Document and Entity Information
Document and Entity Information - shares | 9 Months Ended | |
May 31, 2019 | Jul. 15, 2019 | |
Document And Entity Information | ||
Entity Registrant Name | SHIFTPIXY, INC. | |
Entity Central Index Key | 0001675634 | |
Document Type | 10-Q | |
Document Period End Date | May 31, 2019 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --08-31 | |
Is Entity's Reporting Status Current? | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Common Stock, Shares Outstanding | 36,202,107 | |
Document Fiscal Period Focus | Q3 | |
Document Fiscal Year Focus | 2019 | |
Entity Emerging Growth Company | true | |
Entity Small Business | true | |
Entity Ex Transition Period | false | |
Entity Shell Company | false |
Condensed Consolidated Balance
Condensed Consolidated Balance Sheets - USD ($) | May 31, 2019 | Aug. 31, 2018 |
Current assets | ||
Cash | $ 2,931,274 | $ 1,649,783 |
Accounts receivable | 338,112 | 110,931 |
Unbilled accounts receivable | 6,700,054 | 6,192,631 |
Deposit - workers' compensation | 2,250,103 | 1,672,097 |
Prepaid expenses | 762,990 | 563,002 |
Other current assets | 227,103 | 258,901 |
Total current assets | 13,209,636 | 10,447,345 |
Fixed assets, net | 3,013,062 | 3,032,325 |
Deposits - workers' compensation | 5,438,125 | 2,201,556 |
Deposits and other assets | 94,083 | 120,606 |
Total assets | 21,754,906 | 15,801,832 |
Current liabilities | ||
Accounts payable | 2,178,351 | 1,246,461 |
Payroll related liabilities | 14,311,903 | 9,476,641 |
Convertible note, net | 1,407,340 | 6,171,315 |
Derivative liability | 1,577,328 | |
Accrued workers' compensation costs | 1,027,043 | 305,217 |
Registration rights penalties accrual (Note 4) | 3,500,000 | |
Other current liabilities | 1,670,997 | 1,955,921 |
Total current liabilities | 22,172,962 | 22,655,555 |
Non-current liabilities | ||
Accrued workers' compensation costs | 3,000,732 | 900,978 |
Total liabilities | 25,173,694 | 23,556,533 |
Commitments and contingencies | ||
Stockholders' deficit | ||
Preferred stock, 50,000,000 authorized shares; $0.0001 par value; no shares issued and outstanding | ||
Common stock, 750,000,000 authorized shares; $0.0001 par value; 36,038,219 and 28,851,787 shares issued and outstanding, respectively | 3,604 | 2,886 |
Additional paid-in capital | 32,183,503 | 18,465,419 |
Accumulated deficit | (35,605,895) | (26,223,006) |
Total stockholders' deficit | (3,418,788) | (7,754,701) |
Total liabilities and stockholders' deficit | $ 21,754,906 | $ 15,801,832 |
Condensed Consolidated Balanc_2
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares | May 31, 2019 | Aug. 31, 2018 |
Stockholders' deficit | ||
Preferred stock, par value | $ 0.0001 | $ 0.0001 |
Preferred stock, authorized | 50,000,000 | 50,000,000 |
Preferred stock, issued | 0 | 0 |
Preferred stock, outstanding | 0 | 0 |
Common stock, par value | $ 0.0001 | $ 0.0001 |
Common stock, authorized | 750,000,000 | 750,000,000 |
Common stock, issued | 36,038,219 | 28,851,787 |
Common stock, outstanding | 36,038,219 | 28,851,787 |
Condensed Consolidated Statemen
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) | 3 Months Ended | 9 Months Ended | ||
May 31, 2019 | May 31, 2018 | May 31, 2019 | May 31, 2018 | |
Condensed Consolidated Statements Of Operations | ||||
Revenues (gross billings of $94.2m and $60.2m less worksite employee payroll cost of $79.9m and $50.8m, respectively for the three months ended; gross billings of $247.6m and $149.0m less worksite employee payroll cost of $209.6m and $125.2m, respectively for nine months ended) | $ 14,303,816 | $ 9,375,492 | $ 38,012,069 | $ 23,773,871 |
Cost of revenue | 11,591,990 | 7,825,500 | 28,693,394 | 20,099,218 |
Gross profit | 2,711,826 | 1,549,992 | 9,318,675 | 3,674,653 |
Operating expenses: | ||||
Salaries, wages and payroll taxes | 1,813,619 | 1,309,871 | 5,595,328 | 3,835,964 |
Stock-based compensation - general and administrative | (4,743) | 72,312 | 153,571 | 169,407 |
Commissions | 764,590 | 463,327 | 1,906,781 | 1,073,392 |
Professional fees | 1,279,855 | 416,311 | 2,798,983 | 1,417,554 |
Software development | 1,027,566 | 2,386,354 | ||
Depreciation and amortization | 221,523 | 59,343 | 600,360 | 134,986 |
General and administrative | 1,763,342 | 1,046,147 | 3,878,879 | 2,534,415 |
Total operating expenses | 5,838,186 | 3,367,311 | 15,961,468 | 11,552,072 |
Operating Loss | (3,126,360) | (1,817,319) | (6,642,793) | (7,877,419) |
Other (expense) income: | ||||
Interest expense | (4,345,004) | (6,271,000) | ||
Inducement loss from debt conversion | (2,273,000) | (3,828,550) | ||
Change in fair value derivative and warrant liability | 4,748,342 | 4,748,342 | ||
Settlement of registration rights penalties accrual | 2,611,112 | |||
Total other expense | (1,869,662) | (2,740,096) | ||
Net Loss | $ (4,996,022) | $ (1,817,319) | $ (9,382,889) | $ (7,877,419) |
Net loss per common share, Basic | $ (0.14) | $ (0.06) | $ (0.30) | $ (0.27) |
Net loss per common share, Diluted | $ (0.15) | $ (0.06) | $ (0.30) | $ (0.27) |
Weighted average number of common shares, Basic | 34,516,621 | 28,800,675 | 31,623,064 | 28,795,145 |
Weighted average number of common shares, Diluted | 44,516,621 | 28,800,675 | 31,623,064 | 28,795,145 |
Condensed Consolidated Statem_2
Condensed Consolidated Statements of Stockholders Deficit (Unaudited) - USD ($) | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total |
Beginning Balance, Shares at Aug. 31, 2017 | 28,762,424 | |||
Beginning Balance, Amount at Aug. 31, 2017 | $ 2,877 | $ 15,012,584 | $ (9,400,227) | $ 5,615,234 |
Warrants exercised for cash, Shares | 25,000 | |||
Warrants exercised for cash, Amount | $ 2 | 49,998 | 50,000 | |
Common stock issued for services rendered, Shares | 13,251 | |||
Common stock issued for services rendered, Amount | $ 2 | 125,353 | 125,355 | |
Stock-based compensation expense | 169,407 | 169,407 | ||
Net loss | (7,877,419) | (7,877,419) | ||
Ending Balance, Shares at May. 31, 2018 | 28,800,675 | |||
Ending Balance, Amount at May. 31, 2018 | $ 2,881 | 15,357,342 | (17,277,646) | (1,917,423) |
Beginning Balance, Shares at Feb. 28, 2018 | 28,800,675 | |||
Beginning Balance, Amount at Feb. 28, 2018 | $ 2,881 | 15,210,030 | (15,460,327) | (247,416) |
Common stock issued for services rendered, Shares | ||||
Common stock issued for services rendered, Amount | 75,000 | 75,000 | ||
Stock-based compensation expense | 72,312 | 72,312 | ||
Inducement loss from debt conversion, Amount | ||||
Net loss | (1,817,319) | (1,817,319) | ||
Ending Balance, Shares at May. 31, 2018 | 28,800,675 | |||
Ending Balance, Amount at May. 31, 2018 | $ 2,881 | 15,357,342 | (17,277,646) | (1,917,423) |
Beginning Balance, Shares at Aug. 31, 2018 | 28,851,787 | |||
Beginning Balance, Amount at Aug. 31, 2018 | $ 2,886 | 18,465,419 | (26,223,006) | (7,754,701) |
Warrants exercised for cash, Shares | 267,500 | |||
Warrants exercised for cash, Amount | $ 27 | 659,973 | 660,000 | |
Common stock issued for services rendered, Shares | 119,585 | |||
Common stock issued for services rendered, Amount | $ 12 | 224,994 | 225,006 | |
Stock-based compensation expense | 153,571 | 153,571 | ||
Reclass of derivative liability upon conversion of related convertible debentures | 12,330 | 12,330 | ||
Common shares issued upon conversion of convertible notes and interest, Shares | 4,067,187 | |||
Common shares issued upon conversion of convertible notes and interest, Amount | $ 406 | 8,838,939 | 8,839,345 | |
Inducement loss from debt conversion, Amount | $ 273 | 3,828,277 | 3,828,550 | |
Inducement loss from debt conversion, Share | 2,732,160 | |||
Net loss | (9,382,889) | (9,382,889) | ||
Ending Balance, Shares at May. 31, 2019 | 36,038,219 | |||
Ending Balance, Amount at May. 31, 2019 | $ 3,604 | 32,183,503 | (35,605,895) | (3,418,788) |
Beginning Balance, Shares at Feb. 28, 2019 | 32,117,326 | |||
Beginning Balance, Amount at Feb. 28, 2019 | $ 3,212 | 25,842,632 | (30,609,873) | (4,764,029) |
Common stock issued for services rendered, Shares | 80,973 | |||
Common stock issued for services rendered, Amount | $ 8 | 112,494 | 112,502 | |
Stock-based compensation expense | (4,743) | (4,743) | ||
Reclass of derivative liability upon conversion of related convertible debentures | 12,330 | 12,330 | ||
Common shares issued upon conversion of convertible notes and interest, Shares | 2,088,429 | |||
Common shares issued upon conversion of convertible notes and interest, Amount | $ 209 | 3,947,965 | 3,948,174 | |
Inducement loss from debt conversion, Amount | $ 175 | 2,272,825 | 2,273,000 | |
Inducement loss from debt conversion, Share | 1,751,491 | |||
Net loss | (4,996,022) | (4,996,022) | ||
Ending Balance, Shares at May. 31, 2019 | 36,038,219 | |||
Ending Balance, Amount at May. 31, 2019 | $ 3,604 | $ 32,183,503 | $ (35,605,895) | $ (3,418,788) |
Condensed Consolidated Statem_3
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) | 9 Months Ended | |
May 31, 2019 | May 31, 2018 | |
OPERATING ACTIVITIES | ||
Net Loss | $ (9,382,889) | $ (7,877,419) |
Adjustments to reconcile net loss to net cash used in operating activities: | ||
Depreciation and amortization | 600,360 | 134,986 |
Settlement of registration rights penalties accrual | (2,611,112) | |
Financing costs | 2,588,000 | |
Inducement loss | 3,828,550 | |
Amortization debt discount and debt issuance cost | 3,598,776 | |
Stock issued for services | 225,006 | 125,354 |
Stock-based compensation- general and administrative | 153,571 | 169,407 |
Non-cash interest | 508,510 | |
Change in fair value derivative and warrant liability | (4,748,342) | |
Changes in operating assets and liabilities | ||
Accounts receivable | (227,181) | 120,943 |
Unbilled accounts receivable | (507,423) | |
Prepaid expenses | (199,988) | 481,447 |
Other current assets | 31,798 | (161,796) |
Deposits workers' compensation | (3,814,575) | |
Deposits and other assets | 26,523 | (11,500) |
Accounts payable | 931,890 | (310,249) |
Payroll related liabilities | 4,835,262 | 2,986,500 |
Accrued workers' compensation | 2,821,580 | |
Other current liabilities | (284,924) | 516,210 |
Net cash used in operating activities | (1,626,608) | (3,826,117) |
INVESTING ACTIVITIES | ||
Purchase of fixed assets | (581,097) | (933,202) |
Net cash used in investing activities | (581,097) | (933,202) |
FINANCING ACTIVITIES | ||
Proceeds from issuance of convertible notes | 3,750,000 | |
Issuance costs related to convertible notes | (485,198) | |
Repayment of convertible notes | (435,606) | |
Proceeds from exercise of warrants | 660,000 | 50,000 |
Net cash provided by financing activities | 3,489,196 | 50,000 |
Net increase (decrease) in cash | 1,281,491 | (4,709,319) |
Cash - Beginning of Period | 1,649,783 | 5,896,705 |
Cash - End of Period | 2,931,274 | 1,187,386 |
Supplemental Disclosure of Cash Flows Information: | ||
Cash paid for interest | 225,894 | |
Non-cash Investing and Financing Activities: | ||
Conversion of debt and accrued interest into common stock | 8,839,345 | |
Additional Principal to settle registration rights penalties | $ 888,889 |
Nature of Operations
Nature of Operations | 9 Months Ended |
May 31, 2019 | |
Notes to Financial Statements | |
Note 1: Nature of Operations | ShiftPixy, Inc. (the “Company”) was incorporated in the State of Wyoming on June 3, 2015. The Company is a specialized staffing and human capital management service provider that provides solutions for large contingent part-time workforce demands, primarily in the restaurant and hospitality sectors. The Company’s initial focus is on the restaurant industry in Southern California. Shift Human Capital Management Inc. (“SHCM”), a wholly-owned subsidiary of ShiftPixy, Inc., is incorporated in the State of Wyoming. SHCM functions substantially as a professional employer organization (“PEO”) and provides comprehensive human resources solutions under its co-employment model. SHCM assumes certain of the responsibilities of being an employer and helps its clients mitigate employer-related risks and manage many of the complex and burdensome administrative and compliance responsibilities associated with employment. SHCM also functions as an-administrative-services only (“ASO”) provider, in response to client needs for only administrative and processing services, performing functions in the nature of a payroll processor, human resources consultant, administrator of worker’s compensation coverages and claims, under circumstances wherein the client remains as the sole employer of the subject employees. These services are also available to businesses in all industries, not limited to the restaurant and hospitality industries. The Company hopes that this mechanism may become a way to onboard new clients into the ShiftPixy Ecosystem when eligible clients to whom the Company is providing these services recognize the value of the services provided by the parent Company. The Company is currently operating in one reportable segment. |
Summary of significant accounti
Summary of significant accounting policies | 9 Months Ended |
May 31, 2019 | |
Notes to Financial Statements | |
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 smaller reporting company. 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 operations for the three and nine months ended May 31, 2019, are not necessarily indicative of the results that may be expected for the year ending August 31, 2019. The condensed consolidated balance sheet as of August 31, 2018, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial information. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended August 31, 2018, filed with the SEC on November 29, 2018. Principles of Consolidation The Company and its wholly-owned subsidiary have been consolidated in the accompanying unaudited condensed consolidated financial statements. All intercompany balances have been eliminated. 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: · Liability for legal contingencies; · Useful lives of property and equipment; · Assumptions made in valuing equity instruments; · Assumptions made in valuing embedded derivatives and freestanding equity-linked instrument classified as liabilities; · Deferred income taxes and related valuation allowance; and · Projected development of workers’ compensation claims. Revenue Recognition The Company’s revenues are primarily attributable to fees for providing staffing solutions and PEO/HCM (“Professional Employer Organization” / “Human Capital Management”) services. The Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the services have been rendered to the customer; (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The Company accounts for its PEO revenues in accordance with ASC 605-45, Revenue Recognition, Principal Agent Considerations The gross billings are invoiced concurrently with each periodic payroll of the Company’s worksite employees. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup are recognized ratably over the payroll period as worksite employees perform their service at the client worksite. Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on our condensed consolidated balance sheets. Consistent with its revenue recognition policy, its direct costs do not include the payroll cost of its worksite employees. The Company’s cost of revenue associated with its revenue generating activities are primarily comprised of all other costs related to its worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs. Concentration of Credit Risk The Company considers all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash with a commercial bank and from time to time exceed the federally insured limits. The deposits are made with a reputable financial institution, and the Company had not experienced losses from these deposits. No one individual client represents more than 10% of revenues for the three and nine months ended May 31, 2019, or 2018. However, four clients represent 85% of total accounts receivable at May 31, 2019, compared to four clients representing approximately 86% of our total accounts receivable at August 31, 2018. Impairment and Disposal of Long-Lived Assets The Company periodically evaluate its long-lived assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment Workers’ compensation Everest Program Up to July 2018, a portion of the Company’s workers’ compensation risk was covered by a retrospective rated policy, 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 funds 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. During the year ended August 31, 2017, the Company funded an initial deposit of $2.3 million, which was included in Deposits – worker’ compensation (“deposits”) on the condensed consolidated balance sheet. During the year ended August 31, 2018, the Company funded two-month worth of policy premiums against this initial deposit for approximately $0.8 million. As of May 31, 2019, the Company had “deposit-workers’ compensation” of $1.3 million for this retrospective rated policy. The Company utilizes a third-party to estimate its loss development rate, which is based primarily upon the nature of worksite employees’ job responsibilities, the location of worksite employees, 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 our workers’ compensation claims cost estimates. As of May 31, 2019, the Company classified $0.1 million in short term accrued workers’ compensation and $0.3 million in long term accrued workers’ compensation in our condensed consolidated balance sheets. Sunz Program Starting in July 2018, the Company’s workers’ compensation program for its worksite employees has been provided through an arrangement with United Wisconsin Insurance Company (“UWIC”) and administered by 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 will be used to pay claims and claim related expenses. The workers’ compensation insurance carrier established 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 worksite employee payroll levels and expected worker’s compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as “Deposit - workers’ compensation, a short-term asset, while the remainder of claim funds are included in deposits- workers’ compensation, a long-term asset in our consolidated balance sheets. As of May 31, 2019, the Company had $0.9 million in “deposit – workers’ compensation”, classified as a short-term asset and $5.4 million, classified as a long-term asset. 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 condensed balance sheets. As of May 31, 2019, the Company had short term accrued workers’ compensation costs of $0.9 million and long term accrued workers’ compensation costs of $2.7 million. Because the Company bears the financial responsibility for claims up to the level noted above, such claims, which are the primary component of our 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 takes into account the ongoing development of claims and therefore requires 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 which are primarily based upon the worksite employee’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 our 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. Debt issuance Costs and Debt discount Debt issuance costs and debt discounts are being amortized over the lives of the related financings on a basis that approximates the effective interest method. Costs and discounts are presented as a reduction of the related debt in the accompanying condensed balance sheets Beneficial Conversion Features The intrinsic value of a beneficial conversion feature (“BCF”) inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the stated maturity using the straight-line method which approximates the effective interest method. If the note payable is retired prior to the end of the contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the BCF is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion. Derivative financial instruments When a Company issues debt that contains a conversion feature, it first evaluates whether the conversion feature meets the requirement to be treated as a derivative: a) the settlement amount is determined by one or more underlying, typically the price of the Company’s stock, b) the settlement amount is determined by one or more notional amounts or payments provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provision, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. There are certain scope exception from derivative treatment, but these typically exclude conversion features that provide for a variable number of shares. When ShiftPixy, Inc., issues warrant to purchase its common stock, the Company must evaluate whether they meet the requirements to be treated as derivative. Generally, warrants would be treated as a derivative if the provisions of the warrants agreements create uncertainty as to a) the number of shares to be issued upon exercise, or b) whether shares may be issued upon exercise. If the conversion feature within convertible debt or warrants meet the requirements to be treated as a derivative, ShiftPixy estimates the fair value of the derivative liability using the lattice-based option valuation model upon the date of issuance. If the fair value of the derivative liability is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount of the debt. The derivative liability is revalued at the end of each reporting period and any change in fair value is recorded as a change in fair value in the condensed statement of operations. The debt discount is amortized through interest expense over the life of the debt. Derivative instrument liabilities and the host debt agreements are classified on the condensed balance sheets as current or non-current based on whether settlement of the derivative instrument could be required within twelve months of the condensed balance sheet date. The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Fair Value of Financial Instruments FASB ASC 825, “Financial Instruments,” 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. FASB 825 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. At May 31, 2019, and August 31, 2018, the carrying value of certain financial instruments (cash, accounts receivable and payable, and other financial instruments) approximates fair value due to the short-term nature of the instruments. Convertible notes approximate fair value based on comparison of terms from similar instruments in the marketplace. The Company measures fair value under a framework that utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of inputs which prioritize the inputs used in measuring fair value are: · Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. · Level 2: Inputs to the valuation methodology include: o Quoted prices for similar assets or liabilities in active markets; o Quoted prices for identical or similar assets or liabilities in inactive markets o Inputs other than quoted prices that are observable for the asset or liability; o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. 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. The Company did not have any Level 1 or Level 2 assets and liabilities at May 31, 2019. The Derivative liabilities and warrants at May 31, 2019, are Level 3 fair value measurements. The table below sets forth a summary of the changes in the fair value of the Company’s derivative liabilities classified as Level 3 for the three and nine months ended May 31, 2019: 2019 Balance at beginning of the period $ - Initial recognition of conversion feature 2,421,000 Reclassification to equity (12,330 ) Change in fair value (1,730,579 ) Balance at end of the period $ 678,091 At May 31, 2019, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on weighted probabilities of assumptions used in the Lattice-based option valuation model. The key valuation assumptions used consists, in part, of the price of the Company’s common stock, a risk free interest rate based on the average yield (2.41%-2.485%) of a Treasury note and expected volatility of the Company’s common stock all as of the measurement dates (120%-122%), and the various estimated reset exercise prices weighted by probability. The table below sets forth a summary of the changes in the fair value of the Company’s warrant liabilities classified as Level 3 for the three and nine months ended May 31, 2019: 2019 Balance at beginning of the period $ - Initial recognition of warrant liability 3,917,000 Change in fair value (3,017,763 ) Balance at end of the period $ 899,237 At May 31, 2019, the Company estimated the fair value of the warrant liabilities based on the Lattice-based option valuation model. The key valuation assumptions used consists, in part, of the price of the Company’s common stock, a risk-free interest rate based on the average yield of a Treasury note (2.41%) and expected volatility of the Company’s common stock all as of the measurement dates (120%-122%). 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 may need 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. For the periods ended May 31, 2019 and August 31, 2018, there were no significant transfers of financial assets or financial liabilities between the hierarchy levels. Advertising Costs The Company expenses all advertising as incurred. The Company incurred advertising costs totaling $366,475 and $948,414 for the three and nine months ended May 31, 2019, respectively and $181,957 and $362,207 for the three and nine months ended May 31, 2018, respectively. Earnings (Loss) Per Share The Company utilizes Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common share equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common share equivalents include the dilutive effect of in-the-money share equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any common share equivalents if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. The table below shows earnings per common share and diluted earnings per common share and reconciles the numerator and denominator of both earnings per common share calculations. For the Three Months Ended May 31, For the Nine Months 2019 2018 2019 2018 Diluted Earnings per common share: Net loss allocated to common shareholders $ (4,996,022 ) $ (1,817,319 ) $ (9,382,889 ) $ (7,877,419 ) Less: mark to market gain (1,730,579 ) - - - Net loss allocated to common shareholders $ (6,726,601 ) $ (1,817,319 ) $ (9,382,889 ) $ (7,877,419 ) Weighted average shares outstanding 34,516,621 28,800,675 31,623,064 28,795,145 Incremental shares from convertible notes with “down round” provision 10,000,000 - - - Diluted weighted average shares outstanding 44,516,621 28,800,675 31,623,064 28,795,145 Diluted net loss per common share $ (0.15 ) $ 0.06 $ (0.30 ) $ (0.27 ) Securities that are excluded from the calculation of weighted average dilutive common shares, because their inclusion would have been antidilutive are: For the Three and Nine Months Ended May 31, 2019 For the Three and Nine Months Ended May 31, 2018 Options 1,951,650 1,343,745 Senior Secured Convertible Notes (Note 4) 12,332,447 - Warrants 4,296,361 2,570,413 Total potentially dilutive shares 18,580,458 3,914,158 Stock-Based Compensation At May 31, 2019, the Company has one stock-based compensation plan under which the Company may issue awards. The Company accounts for this plan under the recognition and measurement principles of ASC 718, Compensation- Stock Compensation 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 over the requisite service period 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 since our Initial Public Offering. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense. The Company elected to account for forfeitures as they occur, as such, compensation cost previously recognized for an award that is forfeited because of the failure to satisfy a service condition is revised in the period of forfeiture. Reclassifications Certain reclassifications have been made to prior year’s data to confirm to the current year’s presentation. Such reclassifications had no impact on the Company’s financial condition, operating results, cash flows or stockholder’s equity. Recent Accounting Standards In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. For all entities, amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the potential impact this guidance will have on the condensed consolidated financial statements, if any. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. For entities that early adopted Topic 842, the amendments are effective upon issuance of ASU 2018-10, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. ASU 2018-10 will be effective for use for fiscal years beginning after December 15, 2019. The Company is currently evaluating the potential impact this guidance will have on the consolidated financial statements, if any. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The standard provides enhancements to the quality and consistency of how revenue is reported by companies, while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP. The new standard also will require enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. This accounting standard becomes effective for the Company for reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted for annual reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of this standard is to clarify the implementation of guidance on principal versus agent considerations related to ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarity related to ASU 2014-09 regarding identifying performance obligations and licensing implementation. The standard has the same effective date as ASU 2014-09 described above. In May 2016, the FASB issued ASU 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope improvements and practical expedients related to ASU 2014-09. The purpose of this standard is to clarify certain narrow aspects of ASU 2014-09, such as assessing the collectability criterion, presentation of sales taxes, and other similar taxes collected from customers, noncash considerations, contract modifications at transition, completed contracts are transition, and technical correction. The standard has the same effective date as ASU 2014-09 described above. In December 2016, the FASB issued ASU 2016-20: Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this standard affect narrow aspects of guidance issued in ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above. The Company is currently developing an adoption plan of how it currently recognizes revenue compared to the accounting treatment required under the new guidance. This plan includes a review of client contracts and revenue transactions to determine the impact of the accounting treatment under the new guidance, evaluation of the adoption method and completing a rollout plan for the new guidance. Additionally, the Company is in the process of assessing the impact of the new standard on its disclosures and internal controls. In February 2016, the FASB issued new accounting guidance on leases ASU 2016-02, Leases. The new standard requires that a lessee recognize assets and liabilities on the balance sheet for leases with terms longer than 12 months. The recognition, measurement and presentation of lease expenses and cash flows by a lessee will depend on its classification as a finance or operating lease. The guidance also includes new disclosure requirements providing information on the amounts recorded in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact that this standard will have on its consolidated financial statement. In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard will be effective for the Company in the first quarter of fiscal year 2020, although early adoption is permitted (but no sooner than the adoption of Topic 606). The Company does not expect that the adoption of this ASU will have a significant impact on its consolidated financial statements. |
Going Concern
Going Concern | 9 Months Ended |
May 31, 2019 | |
Notes to Financial Statements | |
Note 3: Going Concern | As of May 31, 2019, the Company had cash of $2.9 million and a working capital deficiency of $9.2 million. During the nine months ended May 31, 2019, the Company used approximately $1.6 million of cash in its operations, of which $1 million was attributed to the mobile application development costs. The Company has incurred recurring losses resulting in an accumulated deficit of $34.6 million as of May 31, 2019. These conditions raise substantial doubt as to its ability to continue as going concern within one year from issuance date of the financial statements. The ability of the Company to continue as a going concern is dependent upon generating profitable operations in the future and/or obtaining additional funds by way of public or private offering to meet the Company’s obligations and repay its liabilities when they become due. Historically, the Company’s principal source of financing has come through the sale of its common stock and issuance of convertible notes. The Company successfully completed an Initial Public Offering (IPO) on NASDAQ on June 29, 2017, raising a total of $12 million or $10.9 million net of costs. In June 2018, the Company completed a private placement of 8% senior secured convertible notes to institutional investors raising $9 million of gross proceeds or $8.4 million net of costs. In March 2019, the Company completed a private placement of senior secured convertible notes with certain of its existing institutional investors raising an additional $3.75 million of gross proceeds or $3.3 million net of closing costs. The Company is in dispute with its former software developer, Kadima Ventures (“Kadima”), over incomplete but paid for software development work. The Company began building its internal software development team and transitioned away from Kadima to expedite the Company’s technology deployment. Such transition would further increase the Company’s quarterly cash burn by approximately $0.5 million per quarter. The tardy delivery of the user features from Kadima and related on-going litigation slowed down the pace of the Company’s growth. Under licensing agreements with new vendors for certain features, the Company will be launching version 2.0 of its app and enhanced user features during the Company’s fourth fiscal quarter with all user features including the self-delivery feature. The completion of our technology and the deployment of these features, expected in our fourth fiscal quarter, would further accelerate the growth of the Company. Exclusive of the software development costs and assuming all payroll taxes are paid as incurred and excluding non-recurring expenditures, the Company is currently using $2.0 million each quarter from its operations or approximately $0.7 million per month. The Company continues to experience significant growth in the number of worksite employees, which would generate additional administrative fees and profit on employer-related taxes that would offset the current level of operational cash burn. Indeed, since May 31, 2019, the Company has added, through executed service agreements, approximately 17 new clients, servicing approximately 6,600 worksite employees with approximately $32.5 million in additional revenue per year, which would generate an additional of $1.1 million in quarterly gross profit. The Company’s existing institutional investors from our senior secured convertibles have converted approximately $8.8 million of their principal into 6.8 million shares of the Company’s common stock, which allowed the Company to retain cash to fund its operations and build its IT department to complete the deployment of its technology platform. The Company seeks to renegotiate the 2018 and 2019 notes, without litigating the matter in courts, to amend the terms to remove the conversion features and revise the cash amortization schedule to be more in alignment with the Company’s cash flow. With the added general and administrative costs from building its IT department, the Company anticipates using the actual cash position and continue leveraging its payables until it reaches breakeven at about 25,000 worksite employees. The deployment of our technology features, especially our self-delivery feature, is expected to further accelerate the growth of the Company. The Company’s management believes that the current cash position, along with the resulted accelerated revenue growth will be sufficient to fund its operation for at least a year from the date these financials are available. If these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months from the date of this report, the Company may need to curtail certain aspects of its operations or expansion activities, consider the sale of its 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 terms advantageous to the Company or that any such additional financing would be available to the Company. These condensed consolidated financial statements do not include any adjustments from this uncertainty |
Senior Secured Convertible Note
Senior Secured Convertible Note Payable | 9 Months Ended |
May 31, 2019 | |
Notes to Financial Statements | |
Note 4: Senior Secured Convertible Note Payable | June 2018 Financing – December 2018 Limited Settlement On June 4, 2018, the Company issued convertible notes in the principal amount of $10 million for a purchase price of $9 million to institutional investors, bearing interest at a rate of 8%, with maturity date of September 4, 2019, for cash proceeds of $8.4 million for mobile application development and support, IT and HR platform development and support and working capital. The Company incurred approximately $0.6 million of debt issuance costs that are incremental costs directly related to the issuance of the senior secured convertible notes payable. Concurrently with the sale of the notes, the Company also granted warrants to purchase 1,004,016 shares of common stock to its institutional investors and also granted warrants to purchase 216,867 shares of common stock to its investment banker as placement fees, at an exercise price of $2.49, subject to down round price protection adjustment, as defined in the agreements. The terms of convertible notes are summarized as follows: · Term: September 4, 2019; · Coupon: 8%; · Convertible at the option of the holder at any time; · Conversion price is initially set at $2.49 but subject to down round price protection. After the maturity, the conversion price will be set subsequently at the lesser of the then conversion price and 85% of the volume weighted average price for the trading date immediately prior to the application conversion date; and · Monthly amortization of principal either in cash at a 10% premium or in stock, subject to equity conditions, at a 15% discount to the lowest volume weighted average price, at the option of the Company. The Company has been converting the convertible notes in its shares of common stock at a fifteen percent (15%) discount to the lowest volume weighted average price (“VWAP”) whereas the terms of the agreement state that such discount to the original conversion price of $2.49 should have been initiated on or after the maturity date of the convertible notes or September 4, 2019. The accounting standards require the recognition through earnings of an inducement charge equal to the fair value of the consideration delivered in excess of the consideration issuable under the original conversion terms. This resulted in a non-cash charge of $2.3 million for the three months ended May 31, 2019, and $3.8 million for the nine months ended May 31, 2019. The Company had the following principal balances under its convertible notes outstanding as of May 31, 2019 and August 31, 2018: May 31, August 31, 2019 2018 8% Senior Secured Convertible notes, Principal $ 10,000,000 $ 10,000,000 Less debt discount costs (400,592 ) (1,602,362 ) Less debt issuance costs (556,427 ) (2,226,323 ) Less Principal converted to common stock (8,120,836 ) - Less Principal repaid in cash (435,606 ) - Plus Additional Principal from settlement agreements 888,889 - Total outstanding convertible notes, net 1,375,428 6,171,315 Less current portion of convertible notes payable (1,375,428 ) (6,171,315 ) Long-term convertible notes payable $ - $ - The Company recognized amortization expense related to the debt discount and debt issuance costs of $957,222 and $2,871,666 for the three and nine months ended March 31, 2019, respectively, and $0 for the three and nine months ended May 31, 2018, respectively, which is included in interest expense in the condensed statements of operations. For the three and nine months ended May 31, 2019, the interest expense on convertible notes was $72,671 and $84,227, respectively, and $0 for the three and nine months ended May 31, 2018. The Company applied the interest paid in cash and interest paid in equity against the make whole provision, which represents guaranteed twelve months of coupon payments since the Company was in default from its registration rights agreements. As of May 31, 2019, and August 31, 2018, the balance in the make whole accrual amounted to $23,169 and $608,889, respectively, and such amount were accrued as of May 31, 2019, and August 31, 2018. During the three and nine months ended May 31, 2019, the Company paid in cash $435,606 of principal and converted $3,527,541 and $8,120,836, respectively, of principal and $203,966 and $501,844, respectively, of interest into shares of commons to its institutional investors and issued 3,405,079 and 6,364,506, respectively, shares of common stock. Event of default The Company executed registration rights agreements with each of its institutional investors. These registration rights agreements require, among other things, that the initial registration statement should be (a) filed within 30 days of June 4, 2018, and (b) declared effective within 90 days of June 4, 2018. The Company’s registration statement was filed on October 1, 2018 and it was declared effective by the SEC on October 29, 2018; thus, both the filing and effectiveness deadlines were missed. The Company recorded in its condensed consolidated financial statements the mandatory default amount as stipulated in the convertible note agreements. As of August 31, 2018, the Company recorded approximately $3.5 million, which is reported under current liabilities in its condensed consolidated statement of operations. On December 20, 2018, the Company entered into settlement agreements with its institutional investors, which resolves all disputes relating to technical defaults by the Company in failing to meet deadlines for filing a registration statement and for having a registration statement effective by the SEC. As a result of such settlement, the Company increased the principal amount of the convertible notes by $888,889 in full settlement of the previously accrued $3.5 million default amount thereby decreasing the total liabilities reported on the Company’s August 31, 2018, balance sheet by $2.6 million, and recognized a gain of approximately $0 and $2.6 million during the three and nine months ended May 31, 2019. March 2019 Bridge Financing On March 12, 2019, the Company issued convertible notes in the principal amount of $4,750,000 for a purchase price of $3,750,000 to certain of our existing institutional investors, bearing no coupon interest, with maturity date of September 12, 2020, for net cash proceeds of $3.3 million for mobile application development and working capital. The Company incurred approximately $0.5 million of debt issuance costs that are incremental costs directly related to the issuance of the bridge financing senior convertible notes payable. Concurrently with the sale of the notes, the Company also granted warrants to purchase 2,840,909 shares of common stock to its institutional investors and also granted warrants to purchase 134,569 shares of common stock to its investment bankers as placement fees, at an exercise price of $1.75, subject to down round price protection adjustment, as defined in the agreements. The notes bear no interest since they were issued at a deep discount. If the Company defaults on the notes, then the Company will be charged a default interest rate of 18% until default is resolved. The terms of the notes provide for payment of 110% of all amount outstanding (including the principal amount of each note together with any accrued and unpaid interest and any other accrued and unpaid charges) at maturity on September 12, 2020. Subject to the conversion limitation, each note may be converted, at the option of the holder, at a fixed price of $1.67, subject to adjustment or alternatively, at a variable price calculated by dividing (x) such portion of the principal, accrued and unpaid interest and fees subject to conversion by (y) the greater of (i) $0.31, and (ii) the lower of the conversion price in effect and 85% (subject to downward adjustment in the case of conversion upon an event of default or bankruptcy) of the lowest volume-weighted average price per share during the ten consecutive trading days prior to conversion. The terms of the March 2019 convertible notes are summarized as follows: · Term: September 12, 2020; · Coupon: 0%; · Default interest rate: 18%; · Original issue discount: $1,000,000; · Convertible at the option of the holder at any time; · Initial conversion price is set at $1.67 but subject to down round price protection; · Alternate conversion price at the greater of the floor price of $0.31 and the lower of the conversion price in effect and alternate conversion percentage of the lowest VWAP of the common share during the 10 consecutive trading day prior to the applicable conversion date; · Alternate conversion percentage is 75% if the alternate conversion is an alternate conversion event of default as a result of bankruptcy or 80% for all alternate event of default conversion or 85% is such alternate conversion is an alternate optional conversion; · Redemption at the option of the holder at 25% premium upon an event of default; · Redemption at the option of the Company at 15% premium at any time after 45 days from March 12, 2019. In connection with the note, the Company issued 2,840,909 warrants, exercisable at $1.75, with a five-year term. The Company estimated the fair value of the warrants using the Lattice pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s common stock of $1.59%, a risk-free interest rate of 2.49% and expected volatility of the Company’s common stock, of 122%, resulting in a fair value of $3,917,000. The Company estimated the aggregate fair value of the conversion feature derivative embedded in the debenture at issuance at $2,421,000 based on weighted probabilities of assumptions used the Lattice pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s common stock of $1.59, a risk-free interest rate of 2.49% and expected volatility of the Company’s common stock, of 122%, and the various estimated reset exercise prices weighted by probability. This resulted in the calculated fair value of the debt discount resulted from bifurcating the warrants and the conversion feature being greater than the face amount of the debt net of the original issue discount, and the excess amount of $2.6 million was immediately expenses as financing costs. The Company had the following principal balances under its convertible notes outstanding as of May 31, 2019, and August 31, 2018: May 31, August 31, 2019 2018 Senior Secured Convertible notes, Principal $ 4,750,000 $ - Less debt discount costs (4,090,278 ) - Less debt issuance costs (417,810 ) - Less Principal converted to common stock (210,000 ) - Total outstanding convertible notes, net 31,912 - Less current portion of convertible notes payable 31,912 - Long-term convertible notes payable $ - $ - The Company recognized amortization expense related to the debt discount and debt issuance costs of $727,111 for the three and nine months ended March 31, 2019, respectively, and $0 for the three and nine months ended May 31, 2018, respectively, which is included in interest expense in the condensed statements of operations. During the three and nine months ended May 31, 2019, the Company converted $210,000 of principal into shares of commons to its institutional investors and issued 434,841 shares of common stock. |
Stockholders' Equity
Stockholders' Equity | 9 Months Ended |
May 31, 2019 | |
Notes to Financial Statements | |
Note 5: Stockholders' Equity | Preferred Stock In September of 2016, the Company issued options to purchase preferred stock at $0.0001 per share. This issuance was approved by our shareholders. The number of options is equal to the lesser of (a) the number of shares of common stock held by such shareholder on September 28, 2016, which accounts for approximately 25.6 million shares, or (b) the number of shares of common stock held by such shareholder on date of the shareholder’s exercise of the aforesaid option. The preferred stock that is the subject of such contingent option provides a right to elect a majority of the directors on the Board of Directors of the Corporation and does not include any rights to dividends, conversion to shares of common stock, or preference upon liquidation of the Corporation. The contingent option is exercisable only upon the acquisition of a 20% or greater voting interest in the Corporation by a party other than the founding shareholders, or prior to any proposed merger, consolidation (in which the Corporation’s common stock is changed or exchanged) or sale of at least 50% of the Corporation’s assets or earning power (other than a reincorporation). The right to exercise the option terminates on December 31, 2023. Common Stock and Warrants During the nine months ended May 31, 2019, the Company issued 267,500 shares of common stock following the exercise of warrants and received gross proceeds of $660,000. During the nine months ended May 31, 2018, the Company issued 25,000 shares of common stock following the exercise of warrants with an exercise price of $2 and received gross proceeds of $50,000 As described more fully in note 4, during the nine months ended May 31, 2019, the Company issued 6,799,347 shares of common stock in satisfaction of principal and accrued interest following conversion of convertible notes into shares of common stock. On September 28, 2017, the Company granted each 26,316 common shares, through the ShiftPixy, Inc., Plan to two of its independent directors, Whitney White and Sean Higgins at a fair value of $2.85 per share, of which 50% will vest on the date marking the six-month anniversary and the remaining 50% of the shares vesting on the first anniversary (September 28, 2018) of service under the executed agreement. For the three and nine months ended May 31, 2019, the Company recognized $0 and $75,000 of compensation expense in its shareholders’ equity. For the nine months ended May 31, 2018, the Company recognized $125,354 of compensation expense in its shareholders’ equity. On December 11, 2018, the Company granted each 32,895 common shares, through the ShiftPixy, Inc., Plan to Whitney White and Sean Higgins at a fair value of $2.28 per share, of which 50% will vest on the date marking the six-month anniversary (March 28, 2019) and the remaining 50% of the shares vesting on the second anniversary (September 27, 2019) of service under the executed agreements. For the three and nine months ended May 31, 2019, the Company recognized $38,600 and $93,976 of compensation expense in our condensed consolidated statement of operation. On November 30, 2018, the Company granted 12,296 common shares, through the ShiftPixy, Inc., Plan to Ken Weaver, Chairman of its Audit Committee, at a fair value of $3.05 per share. For the three and nine months ended May 31, 2019, the Company recognized $0 and $37,500 of compensation expense in its shareholders’ equity. For the nine months ended May 31, 2018, the Company recognized 13,251 shares of common stock to Ken Weaver for services that vested during the nine months ended May 31, 2018, at a fair value of approximately $50,300. On May 15, 2019, the Company granted 48,077 common shares, through the ShiftPixy, Inc., Plan to Ken Weaver at a fair value of $0.78 per share. For the three and nine months ended May 31, 2019, the Company recognized $37,500 of compensation expense in its shareholders’ equity. The following tables summarize our warrants outstanding as of May 31, 2019: Number of shares Weighted average remaining life (years) Weighted average exercise price Warrants outstanding, August 31, 2018, 3,778,796 2.13 $ 2.84 Issued 2,975,478 4.79 $ 1.75 (Exercised) (267,500 ) 0.45 $ 2.47 (Cancelled) - - - (Expired) (2,190,413 ) - $ 2.87 Warrants outstanding, May 31, 2019, 4,296,361 4.67 $ 2.08 Warrants exercisable, May 31, 2019, 4,296,361 4.67 $ 2.08 The following table summarizes information about warrants outstanding as of May 31, 2019: Exercise price Warrants Outstanding Weighted average life of outstanding warrants in years $ 1.75 2,975,478 4.8 $ 2.49 1,220,883 4.5 $ 6.90 100,000 3.1 4,296,361 4.7 |
Stock based Compensation
Stock based Compensation | 9 Months Ended |
May 31, 2019 | |
Notes to Financial Statements | |
Note 6: Stock based Compensation | The Company granted options to purchase an aggregate total of 1,192,903 shares of common stock during the nine months ended May 31, 2019. The Company recognized approximately ($4,743) and $153,571 in the three and nine months ended May 31, 2019, respectively. The Company recognized approximately $72,312 and $169,407 of compensation expense in the three and nine months ended May 31, 2018. The weighted average remaining contract life of the options is 9.1 and 9.42 years, respectively. The total intrinsic value of options as of May 31, 2019, and 2018, is $0 and $6,287 respectively. The Company estimated the fair value of the stock options based on the black Scholes valuation model. The key valuation assumptions used consists, in part, of the price of the Company’s common stock, risk free interest rate based on the average yield (2.30%-2.55%) of a Treasury note and expected volatility of the Company’s common stock all as of the measurement dates (120%-122%). Stock option activity during the nine months ended May 31, 2019, is summarized as follows: Options Outstanding Weighted Average Exercise Price Options outstanding at August 31, 2018 1,348,745 $ 3.45 Exercised - $ - Granted 1,192,903 1.83 Forfeited (589,998 ) $ 3.01 Expired - Options outstanding at May 31, 2019 1,951,650 $ 2.59 |
Related Parties
Related Parties | 9 Months Ended |
May 31, 2019 | |
Notes to Financial Statements | |
Note 7: Related Parties | J. Stephen Holmes, our Sales Manager is an advisor to and significant shareholder of the Company. The Company incurred $180,000 and $540,000 in professional fees for management consulting services in the three and nine months ended May 31, 2019, and $180,000 and $520,000 in the three and nine months ended May 31, 2018, respectively. On September 28, 2017, Sean Higgins, one of the Company’s independent directors, was awarded 13,158 shares for services at an assumed fair value of $2.85. For the three and nine months ended May 31, 2019, the Company recognized $0 and $37,500 of compensation expense in its shareholders’ equity for the portion that fully vested. For the three and nine months ended May 31, 2018, the Company recognized 37,500 of compensation expense in its shareholders’ equity. On December 11, 2018, the Company awarded Sean Higgins 32,895 shares for services for his director agreement second anniversary, at an assumed fair value of $2.28. For the three and nine months ended May 31, 2019, the Company recognized $19,300 and 46,988 respectively, of compensation expenses in its condensed consolidated statement of operation. The Company also recorded $64,000 and $57,500 as compensation for his role as independent director for the nine months ended May 31, 2019, and 2018, respectively. On September 28, 2017, Whitney White, one of the Company’s independent directors, was awarded 13,158 shares for services at an assumed fair value of $2.85. For the three and nine months ended May 31, 2019, the Company recognized $0 and $37,500 of compensation expense in its shareholders’ equity for the portion that fully vested. For the three and nine months ended May 31, 2018, the Company recognized 37,500 of compensation expense in its shareholders’ equity. On December 11, 2018, the Company granted Whitney White 32,895 common shares, through the ShiftPixy, Inc., Plan at an assumed fair value of $2.28 per shares, of which 50% will vest on the date marking the six-month anniversary (March 28, 2019) and the remaining 50% of the shares vesting on the second anniversary (September 27, 2019) of service under the executed agreement. For the three and nine months ended May 31, 2019, the Company recognized 19,300 and $46,988, respectively, of compensation expense in its condensed consolidated statement of operation. The Company also recorded $68,000 and $62,000 as compensation for his role as independent director for the nine months ended May 31, 2019, and 2018, respectively. On November 30, 2018, the Board of Directors awarded 12,296 shares of common stock at an assumed fair value of $3.05 to Kenneth W. Weaver. For the three and nine ended May 31, 2019, the Company recognized $0 and $37,500 of compensation expense in its shareholders’ equity. For the nine months ended May 31, 2019, and 2018, the Company recorded $68,500 and $70,000, respectively, as compensation for his role as independent director. On May 15, 2019, the Company granted Ken Weaver 48,077 shares of common stock at an assumed fair value of $0,78. For the three and nine months ended May 31, 2019, the Company recognized $37,500 of compensation expense in its shareholders’ equity for the portion that fully vested |
Commitment and contingencies
Commitment and contingencies | 9 Months Ended |
May 31, 2019 | |
Notes to Financial Statements | |
Note 8: Commitment and 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, in consultation with its legal counsel as appropriate, 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 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. Lyons Capital, LLC Litigation On June 21, 2018, ShiftPixy was served with a summons and complaint in connection with a claim by Lyons Capital, LLC, arising out of a contract wherein ShiftPixy, Inc., agreed to pay Lyons Capital, LLC, a total of 210,000 shares of the company’s common stock in exchange for introductions to brokers, research coverage, funds, investment banking firms, and market makers as well as board representation and business opportunities and for promotion of the company at Lyons Capital, LLC’s annual conference. This lawsuit was settled during the three months ending May 31, 2019 for an immaterial amount which was included in general and administrative expenses on the condensed statement of operations. Kadima Ventures The Company is in dispute with its software developer, Kadima Ventures, over incomplete but paid for software development work. In May 2016, the Company entered into a contract with Kadima Ventures for the development and deployment of user features that were proposed by Kadima for an original build cost of $8.5 million to complete. As of the date of this filing, the Company has spent approximately $11million but has not received the majority of certain modules. In addition to the non-delivery of the paid for user features, Kadima Ventures asserts that it is owed additional funds to turn over the work completed. The Company is initiating litigation to force the delivery of the paid for software and exit the development engagement. Kadima made a demand for an additional $10 million or they would not turn over the remaining features. The Company has accelerated its internal development team to expedite the user features delivery for summer of 2019. Under licensing agreement, the Company will be launching version 2.0 of its app and enhanced user features during the Company’s fourth fiscal quarter with all user features as well as the driver management, which will allow its clients to self- deliver. The Company hopes to recover some of the funds spent with Kadima Ventures for their failure to deliver. Licensing agreement However, the Company entered into a white-label last mile platform solution on March 22, 2019. Such agreement includes a three-year monthly licensing fee of approximately $80k. |
Subsequent Events
Subsequent Events | 9 Months Ended |
May 31, 2019 | |
Notes to Financial Statements | |
Note 9: Subsequent Events | The Company granted 215,000 incentive stock options to employees with a weighted average grant-date exercise price of $0.45, which vest over a service period of 48 months. The stock options were valued using the Black-Scholes option-pricing model. The Company issued 163,888 shares of common stock as repayment of $65,000 in principal from the March 2019 convertible notes at a weighted average effective conversion rate of $0.3966. The Company entered into a $325,000 promissory note to one of its majority shareholders, effective June 4, 2019, with no maturity date and carrying a coupon rate of 5% per annum. In as much as after discussing the aforementioned promissory note with the Company’s counsel, management does not believe the aforementioned loan violates the Sarbanes Oxley Act (the “Act”). However, since the recipient is one of the majority shareholders it could be construed as a violation of the Act, therefore the Company is pursuing remedies to cure this uncertainty by repurchasing shares of common stock in satisfaction of the aforementioned loan. On June 7, 2019, and June 10, 2019, the Company received notices from two of its institutional investors that the Company was in default due to missed principal and interest payments under the terms of the Notes. On June 27, 2019, the Company reported that is has informed its convertible note holders that it will cease honoring conversion requests of the 2018 and 2019 Notes forcing a voluntary default of these instruments. The Company is pursuing a renegotiation and amendment of these instruments in an effort to avoid litigation. The Company is requesting to amend the terms of the notes to remove the conversion features and revise the cash amortization schedule to be more in alignment with the Company’s improving cash flow, among other items. On June 3, 2019, one of its institutional investors filed claim in the United States District Court, Southern District of New York seeking preliminary injunctive relief against the Company to immediately deliver one million shares of the Company’s common stock and to honor all future conversion requests duly submitted in accordance with the terms of the notes. The Company has been served on July 10, 2019. The claim will be heard by the court on July 24, 2019. On July 9, 2019, the Company’s board of Directors authorized the repurchase of up to 10 million shares of our outstanding common shares as market conditions warrant over a period of 18 months. Management has evaluated subsequent events pursuant to the issuance of the interim unaudited consolidated financial statements and has determined that other than listed above, no other subsequent events exist through the date of this filing. |
Summary of significant accoun_2
Summary of significant accounting policies (Policies) | 9 Months Ended |
May 31, 2019 | |
Summary Of Significant Accounting Policies 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 smaller reporting company. 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 operations for the three and nine months ended May 31, 2019, are not necessarily indicative of the results that may be expected for the year ending August 31, 2019. The condensed consolidated balance sheet as of August 31, 2018, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial information. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended August 31, 2018, filed with the SEC on November 29, 2018. |
Principles of Consolidation | The Company and its wholly-owned subsidiary have been consolidated in the accompanying unaudited condensed consolidated financial statements. All intercompany balances have been eliminated. |
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: Liability for legal contingencies; Useful lives of property and equipment; Assumptions made in valuing equity instruments; Assumptions made in valuing embedded derivatives and freestanding equity-linked instrument classified as liabilities; Deferred income taxes and related valuation allowance; and Projected development of workers’ compensation claims. |
Revenue Recognition | The Company’s revenues are primarily attributable to fees for providing staffing solutions and PEO/HCM (“Professional Employer Organization” / “Human Capital Management”) services. The Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the services have been rendered to the customer; (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The Company accounts for its PEO revenues in accordance with ASC 605-45, Revenue Recognition, Principal Agent Considerations The gross billings are invoiced concurrently with each periodic payroll of the Company’s worksite employees. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup are recognized ratably over the payroll period as worksite employees perform their service at the client worksite. Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on our condensed consolidated balance sheets. Consistent with its revenue recognition policy, its direct costs do not include the payroll cost of its worksite employees. The Company’s cost of revenue associated with its revenue generating activities are primarily comprised of all other costs related to its worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs. |
Concentration of Credit Risk | The Company considers all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash with a commercial bank and from time to time exceed the federally insured limits. The deposits are made with a reputable financial institution, and the Company had not experienced losses from these deposits. No one individual client represents more than 10% of revenues for the three and nine months ended May 31, 2019, or 2018. However, four clients represent 85% of total accounts receivable at May 31, 2019, compared to four clients representing approximately 86% of our total accounts receivable at August 31, 2018. |
Impairment and Disposal of Long-Lived Assets | The Company periodically evaluate its long-lived assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment |
Workers' compensation | Everest Program Up to July 2018, a portion of the Company’s workers’ compensation risk was covered by a retrospective rated policy, 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 funds 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. During the year ended August 31, 2017, the Company funded an initial deposit of $2.3 million, which was included in Deposits – worker’ compensation (“deposits”) on the condensed consolidated balance sheet. During the year ended August 31, 2018, the Company funded two-month worth of policy premiums against this initial deposit for approximately $0.8 million. As of May 31, 2019, the Company had “deposit-workers’ compensation” of $1.3 million for this retrospective rated policy. The Company utilizes a third-party to estimate its loss development rate, which is based primarily upon the nature of worksite employees’ job responsibilities, the location of worksite employees, 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 our workers’ compensation claims cost estimates. As of May 31, 2019, the Company classified $0.1 million in short term accrued workers’ compensation and $0.3 million in long term accrued workers’ compensation in our condensed consolidated balance sheets. Sunz Program Starting in July 2018, the Company’s workers’ compensation program for its worksite employees has been provided through an arrangement with United Wisconsin Insurance Company (“UWIC”) and administered by 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 will be used to pay claims and claim related expenses. The workers’ compensation insurance carrier established 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 worksite employee payroll levels and expected worker’s compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as “Deposit - workers’ compensation, a short-term asset, while the remainder of claim funds are included in deposits- workers’ compensation, a long-term asset in our consolidated balance sheets. As of May 31, 2019, the Company had $0.9 million in “deposit – workers’ compensation”, classified as a short-term asset and $5.4 million, classified as a long-term asset. 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 condensed balance sheets. As of May 31, 2019, the Company had short term accrued workers’ compensation costs of $0.9 million and long term accrued workers’ compensation costs of $2.7 million. Because the Company bears the financial responsibility for claims up to the level noted above, such claims, which are the primary component of our 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 takes into account the ongoing development of claims and therefore requires 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 which are primarily based upon the worksite employee’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 our 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. |
Debt issuance Costs and Debt discount | Debt issuance costs and debt discounts are being amortized over the lives of the related financings on a basis that approximates the effective interest method. Costs and discounts are presented as a reduction of the related debt in the accompanying condensed balance sheets |
Beneficial Conversion Features | The intrinsic value of a beneficial conversion feature (“BCF”) inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the stated maturity using the straight-line method which approximates the effective interest method. If the note payable is retired prior to the end of the contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the BCF is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion. |
Derivative financial instruments | When a Company issues debt that contains a conversion feature, it first evaluates whether the conversion feature meets the requirement to be treated as a derivative: a) the settlement amount is determined by one or more underlying, typically the price of the Company’s stock, b) the settlement amount is determined by one or more notional amounts or payments provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provision, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. There are certain scope exception from derivative treatment, but these typically exclude conversion features that provide for a variable number of shares. When ShiftPixy, Inc., issues warrant to purchase its common stock, the Company must evaluate whether they meet the requirements to be treated as derivative. Generally, warrants would be treated as a derivative if the provisions of the warrants agreements create uncertainty as to a) the number of shares to be issued upon exercise, or b) whether shares may be issued upon exercise. If the conversion feature within convertible debt or warrants meet the requirements to be treated as a derivative, ShiftPixy estimates the fair value of the derivative liability using the lattice-based option valuation model upon the date of issuance. If the fair value of the derivative liability is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount of the debt. The derivative liability is revalued at the end of each reporting period and any change in fair value is recorded as a change in fair value in the condensed statement of operations. The debt discount is amortized through interest expense over the life of the debt. Derivative instrument liabilities and the host debt agreements are classified on the condensed balance sheets as current or non-current based on whether settlement of the derivative instrument could be required within twelve months of the condensed balance sheet date. The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. |
Fair Value of Financial Instruments | FASB ASC 825, “Financial Instruments,” 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. FASB 825 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. At May 31, 2019, and August 31, 2018, the carrying value of certain financial instruments (cash, accounts receivable and payable, and other financial instruments) approximates fair value due to the short-term nature of the instruments. Convertible notes approximate fair value based on comparison of terms from similar instruments in the marketplace. The Company measures fair value under a framework that utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of inputs which prioritize the inputs used in measuring fair value are: · Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. · Level 2: Inputs to the valuation methodology include: o Quoted prices for similar assets or liabilities in active markets; o Quoted prices for identical or similar assets or liabilities in inactive markets o Inputs other than quoted prices that are observable for the asset or liability; o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. 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. The Company did not have any Level 1 or Level 2 assets and liabilities at May 31, 2019. The Derivative liabilities and warrants at May 31, 2019, are Level 3 fair value measurements. The table below sets forth a summary of the changes in the fair value of the Company’s derivative liabilities classified as Level 3 for the three and nine months ended May 31, 2019: 2019 Balance at beginning of the period $ - Initial recognition of conversion feature 2,421,000 Reclassification to equity (12,330 ) Change in fair value (1,730,579 ) Balance at end of the period $ 678,091 At May 31, 2019, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on weighted probabilities of assumptions used in the Lattice-based option valuation model. The key valuation assumptions used consists, in part, of the price of the Company’s common stock, a risk free interest rate based on the average yield (2.41%-2.485%) of a Treasury note and expected volatility of the Company’s common stock all as of the measurement dates (120%-122%), and the various estimated reset exercise prices weighted by probability. The table below sets forth a summary of the changes in the fair value of the Company’s warrant liabilities classified as Level 3 for the three and nine months ended May 31, 2019: 2019 Balance at beginning of the period $ - Initial recognition of warrant liability 3,917,000 Change in fair value (3,017,763 ) Balance at end of the period $ 899,237 At May 31, 2019, the Company estimated the fair value of the warrant liabilities based on the Lattice-based option valuation model. The key valuation assumptions used consists, in part, of the price of the Company’s common stock, a risk-free interest rate based on the average yield of a Treasury note (2.41%) and expected volatility of the Company’s common stock all as of the measurement dates (120%-122%). 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 may need 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. For the periods ended May 31, 2019 and August 31, 2018, there were no significant transfers of financial assets or financial liabilities between the hierarchy levels. |
Advertising Costs | The Company expenses all advertising as incurred. The Company incurred advertising costs totaling $366,475 and $948,414 for the three and nine months ended May 31, 2019, respectively and $181,957 and $362,207 for the three and nine months ended May 31, 2018, respectively. |
Earnings (Loss) Per Share | The Company utilizes Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common share equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common share equivalents include the dilutive effect of in-the-money share equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any common share equivalents if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. The table below shows earnings per common share and diluted earnings per common share and reconciles the numerator and denominator of both earnings per common share calculations. For the Three Months Ended May 31, For the Nine Months 2019 2018 2019 2018 Diluted Earnings per common share: Net loss allocated to common shareholders $ (4,996,022 ) $ (1,817,319 ) $ (9,382,889 ) $ (7,877,419 ) Less: mark to market gain (1,730,579 ) - - - Net loss allocated to common shareholders $ (6,726,601 ) $ (1,817,319 ) $ (9,382,889 ) $ (7,877,419 ) Weighted average shares outstanding 34,516,621 28,800,675 31,623,064 28,795,145 Incremental shares from convertible notes with “down round” provision 10,000,000 - - - Diluted weighted average shares outstanding 44,516,621 28,800,675 31,623,064 28,795,145 Diluted net loss per common share $ (0.15 ) $ 0.06 $ (0.30 ) $ (0.27 ) Securities that are excluded from the calculation of weighted average dilutive common shares, because their inclusion would have been antidilutive are: For the Three and Nine Months Ended May 31, 2019 For the Three and Nine Months Ended May 31, 2018 Options 1,951,650 1,343,745 Senior Secured Convertible Notes (Note 4) 12,332,447 - Warrants 4,296,361 2,570,413 Total potentially dilutive shares 18,580,458 3,914,158 |
Stock-Based Compensation | At May 31, 2019, the Company has one stock-based compensation plan under which the Company may issue awards. The Company accounts for this plan under the recognition and measurement principles of ASC 718, Compensation- Stock Compensation 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 over the requisite service period 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 since our Initial Public Offering. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense. The Company elected to account for forfeitures as they occur, as such, compensation cost previously recognized for an award that is forfeited because of the failure to satisfy a service condition is revised in the period of forfeiture. |
Reclassifications | Certain reclassifications have been made to prior year’s data to confirm to the current year’s presentation. Such reclassifications had no impact on the Company’s financial condition, operating results, cash flows or stockholder’s equity. |
Recent Accounting Standards | In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. For all entities, amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the potential impact this guidance will have on the condensed consolidated financial statements, if any. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. For entities that early adopted Topic 842, the amendments are effective upon issuance of ASU 2018-10, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. ASU 2018-10 will be effective for use for fiscal years beginning after December 15, 2019. The Company is currently evaluating the potential impact this guidance will have on the consolidated financial statements, if any. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The standard provides enhancements to the quality and consistency of how revenue is reported by companies, while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP. The new standard also will require enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. This accounting standard becomes effective for the Company for reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted for annual reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of this standard is to clarify the implementation of guidance on principal versus agent considerations related to ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarity related to ASU 2014-09 regarding identifying performance obligations and licensing implementation. The standard has the same effective date as ASU 2014-09 described above. In May 2016, the FASB issued ASU 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope improvements and practical expedients related to ASU 2014-09. The purpose of this standard is to clarify certain narrow aspects of ASU 2014-09, such as assessing the collectability criterion, presentation of sales taxes, and other similar taxes collected from customers, noncash considerations, contract modifications at transition, completed contracts are transition, and technical correction. The standard has the same effective date as ASU 2014-09 described above. In December 2016, the FASB issued ASU 2016-20: Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this standard affect narrow aspects of guidance issued in ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above. The Company is currently developing an adoption plan of how it currently recognizes revenue compared to the accounting treatment required under the new guidance. This plan includes a review of client contracts and revenue transactions to determine the impact of the accounting treatment under the new guidance, evaluation of the adoption method and completing a rollout plan for the new guidance. Additionally, the Company is in the process of assessing the impact of the new standard on its disclosures and internal controls. In February 2016, the FASB issued new accounting guidance on leases ASU 2016-02, Leases. The new standard requires that a lessee recognize assets and liabilities on the balance sheet for leases with terms longer than 12 months. The recognition, measurement and presentation of lease expenses and cash flows by a lessee will depend on its classification as a finance or operating lease. The guidance also includes new disclosure requirements providing information on the amounts recorded in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact that this standard will have on its consolidated financial statement. In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard will be effective for the Company in the first quarter of fiscal year 2020, although early adoption is permitted (but no sooner than the adoption of Topic 606). The Company does not expect that the adoption of this ASU will have a significant impact on its consolidated financial statements. |
Summary of significant accoun_3
Summary of significant accounting policies (Tables) | 9 Months Ended |
May 31, 2019 | |
Summary Of Significant Accounting Policies | |
Schedule of fair value of the Company's derivative liabilities | 2019 Balance at beginning of the period $ - Initial recognition of conversion feature 2,421,000 Reclassification to equity (12,330 ) Change in fair value (1,730,579 ) Balance at end of the period $ 678,091 |
Schedule of fair value of the Company's warrant liabilities | 2019 Balance at beginning of the period $ - Initial recognition of warrant liability 3,917,000 Change in fair value (3,017,763 ) Balance at end of the period $ 899,237 |
Schedule of weighted average dilutive common shares | For the Three and Nine Months Ended May 31, 2019 For the Three and Nine Months Ended May 31, 2018 Options 1,951,650 1,343,745 Senior Secured Convertible Notes (Note 4) 12,332,447 - Warrants 4,296,361 2,570,413 Total potentially dilutive shares 18,580,458 3,914,158 |
Schedule of earning per common share | The table below shows earnings per common share and diluted earnings per common share and reconciles the numerator and denominator of both earnings per common share calculations. For the Three Months Ended May 31, For the Nine Months 2019 2018 2019 2018 Diluted Earnings per common share: Net loss allocated to common shareholders $ (4,996,022 ) $ (1,817,319 ) $ (9,382,889 ) $ (7,877,419 ) Less: mark to market gain (1,730,579 ) - - - Net loss allocated to common shareholders $ (6,726,601 ) $ (1,817,319 ) $ (9,382,889 ) $ (7,877,419 ) Weighted average shares outstanding 34,516,621 28,800,675 31,623,064 28,795,145 Incremental shares from convertible notes with “down round” provision 10,000,000 - - - Diluted weighted average shares outstanding 44,516,621 28,800,675 31,623,064 28,795,145 Diluted net loss per common share $ (0.15 ) $ 0.06 $ (0.30 ) $ (0.27 ) |
Senior Secured Convertible No_2
Senior Secured Convertible Note Payable (Tables) | 9 Months Ended |
May 31, 2019 | |
June2018FinancingDecember 2018 Limited Settlement [Member] | |
Schedule of principal balances under convertible notes | The Company had the following principal balances under its convertible notes outstanding as of May 31, 2019 and August 31, 2018: May 31, August 31, 2019 2018 8% Senior Secured Convertible notes, Principal $ 10,000,000 $ 10,000,000 Less debt discount costs (400,592 ) (1,602,362 ) Less debt issuance costs (556,427 ) (2,226,323 ) Less Principal converted to common stock (8,120,836 ) - Less Principal repaid in cash (435,606 ) - Plus Additional Principal from settlement agreements 888,889 - Total outstanding convertible notes, net 1,375,428 6,171,315 Less current portion of convertible notes payable (1,375,428 ) (6,171,315 ) Long-term convertible notes payable $ - $ - |
March 2019 Bridge Financing [Member] | |
Schedule of principal balances under convertible notes | May 31, August 31, 2019 2018 Senior Secured Convertible notes, Principal $ 4,750,000 $ - Less debt discount costs (4,090,278 ) - Less debt issuance costs (417,810 ) - Less Principal converted to common stock (210,000 ) - Total outstanding convertible notes, net 31,912 - Less current portion of convertible notes payable 31,912 - Long-term convertible notes payable $ - $ - |
Stockholders' Equity (Tables)
Stockholders' Equity (Tables) | 9 Months Ended |
May 31, 2019 | |
Stockholders Equity Tables | |
Summary of warrants outstanding | Number of shares Weighted average remaining life (years) Weighted average exercise price Warrants outstanding, August 31, 2018, 3,778,796 2.13 $ 2.84 Issued 2,975,478 4.79 $ 1.75 (Exercised) (267,500 ) 0.45 $ 2.47 (Cancelled) - - - (Expired) (2,190,413 ) - $ 2.87 Warrants outstanding, May 31, 2019, 4,296,361 4.67 $ 2.08 Warrants exercisable, May 31, 2019, 4,296,361 4.67 $ 2.08 |
Summary of information about warrants outstanding | Exercise price Warrants Outstanding Weighted average life of outstanding warrants in years $ 1.75 2,975,478 4.8 $ 2.49 1,220,883 4.5 $ 6.90 100,000 3.1 4,296,361 4.7 |
Stock based compensation (Table
Stock based compensation (Tables) | 9 Months Ended |
May 31, 2019 | |
Stock Based Compensation Tables | |
Schedule of stock option activity | Options Outstanding Weighted Average Exercise Price Options outstanding at August 31, 2018 1,348,745 $ 3.45 Exercised - $ - Granted 1,192,903 1.83 Forfeited (589,998 ) $ 3.01 Expired - Options outstanding at May 31, 2019 1,951,650 $ 2.59 |
Nature of Operations (Details N
Nature of Operations (Details Narrative) | 9 Months Ended |
May 31, 2019 | |
Nature Of Operations Details Narrative | |
Date of incorporation | Jun. 3, 2015 |
State of incorporation | Wyoming |
Summary of significant accoun_4
Summary of significant accounting policies (Details) | 9 Months Ended |
May 31, 2019USD ($) | |
Summary Of Significant Accounting Policies Details Abstract | |
Balance at beginning of the period | |
Initial recognition of conversion feature | 2,421,000 |
Reclassification to equity | (12,330) |
Change in fair value | (1,730,579) |
Balance at end of the period | $ 678,091 |
Summary of significant accoun_5
Summary of significant accounting policies (Details 1) | 9 Months Ended |
May 31, 2019USD ($) | |
Change in fair value | $ (1,730,579) |
Warrant [Member] | |
Balance at beginning of the period | |
Initial recognition of warrant liability | 3,917,000 |
Change in fair value | (3,017,763) |
Balance at end of the period | $ 899,237 |
Summary of significant accoun_6
Summary of significant accounting policies (Details 2) - shares | 6 Months Ended | |
May 31, 2019 | May 31, 2018 | |
Total potentially dilutive shares | 18,580,458 | 3,914,158 |
Warrant [Member] | ||
Total potentially dilutive shares | 4,296,361 | 2,570,413 |
Stock Option [Member] | ||
Total potentially dilutive shares | 1,951,650 | 1,343,745 |
Senior Secured Convertible Notes [Member] | ||
Total potentially dilutive shares | 12,332,447 |
Summary of significant accoun_7
Summary of significant accounting policies (Details 3) - USD ($) | 3 Months Ended | 9 Months Ended | ||
May 31, 2019 | May 31, 2018 | May 31, 2019 | May 31, 2018 | |
Diluted Earnings per common share: | ||||
Net loss allocated to common shareholders | $ (4,996,022) | $ (1,817,319) | $ (9,382,889) | $ (7,877,419) |
Less: mark to market gain | (1,730,579) | |||
Net loss allocated to common shareholders | $ (6,726,601) | $ (1,817,319) | $ (9,382,889) | $ (7,877,419) |
Weighted average shares outstanding | 34,516,621 | 28,800,675 | 31,623,064 | 28,795,145 |
Incremental shares from convertible notes with “down round” provision | 10,000,000 | |||
Diluted weighted average shares outstanding | 44,516,621 | 28,800,675 | 31,623,064 | 28,795,145 |
Diluted net loss per common share | $ (0.15) | $ (0.06) | $ (0.30) | $ (0.27) |
Summary of significant accoun_8
Summary of significant accounting policies (Details Narrative) - USD ($) | 3 Months Ended | 9 Months Ended | 12 Months Ended | ||||
May 31, 2019 | Feb. 28, 2019 | May 31, 2018 | May 31, 2019 | May 31, 2018 | Aug. 31, 2018 | Aug. 31, 2017 | |
Advertising costs | $ 366,475 | $ 181,957 | $ 948,414 | $ 362,207 | |||
Deposit-workers' compensation | 2,250,103 | $ 2,250,103 | $ 1,672,097 | ||||
Revenue [Member] | |||||||
Concentration of credit risk, description | No one individual client represents more than 10% of revenues for the three and nine months ended May 31, 2019, or 2018. | No one individual client represents more than 10% of revenues for the three and nine months ended May 31, 2019, or 2018. | |||||
July 2018 [Member] | Everest Program [Member] | |||||||
Deposit-workers' compensation | 1,300,000 | $ 1,300,000 | $ 800,000 | $ 2,300,000 | |||
July 2018 [Member] | Sunz Program [Member] | |||||||
Short term accrued workers compensation | 900,000 | 900,000 | |||||
Long term accrued workers compensation | 2,700,000 | 2,700,000 | |||||
Short-term asset and workers compensation - deposits | 900,000 | 900,000 | |||||
Short-term asset and workers compensation - deposits | 5,400,000 | 5,400,000 | |||||
Third-Party [Member] | |||||||
Short term accrued workers compensation | 100,000 | 100,000 | |||||
Long term accrued workers compensation | $ 300,000 | $ 300,000 | |||||
Four clients [Member] | Accounts Receivable [Member] | |||||||
Concentration of credit risk percent | 85.00% | 86.00% | |||||
United Wisconsin Insurance Company [Member] | July 2018 [Member] | Sunz Program [Member] | |||||||
Settlement claims | $ 500,000 | ||||||
Minimum [Member] | Convertible Debt [Member] | |||||||
Risk-free interest rate | 2.41% | ||||||
Volatility rate | 120.00% | ||||||
Maximum [Member] | Convertible Debt [Member] | |||||||
Risk-free interest rate | 2.485% | ||||||
Volatility rate | 122.00% | ||||||
Warrant [Member] | Minimum [Member] | |||||||
Volatility rate | 120.00% | ||||||
Warrant [Member] | Maximum [Member] | |||||||
Volatility rate | 122.00% |
Going Concern (Details Narrativ
Going Concern (Details Narrative) - USD ($) | 1 Months Ended | 3 Months Ended | 9 Months Ended | ||||||
Mar. 31, 2019 | Jun. 30, 2018 | Jun. 29, 2017 | May 31, 2019 | May 31, 2019 | Mar. 31, 2019 | May 31, 2018 | Aug. 31, 2018 | Aug. 31, 2017 | |
Cash | $ 2,931,274 | $ 2,931,274 | $ 1,187,386 | $ 1,649,783 | $ 5,896,705 | ||||
Working capital deficit | (9,200,000) | (9,200,000) | |||||||
Accumulated deficit | (35,605,895) | (35,605,895) | $ (26,223,006) | ||||||
Proceeds from initial public offering, net of costs | |||||||||
Net cash used in operating activities | (1,626,608) | $ (3,826,117) | |||||||
Mobile application development costs | 1,000,000 | ||||||||
Quarterly payment from operations | 2,000,000 | ||||||||
Monthly payment from operations | $ 700,000 | ||||||||
Service agreement description | The Company has added, through executed service agreements, approximately 17 new clients, servicing approximately 6,600 worksite employees with approximately $32.5 million in additional revenue per year, which would generate an additional of $1.1 million in quarterly administrative fees. | ||||||||
Additional payroll cost | 32,500,000 | $ 32,500,000 | |||||||
Administrative fees (quarterly) | 1,600,000 | ||||||||
Costs incurred due to transition of current software developer | 200,000 | ||||||||
Debt Conversion, Converted Instrument, Amount | $ 3,527,541 | $ 8,120,836 | |||||||
Debt Conversion, Converted Instrument, Shares Issued | 3,405,079 | 6,364,506 | |||||||
Senior Secured Convertible Notes [Member] | |||||||||
Debt Conversion, Converted Instrument, Amount | $ 8,800,000 | ||||||||
Debt Conversion, Converted Instrument, Shares Issued | 6,800,000 | ||||||||
IPO [Member] | |||||||||
Proceeds from initial public offering | $ 12,000,000 | ||||||||
Proceeds from initial public offering, net of costs | $ 10,900,000 | ||||||||
Private Placement [Member] | Senior Secured Convertible Notes [Member] | |||||||||
Proceeds from initial public offering | $ 3,750,000 | $ 9,000,000 | |||||||
Proceeds from initial public offering, net of costs | $ 3,300,000 | $ 8,400,000 |
Senior Secured Convertible No_3
Senior Secured Convertible Note Payable (Details) - USD ($) | May 31, 2019 | Aug. 31, 2018 |
Senior Secured Convertible Note Payable | ||
8% Senior Secured Convertible notes, Principal | $ 10,000,000 | $ 10,000,000 |
Less debt discount costs | (400,592) | (1,602,362) |
Less debt issuance costs | (556,427) | (2,226,323) |
Less Principal converted to common stock | (8,120,836) | |
Less Principal repaid in cash | (435,606) | |
Plus Additional Principal from settlement agreements | 888,889 | |
Total outstanding convertible notes, net | 1,375,428 | 6,171,315 |
Less current portion of convertible notes payable | (1,375,428) | (6,171,315) |
Long-term convertible notes payable |
Senior Secured Convertible No_4
Senior Secured Convertible Note Payable (Details 1) - USD ($) | May 31, 2019 | Aug. 31, 2018 |
Senior Secured Convertible notes, Principal | $ 10,000,000 | $ 10,000,000 |
Less debt discount costs | (400,592) | (1,602,362) |
Less debt issuance costs | (556,427) | (2,226,323) |
Less Principal converted to common stock | (8,120,836) | |
Total outstanding convertible notes, net | 1,407,340 | 6,171,315 |
Less current portion of convertible notes payable | (1,375,428) | (6,171,315) |
Long-term convertible notes payable | ||
Convertible Notes Payable [Member] | ||
Senior Secured Convertible notes, Principal | 4,750,000 | |
Less debt discount costs | (4,090,278) | |
Less debt issuance costs | (417,810) | |
Less Principal converted to common stock | (210,000) | |
Total outstanding convertible notes, net | 31,912 | |
Less current portion of convertible notes payable | 31,912 | |
Long-term convertible notes payable |
Senior Secured Convertible No_5
Senior Secured Convertible Note Payable (Details Narrative) - USD ($) | Mar. 12, 2019 | Jun. 04, 2018 | Dec. 20, 2018 | May 31, 2019 | Mar. 31, 2019 | May 31, 2018 | May 31, 2019 | Mar. 31, 2019 | May 31, 2018 | Aug. 31, 2018 |
Convertible notes, Principal | $ 10,000,000 | $ 10,000,000 | $ 10,000,000 | |||||||
Warrants granted | 1,004,016 | |||||||||
Warrants exercise price | $ 2.49 | |||||||||
Financing costs | $ 2,588,000 | |||||||||
Conversion price description | Conversion price is initially set at $2.49 but subject to down round price protection. After the maturity, the conversion price will be set subsequently at the lesser of the then conversion price and 85% of the volume weighted average price for the trading date immediately prior to the application conversion date; and Monthly amortization of principal either in cash at a 10% premium or in stock, subject to equity conditions, at a 15% discount to the lowest volume weighted average price, at the option of the Company. | |||||||||
Non-cash charge | $ 2,200,000 | |||||||||
Amortization debt discount and debt issuance cost | 957,222 | $ 2,871,666 | ||||||||
Interest expense | 72,671 | $ 0 | 84,227 | $ 0 | ||||||
Accrued interest payable | 23,169 | 23,169 | 608,889 | |||||||
Convertible debt principal amount | 3,948,174 | 8,839,345 | ||||||||
Debt default amount recorded as other current liabilities | 3,500,000 | |||||||||
Settlement amount | 2,600,000 | |||||||||
Gain (loss) on settlement of convertible notes | 0 | 2,600,000 | ||||||||
Debt instrument converted amount, principal | 3,527,541 | 8,120,836 | ||||||||
Debt instrument converted amount, interest | $ 203,966 | $ 501,844 | ||||||||
Debt instrument converted amount shares issued | 3,405,079 | 6,364,506 | ||||||||
Amortized in cash amount | $ 435,606 | |||||||||
Convertible Notes Payable [Member] | ||||||||||
Convertible notes, Principal | $ 4,750,000 | $ 4,750,000 | ||||||||
Conversion price description | The Company has been converting the convertible notes in its shares of common stock at a fifteen percent (15%) discount to the lowest volume weighted average price (VWAP) whereas the terms of the agreement states that such discount to the original conversion price of $2.49 should have been initiated on or after the maturity date of the convertible notes or September 4, 2019. | |||||||||
Non-cash charge | $ 3,828,550 | |||||||||
Amortization debt discount and debt issuance cost | $ 0 | $ 727,111 | $ 0 | $ 727,111 | ||||||
Institutional Investors [Member] | ||||||||||
Convertible notes, Principal | $ 4,750,000 | $ 10,000,000 | ||||||||
Purchase price of notes | $ 3,750,000 | $ 9,000,000 | ||||||||
Interest rate | 8.00% | |||||||||
Maturity date | Sep. 12, 2020 | Sep. 4, 2019 | ||||||||
Proceeds from issuance of notes | $ 3,300,000 | $ 8,400,000 | ||||||||
Debt issuance costs | $ 500,000 | $ 600,000 | ||||||||
Warrants granted | 2,840,909 | |||||||||
Warrants exercise price | $ 1.75 | |||||||||
Price per share | $ 1.49 | |||||||||
Risk-free interest rate | 2.49% | |||||||||
Expected volatility | 122.00% | |||||||||
Fair value of the conversion feature derivative | $ 2,421,000 | |||||||||
Financing costs | $ 2,600,000 | |||||||||
Description for event of default | If the Company defaults on the notes, then the Company will be charged a default interest rate of 18% until default is resolved.The terms of the notes provide for payment of 110% of all amount outstanding (including the principal amount of each note together with any accrued and unpaid interest and any other accrued and unpaid charges) at maturity on September 12, 2020. | The Company executed registration rights agreements with each of its institutional investors. These registration rights agreements require, among other things, that the initial registration statement should be (a) filed within 30 days of June 4, 2018, and (b) declared effective within 90 days of June 4, 2018. The Companys registration statement was filed on October 1, 2018 and it was declared effective by the SEC on October 29, 2018; thus, both the filing and effectiveness deadlines were missed. | ||||||||
Convertible debt principal amount | $ 888,889 | |||||||||
Conversion price | $ 1.67 | |||||||||
Debt default amount | $ 3,500,000 | |||||||||
Debt instrument converted amount, principal | $ 210,000 | |||||||||
Debt instrument converted amount shares issued | 434,841 | |||||||||
Original issue discount | $ 100,000 | |||||||||
Institutional Investors [Member] | Warrant [Member] | ||||||||||
Warrants granted | 2,840,909 | |||||||||
Warrants exercise price | $ 1.75 | |||||||||
Maturity term | 5 years | |||||||||
Price per share | $ 1.49 | |||||||||
Risk-free interest rate | 2.49% | |||||||||
Expected volatility | 122.00% | |||||||||
Fair value of common stovk | $ 3,917,000 | |||||||||
Common stock shares issued upon conversion of senior secured convertible debt | 6,799,347 | |||||||||
Investment bankers [Member] | ||||||||||
Warrants granted | 134,569 | |||||||||
Warrants exercise price | $ 1.75 | |||||||||
Investment Banker [Member] | ||||||||||
Warrants granted | 216,867 | |||||||||
Warrants exercise price | $ 2.49 |
Stockholders' Equity (Details)
Stockholders' Equity (Details) | 9 Months Ended |
May 31, 2019$ / sharesshares | |
Number of shares outstanding, Ending balance | 4,296,361 |
Weighted average remaining life Beginning | 4 years 8 months 12 days |
Warrant [Member] | |
Number of shares outstanding, Beginning balance | 3,778,796 |
Issued | 2,975,478 |
Exercised | (267,500) |
Cancelled | |
Expired | (2,190,413) |
Number of shares outstanding, Ending balance | 4,296,361 |
Number of shares exercisable | 4,296,361 |
Weighted average remaining life Beginning | 2 years 1 month 16 days |
Issued | 4 years 9 months 14 days |
Exercised | 5 months 12 days |
Weighted average remaining life Ending | 4 years 8 months 2 days |
Weighted average remaining life of warrants exercisable | 4 years 8 months 2 days |
Weighted Average Exercise Price Beginning | $ / shares | $ 2.84 |
Issued | $ / shares | 1.75 |
Exercised | $ / shares | 2.47 |
Cancelled | $ / shares | |
Expired | $ / shares | 2.87 |
Weighted Average Exercise Price Ending | $ / shares | 2.08 |
Weighted average Exercise Price of warrants exercisable | $ / shares | $ 2.08 |
Stockholders' Equity (Details 1
Stockholders' Equity (Details 1) | 9 Months Ended |
May 31, 2019shares | |
Warrants Outstanding | 4,296,361 |
Weighted average life of outstanding warrants in years | 4 years 8 months 12 days |
$2.00 Per Share [Member] | |
Warrants Outstanding | 2,975,478 |
Weighted average life of outstanding warrants in years | 4 years 9 months 18 days |
2.49 Per Share [Member] | |
Warrants Outstanding | 1,220,883 |
Weighted average life of outstanding warrants in years | 4 years 6 months |
$6.90 Per Share [Member] | |
Warrants Outstanding | 100,000 |
Weighted average life of outstanding warrants in years | 3 years 1 month 6 days |
Stockholders' Equity (Details N
Stockholders' Equity (Details Narrative) - USD ($) | May 15, 2019 | Dec. 11, 2018 | Jun. 04, 2018 | Nov. 30, 2018 | Sep. 28, 2017 | Sep. 28, 2016 | May 31, 2019 | May 31, 2019 | May 31, 2018 | Aug. 31, 2018 |
Preferred stock, par value | $ 0.0001 | $ 0.0001 | $ 0.0001 | $ 0.0001 | ||||||
Common stock shares held by shareholders | 25,600,000 | |||||||||
Conversion description | The preferred stock that is the subject of such contingent option provides a right to elect a majority of the directors on the Board of Directors of the Corporation and does not include any rights to dividends, conversion to shares of common stock, or preference upon liquidation of the Corporation. The contingent option is exercisable only upon the acquisition of a 20% or greater voting interest in the Corporation by a party other than the founding shareholders, or prior to any proposed merger, consolidation (in which the Corporation’s common stock is changed or exchanged) or sale of at least 50% of the Corporation’s assets or earning power (other than a reincorporation). The right to exercise the option terminates on December 31, 2023. | |||||||||
Class of warrant or right expiration date | Dec. 31, 2023 | |||||||||
Proceeds from exercise of warrants | $ 660,000 | $ 50,000 | ||||||||
Warrants granted | 1,004,016 | |||||||||
Compensation expense | 125,354 | |||||||||
Common stock issued for services, value | $ 225,006 | $ 125,354 | ||||||||
Warrant [Member] | ||||||||||
Shares issued upon exercise of warrants | 267,500 | 25,000 | ||||||||
Proceeds from exercise of warrants | $ 660,000 | $ 50,000 | ||||||||
Fair value exercise price per share | $ 2 | |||||||||
Ken Weaver [Member] | ||||||||||
Warrants granted | 48,077 | 12,296 | 12,296 | |||||||
Fair value exercise price per share | $ 0.78 | $ 3.05 | $ 3.05 | $ 3.05 | ||||||
Compensation expense | $ 0 | $ 37,500 | ||||||||
Common stock issued for services, shares | 13,251 | |||||||||
Common stock issued for services, value | $ 50,300 | |||||||||
Ken Weaver [Member] | May 15, 2019 [Member] | ||||||||||
Compensation expense | 37,500 | 37,500 | ||||||||
Whitney White and Sean Higgins One [Member] | ||||||||||
Warrants granted | 32,895 | |||||||||
Fair value exercise price per share | $ 2.28 | |||||||||
Stock option vesting description | Whitney White and Sean Higgins at a fair value of $2.28 per share, of which 50% will vest on the date marking the six-month anniversary (March 28, 2019) and the remaining 50% of the shares vesting on the second anniversary (September 27, 2019) of service under the executed agreements. | |||||||||
Compensation expense | 38,600 | 93,976 | ||||||||
Whitney White and Sean Higgins [Member] | ||||||||||
Warrants granted | 26,316 | |||||||||
Fair value exercise price per share | $ 2.85 | |||||||||
Stock option vesting description | Whitney White and Sean Higgins at a fair value of $2.95 per share, of which 50% will vest on the date marking the six-month anniversary and the remaining 50% of the shares vesting on the first anniversary (September 28, 2018) of service under the executed agreement. | |||||||||
Compensation expense | $ 0 | $ 75,000 |
Stock based compensation (Detai
Stock based compensation (Details) - $ / shares | Jun. 04, 2018 | May 31, 2019 |
Granted | 1,004,016 | |
Number of shares outstanding, Ending balance | 4,296,361 | |
Stock Option [Member] | ||
Number of shares outstanding, Beginning balance | 1,348,745 | |
Exercised | ||
Granted | 1,192,903 | |
Forfeited | (589,998) | |
Expired | ||
Number of shares outstanding, Ending balance | 1,951,650 | |
Weighted Average Exercise Price Beginning | $ 3.45 | |
Exercised | ||
Granted | 1.83 | |
Forfeited | 3.01 | |
Weighted Average Exercise Price Ending | $ 2.59 |
Stock based compensation (Det_2
Stock based compensation (Details Narrative) - USD ($) | Jun. 04, 2018 | May 31, 2019 | May 31, 2018 | May 31, 2019 | May 31, 2018 |
Common stock option granted shares | 1,004,016 | ||||
Stock based compensation expense | $ (4,743) | $ 72,312 | $ 153,571 | $ 169,407 | |
Total intrinsic value of options | $ 0 | $ 6,287 | $ 0 | $ 6,287 | |
Stock Option [Member] | |||||
Common stock option granted shares | 1,192,903 | ||||
Weighted average remaining contract life | 9 years 1 month 6 days | 9 years 4 months 24 days | |||
Stock Option [Member] | Minimum [Member] | |||||
Risk-free interest rate | 2.30% | ||||
Volatility rate | 120.00% | ||||
Stock Option [Member] | Maximum [Member] | |||||
Risk-free interest rate | 2.55% | ||||
Volatility rate | 122.00% |
Related Parties (Details Narrat
Related Parties (Details Narrative) - USD ($) | May 15, 2019 | Dec. 11, 2018 | Jun. 04, 2018 | Nov. 30, 2018 | Sep. 28, 2017 | May 31, 2019 | May 31, 2018 | May 31, 2019 | May 31, 2018 |
Professional fees for management consulting services | $ 1,279,855 | $ 416,311 | $ 2,798,983 | $ 1,417,554 | |||||
Common stock option granted shares | 1,004,016 | ||||||||
Compensation expense | $ 125,354 | ||||||||
Ken Weaver [Member] | |||||||||
Common stock option granted shares | 48,077 | 12,296 | 12,296 | ||||||
Fair value exercise price per share | $ 0.78 | $ 3.05 | $ 3.05 | $ 3.05 | |||||
Compensation expense | $ 0 | $ 37,500 | |||||||
Ken Weaver [Member] | Independent Director [Member] | |||||||||
Compensation expense | 68,500 | 70,000 | |||||||
Ken Weaver [Member] | May 15, 2019 [Member] | |||||||||
Compensation expense | 37,500 | 37,500 | |||||||
Whitney White One [Member] | |||||||||
Common stock option granted shares | 32,895 | ||||||||
Fair value exercise price per share | $ 2.28 | ||||||||
Compensation expense | 19,300 | $ 46,988 | |||||||
Stock option vesting description | Whitney White at an assumed fair value of $2.28 per shares, of which 50% will vest on the date marking the six-month anniversary (March 28, 2019) and the remaining 50% of the shares vesting on the second anniversary (September 27, 2019) of service under the executed agreement. | ||||||||
Whitney White One [Member] | Independent Director [Member] | |||||||||
Compensation expense | 62,000 | $ 68,000 | |||||||
Whitney White [Member] | |||||||||
Common stock option granted shares | 13,158 | ||||||||
Fair value exercise price per share | $ 2.85 | ||||||||
Compensation expense | 0 | 37,500 | 37,500 | 37,500 | |||||
Sean Higgins One [Member] | |||||||||
Common stock option granted shares | 32,895 | ||||||||
Fair value exercise price per share | $ 2.28 | ||||||||
Compensation expense | 19,300 | 46,988 | |||||||
Sean Higgins One [Member] | Independent Director [Member] | |||||||||
Compensation expense | 57,500 | 64,000 | |||||||
Sean Higgins [Member] | |||||||||
Common stock option granted shares | 13,158 | ||||||||
Fair value exercise price per share | $ 2.85 | ||||||||
Compensation expense | 0 | 37,500 | 37,500 | 37,500 | |||||
J. Stephan Holmes [Member] | |||||||||
Professional fees for management consulting services | $ 180,000 | $ 180,000 | $ 540,000 | $ 520,000 |
Commitment and contingencies (D
Commitment and contingencies (Details Narrative) - USD ($) | 1 Months Ended | ||
Mar. 22, 2019 | May 31, 2016 | Jun. 21, 2018 | |
Lyons Capital LLC [Member] | |||
Common stock shares outstanding | 210,000 | ||
Kadima Ventures [Member] | Licensing Agreements [Member] | |||
Description for licensing agreement | Such agreement includes a three-year monthly licensing fee of approximately $80k | ||
Kadima Ventures [Member] | Software Development [Member] | |||
Software development cost | $ 8,500,000 | ||
Description for the dispute with software developer | the Company entered into a contract with Kadima Ventures for the development and deployment of user features that were proposed by Kadima for an original build cost of $8.5 million to complete. As of the date of this filing, the Company has spent approximately $11million but has not received the majority of certain modules. | ||
Additional funds demand | $ 10,000,000 |
Subsequent Events (Details Narr
Subsequent Events (Details Narrative) - Subsequent Event [Member] - USD ($) | Jul. 09, 2019 | May 31, 2019 |
Common stock shares issued upon repayment of debt | 163,888 | |
Repayment of convertable debt | $ 65,000 | |
weighted average effective conversion rate | $ 0.3966 | |
Promissory note | $ 325,000 | |
Interest rate | 5.00% | |
Incentive stock options [Member] | ||
Stock options granted | 215,000 | |
Fair value price per share | $ 0.45 | |
Vesting period | 48 months | |
Board of Directors [Member] | ||
Number of common stock shares repurchase | 10,000,000 | |
Warrants term | 18 months |