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, 2023November 30, 2022
☐ | |||||
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 incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
13450 W Sunrise Blvd, Suite 650, Sunrise FL | 33323 | |||||||
(Address of principal executive offices) | (Zip Code) | |||||||
Registrant’s telephone number:
(888) 798-9100N/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
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
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
The number of shares of the registrant’s only class of common stock, issued and outstanding$0.0001 par value was 12,177,191, as of January 19, 2023, was 9,671,196.
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| 2 |
| Table of Contents |
ShiftPixy, Inc.
Condensed Consolidated Balance Sheets
| November 30, 2022 | August 31, 2022 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash | $ | 864,000 | $ | 618,000 | |||||||
| Accounts receivable | 238,000 | 279,000 | |||||||||
| Unbilled accounts receivable | 2,706,000 | 2,105,000 | |||||||||
| Prepaid expenses | 480,000 | 696,000 | |||||||||
| Other current assets | 288,000 | 187,000 | |||||||||
| Cash and marketable securities held in Trust Account (See Notes 2 and 4) | 117,770,000 | 116,969,000 | |||||||||
| Total current assets | $ | 122,346,000 | $ | 120,854,000 | |||||||
| Fixed assets, net | 3,020,000 | 2,769,000 | |||||||||
| Right-of -use operating lease | 3,965,000 | 4,076,000 | |||||||||
| Deposits and other assets | 920,000 | 919,000 | |||||||||
| Total assets | $ | 130,251,000 | $ | 128,618,000 | |||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable and other accrued liabilities | $ | 15,827,000 | $ | 17,122,000 | |||||||
| Payroll related liabilities | 18,766,000 | 16,055,000 | |||||||||
| Accrued workers’ compensation costs | 575,000 | 567,000 | |||||||||
| Current liabilities of discontinued operations | 1,438,000 | 1,362,000 | |||||||||
| Class A common shares of SPAC mandatory redeemable 11,500,000 shares as of November 30, 2022 and August 31, 2022 (See Notes 2 and 4) | 117,770,000 | 116,969,000 | |||||||||
| Total current liabilities | $ | 154,376,000 | $ | 152,075,000 | |||||||
| Non-current liabilities | |||||||||||
| Operating lease liability, non-current | 3,453,000 | 3,541,000 | |||||||||
| Accrued workers’ compensation costs | 1,196,000 | 1,227,000 | |||||||||
| Non-current liabilities of discontinued operations | 3,394,000 | 3,269,000 | |||||||||
| Total liabilities | 162,419,000 | 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 November 30, 2022 and August 31, 2022. | — | 1,000 | |||||||||
| Common stock, 750,000,000 authorized shares; $0.0001 par value; 9,671,196 and 513,349 shares issued as of November 30, 2022 and August 31, 2022. | 1,000 | — | |||||||||
| Additional paid-in capital | 156,485,000 | 151,736,000 | |||||||||
| Accumulated deficit | (198,148,000) | (192,725,000) | |||||||||
| Total ShiftPixy, Inc. Stockholders' deficit | (41,662,000) | (40,988,000) | |||||||||
| Non-controlling interest in consolidated subsidiary (See Note 5) | $ | 9,494,000 | $ | 9,494,000 | |||||||
| Total stockholders' deficit | $ | (32,168,000) | $ | (31,494,000) | |||||||
| Total liabilities and stockholders' deficit | $ | 130,251,000 | $ | 128,618,000 | |||||||
|
| 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 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | |||||||||||
| November 30, 2022 | November 30, 2021 | ||||||||||
| Revenues (See Note 2) | $ | 5,266,000 | $ | 8,940,000 | |||||||
| Cost of revenue | 4,845,000 | 8,245,000 | |||||||||
| Gross profit | 421,000 | 695,000 | |||||||||
| Operating expenses: | |||||||||||
| Salaries, wages, and payroll taxes | 2,259,000 | 3,890,000 | |||||||||
| Commissions | 10,000 | 27,000 | |||||||||
| Professional fees | 1,195,000 | 1,737,000 | |||||||||
| Software development | 60,000 | 1,161,000 | |||||||||
| Depreciation and amortization | 149,000 | 123,000 | |||||||||
| General and administrative | 1,971,000 | 2,340,000 | |||||||||
| Total operating expenses | 5,644,000 | 9,278,000 | |||||||||
| Operating Loss | (5,223,000) | (8,583,000) | |||||||||
| Other (expense) income: | |||||||||||
| Interest expense | — | (1,000) | |||||||||
| Other income | — | 5,000 | |||||||||
| Total other expense | — | 4,000 | |||||||||
| Loss from continuing operations | (5,223,000) | (8,579,000) | |||||||||
| Loss from discontinued operations, net of tax | (200,000) | (134,000) | |||||||||
| Net loss | (5,423,000) | (8,713,000) | |||||||||
| Preferred stock preferential dividend | (127,145,000) | — | |||||||||
| Net loss attributable to ShiftPixy, Inc. shareholders | $ | (132,568,000) | $ | (8,713,000) | |||||||
| Net loss per share, Basic and diluted | |||||||||||
| Continuing operations | $ | (13.88) | $ | (24.00) | |||||||
| Discontinued operations | (0.02) | — | |||||||||
| Net loss per common share – Basic and diluted | $ | (13.90) | $ | (24.00) | |||||||
| Weighted average common shares outstanding – Basic and diluted | 9,533,982 | 359,452 | |||||||||
| Preferred Stock Issued | Common Stock Issued | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Deficit ShiftPixy, Inc. | Noncontrolling interest | Total Stockholders' Deficit | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 1, 2022 | 8,600,000 | $ | 1,000 | 513,349 | $ | — | $ | 151,736,000 | $ | (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 cost | — | — | 416,667 | — | 4,387,000 | — | 4,387,000 | — | $ | 4,387,000 | |||||||||||||||||||||||||||||||||||||||||||
| Common stock issued on conversion or preferred shares | (8,600,000) | (1,000) | 8,600,000 | 1,000 | — | — | — | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 255,000 | — | 255,000 | — | $ | 255,000 | |||||||||||||||||||||||||||||||||||||||||||
| Warrant modification expense | — | — | — | — | 106,000 | — | 106,000 | — | $ | 106,000 | |||||||||||||||||||||||||||||||||||||||||||
| Additional Shares issued due to reverse stock split | — | — | 16,976 | — | — | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (5,423,000) | (5,423,000) | $ | (5,423,000) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, November 30, 2022 | — | $ | — | 9,671,196 | $ | 1,000 | $ | 156,485,000 | $ | (198,148,000) | $ | (41,662,000) | $ | 9,494,000 | $ | (32,168,000) | |||||||||||||||||||||||||||||||||||||
| Preferred Stock Issued | Common Stock Issued | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Deficit ShiftPixy, Inc. | Noncontrolling interest | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 1, 2021 | — | $ | — | 258,631 | $ | — | $ | 142,786,000 | $ | (149,338,000) | $ | (6,552,000) | $ | 47,472,000 | $ | 40,920,000 | |||||||||||||||||||||||||||||||||||||
| Common stock issued on exercised warrants, net of offering costs | — | — | 28,500 | — | 4,183,000 | — | $ | 4,183,000 | — | $ | 4,183,000 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 408,000 | — | 408,000 | — | $ | 408,000 | |||||||||||||||||||||||||||||||||||||||||||
| Remeasurement of IHC temporary equity | (13,270,000) | (13,270,000) | $ | (13,270,000) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (8,713,000) | (8,713,000) | — | $ | (8,713,000) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, November 30, 2021 | — | $ | — | 287,131 | $ | — | $ | 140,968,000 | $ | (158,051,000) | $ | (17,083,000) | $ | 47,472,000 | $ | 30,389,000 | |||||||||||||||||||||||||||||||||||||
|
| 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 ShiftPixy, Inc. |
|
| (7,455,000 | ) |
|
| (12,827,000 | ) |
|
| (18,647,000 | ) |
|
| (31,037,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock preferential dividend |
|
| — |
|
|
| — |
|
|
| (127,145,000 | ) |
|
| — |
|
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 per share attributable stockholders, 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 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
| Table of Contents |
ShiftPixy, Inc.
Condensed Consolidated Statement of Contents
For the Nine Months Ended May 31, 2023
(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, 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 | ) |
ShiftPixy, Inc.
Condensed Consolidated Statement of Stockholders’ Deficit
For the Three Months Ended May 31, 2023
(Unaudited)
|
| 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, March 1, 2023 |
|
| — |
|
| $ | — |
|
|
| 9,976,536 |
|
|
| 6,000 |
|
| $ | 168,193,000 |
|
| $ | (203,917,000 | ) |
| $ | (35,718,000 | ) |
| $ | 9,494,000 |
|
| $ | (35,718,000 | ) |
Proceeds of ATM, net of offering expenses |
|
| — |
|
|
| — |
|
|
| 133,988 |
|
|
| — |
|
|
| 539,000 |
|
|
| — |
|
| $ | 539,000 |
|
|
| — |
|
| $ | 539,000 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 235,000 |
|
|
| — |
|
|
| 235,000 |
|
|
| — |
|
| $ | 235,000 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,455,000 | ) |
|
| (7,455,000 | ) |
|
| — |
|
| $ | (7,455,000 | ) |
Balance, May 31, 2023 |
|
| — |
|
| $ | — |
|
|
| 10,110,524 |
|
| $ | 6,000 |
|
| $ | 168,967,000 |
|
| $ | (211,372,000 | ) |
| $ | (42,399,000 | ) |
| $ | — |
|
| $ | (42,399,000 | ) |
accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
| Table of Contents |
ShiftPixy, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended May 31, 2022
(Unaudited)
| For the Three Months Ended | |||||||||||
| November 30, 2022 | November 30, 2021 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net loss | $ | (5,423,000) | $ | (8,713,000) | |||||||
| Loss from discontinued operations | (200,000) | (134,000) | |||||||||
| Net loss from continuing operations | (5,223,000) | (8,579,000) | |||||||||
| Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities: | |||||||||||
| Depreciation and amortization | 149,000 | 123,000 | |||||||||
| Stock-based compensation | 255,000 | 408,000 | |||||||||
| Warrant modification expense | 106,000 | — | |||||||||
| Amortization of operating lease | 23,000 | — | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 41,000 | 98,000 | |||||||||
| Unbilled accounts receivable | (601,000) | 41,000 | |||||||||
| Prepaid expenses and other current assets | 115,000 | (366,000) | |||||||||
| Deposits – workers’ compensation | — | 200,000 | |||||||||
| Deposits and other assets | (1,000) | (73,000) | |||||||||
| Accounts payable and other accrued liabilities | (1,295,000) | 1,116,000 | |||||||||
| Payroll related liabilities | 2,711,000 | 743,000 | |||||||||
| Accrued workers’ compensation costs | (23,000) | (384,000) | |||||||||
| Total Adjustments | 1,480,000 | 1,906,000 | |||||||||
| Net cash used in continuing operating activities | (3,743,000) | (6,673,000) | |||||||||
| Net cash provided by (used in) discontinued operating activities | 1,000 | (1,000) | |||||||||
| Net cash used in operating activities | (3,742,000) | (6,674,000) | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Investment of IHC IPO proceeds into Trust Account | — | (116,725,000) | |||||||||
| Purchase of fixed assets | (400,000) | (349,000) | |||||||||
| Net cash used in investing activities | (400,000) | (117,074,000) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Deferred offering costs | — | (3,502,000) | |||||||||
| Proceeds from initial public offering of IHC | — | 116,725,000 | |||||||||
| Proceeds from prefunded warrant exercises | 1,000 | — | |||||||||
| Proceeds from private placement, net of offering costs | — | 4,183,000 | |||||||||
| Proceeds from private placement prefunded warrants, net of offering costs | 4,387,000 | 6,861,000 | |||||||||
| Net cash provided by financing activities | 4,388,000 | 124,267,000 | |||||||||
| Net increase in cash | 246,000 | 519,000 | |||||||||
| Cash - Beginning of Period | 618,000 | 1,199,000 | |||||||||
| Cash -End of Period | $ | 864,000 | $ | 1,718,000 | |||||||
| Supplemental Disclosure of Cash Flows Information: | |||||||||||
| Cash paid for interest | $ | — | $ | 1,000 | |||||||
| Cash paid for income taxes | — | — | |||||||||
| Non-cash Investing and Financing Activities: | |||||||||||
| Deferred Offering costs SPACs | $ | — | $ | 9,464,000 | |||||||
| Increase in Marketable securities in trust account and Class A mandatory redeemable common shares | $ | 801,000 | $ | 13,270,000 | |||||||
| Transfer of preferred shares to common shares | $ | 1,000 | |||||||||
|
| 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, 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’ Deficit
For the Three 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, March 1, 2022 |
|
| — |
|
| $ | — |
|
|
| 336,616 |
|
| $ | 3,000 |
|
| $ | 146,716,000 |
|
| $ | (166,940,000 | ) |
| $ | (20,221,000 | ) |
| $ | 9,494,000 |
|
| $ | (10,727,000 | ) |
Common stock issued on exercised warrants, net of offering costs |
|
| — |
|
|
| — |
|
|
| 46,733 |
|
|
| 1,000 |
|
|
|
— |
|
|
| — |
|
|
| 1,000 |
|
|
| — |
|
| $ | 1,000 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 321,000 |
|
|
| — |
|
|
| 321,000 |
|
| $ | — |
|
| $ | 321,000 |
|
Remeasurement of IHC temporary equity |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (160,000 | ) |
|
| — |
|
|
| (160,000 | ) |
|
| — |
|
| $ | (160,000 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,827,000 | ) |
|
| (12,827,000 | ) |
| $ | — |
|
| $ | (12,827,000 | ) |
Balance, May 31, 2022 |
|
| — |
|
|
| — |
|
|
| 383,349 |
|
|
| 4,000 |
|
|
| 146,877,000 |
|
|
| (179,767,000 | ) |
|
| (32,886,000 | ) |
|
| 9,494,000 |
|
|
| (23,392,000 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
| Table of Contents |
ShiftPixy, Inc.
Condensed Consolidated Statements of Contents
|
| 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 |
|
| $ | — |
|
The accompanying notes are an integral part of these financial statements.
| 7 |
| Table of Contents |
ShiftPixy, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Nature of Operations
ShiftPixy, Inc. (the "Company"“Company”) was incorporated on June 3, 2015, in the State of Wyoming. The Company is a specialized Human Capital service provider that provides solutions for large, contingent, part-time workforce demands, primarily in the restaurant and hospitality service trades. The Company’s historic focus has been on the quick service restaurant 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-ownedwholly owned subsidiary, ReThink Human Capital Management, Inc. (“HCM”), as well as a staffing provider through another of its wholly-ownedwholly owned subsidiaries, ShiftPixy Staffing, Inc. (“Staffing”). These subsidiaries provide a variety of services to our clients (astypically as a co-employer through HCM and a direct employer through Staffing),Staffing, including the following: 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 acquisition that simplifies the onboarding of new clients into the Company’s closed proprietary operating and processing information system (the “ShiftPixy Ecosystem”). We expectThe 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-ownedwholly 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 financial statements is described below in Note 3, Discontinued Operations.
Effective August 31,September 1, 2022, the Company filed articles of amendment to the Company’s articles of incorporation to effect a one-for-one hundred (1:100) reverse split of the Company’s issued and outstanding sharesshare of Common Stock.common stock. The reverse split became effective on NasdaqNASDAQ, September 1, 2022. All share related numbers in this Report on Form 10-Q give effect to this reverse split.
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 the rules of the Securities and Exchange Commission (“SEC”) applicable to interim reports of companies filing as a smallsmaller reporting company.companies. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The results of unaudited condensed operations for the three and nine months ended November 30, 2022end May 31, 2023 are not necessarily indicative of the results that may be expected for the full year ending August 31, 2023.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K and 10-K/A for the fiscal year ended August 31, 2022 (“Fiscal 2022”), filed with the SEC on December 13, 2022, andas amended by Forms 10-K/A, filed with the SEC on December 14, 2022, February 3, 2023 and February 9, 2023, respectively.
| 8 |
| Table of Contents |
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of ShiftPixy, Inc., and its wholly-ownedwholly owned subsidiaries. The unaudited condensed consolidated financial statements also includepreviously included the accounts of (a) Industrial Human Capital, Inc. ("IHC"(“IHC”), which iswas a special purpose acquisition company, or "SPAC",“SPAC,” for which we serveour wholly owned subsidiary, ShiftPixy Investments, Inc., served as the financial sponsor (as described below), and which isSPAC was deemed to be controlled by us as a result of the Company'sCompany’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 we currently exercisethe Company exercised over the funding and acquisition of
Use of Estimates
The preparation of 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 | |
· | Useful lives of property and equipment | |
· | Deferred income taxes and related valuation allowance | |
· | Projected development of workers’ compensation claims. |
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 are difficult to measure of value.
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 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, 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 $6.7 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 Tax Credits (“ERTCs”) due. In addition, some clients have filed suits against the Company, demanding that the Company take 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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| Table of Contents |
Reclassification
The Company reclassified certain expenses to conform to the current year's presentation.
Revenue and Direct Cost Recognition
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 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'sCompany’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 inEAS Solutions
EAS solutions revenue is 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 and workers’ compensation premiums.
Gross billings are invoiced to each EAS 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. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup, are recognized ratably over the payroll period as WSEs perform their services at the client worksite. Although the Company assumes responsibility for processing and remitting payroll 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 invoiced for EAS clientsinvoice are included in unbilled accounts receivable on the Company’s condensed consolidated balance sheets were $2.0 million and were $2,706,000 and $2,105,000,$2.1 million, as of November 30, 2022May 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 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 taxes are included in operating expenses for EAS clients, as the Company does retain risk and acts as a principal with respect to this aspect of the arrangement. With respect to these fees, the Company is primarily responsible for fulfilling the service and has discretion in establishing price.
Disaggregation of Revenue
The Company’s primary revenue streams include HCM and staffing services. The Company’s disaggregated revenues for the threenine months ended November 30,May 31, and May 31, 2022, and November 30, 2021, respectively, were as follows:
| For the Three Months Ended | ||||||||||||||||||||||||||
| Revenue (in millions): | November 30, 2022 | November 30, 2021 | ||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||
HCM1 | $ | 1.5 | $ | 1.8 | ||||||||||||||||||||||
| Staffing | 3.8 | 7.1 | ||||||||||||||||||||||||
| $ | 5.3 | $ | 8.9 | |||||||||||||||||||||||
|
| 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 |
|
1
HCM revenue is presented net,For the three and nine months ended November 30,May 31, 2023 and May 31, 2022, and November 30, 2021, respectively, the following geographical regions represented more than 10% of total revenues:
| For the Three Months Ended | ||||||||||||||
| Region: | November 30, 2022 | November 30, 2021 | ||||||||||||
| (Unaudited) | ||||||||||||||
| California | 48.8 | % | 53.7 | % | ||||||||||
| Washington | 12.2 | % | 13.3 | % | ||||||||||
| New Mexico | 10.2 | % | 6.73 | |||||||||||
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
Region: |
| May 31, 2023 |
|
| May 31, 2022 |
|
| May 31, 2023 |
|
| May 31, 2022 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
California |
|
| 33.1 | % |
|
| 49.0 | % |
|
| 42.5 | % |
|
| 52.2 | % |
Washington |
|
| 15.5 | % |
|
| 14.9 | % |
|
| 12.8 | % |
|
| 13.7 | % |
New Mexico |
|
| 12.9 | % |
|
| 7.6 | % |
|
| 11.9 | % |
|
| 7.4 | % |
Incremental Cost of Obtaining a Contract
Pursuant to the “practical expedients” provided under ASUAccounting 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 days'day’' notice. These costs are recorded in commissions in the Company’s unaudited condensed consolidated statements of operations.
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| Table of Contents |
Segment Reporting
Prior to August 31, 2021, the Company operated as one reportable segment under ASCAccounting Standards Codification “ASC” 280,
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 November 30, 2022May 31, 2023 and August 31, 2022.
Marketable Securities Held in Trust Account
As of November 30, 2022 and 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 ("IBC"IB") or redemption of the public common shares of IHC. InOn December 1, 2022, the Company distributed $117,574,000$117.6 million to the shareholder'sshareholders of IHC.
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 November 30, 2022May 31, 2023 and August 31, 2022, there was $463,000$0.0 million and $615,000,$0.6 million, respectively, of cash on deposit in excess of the amounts insured by the FDIC.
The following represents clients represented more than 10% of revenues. However, seven clients represented 88%who have ten percent of total accounts receivable as of November 30, 2022. For the three months ended November 30, 2021, no individual client represented more than 10% of revenuesMay 31, 2023 and three clients represented 98% of total accounts receivable.
|
| 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 | ||||
Leasehold improvements | Shorter of useful life or the remaining lease term, typically 5 years | ||||
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| Table of Contents |
Depreciation and amortization expense isfor the three months ended May 31, 2023 and May 31, 2022 was $0.1 million and $0.1 million, respectively, and included on the unaudited condensed consolidated statements of operations.
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 ASCAccounting Standards Codification “ASC” 350-40,
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 werewas no material capitalized internal software development costs for the threenine months ended November 30,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 November 30, 2022.May 31, 2023, respectively. During the three and nine months ended November 30, 2021May 31, 2022, the Company incurred research and development costs of approximately $2.2 million.$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. In addition, no software costs were capitalized for the three months ended November 30, 2022 and November 30, 2021, respectively.
Lease Recognition
The Financial Accounting Standards Board "FASB" established Topic 842, Leases, by issuing ASU No. 2016-02 (“ASC 842”),“ASC” 842, which required lessees to recognize leases on-balanceon 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 sheetsheets 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| 14 |
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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 fundsfunded the policy premium 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 is currentlybecame engaged in litigation regarding such a demand for additional premium payments, which we believe to be without merit,payments; however, the Company has entered into a settlement agreement with Everest and Gallagher Bassett, concluding the litigation. See Note 9, Contingencies, Everest Litigation, below and Note 10 subsequent events. The Company has accrued for this settlement as discussed at Note 11,
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 arewere recorded as Deposit - workers’ compensation, a short-term asset, while the remainder of claim funds arewere included in Deposit-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 11, 9, Contingencies,
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 thesesthese programs as of November 30, 2022May 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 November 30, 2022May 31, 2023 and August 31, 2022, the Company had short term accrued workers’ compensation costs of $0.6$0.4 million and $0.6 million, and long termlong-term accrued workers’ compensation costs of $1.2$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-ownedwholly owned subsidiary of Vensure Employer Services, Inc. (“Vensure”), in connection with the Vensure Asset Sale described in Note 3, Discontinued Operations
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| 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 requiresrequire 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 November 30, 2022,May 31, 2023, we continue to monitor closely all workers’ compensation claims made asin relation to the COVID-19 pandemic continues.
Fair Value of Financial Instruments
Accounting Standard Codification "ASC" 820,
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 which it is practical to estimate fair value. ASC 820 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As ofThe 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
· | Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. | |
· | Level 2: Inputs to the valuation methodology include |
· | Quoted prices for similar assets or liabilities in active markets | |
· | Quoted prices for identical or similar assets or liabilities in inactive markets | |
· | Inputs other than quoted prices that are observable for the asset or liability | |
· | Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and | |
· | 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 |
· | Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement |
| 16 |
| Table of Contents |
Funds held in trustTrust Account represent U.S. treasury bills that were purchased with funds raised through the initial public offering of IHC. The funds raised from SPACs are held in trust accounts that arewas 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 Cashcash and marketable securities held in Trust Account in the accompanying condensed consolidated balance sheets.
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 threenine months ended November 30,May 31, 2023 and August 31, 2022.
Advertising Costs
The Company expenses all advertising as incurred. The Company incurred advertising costs totaling $0.7 millionAdvertising expense for the three months ended November 30,May 31, 2023 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 million and $1.4 million, for the three months ended November 30, 2021, respectively.
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
Income (Loss) Per Share
Basic Net Income (Net Loss)net income or net (loss) per common share is computed by dividing Net Income (Net Loss)net income or net (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 of Net Income (Net Loss)net income or net (loss) per share calculations include unexercisedoptions, warrants, shares of common stock to be issued to directors for services provided and Preferred OptionsOption. Diluted net income or and unexercised prefunded warrants, as described in Note 7,
| For the Three Months Ended | November 30, 2022 | November 30, 2021 | |||||||||||||||
| (Unaudited) ) | (Unaudited) | ||||||||||||||||
| Options (See Note 8) | 10,603 | 4,023 | |||||||||||||||
| Warrants (See Note 7) | 1,252,748 | 174,918 | |||||||||||||||
| Total potentially dilutive shares | 1,263,351 | 178,941 | |||||||||||||||
|
| 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 |
|
| 17 |
| Table of Contents |
For the table above, “Options” represent all options granted under the Company’s 2017 Stock Option/Stock Issuance Plan (the "Plan"), as described in Note 8,
Stock-Based Compensation
The Company hadhas one stock-based compensation plan under which the Company may issue awards, as described in Note 8,
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).
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 and 10-K/A for Fiscalthe 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, 20212023 and on February 28, 2022,9, 2023, respectively, which includesinclude 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 FASBFinancial 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
| 18 |
| Table of Contents |
Variable Interest Entity
The Company has been involved 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 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 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, the Company's sponsored SPAC, IHC, completed its IPO, selling 11,500,000 units (the "IHC Units") pursuant to a registration statement and prospectus, as described below. The IPO closed on October 22, 2021, raising gross proceeds of $115 million.
In connection with the IPO wein October 2021, the Company purchased, through the Company's wholly-ownedits wholly owned subsidiary, ShiftPixy Investments, Inc. ("Investments" or the "Sponsor"), 4,639,102 private placement warrants ("Placement Warrants") at a price of $1.00 per warrant, for an aggregate purchase price of $4,639,102, and wethe Company currently own 2,110,000 Founder Shares of IHC common stock, representing approximately 15% of the issued and outstanding 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 iswas identical to the warrants sold in the IPO, except as described in the IPO registration statement and prospectus. Following the completion of IHC's IPO, the IHC IPO, weCompany determined that IHC iswas a Variable Interest Entity ("VIE")VIE in which we havethe Company had a variable interest because IHC doesdid not have enough equity at risk to finance its activities without additional subordinated financial support. We haveThe Company had also determined that IHC's public stockholders dodid not have substantive rights, and their equity interest constitutes temporary equity, outside of permanent equity, in accordance with ASC 480-10-S99-3A.480-10-S99-3A, at such time. As such, we havethe Company concluded that we are currentlythey were the primary beneficiary of IHC as a VIE, as we havethe Company had the right to receive benefits or the obligation to absorb losses of the entity, as well as the power to direct a majority of the activities that significantly impact IHC's economic performance. Since we arethe Company was the primary beneficiary, IHC isto be consolidated into the CompanyCompany's unaudited condensed consolidated financial statements.
Subject to Possible Redemption
The Company previously accounts for its common stock holdings in its sponsored SPACs (which arewere consolidated in the CompanyCompany's unaudited condensed consolidated financial statements) that arethrough 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 (including shares of common stock that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) arewere classified as temporary equity. At all other times,a current liability since the shares were redeemed as of common stock are classified as shareholders’ equity.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. Accordingly, as of November 30, 2022, shares ofHowever, since the common stock subject to possible redemption are presentedwere paid to IHC shareholders on December 1. 2022, the fair market value as temporary equity, outside of the shareholders’ equity section of the Company’s condensed consolidated balance sheets.
| 19 |
| Table of Contents |
Note 3: Discontinued Operations
On January 3, 2020, the Company executedentered into an asset purchase agreement assigning client contracts comprising approximately 88% of its quarterly revenue through the date of the transaction, including 100% of its existing professional employer organization (“PEO”) business effective as of December 31, 2019, and transferring $1.5 million of working capital assets, including cash balances and certain operating assets associated with the assigned client contracts included in the agreement, toShiftable HR Acquisition, LLC, a wholly owned subsidiary of Vensure, (the “Vensure Asset Sale”). Gross proceeds frompursuant which was the Vensure Asset Sale were $19.2 million,assigned client contracts was significant to its revenues for the three months ended November 30, 2019, including 100% of which $9.7 million was received at closing and $9.5 million was scheduledthe Company's existing PEO business. In connection with this transaction, the Company had a Note Receivable to be paid out in equal monthly payments over the four years following the closing of the transaction (the “Note Receivable”), subject to adjustments for working capital and customer retention (as measured by a gross wage guarantee included in the governing agreement), over the twelve month period following the Vensure Asset Sale.
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,The following reconciliation of the gross proceeds to the net proceeds from the Vensure Asset Sale is presented in the condensed consolidated balance sheets for the period ended November 30, 2022as of May 31, 2023 and August 31, 2022.
| As of | ||||||||
| November 30, 2022 (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 (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 November 30, 2022May 31, 2023 and August 31, 2022, as discussed above, the Notes Receivablesnote receivables asset has been impairmentimpaired to adjust the net realizable value of the long-term note receivable to zero.
| 20 |
| 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(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| 21 |
| 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 | |||||||||||
| November 30, 2022 | August 31, 2022 | ||||||||||
| (Unaudited) | |||||||||||
| Deposits – workers’ compensation | — | — | |||||||||
| Total current assets | — | — | |||||||||
| Deposits – workers’ compensation | — | — | |||||||||
| Total assets | $ | — | $ | — | |||||||
| Accrued workers’ compensation cost | 1,438,000 | 1,362,000 | |||||||||
| Total current liabilities | 1,438,000 | 1,362,000 | |||||||||
| Accrued workers’ compensation cost | 3,394,000 | 3,269,000 | |||||||||
| Total liabilities | 4,832,000 | 4,631,000 | |||||||||
| Net liability | $ | (4,832,000) | $ | (4,631,000) | |||||||
|
| 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 | ||||||||||||||||||||
| November 30, 2022 | November 30, 2021 | |||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||
| Revenues | $ | — | $ | — | ||||||||||||||||
| Cost of revenue | 200,000 | 134,000 | ||||||||||||||||||
| Gross profit (loss) | (200,000) | (134,000) | ||||||||||||||||||
| Total operating expenses | — | — | ||||||||||||||||||
| (Loss) income from discontinued operations | $ | (200,000) | $ | (134,000) | ||||||||||||||||
|
| 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 to acquire companies in the light industrial, healthcare and technology segments of the staffing industry, as well as one or more insurance entities. On March 18, 2022, the IPO registration statements related to three of the SPACs we had sponsored, Vital Human Capital, Inc. ("Vital"), TechStackery, Inc. ("TechStackery"), and Firemark Global Capital, Inc. ("Firemark"), were withdrawn. With the withdrawal of these IPO registrations, the Company recorded approximately $38.0 million of deferred costs against Non-controlling interest.
| 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.Account, leaving 248,653 of the Company’s remaining Public Shares outstanding and the Trust Account substantially below the $5,000,001$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.
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 subject periods. Until theSouthern District of Florida. The matter is concludedproceeding, and the taxesCompany and its subsidiary, ShiftPixy Investments, Inc., are paid, the IRS could, subject to its standard processes and the Company’s rights to respond, implement collection actions, including such actionslisted as levying against Company bank accounts, to recover the amounts that it calculates to be due and owing.
Note 7:5: 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 to purchase 12,500,000 shares of the Company's preferred stock for an aggregate purchase price of $1,250.$1,250 per share, Immediately following the exercise of the Preferred Options, Mr. Absher elected to convert the 12,500,000 shares of preferred stock 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 were subject to a six-month lock up period at the time they were issued, during which such shares could not be traded on the open market. As of November 30, 2022, the restrictions on all of these shares have been lifted, rendering themare 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.
| 23 |
| 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 number of shares of common stock held by the option holders at the time the Preferred Options were issued in September 2016. Accordingly, in order to confirm the original intent of the granting of up 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 ofOn 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 $820,793,$0.82 million, in exchange for an option to receive 4,100,000 shares of the Company's Preferred Class A Stock.
Prior to the shareholder vote to approve the reverse stock split, the Company on August 2, 2022, amended its Articles of Incorporation to hereby state that the preferred stock will not be split adjusted ifonly the common stock is affected if the reverse stock split is effectuated.effectuated with no intention to affect the preferred stock of the company. The reverse stock split was subsequently approved by the shareholders, 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).
On September 1, 2022, Mr. Absher converted 8,600,000 Preferred Shares to 8,600,000 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 preferred shares were converted into common shares on September 1, 2022, after the Company's reverse stock split had taken effect. Accordingly, no preferred shares are issued and outstanding as of May 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.
| 24 |
| Table of Contents |
Common Stock and Warrants
As reported in our 8-K filed on September 23, 2022, the Company closed the following transactions:
In connection with the Purchase Agreement, the Company and the Purchaser entered into amendmentAmendment No. 1 to warrantsWarrants (the “Warrant Amendment”). Pursuant to the Warrant Amendment, the exercise price of (i) 25,233 warrants issued on September 3, 2021, and (ii) 98,969 warrants issued on January 28, 2022, was reduced to $0.01., As a result of the change in exercise price, the Company recorded an expense of $106,000. The incremental change in the fair market values was based upon the BlackBlack- Scholes option pricing model with the following inputs. RiskThe 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.
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,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 shares of common stock (5% of the number of shares sold in the Offering (the “Placement Agent Warrants”). The Placement Agent Warrants will beare 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 per share.
On September 1, 2022, afterJanuary 31, 2023, the Company's reverse stock split had taken effect, Mr. Absher converted 8,600,000Company entered into an ATM Issuance Sales Agreement which was a part of histhe registration statement on Form S-3 and prospectus supplement. The at the market offering was for up to $8.2 million in shares of Preferred Class A Stockits common stock, could be sold from time to 8,600,000time and at various prices at the Company’s sole control, subject to the conditions and limitations in the sales agreement with AGP. For the three and nine months ended May 31, 2023, the Company received net proceeds of $0.5 million and $2.0 million from the sale of 133,988 and 439,328 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, see
| 25 |
| Table of Contents |
During the three months ended May 31, 2022, certain prefunded warrant holders exercised their right to purchase 4,673,321 shares of the Company’s Common Stock at an exercise price of $0.0001 totaling $467, all of which was received by the Company in May 2022.
The following table summarizes the changes in the Company’s common stock and Prefunded Warrants from Augustprefunded warrants for the period ended May 31, 2022 to November 30, 2022
| 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 | 7.1 | 12.00 | ||||||||||||||
| Cancelled | — | — | — | ||||||||||||||
| Exercised | (124,204) | 0 | — | ||||||||||||||
| Warrants outstanding, November 30, 2022 | 1,252,748 | 6.9 | 34.78 | ||||||||||||||
| Warrants exercisable, November 30, 2022 | 50,173 | 3.0 | $ | 459.36 | |||||||||||||
|
| 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 |
|
The following table summarizes the Company’s warrants outstanding as of November 30, 2022 (Unaudited):
| Warrants Outstanding | Weighted average Life of Outstanding Warrants in years | Exercise price | |||||||||||||||
September 2022 Common Warrants(1) | 833,333 | 6.8 | $ | 12.00 | |||||||||||||
| September 2022 Underwriter Warrants | 20,833 | 4.3 | $ | 13.20 | |||||||||||||
July 2022 Common Warrants(2) | 348,408 | 7.6 | $ | 26.00 | |||||||||||||
| Sep 2021Underwriter Warrants | 3,762 | 6.4 | 175.00 | ||||||||||||||
| May 2021Underwriter Warrants | 2,474 | 3.5 | 267.00 | ||||||||||||||
| October 2020 Common Warrants | 23,000 | 2.9 | 330.00 | ||||||||||||||
| October 2020 Underwriter Warrants | 2,000 | 2.9 | 330.00 | ||||||||||||||
| May 2020 Common Warrants | 12,776 | 2.5 | 540.00 | ||||||||||||||
| May 2020 Underwriter Warrants | 1,111 | 2.5 | 540.00 | ||||||||||||||
| March 2020 Exchange Warrants | 4,237 | 2.9 | 1,017.00 | ||||||||||||||
| Amended March 2019 Warrants | 663 | 1.3 | 4,000.00 | ||||||||||||||
| March 2019 Services Warrants | 34 | 1.3 | 7,000.00 | ||||||||||||||
| June 2018 Warrants | 63 | 1.0 | 4,000.00 | ||||||||||||||
| June 2018 Services Warrants | 54 | 1.0 | 9,960.00 | ||||||||||||||
| 1,252,748 | 6.9 | $ | 34.78 | ||||||||||||||
|
| 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. |
| 26 |
| Table of Contents |
Note 8:6: 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”), (each of which is exercisable into shares of common stock) (collectively, “Options”), or shares of common stock (“Share Grants”).
For all 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 in equal quarterly installments over the succeeding 12 quarters. All options granted to datepurchase common stock have a stated ten-year term and, as of November 30, 2022, all options granted to date are exercisable.
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 of ASU 2016-9, 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.
Stock-based compensation expense was $255,000$0.2 million and $408,000$0.7 million for the three and nine months ended November 30,May 31, 2023, respectively. Stock-based compensation was approximately $0.3 million and $1.1 million of compensation expense for the three and nine months ended May 31, 2022, and November 30, 2021, respectively.
The following table summarizes option activity duringfor the threenine months ended November 30, 2022 (Unaudited):
| Options Outstanding and Exercisable | |||||||||||||||||
| Number of Options | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | |||||||||||||||
| (In years) | |||||||||||||||||
| Balance Outstanding, August 31, 2022 | 11,753 | 8.1 | $ | 733.00 | |||||||||||||
| Granted | |||||||||||||||||
| Exercised | |||||||||||||||||
| Forfeited | (1,150) | 217.00 | |||||||||||||||
| Balance Outstanding at November 30, 2022 | 10,603 | 7.8 | $ | 789.00 | |||||||||||||
|
| 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 |
|
| 27 |
| Table of Contents |
As of November 30, 2022,May 31, 2023, the total unrecognized deferred share-based compensation expected to be recognized over the remaining weighted average vesting periods of 1.81.5 years for outstanding grants was $1,458,000. Option vesting activity from August$918,000. There was no intrinsic value for outstanding as of May 31, 2022, through November 30, 2022 was as follows:
| Options Vested | Number of Options | Weighted Remaining Contractual Life | Weighted Average Exercise Price | |||||||||||||||||
| (In years) | ||||||||||||||||||||
| Balance, August 31, 2022 | 5,269 | 8.1 | $ | 1,146.00 | ||||||||||||||||
| Vested | 830 | 8.0 | 426.00 | |||||||||||||||||
| Exercised | — | |||||||||||||||||||
| Forfeited | (369) | 286.00 | ||||||||||||||||||
| Balance, November 30, 2022 | 5,730 | 7.6 | $ | 1,101.00 | ||||||||||||||||
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 aboutof all stock options outstanding and vested as of November 30, 2022:
| 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) | |||||||||||||||||||||||||||||||||||||
| $0.50 - 10.00 | 10,241 | 7.8 | $ | 438.00 | 5,375 | 7.8 | $ | 467.00 | ||||||||||||||||||||||||||||||
| $10.01 - $40.00 | 20 | 6.5 | 1,895.00 | 18 | 7.3 | 1,897.00 | ||||||||||||||||||||||||||||||||
| $40.01 - $80.00 | 121 | 6.3 | 5,121.00 | 116 | 6.6 | 5,120.00 | ||||||||||||||||||||||||||||||||
| $80.01 - $120.00 | 101 | 5.5 | 10,298.00 | 101 | 5.5 | 10,298.00 | ||||||||||||||||||||||||||||||||
| $120.01 - $160.00 | 109 | 4.6 | 15,584.00 | 109 | 4.6 | 15,584.00 | ||||||||||||||||||||||||||||||||
| $160.01 - $391.60 | 11 | 4.6 | 30,160.00 | 11 | 4.6 | 39,160.00 | ||||||||||||||||||||||||||||||||
| 10,603 | 7.6 | $ | 789.00 | 5,730 | 7.6 | $ | 1,101.00 | |||||||||||||||||||||||||||||||
|
| 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 |
| |
Note 9:7: Related Parties and Certain Directors and Officers
Director Compensation
Scott W. Absher the Company's CEO and Chair of
On October 22, 2021, our Board approved raising Mr. Absher’s annual salary to $1M, effective January 1, 2022, and also approved the payment of a $0.5 million bonus to Mr. Absher, 50% of which was payable upon Board approval, and the remainder 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 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, the formdeferred payment of his incremental base salary, his outstanding personal time off or PTO as of $127,644July 31, 2022, and $153,307the remaining 50% of his approved bonus. As of January 1, 2023, Mr. Absher's salary was adjusted back to the level applicable prior to the time of the adjustment effective January 1, 2022. Mr. Absher salary for the three months ending November 30, 2022 and November 30, 2021,nine months ended May 31, 2023 was $0.2 million and $0.6 million, respectively.
| 28 |
| Table of Contents |
Amanda Murphy
On February 10, 2020, Amanda Murphy was appointed 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. Murphy 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 a deferred unpaid compensation accrualpayment related to her salary increase of approximately $0.2 million. The deferred payment salary is recorded in the amountaccrued liabilities on the condensed consolidated balance sheets. As of $58,832.
J. Stephen Holmes
J. Stephen Holmes formerly served as a non-employee sales manager, advisor to and was a significant shareholder of the Company. The Company incurred $750,000$0.8 million in professional fees for services provided by Mr. Holmes during Fiscal 2021. For the three months ended November 30, 2021, Mr. Holmes was compensated $120,000 for his services.
Related Persons to Scott Absher
Mark Absher, the brother of Scott Absher, was previously employed as our Registered In-House Counsel, Director and Secretary. Mr. Absher resigned from his positions with the Company on February 6, 2019.
David May, a member of our business development team, is the son-in-law of ScottMr. Absher. Mr. May received compensation of approximately $149,000
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 for the three and nine months ended May 31, 2023, respectively. His compensation remained the same for the three and nine month period ending May 31, 2022.
Jason Absher, a member of the Company's business development team, is the nephew of Scott Absher and the son of Mark Absher.
Mr.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 aggregate compensation infor the amountthree and nine month period ending May 31, 2023, of $48,764$56,000 and $0.2 million, respectively. Compensation as a group for these individuals for the three month period and nine month period ending November 30,May 31, 2022 was $53,000 and in the amount$0.2 million, respectively.
| 29 |
| Table of Contents |
The Company has accrued stock-based compensation related to shares of $53,611common stock to be issued for services provided by three directors. Stock-based compensation expense for the three month period ending Novembermonths 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, respectively. As of May 31, 2023, there are 59,040 shares of common stock to be issued to directors.
As of May 31, 2023 and August 30, 2021.
Note 10:8: Commitments
Operating Leases & License Agreements
Effective August 13, 2020, the Company entered into a non-cancelable seven-year lease for 13,246 square feet of 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. MonthlyThe monthly rent expense under this lease is approximately $57,000.
On October 1, 2020, the Company entered into a non-cancelable 64-month lease for 23,500 square feet of primarily 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 escalation clauses relating to increases in real property taxes as well as certain maintenance costs. MonthlyThe monthly rent expense under this lease is approximately $34,000.
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 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 rent expense under this lease is approximately $26,000.
On June 21, 2021, the Company entered into a non-cancelable 77-month lease for premises consisting of approximately 13,418 square feet offor 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 lease had possession date of August 1, 2022. The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the lease. Monthly rent expense under this lease is approximately $27,000.
On May 2, 2022, the Company entered into a non-cancelable 60-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 to housefor 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.
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. Seecosts, see Note 11, Contingencies.9, Contingencies. As a result of the
| 30 |
| Table of Contents |
The components of lease expense are as follows:
|
| Three Months Ended May 31, 2023 |
|
| Nine Months Ended May 31, 2023 |
| ||
Operating Lease Cost |
| $ | 260,000 |
|
| $ | 824,000 |
|
Future minimum lease and licensing payments under non-cancelable operating leases at November 30, 2022,as of May 31, 2023, are as follows:
| Minimum lease commitments | |||||
| 2023 | $ | 919,000 | |||
| 2024 | 1,064,000 | ||||
| 2025 | 1,099,000 | ||||
| 2026 | 777,000 | ||||
| 2027 | 568,000 | ||||
| Thereafter | 351,000 | ||||
| Total minimum payments | $ | 4,778,000 | |||
| Less: present value discount | 621,000 | ||||
| Lease Liability | $ | 4,157,000 | |||
| Weighted-average remaining lease term - operating leases (months) | 72 | ||||
| Weighted-average discount rate | 5.54 | % | |||
|
| Minimum lease commitments |
| |
2024 |
| $ | 1,047,000 |
|
2025 |
|
| 1,081,000 |
|
2026 |
|
| 928,000 |
|
2027 |
|
| 694,000 |
|
2028 |
|
| 403,000 |
|
Thereafter |
|
| 225,000 |
|
Total minimum payments |
|
| 4,378,000 |
|
Less: present value discount |
|
| 508,000 |
|
Lease liability |
|
| 3,870,000 |
|
|
|
|
|
|
Weighted-average remaining lease term - operating leases (months) |
|
| 49 |
|
Weighted-average discount rate |
|
| 5.54 | % |
The current portion of the operating lease liability is included within our accounts payable and other accrued liabilities in our condensed consolidated balance sheets.
Special Purpose Acquisition Company Sponsorship
On April 29, 2021, the Company announced its sponsorship, through a wholly-ownedwholly owned subsidiary, of four SPAC IPOs.
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, the Company purchased, through itsThe investment amounts set forth above do not include loans that the Company may extendCompany's subsidiary, ShiftPixy Investments, Inc., has extended to IHC in an amount not to exceed $500,000,$0.5 million, in its role as sponsor.
| 31 |
| Table of Contents |
Note 11:9: Contingencies
Certain conditions may exist as of the date the 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.
During the ordinary course of business, the Company is subject 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, 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.
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
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 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 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.
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Vensure Litigation
On September 7, 2021, Shiftable HR Acquisition, LLC, a wholly-ownedwholly 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-ownedwholly 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 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 . . .”
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 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 and denies 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
Courvoisier Centre Litigation
On August 24, 2022, the landlord of our 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. WeThe 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 inability and refusal to provide any adequate relief. On or about October 10, 2022, wethe 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.
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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. Discovery is currently proceeding, and trial is scheduled to commence on or after March 27,Trial in the matter has been set for September 5, 2023. 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 preferred options on October 22, 2021, violated the automatic stay applicable to Mr. Holmes' Chapter 7 proceedings. The matter is inAfter the preliminary stages; as noted in Note 12,
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. 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 which became effective on September 1, 2022, on September 19, 2022,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, such client may seek to enforce its rights to recover its ERTCs by filing lawsuits against the Company.
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Note 10: Subsequent Events
On June 5, 2023, the Company received a letter from the staff of Nasdaq (the "Staff"“Nasdaq Letter”) notifying the Company that the Staff has determined that for the last 10 consecutive business days, from September 1 to September 16, 2022, the closing bid price of the Company’s common stock had been at $1.00 per share or greater and that accordingly, the Company has regained compliance with Listing Rule 5550(a)(2).
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 regained compliance with Listing Rule 5550(b) in that,accrued for this settlement as of May 31, 2023.
On July 12, 2023, the Company priced a “best efforts” public offering for the last 21 consecutive business days, from September 1 through September 30,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 net proceeds of approximately $2.5 million. The offering closed on July 14, 2023. Effective upon closing of the offering, the exercise price of 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 Company’s market value of listed securities has been above $35,000,000.
Management has evaluated events that have occurred subsequent to the date of these consolidated financial statements and has determined that, other than those listed below, no such reportable subsequent events exist through the date the financial statements were issued in accordance with FASB ASC Topic 855, "Subsequent Events."
The following discussion of our financial condition and results of operations should be read in conjunction with our 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 (“Fiscal 2022”), filed with the SEC on December 13, 2022, and 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
· | our future financial performance, including our revenue, costs of revenue and operating expenses; |
· | our ability to achieve and grow profitability; |
· | the sufficiency of our cash, cash equivalents and investments to meet our liquidity needs; |
· | our predictions about industry and market trends; |
· | our ability to expand successfully internationally; |
· | 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; |
· | our estimated total addressable market; |
· | our ability to maintain, protect and enhance our intellectual property; |
· | our ability to comply with modified or new laws and regulations applying to our business; |
· | the attraction and retention of qualified employees and key personnel; |
· | 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; |
· | our ability to be successful in defending litigation brought against us; and | |
· | 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, filed with the SEC on December 13, 2021 and on2022, December 14, 2022, February 3, 2023 and February 9, 2023, respectively, which isare expressly incorporated herein by reference, and elsewhere in this Quarterly Report. Moreover, we operatethe 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 wethe 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 wethat the Company currently believe are immaterial to our business. In addition, wethe 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
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 wethe 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. We haveThe Company has developed a comprehensive human resources information system or HRIS"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. We provideThe 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, wethe 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. We have built a substantial business on a recurring revenue model since our inception in 2015. For the three months ended November 30, 2022 and November 30, 2021, we processed approximately $11.7 million and $14.1 million of payroll billings, respectively, our primary operating metric, and incurred approximately $5.4 million and $8.7 million in operatingOur losses for the three months ended November 30, 2022 and November 31, 2021, respectively. Our loses 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 of the fiscal year ending August 31, 2022, and continuing intothrough the first quarter ofnine months ended May 31, 2023, ending November 30, 2022, ourthe Company's primary focus was on clients in the restaurant and hospitality industries, (market segments typically characterized by high employee turnover and low pay rates), and healthcare industries typically employing specialized personnel that command higher pay rates. We believeThe Company believes that these industries are better served by our HRIS platform 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 during the three months ending November 30, 2022,three-months ended May 31, 2023, accounting for approximately 48.78%33.1% of our gross billings. Washington and New Mexico represented our other significant markets during the first quarter ofthree-months ended May 31, 2023, ending November 30, 2022, representing approximately 22.43%28.4% of our total gross billings. (OurFor 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.
The Company's business focus during the fiscal year ending August 31, 2022, and continuing into the three monthsquarter ending November 30, 2022,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 feelbelieve that our HRIS platform is at completion stage and our IT development cost has started to stabilize 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
The Company's revenues for the first quarter of 2023 ending November 30, 2022, consisted of:
We believe that our customer value proposition is to provide a combination of overall net cost savings to our clients, for which they are willing to pay increased administrative fees, as follows:
· | 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. |
We have invested heavily in a robust, cloud-based HRIS platform (the ShiftPixy “Ecosystem”) in order to:
· | 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. |
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 reduce 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 business opportunities. Our growth trajectory has been muted by the economic impactsregulations of the COVID-19 pandemic on our core business clients, primarily restaurantsSEC.
Critical Accounting Estimates and nurse staffing organizations supplying health services notPolicies
A critical accounting policy and related estimates are both important to COVID-19. However, manythe portrayal of our clients have, with the benefita company’s financial condition and results of Payroll Protection Plan loans ("PPP Loans") under the CARES Actoperations and with adjustments to business offerings to accommodate the impactrequires management’s most difficult, subjective or complex judgments, often as a result of the virus andneed to make estimates about the related government response thereto, learnedeffect of matters that are inherently uncertain. Refer to respond to and in some cases grow despite the pandemic. Thus far, the impactCompany's Annual Report for a complete listing of the variantscritical 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 the diseaseMay 31, 2023 have been largely inconsequential. However, iftaken into consideration in preparing the disease or its variants further impose onunaudited consolidated financial statements. The preparation of unaudited consolidated financial statements requires estimates and assumptions that affect the healthreported amounts of residentsassets, liabilities, expenses and related disclosures. Some of states wherein wethose estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies and estimates have abeen highlighted as significant presence, the effects thereof, including the government response thereto,because changes to certain judgments and assumptions inherent in these policies could have a material impact onaffect our revenues.
· | Assumption 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; | |
· | Useful lives of property and equipment; | |
· | Deferred income taxes and related valuation allowance; | |
· | Projected development of workers’ compensation claims. |
Growth Initiatives
Through November, 30, 2022.
Transformative Sales Growth Strategy
ShiftPixy's agile business development plan for rapid organic growth starting in the first quarter of Fiscal 2023,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. By helpingOur 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 and compelling go-to-market strategy is prepared to leverage the recently expanded staffing platform on the ShiftPixy Human Resources Information System (“HRIS”) that offers clients an industry-leading digital and mobile technology 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 leadinganticipated to a surge inspur demand for ShiftPixy’s contingent and flexible skilled labor pool. Additional tailwinds supporting our growth strategy include positive demographic trends as the labor market reprioritizesprioritizes flexibility, control, and access to job opportunities anywhere and anytime.
ShiftPixy’s business development plan offers immediate solutions to critical workflow challenges for human capital acquisition, talent management, labor force retention, worker supply chain disruptions, and runaway hiring 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. in 2023 and build the fastest growing flexible labor force to meet the demands of a fast-changing human capital market while ushering significant enterprise value creation and recurring revenue growth for our shareholders.
ShiftPixy Labs
On July 29, 2020, we announced the launch of ShiftPixy Labs, which includes the development of ghost kitchens in conjunction with our wholly-ownedwholly owned subsidiary, ShiftPixy Ghost Kitchens,Labs, Inc. Through this initiative, we intend to bring various food delivery concepts to market that will combine with our HRIS platform to create an easily replicated, comprehensive food preparation and delivery solution. The initial phase of this initiative is being implemented 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-ownedwholly 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 from discussions with our restaurant clients, combined with our observations of industry trends that appear to have accelerated during the pandemic. Beginning in Calendarcalendar 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 QSRs.
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.| 40 |
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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 orderordered a food truck for mobile operation.
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
For the first quarterthree 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 Fiscal 2023, included in our cost of sales was approximately $200,000 of expense foroperations. 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 11,
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, wethe Company entered into an asset purchase agreement with Shiftable HR Acquisition, LLC, a wholly-ownedwholly owned subsidiary of Vensure, pursuant to which we assignedthe assignment of client contracts representing approximately 88% of oursignificantly impacted the Company’s quarterly revenue as of November 30, 2019, including 100% of ourthe Company's existing PEO business effective as of December 31, 2019, and we transferred $1.6 million of working capital assets, including cash balances and certain operating assets associatedbusiness. In connection with this transaction, the assigned client contracts included in the agreement. Gross proceeds from the Asset Sale were $19.2 million, of which $9.7 million was received at closing and $9.5 million was embodied in theCompany had a Note Receivable described above, to be paid out in equal monthly payments forover four years. In the next four years after certain transaction conditions were met. During ourCompany'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 November 30, 2022,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 11,
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Results of Operations
The following table summarizes the condensed consolidated results of our operations for the three and nine months ended November 30, 2022,May 31, 2023 and November 30, 2021.
| For the Three Months Ended | |||||||||||
| November 30, 2022 | November 30, 2021 | ||||||||||
| Revenues (See Note 2) | $ | 5,266,000 | $ | 8,940,000 | |||||||
| Cost of revenue | 4,845,000 | 8,245,000 | |||||||||
| Gross profit (loss) | 421,000 | 695,000 | |||||||||
| Operating expenses: | |||||||||||
| Salaries, wages, and payroll taxes | 2,259,000 | 3,890,000 | |||||||||
| Stock-based compensation – general and administrative | |||||||||||
| Commissions | 10,000 | 27,000 | |||||||||
| Professional fees | 1,195,000 | 1,737,000 | |||||||||
| Software development | 60,000 | 1,161,000 | |||||||||
| Depreciation and amortization | 149,000 | 123,000 | |||||||||
| General and administrative | 1,971,000 | 2,340,000 | |||||||||
| Total operating expenses | 5,644,000 | 9,278,000 | |||||||||
| Operating Loss | (5,223,000) | (8,583,000) | |||||||||
| Other (expense) income: | |||||||||||
| Interest expense | — | (1,000) | |||||||||
| Other income | — | — | |||||||||
| Expensed SPAC offering costs | — | — | |||||||||
| Total other expense | — | 4,000 | |||||||||
| Loss from continuing operations | (5,223,000) | (8,579,000) | |||||||||
| Total (loss) income from discontinued operations, net of tax | (200,000) | (134,000) | |||||||||
| Net loss | $ | (5,423,000) | $ | (8,713,000) | |||||||
| Preferred stock preferential dividend | (127,145,000) | — | |||||||||
| Net loss attributable to common shareholders | $ | (132,568,000) | $ | (8,713,000) | |||||||
| Net loss attributable to common shareholders | |||||||||||
| Continuing operations | $ | (13.88) | $ | (24.00) | |||||||
| Discontinued operations | (0.02) | — | |||||||||
| Net loss per common share – Basic and diluted | $ | (13.90) | $ | (24.00) | |||||||
| Weighted average common shares outstanding – Basic and diluted | 9,533,982 | 359,452 | |||||||||
|
| 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 |
|
| 42 |
| Table of Contents |
We report our revenues as gross billings, net of related direct labor costs for ourthe Company's EAS/HCM clients and revenues without reduction of labor costs for staffing services clients.
The following table presents certain information related to ourthe gross profit components in thousands, (unaudited):
| For the Three Months Ended | |||||||||||
| November 30, 2022 | November 30, 2021 | ||||||||||
| Gross Billings for HCM | $ | 11.7 | $ | 14.1 | |||||||
| Gross Wages for HCM | $ | (10.3) | $ | (12.3) | |||||||
| Total Net Revenue for HCM | $ | 1.4 | 1.8 | ||||||||
| Revenue for Staffing | 3.8 | 7.1 | |||||||||
| Total Net Revenues (in millions) | $ | 5.3 | $ | 8.9 | |||||||
| Increase (Decrease), Quarter over Quarter (in millions) | (3.6) | 6.4 | |||||||||
| Percentage Increase (Decrease), Quarter over Quarter | (40.4) | % | 257.2 | % | |||||||
| Cost of Revenues (in millions) | $ | 4.8 | $ | 8.2 | |||||||
| Increase (Decrease), Quarter over Quarter (in millions) | (3.4) | 6.30 | |||||||||
| Percentage Increase (Decrease), Quarter over Quarter | (41.5) | % | 314.3 | % | |||||||
| Gross Profit (in millions) | $ | 0.4 | $ | 0.7 | |||||||
| Increase (Decrease), Quarter over Quarter (in millions) | (0.3) | 0.2 | |||||||||
| Percentage Increase (Decrease), Quarter over Quarter | (42.9) | % | 35.5 | % | |||||||
| Gross Profit Percentage of Revenues | 7.5 | % | 7.8 | % | |||||||
|
| 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 | % |
Three months ended May 31, 2023 as compared to the three months ended November 30,May 31, 2022
Net revenuerevenues for ourthe HCM services excludesexclude 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 Revenue
Cost of Revenues
includes| 43 |
| Table of Contents |
Gross Profit
for the three months ended| For the Three months Ended | |||||||||||
| November 30, 2022 | November 30, 2021 | ||||||||||
| Operating expenses: | |||||||||||
| Salaries, wages, and payroll taxes | $ | 2,259,000 | $ | 3,890,000 | |||||||
| Commissions | 10,000 | 27,000 | |||||||||
| Professional fees | 1,195,000 | 1,737,000 | |||||||||
| Software development | 60,000 | 1,161,000 | |||||||||
| Depreciation and amortization | 149,000 | 123,000�� | |||||||||
| General and administrative | 1,971,000 | 2,340,000 | |||||||||
| Total operating expenses | $ | 5,644,000 | $ | 9,278,000 | |||||||
Operating expensesexpenses decreased for the three months ended November 30, 2022May 31, 2023, by $3.6$6.7 million, compared withto the same period of Fiscalthree months ended May 31, 2022. The components of operating expenses changedchange for such periods are as follows:
Salaries, wages and payroll taxes
decreased for the three months endedProfessional fees
Software development
consists of costs associated with research and development outsourced to third parties. Software development costs decreased byGeneral and administrative
expenses consist of office rent and related overhead, software licenses, insurance, penalties,Other income for the three months ended November 30, 2022, decreased by $3.3 million, from $8.71 million to $5.4 million,May 31, 2023 was zero compared to the same period in Fiscal 2022. The decrease is mainly driven by the reduction in the costs described above, net by
| 44 |
| Table of Contents |
Interest expense primarily consist of the Company's obligation to the IRS and was describe above.
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 reassessmentdecrease in net wages related to the loss of claims liabilitya 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 period.
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 months ended May 31, 2023 was $6.5 million, primarily consisting of a net loss from continuing operations of $18.6 million, a decrease in accounts receivable and workers compensation payable of $0.8 million, offset by accounts payable and accrued expenses of $1.0 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 million, an increase in non-cash expenses of $1.5 million and impairment loss of $4.0 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 months ended May 31, 2023, was $117.1 million from the redemption of IHC Trust Account of $117.2 million and from the purchase of fixed asset of $0.3 million. Net cash used investing activities for the nine months ended May 31, 2022, was $129.5 million which was from an investment of $116.7 million from the 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
Net cash used in financing activities for the nine months ended May 31, 2023, was $111.2 million which was from the net proceeds of $4.4 million related to a private placement, $2.0 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.
Liquidity and Capital Resources
As of November 30, 2022,May 31, 2023, the Company had cash of $0.9$0.1 million and a working capital deficit of $32.0$41.7 million. During this same period,the nine months ended May 31, 2023, the Company used approximately $3.7$16.5 million of cash from its continuing operations and incurred recurring losses, resulting in an accumulated deficit of $198.1 million as$211.4 million. As of November 30, 2022.
| 46 |
| 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 securities purchase agreement (the “Purchase Agreement”) withregistration statement on Form S-1, providing for the sale of shares of the Company's common stock on a large institutional investor (the “Purchaser”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 whichan underwriting agreement with Titan. The commitment was not consummated by Titan, and on June 30, 2023, the Company soldfiled an amendment to the Purchaser an aggregateregistration statement, on Form S-1/A, providing for the sale on a best efforts basis of 416,667up to $10.0 million of shares (the “Shares”) of itsour common stock, par value $0.0001 per share, together with common warrants (the “Warrants”) to purchase up to 833,3344,926,108 shares of common stock, (collectively,pursuant to a Placement Agent Agreement with AGP.
On January 31, 2023, the “Offering”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"). Each share 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 two accompanying Warrants were sold together at a combined offering price of $12.00. The Warrants are exercisable for a period of seven years commencing upon issuancevarious prices at an exercise price of $12.00,the Company’s sole control, subject to adjustment.the conditions and limitations in the Sales Agreement with AGP. The Offering closedATM was scheduled to expire on September 23, 2022. The netJanuary 31, 2026. For the nine-months ended May 31, 2023, the Company received $2.4 million in gross proceeds to($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 fromterminated the Offering was $4,738,000 .
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 6,
The recurring losses, negative working capital and cash used in the Company’s operations are indicators of substantial doubt as to the Condensed Consolidated Financial StatementsCompany’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 “Part I, Item 1. Condensed Consolidated Financial Statements”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 Quarterly Report.
| 47 |
| 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.
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with GAAP, we monitor other non-GAAP measures that we use to manage our business, make planning decisions and allocate resources. These key financial measures provide an additional view of 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 November 30,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 $11.7$13.9 million and $3.8$8.7 million (total of $15.5$22.6 million), representing 75% and 25% of our gross revenue, respectively. For the three months ended November 30, 2021, our gross billings from HCM and staffing services totaled approximately $14.1$39.4 million and $7.1$25.8 million (total of $21.2$65.2 million), representing 66.4% and 33.6% of our gross revenue, respectively.
Gross billings represent billings to our business clients and include WSE gross wages, employer payroll taxes, and workers’ compensation premiums as well as administrative fees for our value-added services and other charges for workforce management support. Gross billings for our HCM services are a non-GAAP measurement that we believe to represent a key revenue-based operating metric, along with number of WSEs and number of clients. Active WSEs are defined as employees on our HRIS platform that have provided services for at least one of our clients for any reported period. Our primary profitability metrics are gross profit, and our primary driver of gross profit is administrative fees.
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Reconciliation of GAAP to Non-GAAP Measure
Gross Billings to Net Revenues
The following table presents a reconciliation of our Gross Billings (unaudited) to Revenues:
| For the Three Months Ended November 30, | |||||||||||
| ($ in millions) | 2022 | 2021 | |||||||||
| Gross Billings | $ | 11.7 | $ | 14.1 | |||||||
| Less: Adjustment to Gross Billings | $ | 10.3 | $ | 12.3 | |||||||
| Revenues | $ | 1.4 | $ | 1.8 | |||||||
|
| 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 November 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Administrative Fees (in millions) | $ | 0.3 | $ | 0.5 | |||||||
| Increase (Decrease), Quarter over Quarter (in millions) | $ | (0.2) | $ | 0.1 | |||||||
| Percentage Increase (Decrease), Quarter over Quarter | (38.2) | % | 34.9 | % | |||||||
| Administrative Fee % of Gross Billings | 1.8 | % | 2.2 | % | |||||||
| Average WSEs (unaudited) | 2,000 | 3,000 | |||||||||
| Average Gross Billings per Average WSE | $ | 8,049 | $ | 7,066 | |||||||
|
| 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 threenine months ended November 30, 2022May 31, 2023 as compared to 3,000 WSEWSEs for threenine months ending November 30, 2021May 31, 2022 was due the decrease in rnet revenue.net revenue was due to loss of client.s
Material Commitments
We do not have any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipmentThe Company purchased fixed assets and software necessary to conduct ourits operations on an as needed basis.
Contingencies
For a discussion of contingencies, see Note 11,
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,| 49 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
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 carried outconducted 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 at November 30, 2022,as of May 31, 2023, as defined in Rule 13a -15(e) and Rule 15d -15(e) under the Exchange Act. This evaluation was carried out under the 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, at November 30, 2022,as of May 31, 2023, our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting related to the lack of adequate accounting and finance personnel, 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, and which the Company determined continued to exist as of November 30, 2022.
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 November 30, 2022,May 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Item 1. Legal Proceedings.
The Company is a party to various legal actions, in addition to the contingencies noted above in item 11, above,Note 9: Contingencies to the accompanying financial statements, 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 2022,2022”), filed with the SEC on December 12, 202113, 2022, December 14, 2022, February 3, 2023 and on December 13, 2022,February 9, 2023, respectively, except as noted in Note 11 9: Contingencies to the accompanying financial statements.
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, as filed with the SEC on December 12, 2021,13, 2022, December 14, 2022, February 3, 2023 and February 9, 2023, respectively, which isare expressly incorporated herein by reference.Therereference. There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K and Forms 10-K/A for Fiscal 2022, filed with the SEC on December 12, 2022 and 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 89%85.1% of the issued and outstanding shares of the Company’s Common Stock;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,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.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
(a) Exhibits.
Exhibit No. | Document Description | |||||||
101* | Inline XBRL Document 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 | |||||||
* Furnished herewith.
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* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. SIGNATURES
Pursuant to the 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: | By: | /s/ Scott W. Absher | |||||||
Scott W. Absher | |||||||||
Principal Executive Officer | |||||||||
DATE: July 17, 2023 | By: | ||||||||
/s/ Douglas Beck | |||||||||
Douglas Beck | |||||||||
Principal Financial Officer | |||||||||
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