timely pay required tax that are included within ShiftPixy’s Liability That Are Subject to Enforced Collection.

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■
On December 12, 2023, the Company received a lien from the IRS. The IRS can levy the Company’s bank accounts. As a result of the appeal filed with the US Tax Court of Appeals, the tax lien is on stay.
■
In January of 2024, ShiftPixy filed Form 12153, Request for a Collection Due Process or Equivalent Hearing, with respect to ShiftPixy's Liability That Are Subject to Enforced Collection
■
The Company had a collection due process hearing with the IRS Independent Office of Appeals in October 2023. In October and November of 2023, the Company requested that the IRS Independent Office of Appeals (“Appeals”), among other things, abate additions to tax and related interest for the failure to make required deposits and the failure to timely pay required tax.
■
In February 2024, the Company received a Notice of Determination from the IRS on our administrative claims wherein the IRS denied, entirely, our appeal for relief.
■
The Company appealed to the US Tax Court of Appeals on March 25, 2024.
The IRS can, with limited notice, levy the Company’s bank accounts and subject it to enforced collection if the Company cannot obtain a resolution of the payroll tax issues. There is no assurance that the US Tax Court of Appeals will abate penalties and interest currently assessed against the Company by the IRS. If the Company is not successful in getting the outstanding penalties, and/or interest abated, including working out a payment plan with the IRS, it may cause the Company to file for bankruptcy protection in the near future.
The Company has retained tax counsel and has been in near constant communication with the IRS regarding processing its Employee Retention Tax Credits (“ERTCs”). As of September 14, 2023, the IRS has a moratorium on processing new ERTC claims and many of the Company’s clients are seeking refunds. Recently, the Company has filed ERTC claims for its clients and has not received any acceptance from the IRS. Some clients have filed suits against the Company, demanding that the Company takes action to file for additional ERTCs for certain tax periods.
The Company has taken aggressive steps to reduce its overhead expenses. The Company has plans and expectations for the next twelve months include raising additional capital which may help fund the Company’s operations and strengthening the Company’s sales force strategy by focusing on staffing services as the key driver towards its success. In addition, the Company is planning on acquisitions funded by stock and debt to attempt to generate future cash flows. There is no assurance that the Company can execute on obtaining additional equity or debt on the terms that the Company is seeking. In addition, there is no assurance that the Company can execute its contemplated acquisitions and on terms that are deemed appropriate to the Company. These condensed consolidated financial statements do not include any adjustments for these uncertainties. In addition, the Company needs to take additional steps to pay down its payroll taxes with the IRS, states and local tax authorities. If not, penalties and interest will continue to increase. There is a likelihood that the Company may file for bankruptcy in the near future.
The following table sets forth a summary of changes in consolidated cash flows for the six months ended February 29, 2024, and February 28, 2023, in thousands:

For the Six Months
Ended
February 29,

2024

2023

Net cash used in operating activities

$ (2,075 ) )

$ (5,323 )
Net cash provided by investing activities

5

117,275

Net cash provided by (used in) financing activities

2,016

(111,752 )
Increase (decrease) in cash

$ (54 )

$ 200

41
Table of Contents

~~Interest expense~~ primarily consist of the Company's obligation to the IRS and state tax authorities based upon its unpaid payroll liabilities. . Interest expense for the three months ended May 31, 2023 was $0.6 million compared to May 31, 2022.
~~Nine months ended May 31, 2023 as compared to nine months ended May 31, 2022~~
~~Net Revenues~~ decreased $15.2 million from $29.0 million to $13.8 million for the nine months ended May 31, 2023. this decrease is predominantly due to the decrease in net wages related to the loss of a few clients during the end of Fiscal 2022, for which its impact is fully reflected in the nine months ended May 31, 2023.
~~Cost of Revenues~~ includes the Company's costs associated with employer taxes, workers’ compensation insurance premiums, and the gross wages paid for our staffing clients. Cost of revenues for the nine months ended May 31, 2023, decreased by $15.0 million to $12.8 million from $27.8 million for the nine months ended May 31, 2022. The decrease correlates with the decrease in our gross wages.
~~Gross Profit~~ was $1.1 million or 7.5% for the nine months ended May 31, 2023 as compared to a gross profit of $1.2 million or 4.1% for the nine months May 31, 2022 due to lower gross wages for the nine months ended May 31, 2023 and the mix of clients for the change in gross profit.
~~Salaries, wages and payroll taxes~~ decreased for the nine months ended May 31, 2023, by approximately $3.3 million, as compared to May 31, 2022. The decrease is primarily attributable to the significant reduction in employee head count through all departments.
~~Professional fees~~ consist of legal fees, accounting and public company costs, board fees, and consulting fees. Professional fees for the nine months ended May 31, 2023, decreased by $3.3 million, compared to May 31, 2022. The decrease is directly related to the ceased operations of our sponsored SPAC for which the Company is no longer incurring expenses.
~~Software development~~ consists of costs associated with research and development outsourced to third parties. Software development costs decreased by $6.3 million, for the nine months ended , respectively, compared to the nine months May 31, 2022. The decrease is related to a reduction in the number of external IT consultants as the application was substantially completed during the second half of Fiscal 2022. In addition, the company recorded an impairment related to a Software asset of $4.0 million in Q3 2022. This impairment is related to a legal dispute discussed within our legal support documentation.
~~General and administrative~~ expenses consist of office rent and related overhead, software licenses, insurance, penalties, stock- based compensation, travel and entertainment, and other general business expenses. General and administrative expenses for the nine months ended May 31, 2023, decreased by $0.7 million, compared to May 31, 2022. Increased expenses in FYE 2023 for penalties related to outstanding payroll tax liabilities owed to the IRS and states taxing for approximately $1.4 million, offset expense reductions in insurance, rent, other short-term leases and miscellaneous expense.
~~Other income~~ for the nine months ended May 31, 2023 was $0.1 million compared to $0.04 million for the nine months ended May 31, 2022. The increase is related to the deconsolidation of IHC along with a small balance related to the company credit card award program.
~~Interest expense~~ primarily consist of the Company's obligation to the IRS and state tax authorities based upon its unpaid payroll liabilities. Interest expense for the nine months ended May 31, 2023 was $1.0 million as compared to the nine months ended May 31, 2022 which was $2,000.
45
~~Table of Contents~~
~~Cash Flows~~
~~The following table summarizes our sources and uses of cash for the periods presented:~~

For the Nine Months Ended

May 31, 2023

May 31, 2022

Net cash used in operations activities

$ (6,392,000 )

$ (13,380,000 )
Net cash provided by (used in) investing activities

117,131,000

(117,265,000 )
Net cash (used in) provided by financing activities

(111,213,000 )

129,516,000

Net increase in cash

(474,000 )

(1,129,000 )
Cash - beginning of period

618,000

1,199,000

Cash - end of period

$ 144,000

$ 70,000

Operating Activities

Cash used in operations for the ~~nine~~six months ended ~~May 31,~~February 29, 2024, was approximately $2.1 million, which resulted primarily from a net loss of $10.3 million, offset by stock-based compensation of $0.4 million, $0.2 million of provision for doubtful accounts, $0.2 million of amortization of right-of-use assets, $0.3 million of amortization and depreciation, $0.1 million of fair value of shares to be issued to the Company’s directors and $7.0 million of net change in operating assets and liabilities.
Net cash used in operations for the six months ended February 28, 2023 was ~~$6.5~~$5.3 million, primarily consisting of a net loss from continuing operations of ~~$18.6~~$10.4 million, a decrease in ~~accounts receivable and workers compensation payable of $0.8 million, offset by~~ accounts payable and accrued expenses of ~~$1.0~~$0.8 million, decrease in accounts receivable of $0.5 million, a decrease in workers compensation of $0.4 million offset by an increase in payroll related liabilities of ~~$8.3~~$4.9 million, an increase of $0.4 million in prepaid and other liabilities, an increase in non-cash ~~expenses~~stock-based compensation expense of ~~$1.5~~$0.6 million and ~~impairment loss~~an increase in depreciation and amortization expense of ~~$4.0~~$0.3 million.

Cash used in operations of ShiftPixy, Inc for the nine months ended May 31, 2022 was $10.3 million primarily consisting of the net loss of $18.1 million, a decrease in workers compensation of $0.5 million, a decrease in prepaid and other current assets of $0.6 million, offset by an increase in payroll related liabilities of $3.3 million, an increase in accounts payable and accrued expenses of $3.1 million, an increase in non-cash expenses of $1.0 million.
Investing Activities

Net cash provided by investing activities for the ~~nine~~six months ended ~~May 31,~~February 29, 2024, was de minimis, resulting from the cash proceeds from the sale of fixed assets.
Net cash provided by investing activities for the six months ended February 28, 2023, was ~~$117.1~~$117.3 million from the redemption of IHC Trust Account of ~~$117.2~~$117.6 million ~~and from~~offset by the purchase of fixed asset of $0.3 million.
Financing Activities
Net cash ~~used investing~~provided by financing activities for the ~~nine~~six months ended ~~May 31, 2022,~~February 29, 2024, was ~~$129.5~~$2.0 million ~~which was from an investment of $116.7 million~~resulting from the net proceeds of ~~the initial public offering into the IHC Trust Account, proceeds from~~ a private ~~placement of and for the purchase fixed assets of $0.5 million.~~
~~Financing Activities~~placement.

Net cash used in financing activities for the ~~nine~~six months ended ~~May 31,~~February 28, 2023, was ~~$111.2~~$111.8 million which was from $117.6 million payment to IHC shareholders, offset by the net proceeds of $4.4 million related to a private placement, ~~$2.0~~and $1.4 million from the net proceeds of an ATM offering and $117.6 million payment to IHC shareholders. Net cash provided by financing activities for the nine months ended May 31, 2022 was $129.5 million, primarily from the net proceeds of $116.7 million for an initial public offering of IHC, $11.0 million from the net proceeds from two private placements, $5.4 million net proceeds from common stock issued on exercised warrants and payment of $3.5 million of SPAC related offering cost.offering.

~~Liquidity and Capital Resources~~Off-Balance Sheet Arrangements

As of May 31, 2023, the Company had cash of $0.1 million and a working capital deficit of $41.7 million. During the nine months ended May 31, 2023, the Company used approximately $16.5 million of cash from its continuing operations and incurred recurring losses, resulting in an accumulated deficit of $211.4 million. As of May 31, 2023, the Company is delinquent with respect to remitting payroll tax payments to the IRS. The Company has been in communication with the IRS regarding amounts owing in relation to Employee Retention Credits due. In addition, some clients have filed suits against the Company, demanding that the Company take action to file for additional Employee Retention Credits for certain tax periods. Until the matter is concluded, and the taxes are paid, the IRS could, subject to its standard processes and the Company’s rights to respond, implement collection actions, including such actions as levying against Company bank accounts, to recover the amounts that it calculates to be due and owing.
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~~Table of Contents~~
~~Historically, the Company's principal source of financing has come through the sale of the Company's common stock, including in certain instances, warrants and issuance of convertible notes.~~
On May 23, 2023, the Company filed a registration statement on Form S-1, providing for the sale of shares of the Company's common stock on a firm commitment basis, underwritten by Titan Partners Group LLC, a division of American Capital Partners, LLC ("Titan"). On June 7, 2023, the Company filed an amendment to the registration statement, on Form S-1/A, providing for the sale of 4,566,210 shares of our common stock, par value $0.0001 per share at an assumed public offering price of $2.19 per share, pursuant to an underwriting agreement with Titan. The commitment was not consummated by Titan, and on June 30, 2023, the Company filed an amendment to the registration statement, on Form S-1/A, providing for the sale on a best efforts basis of up to $10.0 million of shares of our common stock, par value $0.0001 per share, together with common warrants to purchase up to 4,926,108 shares of common stock, pursuant to a Placement Agent Agreement with AGP.
On January 31, 2023, the Company filed a registration statement on Form S-3 and related prospectus for the sale of up to $100 million of the Company's equity securities via a "shelf" or "at-the-market" ("ATM") sales mechanism over a three-year period. The registration statement also included a prospectus supplement providing for the sale of up to $8,187,827 of the Company's shares of common stock, which the Company proposed to effect pursuant to an ATM Issuance Sales Agreement ("Sales Agreement") executed with A.G.P./Alliance Global Partners (the “Agent” or "AGP"). Under the Sales Agreement, the Company's shares of common stock could be sold from time to time and at various prices at the Company’s sole control, subject to the conditions and limitations in the Sales Agreement with AGP. The ATM was scheduled to expire on January 31, 2026. For the nine-months ended May 31, 2023, the Company received $2.4 million in gross proceeds ($2.0 million, net of costs) from the sale of 439,429 shares of the Company’s common stock. On May 22, 2023, the Company terminated the Sales Agreement and concluded the ATM. There is a limitation on the amount of funds that the Company can access under the baby shelf rules which is the value of a company’s public float if less than $75 million, The Company can only raise ⅓ of its float value over the previous 12-month period.
The recurring losses, negative working capital and cash used in the Company’s operations are indicators of substantial doubt as to the Company’s ability to continue as a going concern for at least one year from issuance of these financial statements. For a discussion of our liquidity and capital resources, see Note 2, Liquidity and Capital Resources to the accompanying financial statements.
The recurring losses, negative working capital and cash used in the Company’s operations are indicators of substantial doubt as to the Company’s ability to continue as a going concern for at least one year from issuance of these financial statements. The Company's plans and expectations for the next twelve months include raising additional capital to help fund expansion of our operations and strengthening of the Company's sales force strategy by focusing on staffing services as the Company's key driver to improve the Company's margin and the continued support and functionality improvement of the Company's information technology (“IT”) and HRIS platform. This expanded go-to-market strategy will focus on building a national account portfolio managed by a newly formed regional team of senior sales executives singularly focused on sustained quarterly revenue growth and gross profit margin expansion. We expect to continue to invest in the Company's HRIS platform, ShiftPixy Labs, and other growth initiatives, all of which have required and will continue to require significant cash expenditures.
The Company also expects its ShiftPixy Labs growth initiative to generate cash flow once launched, by functioning as an incubator of food service and restaurant concepts through collaboration and partnerships with local innovative chefs. If successful, the Company believes that this initiative will produce businesses that provide recurring revenue through direct sales, as well as through utilization of the ShiftPixy Ecosystem, HRIS platform, and other human capital services that the Company provides. To the extent that this business model is successful and can be replicated in other locations, the Company believes that it has the potential to contribute significant revenue to ShiftPixy in the future. The Company may also take equity stakes in various branded restaurants that it develops and operates with its partners through ShiftPixy Labs. Such ownership interests will be held to the extent that it is consistent with the Company’s continued existence as an operating company, and to the extent that the Company believes such ownership interests have the potential to create value for its shareholders.
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~~Table of Contents~~
The Company expects to raise capital from additional sales of its securities during this fiscal year either through its ATM, registered public offerings or private placements, the proceeds of which the Company intends to use to fund its operations and growth initiatives. There can be no assurance that we will meet the requirements to be able to sell securities on terms that the Company is seeking. Management believes that its current cash position, along with its anticipated revenue growth and proceeds from future sales of its securities, when combined with prudent expense management, could alleviate substantial doubt about its ability to continue as a going concern and to fund its operations for at least one year from the date these financials are available (especially when considering the absence of any funded debt outstanding on its balance sheet). If these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months, it may need to curtail certain aspects of its operations or expansion activities, consider the sale of additional assets, or consider other means of financing. The Company can give no assurance that it will be successful in implementing its business plan and obtaining financing on advantageous terms, or that any such additional financing will be available. If the Company is not successful in obtaining the necessary financing, we do not currently have the cash resources to meet our operating commitments for the next twelve months. These unaudited condensed consolidated financial statements do not include any adjustments for this uncertainty. Therefore, management has concluded that Company that there is substantial doubt its ability to continue as a going concern for the next twelve months.
~~As noted in the accompany condensed financial statements, Note 4: Special Purpose Acquisition Company~~ ~~("SPAC") Sponsorship~~, on February 7, 2023, three creditors of IHC filed an involuntary petition for liquidation under Chapter 7 against IHC in the US Bankruptcy Court for the Southern District of Florida. The matter is proceeding, and the Company and its subsidiary, ShiftPixy Investments, Inc., are anticipated to be listed as two of the largest creditors of IHC. However, there can be no assurance that either the Company or ShiftPixy Investments, Inc. will recover any of the amounts owed to them by IHC from the bankruptcy estate. ShiftPixy, Inc. is the largest creditor of IHC, having periodically advanced a total of approximately $2 million in cash to IHC to enable it to fund its ongoing prospective target engagement, evaluation and negotiation activities. Following the dissolution of IHC, in January of 2023, the dissolved IHC issued approximately $0.6 million to ShiftPixy, Inc., in partial satisfaction of amounts advanced by ShiftPixy, Inc. to IHC, including the return to ShiftPixy, Inc. of a recently received refund of approximately $0.5 million in premiums applicable to the cancellation of directors and officer insurance policies attributable to four of the SPACs sponsored by ShiftPixy Investments, Inc. Although the public shareholders of IHC received in excess of $117.6 million in redemption of their capital contributions to IHC, the bankruptcy trustee could elect to pursue the amount received by the Company from IHC, if it can demonstrate that the payment was preferential and made outside of the ordinary course of business of IHC.None

~~Non-GAAP Financial Measures~~Critical Accounting Estimates

~~In addition to financial measures presented~~There have been no material changes in ~~accordance with GAAP, we monitor other non-GAAP measures that we use to manage~~ our ~~business, make planning decisions~~Critical Accounting Estimates from the information provided in the "Critical Accounting Estimates" section of "Item 7- Management's Discussion and ~~allocate resources. These key financial measures provide an additional view~~Analysis of Financial Condition and Results of Operations" in our operational performance over the long term and provide useful information that we use to maintain and grow our business. The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. They are not meant to be considered in isolation, superior to, or as a substitute for the directly comparable financial measures presented in accordance with GAAP.
Our revenue recognition policy differs for our EAS/HCM and staffing clients and is dependent on the respective CSA applicable to each client. During Fiscal 2021, some of our EAS clients migrated to a staffing CSA. Our policy is to report revenues as gross billings, net of related direct labor costs, for our EAS/HCM clients, and revenues without reduction for labor costs for staffing clients. For the three months ended May 31, 2023, our gross billings from HCM and staffing services totaled approximately $8.3 million and $3.0 million (total of $12.1 million), representing 68% and 32% of our gross revenue, respectively. For the nine months ended May 31, 2023, our gross billings from HCM and staffing services totaled approximately $30.7 million and $11.8 million (total of $42.5 million), representing 72% and 28% of our gross revenue, respectively. For the three and nine months ended May 31, 2022, our gross billings from HCM and staffing services totaled approximately $13.9 million and $8.7 million (total of $22.6 million) and $39.4 million and $25.8 million (total of $65.2 million), respectively.
Gross billings represent billings to our business clients and include WSE gross wages, employer payroll taxes, and workers’ compensation premiums as well as administrative fees for our value-added services and other charges for workforce management support. Gross billings for our HCM services are a non-GAAP measurement that we believe to represent a key revenue-based operating metric, along with number of WSEs and number of clients. Active WSEs are defined as employees on our HRIS platform that have provided services for at least one of our clients for any reported period. Our primary profitability metrics are gross profit, and our primary driver of gross profit is administrative fees.
48
~~Table of Contents~~
~~Reconciliation of GAAP to Non-GAAP Measure~~
~~Gross Billings to Net Revenues~~
~~The following table presents a reconciliation of our Gross Billings (unaudited) to Revenues:~~

For the Three Months Ended May 31,

For the Nine Months Ended May 31,

($ in thousands)

2023

2022

2023

2022

Gross Billings

$ 12,144

$ 22,628

$ 42,524

$ 65,198

Less: Adjustment to Gross Billings

(8,156 )

(12,985 )

$ (28,691 )

$ (36,177 )
Revenues

$ 3,988

$ 9,643

$ 13,833

$ 29,021

~~The following table provides the key revenue and our primary gross profit driver used by management (unaudited).~~

For the Three Months Ended May 31,

For the Nine Months Ended

2023

2022

2023

2022

Administrative Fees (in thousands)

$ 433

$ 461

$ 1,065

$ 1,404

Increase (Decrease), Quarter over Quarter (in thousands)

$ (28 )

100

$ (340 )

$ 313

Percentage Increase (Decrease), Quarter over Quarter

(6.1 )%

15.8 %

(24.2 )%

28.7 %
Administrative Fee % of Gross Billings

4.2 %

2.0 %

2.9 %

2.2 %

Average WSEs

1,600

3,000

2,000

3,000

Average Gross Billings per Average WSE

$ 7,590

$ 7,543

$ 21,300

$ 21,733

Average Active WSEs totaled approximately 1,600, decreased for the three months ended May 31, 2023, as compared to 3,000 WSEs for three months ending May 31, 2022 due to the decrease in net revenue was due to loss of clients. Average Active WSEs totaled approximately 2,000, decreased for the nine months ended May 31, 2023 as compared to 3,000 WSEs for nine months ending May 31, 2022 was due the decrease in net revenue was due to loss of clients.Form 10-K.

Material Commitments

We do not have any contractual obligations for ongoing capital expenditures at this time. ~~The Company purchased fixed assets~~We do, however, purchase equipment and software necessary to conduct ~~its~~our operations on an as needed basis. The Company has several legal commitments pursuant to legal disputes and agreed upon settlements for an aggregate amount of approximately $10.9 million.

Contingencies

For a discussion of contingencies, see Note 9,11, Contingencies, to the Notes to the ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements in “Part I, Item 1. ~~condensed~~Condensed consolidated financial ~~statements”~~Statements” of this Quarterly Report.
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Table of Contents

New and Recently Adopted Accounting Standards

For a listing of our new and recently adopted accounting standards, see Note 2, Summary of Significant Accounting Policies, to the Notes to the condensed consolidated financial statements in “Part I, Item 1. ~~condensed consolidated financial statements”~~Condensed Consolidated Financial Statements” of this Quarterly Report.
49
~~Table of Contents~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (Principal Executive Officer) and the Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, the Company recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company ~~conducted~~carried out an evaluation under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of its disclosure controls and procedures as of ~~May 31, 2023,~~February 29, 2024, as defined in Rule 13a -15(e) and Rule 15d -15(e) under the Exchange Act. This evaluation was carried out under supervision and with the participation of our Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of ~~May 31, 2023,~~February 29, 2024, our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting related to (i) the lack of ~~adequate accounting~~segregation of duties, (ii) penalties and ~~finance personnel,~~interest on payroll taxes, (iii) financial reporting and information technology as further discussed in our Annual Report on Form 10-K for the year ended August 31, ~~2022, as amended by Forms 10-K/A,~~2023, and which the Company determined continued to exist as of ~~May 31, 2023.~~February 29, 2024.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended ~~May 31, 2023,~~February 29, 2024, that ~~have~~ materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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Table of Contents

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is a party to various legal actions, in addition to the contingencies noted ~~above~~ in ~~Note 9:~~ ~~Contingencies~~ ~~to the accompanying financial statements,~~item 11, above, arising in the ordinary course of business which, in the opinion of the Company, are not material in that management either expects that the Company will be successful on the merits of the pending cases or that any liabilities resulting from such cases will be immaterial or substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these actions, management believes that the aggregate amount of such liabilities will not be material to the results of operations, financial position, or cash flows of the Company.
There have been no material developments to the litigation disclosed in our Annual Report on Form 10-K and ~~Forms 10-K/A for the fiscal year ended August 31, 2022 (“Fiscal 2022”),~~ filed with the SEC on December ~~13, 2022, December~~ 14, ~~2022, February 3, 2023 and February 9,~~ 2023, respectively, except as noted in Note 9:11 Contingencies to the accompanying condensed consolidated financial statements. The most significant development to the Company’s contingencies relates to the receipt of a notice of determination from the IRS, on February 28, 2024, on the Company’s administrative claims, wherein the IRS denied, entirely, the Company’s appeal for relief. The Company appealed to the US Tax Court of Appeals on March 25, 2024.

Item 1A. Risk Factors.

You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part I, Item 1A, Risk Factors, contained in our Annual Report on Form 10-K ~~and Form 10-K/A~~ for Fiscal ~~2022,~~2023, as filed with the SEC on December ~~13, 2022, December~~ 14, ~~2022, February 3, 2023 and February 9, 2023, respectively, which are expressly incorporated herein by reference.~~2023. There have been no material changes from the risk factors disclosed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K ~~and Forms 10-K/A~~ for ~~Fiscal 2022, filed with~~ the ~~SEC on December 13, 2022, December 14, 2022, February 3, 2023 and February 9, 2023, respectively.~~
In addition, we note that our President, CEO and director, Scott W. Absher, currently owns approximately 85.1% of the issued and outstanding shares of the Company’s common stock; accordingly, he may be deemed to control the Company as a result of his voting power and otherwise has significant influence over the voting matters of the shareholders of the Company’s common stock, including but not limited to the power to elect directors and approve other actions that require stockholder approval. Notwithstanding Mr. Absher's share ownership percentage, no action has been taken to seek the Controlled Company Exemption available under Nasdaq Listing Rule 5615(c)(2). If the Company were to seek Controlled Company status, (a) we would not be required to comply with certain governance requirements set forth in the listing standards, including requiring a majority of independent Directors on our Board, the determination of the compensation of our executive officers solely by independent Directors, and the recommendation of nominees for Director solely by independent Directors, and (b) as a result, the Company’s stockholders would not have certain of the same protections as a stockholder of other publicly-traded companies, and the market price of the Company’s common stock could be adversely affected. The concentration of ownership with respect to the Company’s common stock also results in there being a limited trading volume, which may make it more difficult for stockholders to sell their shares and increase the price volatility of the Company’s common stock.year ended August 31, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other ~~Information.~~Information.

Not applicable.

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Table of Contents

Item 6. ~~Exhibits.~~Exhibits.

(a) Exhibits.

Exhibit No.

Document Description

31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF ~~2002~~2002.*

31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. *

32.1*32.1

CERTIFICATION OF ~~CHIEF~~PRINCIPAL EXECUTIVE OFFICER REQUIRED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. **

32.2*32.2

CERTIFICATION OF ~~CHIEF~~PRINCIPAL FINANCIAL OFFICER REQUIRED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. **

101*101
Inline XBRL Document ~~set~~Set for the financial statements and accompanying notes in Part I, Item 1, of this Quarterly Report on Form 10-Q.
104*
~~Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set.~~ **

* Filed herewith
** Furnished ~~herewith.~~herewith

5245
Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ShiftPixy, Inc.,
a Wyoming corporation

~~DATE: July 17, 2023~~Date: April 19, 2024
By:
/s/ Scott W. Absher

Scott W. Absher

Principal Executive Officer

~~DATE: July 17, 2023~~Date: April 19, 2024
By:
/s/ ~~Douglas Beck~~Patrice Launay

~~Douglas Beck~~Patrice Launay

Principal Financial Officer

5346

	May 31, 2023			August 31, 2022
	(Unaudited)
ASSETS
Current assets
Cash	$	144,000		$	618,000
Accounts receivable, net of reserve of $10,000 and $0 as of May 31, 2023 and August 31, 2022 respectively		537,000			279,000
Unbilled accounts receivable		2,046,000			2,105,000
Prepaid expenses		256,000			696,000
Other current assets		271,000			187,000
Cash and marketable securities held in Trust Account (See Notes 2 and 4)		—			116,969,000
Total current assets		3,254,000			120,854,000

Fixed assets, net		2,665,000			2,769,000
Right-of-use operating lease		3,567,000			4,076,000
Deposits and other assets		1,098,000			919,000
Total assets	$	10,584,000		$	128,618,000

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities
Accounts payable and other accrued liabilities	$	18,342,000		$	17,121,000
Payroll related liabilities		24,379,000			16,055,000
Accrued workers’ compensation costs		425,000			568,000
Current liabilities of discontinued operations		1,765,000			1,362,000
Class A common shares of SPAC mandatory redeemable 0 shares and 11,500,000 shares as of May 31, 2023 and August 31, 2022 (See Notes 2 and 4)		—			116,969,000
Total current liabilities		44,911,000			152,075,000

Non-current liabilities
Operating lease liability, non-current		3,017,000			3,541,000
Accrued workers’ compensation costs		922,000			1,227,000
Non-current liabilities of discontinued operations		4,133,000			3,269,000
Total liabilities	��	52,983,000			160,112,000

Commitments and contingencies

Stockholders’ deficit
Preferred stock, 50,000,000 authorized shares; $0.0001 par value: 0 and 8,600,000 shares issued and outstanding as of May 31, 2023 and August 31, 2022.		—			1,000
Common stock, 750,000,000 authorized shares; $0.0001 par value; 10,110,524 and 513,349 shares issued as of May 31, 2023 and August 31, 2022		6,000			5,000
Additional paid-in capital		168,967,000			151,731,000
Accumulated deficit		(211,372,000	)		(192,725,000	)
Total ShiftPixy, Inc. Stockholders’ deficit		(42,399,000	)		(40,988,000	)

Non-controlling interest in consolidated subsidiary (See Note 4)		—			9,494,000

Total stockholders’ deficit		(42,399,000	)		(31,494,000	)

Total liabilities and stockholders’ deficit	$	10,584,000		$	128,618,000

	Preferred Stock Issued						Common Stock Issued				Additional Paid-In			Accumulated			Total Stockholders’ Deficit			Noncontrolling			Total Stockholders’
	Shares			Amount			Shares		Amount		Capital			Deficit			ShiftPixy, Inc.			interest			Deficit
Balance, September 1, 2022		8,600,000		$	1,000			513,349	$	5,000	$	151,731,000		$	(192,725,000	)	$	(40,988,000	)	$	9,494,000		$	(31,494,000	)
Fair market value increase of preferred stock prior to reverse stock split		—			—			—		—		127,145,000			—			127,145,000			—		$	127,145,000
Preferential dividend of preferred stock		—			—			—		—		(127,145,000	)		—			(127,145,000	)		—		$	(127,145,000	)
Common stock issued on exercised prefunded warrants		—			—			124,204		—		1,000			—			1,000			—		$	1,000
Common stock issued for private placement, net of offering costs		—			—			416,667		—		4,387,000			—			4,387,000			—		$	4,387,000
Common stock issued on conversion of preferred shares		(8,600,000	)		(1,000	)		8,600,000		1,000		—			—			—			—		$	—
Stock-based compensation expense		—			—			—		—		735,000			—			735,000			—		$	735,000
Warrant modification expense		—			—			—		—		106,000			—			106,000			—		$	106,000
Additional shares issued due to reverse stock split		—			—			16,976		—		—			—			—			—		$	—
Net proceeds of ATM, net of offering expenses		—			—			439,328		—		1,973,000			—			1,973,000			—		$	1,973,000
Deconsolidation of VIE		—			—			—		—		10,034,000			—			10,034,000			(9,494,000	)	$	540,000
Net loss		—			—			—		—		—			(18,647,000	)		(18,647,000	)		—		$	(18,647,000	)
Balance, May 31, 2023		—		$	—			10,110,524	$	6,000	$	168,967,000		$	(211,372,000	)	$	(42,399,000	)	$	—		$	(42,399,000	)

	For the Three Months Ended				For the Nine Months Ended
Revenue (in thousands):	May 31, 2023		May 31, 2022		May 31, 2023		May 31, 2022

HCM¹	$	111	$	1,734	$	1,521	$	4,052
Staffing		3,877		7,909		12,312		24,969

	For the Three Months Ended				For the Six Months Ended
Revenue:	February 29, 2024		February 28, 2023		February 29, 2024		February 28, 2023
EAS/HCM	$	0.4	$	1.6	$	1.0	$	3.0
Staffing		3.4		3.0		6.6		6.8
	$	3.8	$	4.6	$	7.6	$	9.8

	As of
	May 31, 2023			August 31, 2022
Clients:	(Unaudited)
Client 1		57.8	%	—		%
Client 2		21.4	%		41.9	%
Client 3		9.6	%		13.7	%
Client 4		6.3	%		21.9	%
Client 5	—		%		20.7	%

~~Equipment:~~	~~5 years~~
~~Furniture & Fixtures:~~	~~5 – 7 years~~
~~Leasehold improvements~~	~~Shorter of useful life or the remaining lease term, typically 5 years~~

	As of
	February 29, 2024			August 31, 2023
Client 1		49.6	%		64.5	%
Client 2		39.2	%		23.6	%

	·■	Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company ~~has~~as the ability to access.

	·■	Level 2: Inputs to the valuation methodology ~~include~~include:

	·o	Quoted prices for similar assets or liabilities in active ~~markets~~
		markets.
	·o	Quoted prices for identical or similar assets or liabilities in inactive ~~markets~~
		markets.
	·o	Inputs other than quoted prices that are observable for the asset or ~~liability~~
		liability.
	·o	Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

	·o	If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or ~~liability~~liability.

Equipment:	5 years
Furniture & Fixtures:	5 - 7 years
Leasehold improvements	Shorter of useful life or the remaining lease term, typically 5 years

	Three Months Ended				Nine Months Ended
	May 31, 2023		May 31, 2022		May 31, 2023		May 31, 2022
Options (See Note 5)		10,003		15,498		10,003		15,498
Warrants (See Note 5)		1,252,749		224,402		1,252,749		224,402
Shares of common stock to be issued to directors for services provided, (See Note 7)		59,040		—		59,040		—
Preferred Option (Note 5)		37,570		—		37,570		—
Total potentially dilutive shares		1,359,362		239,900		1,359,362		239,900

For the Three and Six Months Ended	February 29, 2024		February 28, 2023		February 29, 2024		February 28, 2023

Options		242		417		242		417
Warrants		232,679		52,198		232,679		52,198
Shares of common stock to be issued to the directors for services provided, (See Note 7)		21,137		2,460		21,137		2,460
Preferred Option		-		1,565		-		1,565
Total potentially dilutive shares		254,058		56,640		254,058		56,640

	February 29, 2024			August 31, 2023
Equipment	$	2,140		$	2,182
Furniture and fixtures		614			614
Leasehold improvements		604			604
		3,358			3,400
Accumulated depreciation and amortization		(2,028	)		(1,778	)
Fixed assets, net	$	1,330		$	1,622

	February 29, 2024		August 31, 2023
Accounts payable (1)	$	9,698	$	6,527
Contingent lease liability		3,761		3,761
Operating lease liability		916		874
Legal settlement		5,685		1,610
Shares owed to directors for services		838		756
Workers’ compensation		9		1,219
ERTC owed to clients		1,089		1,089
Due to IHC		600		600
Financed insurance policies		128		335
Business tax		788		150
Other		1,008		990
Total	$	24,520	$	17,911

	February 29, 2024		August 31, 2023
Payroll taxes liabilities	$	24,819	$	22,840
Payroll related liabilities		82		237
Accrued penalties and interest		9,542		6,518
Total	$	34,443	$	29,595

	As of
	May 31, 2023 (Unaudited)			August 31, 2022
Gross proceeds	$	19,166,000		$	19,166,000
Cash received at closing – asset sale		(9,500,000	)		(9,500,000	)
Cash received at closing – working capital		(166,000	)		(166,000	)
Gross note receivable	$	9,500,000		$	9,500,000

Less: Transaction reconciliation – estimated working capital adjustments		(2,604,000	)		(2,604,000	)
Adjusted Note Receivable		6,896,000			6,896,000
Reserve for estimated potential claims		(2,892,000	)		(2,892,000	)
Reserve for potential collectability concerns	$	(4,004,000	)	$	(4,004,000	)
Long-term note receivable, estimated net realizable value	$	—		$	—

	Number of shares			Weighted average remaining life (years)		Weighted average exercise price
Warrants outstanding, August 31, 2022		522,786			7.2		47.99
Issued		854,166			6.3		12.02
Exercised		(124,203	)		—		—
Warrants outstanding and exercisable, May 31, 2023		1,252,749			6.4	$	35.68

	Number of shares			Weighted average remaining life (years)		Weighted average exercise price
Warrants outstanding, August 31, 2023		138,309			5.6	$	208.78
Issued		94,375			5.1		30.50
Forfeited		(5	)		—		—
Warrants outstanding, February 29, 2024		232,679			4.9	$	131.5
Warrants exercisable, February 29, 2024		138,304			4.9	$	200.4

	Warrants Outstanding		Weighted Average Life of Outstanding Warrants (In years)		Exercise price
September 2022 Common Warrants (Note 10)		833,334		6.3	$	12.00
September 2022 Underwriter Warrants		20,833		3.9		13.20
July 2022 Common Warrants (Note 10)		348,408		7.1		26.00
Sep 2021Underwriter Warrants		3,762		5.9		175.00
May 2021Underwriter Warrants		2,474		3.0		243.00
October 2020 Common Warrants (1)		23,000		2.4		330.00
October 2020 Underwriter Warrants		2,000		2.4		330.00
May 2020 Common Warrants		12,776		2.0		540.00
May 2020 Underwriter Warrants		1,111		2.0		540.00
March 2020 Exchange Warrants		4,237		2.3		1,017.00
Amended March 2019 Warrants		663		0.8		4,000.00
March 2019 Services Warrants		34		0.8		7,000.00
June 2018 Warrants		63		0.5		9,960.00
June 2018 Services Warrants		54		0.5		9,960.00
		1,252,749		6.4	$	35.68

	Warrants Outstanding		Weighted Average Life of Outstanding Warrants (In years)		Exercise Price
October 2023 Common Warrants		94,375		5.1	$	30.5
July 2023 Common Warrants		86,111		4.4		36.0
October 2023 Common Warrants		34,722		5.6		36.0
September 2022 Underwriter Warrants		868		3.1		316.8
July 2022 Common Warrants		14,517		6.4		36.0
September 2021Underwriter Warrants		157		5.2		4,210.8
May 2021Underwriter Warrants		103		2.2		5,820.0
October 2020 Common Warrants		750		1.6		7,920.0
October 2020 Underwriter Warrants		208		1.6		36.0
May 2020 Common Warrants		83		1.6		7,960.0
May 2020 Underwriter Warrants		532		1.2		12,960.0
March 2020 Common Warrant		178		1.6		24,408.0
March 2020 Exchange Warrants		46		1.2		12,960.0
Amended March 2019 Warrants		28		0.0		96,000.0
March 2019 Services Warrants		1		0.0		168,000.0
Total warrants issued and outstanding		232,679		4.9	$	131.5
Total warrants exercisable		138,304		4.9	$	200.4

	Options Outstanding and Exercisable
	Number of Options			Weighted Average Remaining Contractual Life		Weighted Average Exercise Price
				(In years)
Balance outstanding as of August 31, 2022		11,753			8.1	$	733.00
Forfeited		(1,750	)		8.3		2.70
Balance outstanding expected to be exercisable as of May 31, 2023		10,003			7.2	$	813.70

Options Vested	Number of Options			Weighted Remaining Contractual Life		Weighted Average Exercise Price
				(In years)
Balance, August 31, 2022		5,269			8.1	$	1,146
Vested		2,290			7.7		442
Forfeited		(716	)		8.1		293
Balance, May 31, 2023	6,843				7.4	$	998

	Options Outstanding						Options Vested
Exercise Prices	Number of Options Exercisable		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number of Options		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price
			(In Years)						(In Years)
$50.00 - 1,000.00		9,641		7.6	$	453	6,483			7.1	$	466
$1,001.00 - $4,000.00		20		6.3		1,895		19		6.0		1,896
$4,001.00 - $8,000.00		121		6.1		5,121		120		5.1		5,120
$8,001.00 - $12,000.00		101		5.2		10,298		101		4.1		10,298
$12,001.00 - $16,000.00		109		4.4		15,584		109		4.0		15,584
$16,001.00 - $39,160.00		11		4.4		39,160		11		4.0		39,160
		10,003		7.6	$	814	6,843			7.4	$	998

	Options Outstanding								Options Vested
Exercise Prices	Number of Options Outstanding		Number of Options Exercisable		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price $		Number of Options		Weighted Remaining Contractual Life		Weighted Average Exercise Price $
					(In years)						(In years)
$2,520-$5,000		8		6		7.6		3,078		6		7.6		3,078
$5,001- $10,000		38		25		6.8		7,413		25		6.8		7,413
$10,001-$12,960		196		131		6.4		12,631		131		6.4		12,631
		242		162		6.5		11,495		162		6.5		11,495

	Minimum lease commitments			Minimum lease commitments
2024	$	1,047,000		$	1,073
2025		1,081,000			1,033
2026		928,000			688
2027		694,000			483
2028		403,000			319
Thereafter		225,000			-
*Total minimum payments*		4,378,000			3,596
Less: present value discount		508,000			359
Lease liability		3,870,000		$	3,237

Weighted-average remaining lease term - operating leases (months)		49
Weighted-average remaining lease term - operating leases (years)					3.6
Weighted-average discount rate		5.54	%		5.54	%

	·	~~our~~Our ability to be successful in defending litigation brought against us;
	■	Our ability to pay the outstanding delinquent payroll taxes, including penalties and interest. If the IRS or states and local jurisdictions pursues collection efforts beyond what the Company can afford to pay, the IRS can freeze our bank accounts and the Company may be forced to file for bankruptcy, and
	■
	·	~~our~~Our ability to continue to meet the listing requirements of Nasdaq.

	·	~~Payroll tax compliance and management services;~~

	·	~~Governmental HR compliance services, such as compliance with the Affordable Care Act (“ACA”);~~

	·	~~Reduced client workers’ compensation premiums or enhanced coverage; and~~

	·	~~Access to an employee pool of potential applicants to reduce turnover costs.~~

	·	~~Reduce WSE management costs;~~

	·	~~Automate new WSE and client onboarding; and~~

	·	~~Provide value-added services for our business clients resulting in additional revenue streams to the Company.~~

	·	~~Assumption as a going concern; management assumes that~~Instant Interview – In July 2023, the Company ~~will continue as~~announced the "Instant Interview" feature - a ~~going concern, which contemplates continuity~~transformative addition to our application suite. This technology facilitates a rapid interviewing process by capturing video responses from candidates to predetermined questions. This enables recruiters and client managers to expedite the hiring process, allowing for a more agile and responsive assessment of ~~operations, realization of assets and liquidation of all liabilities in the normal course of business;~~potential candidates.

	·	~~Liability for legal contingencies;~~AI Recruiting Technology: In March 2023, the Company introduced its "AI Recruiting" technology. Leveraging Open AI's open API, this platform is designed to bridge the gap in opportunity matching and enhance recruitment efficiency. "AI Recruiting" utilizes AI-driven candidate outreach in natural language conversations and matching algorithms to connect the right candidates with the right opportunities, streamlining the talent acquisition process and providing “Fast-Fill” staffing capabilities.

	·	~~Useful lives of property~~Robust HRIS Platform: Our cloud-based HRIS platform captures, holds, and ~~equipment;~~

	·	~~Deferred income taxes~~processes HR and ~~related valuation allowance;~~

	·	~~Projected development of workers’ compensation claims.~~payroll information through a secure and user-friendly interface. This technology not only reduces the administrative burden on our clients but also provides valuable business intelligence that can inform strategic decision-making.

(In Thousands)	For the Three Months Ended
	February 29, 2024			February 28, 2023
Revenues	$	3,813		$	4,579
Cost of revenues		3,591			4,095
Gross profit		222			484

Operating expenses:
Salaries, taxes and benefits		1,303			2,599
Professional fees		465			870
Software development		1			119
Depreciation and amortization		140			150
General and administrative		3,017			2,010
Total operating expenses		4,926			5,748

Operating loss		(4,704	)		(5,264	)

Other income:
Other income		-			642642
Total other income		-			642
Net loss attributable to ShiftPixy, Inc		(4,704	)		(4,622	)

Loss from discontinued operations, net of tax		-			(607	)

Non-controlling interest		-			(540	)

Net Loss	$	(4,704	)	$	(5,769	)