See accompanying notes to the unaudited
interim condensed consolidated financial statements.
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
See accompanying notes to the unaudited interim condensed consolidated
financial statements.
Notes to the Condensed Consolidated
Financial Statements
(Unaudited)
Note 1: Nature of Operations
ShiftPixy, Inc.,
(“we,” “us,” “our,” the “Company” or “ShiftPixy”), was
incorporated on June 3, 2015, in the State of Wyoming. We are a specialized staffing service provider that provides
solutions for large contingent part-time workforce demands, primarily in the restaurant and hospitality service trades. Our
historic focus has been on the quick service restaurant industry in Southern California, but we have begun to expand into
other geographic areas and industries employing temporary or part-time labor sources.
The Company and its wholly-owned subsidiary
Rethink Human Capital Management, Inc. (“RT”) function as employment administrative services (“EAS”)
providers, offering administrative and processing services, as well as performing functions in the nature of a payroll processor,
human resources consultant, administrator of workers’ compensation coverages and claims and provider of workers’ compensation
coverage written in the names of the Company’s clients (as may be required by some states). We have built a human resources
information systems platform to assist in customer acquisition that simplifies the onboarding of new clients into our closed proprietary
operating and processing information system (the “ShiftPixy Ecosystem”). This platform is expected to facilitate additional
value-added services in future reporting periods. In January 2020, we sold the assets of Shift Human Capital Management, Inc.
(“SHCM”), a wholly-owned subsidiary of the Company, pursuant to which we assigned the majority of our billable clients
to a third party for cash as described below in Note 3.
On December 17, 2019, the Company
effected a 1 for 40 reverse stock split. All common stock and common stock equivalents are presented retroactively to reflect
the reverse split.
On March 25, 2020, the Company filed
Amended and Restated Articles of Incorporation (the “Restated Articles of Incorporation”) with the Wyoming Secretary
of State, which were approved by the Company’s board of directors (the “Board of Directors”) and its stockholders
representing a majority of its outstanding shares of capital stock. The Restated Articles of Incorporation, among other things,
set conversion rights for the Company’s Class A Preferred Stock, par value $0.0001 per share, to convert into shares
of common stock on a one-for-one basis.
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
months ended November 30, 2020, are not necessarily indicative of the results that may be expected for the full year ending
August 31, 2021 (“Fiscal 2021”).
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For further information, refer to the
consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for
the fiscal year ended August 31, 2020 (“Fiscal 2020”), filed with the SEC on November 30, 2020, as well
as the amendment to Item 13 of our Annual Report on Form 10-K for Fiscal 2020 filed with the SEC on January 12, 2021.
Principles of Consolidation
The Company and its wholly-owned subsidiaries
have been consolidated in the accompanying financial statements. All intercompany balances have been eliminated in consolidation.
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:
|
·
|
Valuation expense related to Preferred Options, as defined below;
|
|
|
|
|
·
|
Liability for legal contingencies;
|
|
|
|
|
·
|
Useful lives of property and equipment;
|
|
|
|
|
·
|
Assumptions made in valuing embedded derivatives and freestanding equity-linked instruments classified as liabilities;
|
|
|
|
|
·
|
Deferred income taxes and related valuation allowance;
|
|
|
|
|
·
|
Valuation of long-lived assets including long term notes receivable; and
|
|
|
|
|
·
|
Projected development of workers’ compensation claims.
|
Revenue and Direct Cost Recognition
The Company provides an array of human
resources and business solutions designed to help improve business performance.
The Company’s revenues are primarily
attributable to fees for providing staffing solutions and EAS/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 enters into contracts with its clients for EAS based on a stated rate and price in the contract. Contracts
generally have a term of 12 months but are cancellable at any time by either party with 60 days’ written notice. Contract
performance obligations are satisfied as services are rendered, and the time period between invoicing and when the performance
obligations are satisfied is not significant. The Company does not have significant financing components or significant payment
terms for its customers and consequently has no material credit losses. Payments for the Company’s services are typically
made in advance of, or at the time that the services are provided.
The Company accounts for its EAS revenues
in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
605-45, Revenue Recognition, Principal Agent Considerations. EAS solutions revenue is primarily derived from the Company’s
gross billings, which are based on (i) the payroll cost of the Company’s worksite employees (“WSEs”) and
(ii) a mark-up computed as a percentage of payroll costs for payroll taxes and workers’ compensation premiums.
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Gross billings are invoiced to each client
concurrently with each periodic payroll of the Company’s WSEs which coincides with the services provided and which is typically
a fixed percentage of the payroll processed. Revenues, which exclude the payroll cost component of gross billings and therefore
consist solely of markup, are recognized ratably over the payroll period as WSEs perform their services at the client worksite.
Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on the Company’s consolidated
balance sheets, and were not material as of November 30, 2020 and August 31, 2020, respectively.
Consistent with the Company’s revenue
recognition policy, direct costs do not include the payroll cost of its WSEs. The cost of revenue associated with the Company’s
revenue generating activities is primarily comprised of all other costs related to its WSEs, such as the employer portion of payroll-related
taxes, employee benefit plan premiums and workers’ compensation insurance costs.
The Company has evaluated its revenue recognition
policies in conjunction with its future expected business as it migrates to a staffing business model. For Fiscal 2020 and the
quarter ended November 30, 2020, there were no revenues which should have been evaluated under a staffing business model.
Such a staffing business model would have included the payroll costs in revenues with a corresponding increase to cost of revenues
for payroll costs associated with staffing services.
Segment Reporting
The Company principally operates as one reportable segment under
ASC 280, Segment Reporting. The chief operating decision maker regularly reviews the financial information of the Company
at a consolidated level in deciding how to allocate resources and in assessing performance. During Fiscal 2020, the Company began
to enter into new business lines and geographic areas that, to date, are not material. The Company expects to operate in multiple
segments in the future as its business evolves and will evaluate these changes prospectively.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less when purchased as cash equivalents. The Company had no such investments
as of November 30, 2020 or August 31, 2020.
Concentration of Credit Risk
The Company maintains cash with a commercial
bank, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company has deposits
in this financial institution in excess of the amount insured by the FDIC. The Company has not experienced any losses related to
these balances and believes its credit risk to be minimal. As of November 30, 2020, there was $9,622,000 of cash in excess
of the amounts insured by the FDIC.
No individual client represented more than 10% of revenues for
the three months ended November 30, 2020 and 2019, respectively. However, three clients represented 98% of total accounts
receivable at November 30, 2020.
Fixed Assets
Fixed assets are recorded at cost, less
accumulated depreciation and amortization. Expenditures for major additions and improvements are capitalized and minor replacements,
maintenance, and repairs are charged to expense as incurred. When fixed assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations
for the respective period. Leasehold improvements are amortized over the shorter of the useful life or the initial lease term.
Fixed assets are recorded at cost and are
depreciated over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of
property and equipment for purposes of computing depreciation are as follows:
Equipment:
|
|
5 years
|
Furnitures & Fixtures:
|
|
5 - 7 years
|
The amortization of these assets is included
in depreciation expense on the consolidated statements of operations.
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Computer Software Development
Software development costs relate primarily
to software coding, systems interfaces and testing of the Company’s proprietary employer information systems and are accounted
for in accordance with ASC 350-40, Internal Use Software.
Internal software development costs are
capitalized from the time the internal use software is considered probable of completion until the software is ready for use. Business
analysis, system evaluation and software maintenance costs are expensed as incurred. The capitalized computer software development
costs are reported under the section fixed assets, net in the consolidated balance sheets.
The Company determined that there were
no material capitalized internal software development costs for the quarters ended November 30, 2020 or 2019. All capitalized
software recorded was purchased from third party vendors. Capitalized software development costs are amortized using the straight-line
method over the estimated useful life of the software, generally three to five years from when the asset is placed in service.
Impairment and Disposal of Long-Lived
Assets
The Company periodically evaluates
its long-lived assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment. ASC 360-10
requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an
asset is deemed to not be recoverable. If events or circumstances were to indicate that any of our long-lived assets might be
impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated from
the applicable asset. In addition, the Company may record an impairment loss to the extent that the carrying value of the
asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of discounted future net
cash flows from operating activities or upon disposal of the asset. There were no indicators noted of impairments during the
periods ended November 30, 2020 or 2019, respectively.
Workers’ Compensation
Everest Program
Until 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 exceed the expected losses under that policy, then the Company could receive a demand for additional premium payments.
Sunz Program
Since July 2018, the Company’s
workers’ compensation program for its WSEs has been provided through an arrangement with United Wisconsin Insurance Company
and administered by the Sunz Insurance Company. Under this program, the Company has financial responsibility for the first $0.5
million of claims per occurrence. The Company provides and maintains a loss fund that is earmarked to pay claims and claims related
expenses. The workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs
and funds to be set aside for payment of future claims (“claim loss funds”). The level of claim loss funds is primarily
based upon anticipated WSE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier.
Monies funded into the program for incurred claims expected to be paid within one year are recorded as Deposit - workers’
compensation, a short-term asset, while the remainder of claim funds are included in Deposit- workers’ compensation, a long-term
asset in its consolidated balance sheets.
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Under both the Everest and Sunz Programs,
the Company utilizes a third party to estimate its loss development rate, which is based primarily upon the nature of WSEs’
job responsibilities, the location of WSEs, the historical frequency and severity of workers’ compensation claims, and an
estimate of future cost trends. Each reporting period, changes in the assumptions resulting from changes in actual claims experience
and other trends are incorporated into its workers’ compensation claims cost estimates.
As of November 30, 2020, the Company
had $0.3 million in Deposit – workers’ compensation classified as a short-term asset and $0.7 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 balance sheets. As of November 30,
2020, the Company had short term accrued workers’ compensation costs of $0.5 million and long term accrued workers’
compensation costs of $1.3 million.
The Company retained workers’ compensation
asset reserves and workers’ compensation related liabilities for former WSEs of clients transferred to Shiftable HR Acquisition,
LLC, part of Vensure Employer Services, Inc. (“Vensure”), in connection with the Vensure Asset Sale described
in Note 3. As of November 30, 2020, the retained workers’ compensation assets and liabilities are presented as
a discontinued operation net asset or liability. As of November 30, 2020, the Company had $1.0 million in short term assets
and $1.8 million of short term liabilities, and had $2.4 million of long term assets and $4.5 million of long term liabilities.
Because the Company bears the financial
responsibility for claims up to the level noted above, such claims, which are the primary component of its workers’ compensation
costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage
whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in
each reporting period includes estimates, which take into account the ongoing development of claims and therefore 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 WSE’s job responsibilities, their location,
the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. For each reporting
period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated
into the Company’s workers’ compensation claims cost estimates. The estimated incurred claims are based upon: (i) the
level of claims processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns
under the plan; and (iii) the number of participants in the plan.
The Company has had very limited and immaterial
COVID-19 related claims between March 2020 through the date of this Quarterly Report, although there is a possibility of additional
workers’ compensation claims being made by furloughed WSEs as a result of the employment downturn caused by the COVID-19
pandemic. On May 4, 2020, the State of California indicated that workers who became ill with COVID-19 would have a potential
claim against workers’ compensation insurance for their illnesses. There is a possibility that additional workers’
compensation claims could be made by employees required to work by their employers during the COVID-19 pandemic, which could have
a material impact on its workers’ compensation liability estimates. While the Company has not seen significant additional
expenses as a result of any such potential claims to date, which would include claims for reporting periods after November 30,
it continues to closely monitor all workers’ compensation claims made as the COVID-19 pandemic continues.
Fair Value of Financial Instruments
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. ASC 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 November 30, 2020 and August 31, 2020,
the carrying value of certain financial instruments (cash, accounts receivable and payable) approximated fair value due to the
short-term nature of the instruments. Notes Receivable is valued at estimated fair value as described below.
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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 used in measuring
fair value are:
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·
|
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;
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|
|
|
|
o
|
Quoted prices for identical or similar assets or liabilities in inactive markets;
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|
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|
|
o
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Inputs other than quoted prices that are observable for the asset or liability;
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|
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|
|
o
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Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
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|
o
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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 or liabilities at November 30, 2020 or August 31, 2020. The valuation of the Note Receivable (as defined
below) from the Vensure Asset Sale, as defined below, is a Level 3 fair value measurement.
The Note Receivable, as described in Note 3, was estimated using
a discounted cash flow technique based on expected contingent payments identified in the Vensure Asset Sale contract and with significant
inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The Company
valued the Note Receivable on the January 1, 2020 transaction date using a 10% discount rate, and on the November 30,
2020 and August 31, 2020 remeasurement dates, using a 15% discount rate, which contemplates the risk and probability assessments
of the expected future cash flows. The Company made $41,000 of adjustments to the carrying value of the Note Receivable during
the quarter ended November 30, 2020 reflecting an additional estimated amount of cash payments made by Vensure on behalf of
the Company. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments
of expected future cash flows related to the asset sale, appropriately discounted considering the uncertainties associated with
the obligation, and as calculated in accordance with the terms of the Vensure Asset Sale agreement. The Company believes there
are risks associated with the value of the Note Receivable due to business impacts of the COVID-19 pandemic. The expected cash
payments from the Note Receivable are based on gross wages billed for the clients transferred to Vensure pursuant to the Vensure
Asset Sale. Those transferred clients may have had their business impacted due to the pandemic which, in turn, would have resulted
in lower gross wage billings. While the Company believes the current valuation of the Note Receivable is fairly recorded as of
November 30, 2020 and August 31, 2020, a material change in the business transferred may result in a reduction of the
estimate of the contingent payments expected to be received and therefore the value of this asset. The development and determination
of the unobservable inputs for Level 3 fair value measurements and the fair value calculations are the responsibility of the Company’s
chief financial officer and are approved by the chief executive officer.
The Company used the following assumptions
to value the Note Receivable as of November 30, 2020 and August 31, 2020:
|
·
|
Actual monthly wages billed to the extent available to the Company
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Table of Contents
|
·
|
20% per year annualized gross wage reduction representing an approximate 1.5% per month decline (at November 30, 2020 and August 31, 2020)
|
Research and Development
During the three months ended November 30,
2020 and 2019, the Company incurred research and development costs of approximately $1.4 million and $0.8 million, respectively.
All costs were related to internally developed or externally contracted software and related technology for the Company’s
Human Resources Information System (“HRIS”) platform and related mobile application. No software costs were capitalized
for the three months ended November 30, 2020 and 2019, respectively.
Advertising Costs
The Company expenses all advertising as
incurred. The Company incurred advertising costs totaling $202,000 and $304,000 for the three months ended November 30, 2020,
and 2019, respectively.
Earnings (Loss) Per Share
The Company utilizes 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. Common stock outstanding for purposes of earnings (loss) per share calculations
include unexercised Preferred Options. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share
except that the denominator is increased to include additional common stock equivalents available upon exercise of stock options
and warrants using the treasury stock method. Dilutive common stock equivalents include the dilutive effect of in-the-money stock
equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any
common stock equivalents if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially
dilutive common stock shares are considered anti-dilutive and thus are excluded from the calculation
Table of Contents
Securities that are excluded from the calculation
of weighted average dilutive common stock, because their inclusion would have been antidilutive are:
|
|
For the Three
Months Ended
November 30,
2020
|
|
|
For the Three
Months Ended
November 30,
2019
|
|
Options
|
|
|
1,517,189
|
|
|
|
45,463
|
|
Senior Secured Convertible Notes
|
|
|
-
|
|
|
|
889,935
|
|
Warrants
|
|
|
4,396,209
|
|
|
|
107,416
|
|
Total potentially dilutive stock
|
|
|
5,913,398
|
|
|
|
1,042,814
|
|
Stock-Based Compensation
At November 30, 2020, the Company
had one stock-based compensation plan under which the Company may issue awards, as described in Note 6, below. The Company accounts
for this plan under the recognition and measurement principles of ASC 718, Compensation- Stock Compensation, which requires
all stock-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated
statements of operations at their fair values.
The grant date fair value is
determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, the Company
recognizes expense on an accelerated basis over the employee’s requisite service period
(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 unvested 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 conform 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.
Revision of Financial Statements
During the preparation of the consolidated
financial statements for Fiscal 2020, the Company determined that it had improperly amortized capitalized software that had not
been placed into service. The Company assessed the materiality of the misstatements in accordance with Staff Accounting Bulletin
No. 99, Materiality, and No. 108, Quantifying Misstatements, and concluded that this error was not qualitatively
material to the Company’s consolidated balance sheet, statement of operations, statement of cash flows, statement of stockholders’
equity (deficit) or net loss for the periods then ended.
The effect of this revision on the line
items within the Company’s consolidated financial statements for the three months ended November 30, 2019, was as follows:
|
|
For the quarter ended November 30,
2019
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Depreciation and Amortization
|
|
$
|
241,000
|
|
|
$
|
(162,000
|
)
|
|
$
|
79,000
|
|
Operating Loss
|
|
$
|
(4,330,000
|
)
|
|
$
|
162,000
|
|
|
$
|
(4,168,000
|
)
|
Net Loss
|
|
$
|
(2,556,000
|
)
|
|
$
|
162,000
|
|
|
$
|
(2,394,000
|
)
|
Net loss per common share – continuing operations, Basic and diluted
|
|
$
|
(2.86
|
)
|
|
$
|
0.18
|
|
|
$
|
(2.68
|
)
|
Weighted average number of common stock shares
Basic and diluted
|
|
|
893,094
|
|
|
|
|
|
|
|
893,094
|
|
Recent Accounting Standards
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 GAAP. The new standard also requires enhanced revenue disclosures, provides guidance for transactions that
were not previously addressed comprehensively, and improves guidance for multiple-element arrangements. This accounting standard
was initially scheduled to become effective for the Company for annual reporting periods beginning after December 15, 2018,
and interim reporting periods within annual reporting periods beginning after December 15, 2019, but has since been delayed.
Early adoption was 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. The Company is continuing to evaluate
the impact and believes that the adoption of Topic 606 will not have a material impact on its reported financial results.
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 consideration, contract modifications at transition, completed contracts at transition, and technical correction.
The standard has the same effective date as ASU 2014-09 described above.
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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.
In June 2020, the FASB issued ASU
2020-05: Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842). For entities that, as of June 2020,
had not issued financial statements under Topic 606, the effective date was extended by one year to annual periods beginning after
December 15, 2019 and interim periods within annual periods beginning after December 15, 2020. Entities who have not
issued financial statements under Topic 842 are required to adopt Topic 842 for financial statements issued for fiscal years beginning
after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application
is permitted.
The Company is evaluating the effect of adopting this new accounting guidance and is currently finalizing its analysis
of the financial impact of the adoption. The Company expects to adopt the guidance using the modified retrospective method and
does not expect the adoption to have a material impact on current or historical revenue recognition.
In February 2016, the FASB
issued 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 of the lease as a finance or operating lease. The guidance also includes new disclosure
requirements providing information on the amounts recorded in the financial statements. 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. In June 2020, the FASB voted to defer the effective date for private companies for one year. The updated effective
date will be for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15,
2022. The Company is evaluating the effect of adopting this new accounting guidance and is currently finalizing its analysis of
the financial impact of the adoption. The Company expects to adopt the guidance using the modified retrospective method.
In August 2020, the FASB
issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging –
Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s
Own Equity, which simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the
number of accounting models and the number of embedded conversion features that could be recognized separately from the primary
contract. The update also requires the application of the if-converted method to calculate the impact of convertible instruments
on diluted earnings per share. The new guidance is effective for annual periods beginning after December 15, 2021, including
interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15,
2020. This update can be adopted on either a fully retrospective or a modified retrospective basis. The Company does not expect
the adoption of ASU 2020-06 to have any material impact on its consolidated financial statements.
Table of Contents
Note 3 – Discontinued Operations
On January 3, 2020, the Company
executed an asset purchase agreement assigning client contracts comprising approximately 88% of its quarterly revenue through
the date of the transaction, including 100% of its existing professional employer organization (“PEO”) business
effective as of December 31, 2019, and the transfer of $1.5 million of working capital assets, including cash balances
and certain operating assets associated with the assigned client contracts included in the agreement, to a wholly owned
subsidiary of Vensure Employer Services, Inc. (the “Vensure Asset Sale”). Gross proceeds from the Vensure
Asset Sale were $19.2 million, of which $9.7 million was received at closing and $9.5 million will be paid out in equal
monthly payments over the next four years (the “Note Receivable”), subject to adjustments for working capital and
customer retention, (as measured by a gross wage guarantee included in the governing agreement), over the twelve month period
following the Vensure Asset Sale. During the three months ended November 30, 2020, the Company identified an additional $41,000
of net cash paid on behalf of the Company and adjusted the note receivable accordingly.
The following is a reconciliation of the gross proceeds to the
net proceeds from the Vensure Asset Sale as presented in the balance sheet for the period ended November 30, 2020.
Gross proceeds
|
|
$
|
19,166,000
|
|
Cash received at closing – asset sale
|
|
|
(9,500,000
|
)
|
Cash received at closing – working capital
|
|
|
(166,000
|
)
|
Less: Transaction reconciliation – working capital adjustment
|
|
|
(88,000
|
)
|
Less: Transaction reconciliation – net cash paid by Vensure on behalf of the Company
|
|
|
(2,516,000
|
)
|
Less: Transaction reconciliation – estimate of reduction due to gross wages
|
|
|
(1,400,000
|
)
|
Adjusted Note Receivable
|
|
|
5,496,000
|
|
Discount recorded
|
|
|
(1,492,000
|
)
|
Long-term note receivable
|
|
$
|
4,004,000
|
|
The entire note receivable is recorded
as a long term note receivable as of November 30, 2020. Any adjustments to the note receivable are applied against payments
in the order they are due to be paid. As such, the estimates of the working capital and gross billings adjustments would not result
in any cash payments due to the company within one year of November 30, 2020.
The Vensure Asset Sale met the criteria
of discontinued operations set forth in ASC 205 and as such the Company has reclassified its discontinued operations for all periods
presented and has excluded the results of its discontinued operations from continuing operations for all periods presented. The
Company recorded the Note Receivable net of a discount using a discount rate of 15% per year.
The Vensure Asset Sale calls for adjustments
to the Note Receivable either for: (i) working capital adjustments or (ii) in the event that the gross wages of the business
transferred is less than the required amount, as detailed below:
Working
capital adjustments: Through November 30, 2020, the Company has identified $2,604,000 of likely working capital
adjustments, including $88,000 related to lower net assets transferred at closing, and $2,516,000 of cash remitted to the Company’s
bank accounts, net of cash remitted to Vensure’s bank accounts. Under the terms of the Vensure Asset Sale, a reconciliation
of the working capital was to have been completed by April 15, 2020. Due to operational difficulties and quarantined staff
caused by the outbreak of COVID-19, Vensure requested a postponement of the working capital reconciliation that was due in Fiscal
2020. The working capital adjustment recorded as of November 30, 2020 represents the Company’s estimate of the reconciliation.
There is no assurance that the working capital change identified as of November 30, 2020 represents the final working capital
adjustment.
Gross
billings adjustment: Under the terms of the Vensure Asset Sale, the proceeds of the transaction are reduced if the actual
gross wages of customers transferred for calendar 2020 are less than 90% of those customers’ 2019 gross wages. The Company
has prepared an estimate of the calendar year 2020 gross wages based on a combination of factors including reports of actual transferred
client billings in early 2020, actual gross wages of continuing customers of the Company, publicly available unemployment reports
for the Southern California markets and the relevant COVID-19 impacts on employment levels, and other information. Based on the
information available, the Company estimated that it would receive additional consideration below the required threshold and reduced
the contingent consideration by $1.4 million. The Company expects to conduct a full reconciliation in the first calendar quarter
of 2021, after calendar 2020 wage information becomes available.
Table of Contents
The carrying amounts of the classes of
assets and liabilities from the Vensure Asset Sale included in discontinued operations were as follows:
|
|
November
30, 2020
|
|
|
August
31, 2020
|
|
Cash
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts receivable
and unbilled account receivable
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses
and other current assets
|
|
|
-
|
|
|
|
-
|
|
Deposits
– workers’ compensation
|
|
|
960,000
|
|
|
|
1,030,000
|
|
Total
current assets
|
|
|
960,000
|
|
|
|
1,030,000
|
|
Fixed assets, net
|
|
|
-
|
|
|
|
-
|
|
Deposits
– workers’ compensation
|
|
|
2,435,000
|
|
|
|
2,582,000
|
|
Total
assets
|
|
$
|
3,395,000
|
|
|
$
|
3,612,000
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
and other current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Payroll related
liabilities
|
|
|
-
|
|
|
|
-
|
|
Accrued
workers’ compensation cost
|
|
|
1,764,000
|
|
|
|
1,746,000
|
|
Total
current liabilities
|
|
|
1,764,000
|
|
|
|
1,746,000
|
|
Accrued
workers’ compensation cost
|
|
|
4,475,000
|
|
|
|
4,377,000
|
|
Total
liabilities
|
|
|
6,239,000
|
|
|
|
6,123,000
|
|
|
|
|
|
|
|
|
|
|
Net
liability
|
|
$
|
(2,844,000
|
)
|
|
$
|
(2,511,000
|
)
|
Reported results for the discontinued operations by period were
as follows:
|
|
For the Quarter Ended
|
|
|
|
November
30, 2020
|
|
|
November
30, 2019
|
|
Revenues (gross billings of $0.0 million and $93.5 million less WSE payroll cost of $0.0 million and $79.8 million, respectively for quarter ended)
|
|
$
|
-
|
|
|
$
|
13,697,000
|
|
Cost of revenue
|
|
|
1,314,000
|
|
|
|
10,604,000
|
|
Gross profit
|
|
|
(1,314,000
|
)
|
|
|
3,093,000
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
|
-
|
|
|
|
400,000
|
|
Commissions
|
|
|
-
|
|
|
|
703,000
|
|
Total operating expenses
|
|
|
-
|
|
|
|
1,103,000
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
(1,314,000
|
)
|
|
$
|
1,990,000
|
|
The loss from discontinued operations for the three
months ended November 30, 2020, represents the change in the estimated workers’ compensation accruals required for the residual
workers’ compensation liabilities retained after the Vensure Asset Sale.
Note 4: Liquidity
As of November 30, 2020, the
Company had cash of $9.1 million and a working capital surplus of $1.4 million. The Company has incurred recurring losses
including during the fiscal year ending August 31, 2020 and the quarter ending November 30, 2020. The recurring losses
and cash used in operations are indicators of substantial doubt as to the Company’s ability to continue as going
concern for at least one year from issuance of these financial statements. The Company’s plans to alleviate substantial
doubt are discussed below.
Table of Contents
Historically, the Company’s principal
source of financing has come through the sale of its common stock and issuance of convertible notes. On May 26, 2020, the
Company successfully completed an underwritten public offering, raising a total of $12 million ($10.3 million net of costs), and
closed an additional $1.35 million ($1.24 million net of costs) between June 1, 2020 and July 7, 2020 pursuant to the
underwriter’s overallotment. In October 2020, the Company closed an additional $12 million equity offering ($10.7 million
net of costs). The Company’s plans and expectations for the next 12 months include raising additional capital to help fund
expansion of its operations, including the continued development and support of its IT and HR platform.
During Fiscal 2020, the Company instituted
certain cost reductions and reduced its anticipated monthly cash needs by approximately $1 million. The Company continued its cost
reduction measures during the quarter ended November 30, 2020, and continues to experience significant growth in the number
of WSEs, which it expects to generate additional administrative fees. The reduction in the Company’s monthly cash needs along
with the anticipated additional administrative fees earned should mitigate its current level of operational cash burn. The
Company retained its high growth business as part of the Vensure Asset Sale, which has accounted for billings and revenue growth
for the customers that existed as of January 1, 2020 and who were not transferred to Vensure. The Company also retained the
rights to monetize its existing pool of WSEs, including WSEs transferred to Vensure, and has begun to roll out its delivery and
scheduling applications to its customers.
The Company has been and expects to continue
to be impacted by the COVID-19 pandemic, from which it has experienced both positive and negative impacts. Its current business
focus is providing payroll services for the restaurant and hospitality industries, which have seen a reduction in payroll and consequently
a reduction in payroll processing fees on a per WSE and per location basis. However, the Company believes that it provides the
means for current and potential clients to adapt to many of the obstacles posed by COVID-19 by providing additional services such
as delivery, which have facilitated an increase by the Company in its client and client location counts, resulting in recovery
of billings lost during the first months of the pandemic. Beginning in June 2020, the Company’s billings per WSE and
per location improved as lockdowns in its primary Southern California market were lifted. Although the State of California re-implemented
lockdowns in November 2020, the Company believes that many of its clients have modified their businesses after the initial
lockdowns to adapt somewhat to these adverse circumstances. Nevertheless, if additional lockdowns persist, the Company’s
clients delay hiring or rehiring employees, or if its clients shut down operations, the Company’s ability to generate operational
cash flows may be significantly impaired.
In August 2020, we signed an agreement with the Washington Hospitality Association Member Services Corporation (“Washington Hospitality”),
a consortium representing approximately 200,000 potential WSEs in the food industry located in the State of Washington. This agreement
expands our geographic reach and is expected to drive revenue growth starting in calendar 2021.
The Company also signed a new client in July 2020 representing a significant revenue opportunity. This client provides outsourced nurses
that are paid gross wages in an amount approximately three times what the Company’s typical food WSEs receive, with the Company
receiving the same administrative fee rates per wage dollar paid. We believe that this client will generate new
business for the Company, as the need for nurses increases to administer COVID-19 testing and vaccination services. We began to see an
increase in these billed nurses in December 2020.
The Company’s management believes that the Company’s current cash position, along with its anticipated revenue growth from
new customers in expanded geographic areas and industries and additional HRIS platform features introduced in late calendar 2020, expense
reduction, no funded debt outstanding and future financings will be sufficient to alleviate substantial doubt and fund its operations
for at least a year from the date these financials are issued. If these sources do not provide the capital necessary to fund the Company’s
operations during the next twelve months, the Company may need to curtail certain aspects of its operations or expansion activities, consider
the sale of additional assets, or consider other means of financing. The Company can give no assurance that it will be successful in implementing
its business plan and obtaining financing on terms advantageous to the Company, or that any such additional financing will be available.
These consolidated financial statements do not include any adjustments for this uncertainty.
Table of Contents
Note 5: Stockholders’ Equity
Preferred Stock
As previously disclosed by the Company,
in September 2016, the founding shareholders of the Company were granted options to acquire preferred stock of the Company
(the “Preferred Options”). The number of Preferred Options granted was based upon the number of shares held at that
time. These Preferred Options are nontransferable and forfeited upon the sale of the related founding shares of common stock.
Upon the occurrence of certain specified events, such founding shareholders could exercise each Preferred Option to purchase one
share of preferred stock of the Company at an exercise price of $0.0001 per share. The preferred stock underlying the Preferred
Options does not include any rights to dividends or preference upon liquidation of the Company and is convertible into shares of
common stock on a one-for-one basis pursuant to the Restated Articles of Incorporation. The Preferred Options became exercisable
to purchase shares of preferred stock in January 2020 and in March 2020 became exchangeable into an equal number of shares
of common stock.
On June 4, 2020, Scott Absher, the
Company’s Chief Executive Officer, exercised 12,500,000 Preferred Options to purchase an equal number of shares of preferred
stock. Immediately thereafter, Mr. Absher converted all 12,500,000 shares of preferred stock into 12,500,000 shares of common
stock. These shares of common stock are subject to a two-year lockup from the date of the conversion. Between June 4, 2020
and August 31, 2020, an additional 294,490 Preferred Options were exercised and exchanged for a like number of common stock
shares. As of the date of this Quarterly Report, 11,840,070 Preferred Options remain outstanding and exercisable. The right to
exercise the options terminates on December 31, 2023. As stated above, the amount of the Preferred Options, and the number
of shares of preferred stock issuable upon exercise of such options, is based upon the number of shares of common stock held by
such founding shareholders at the time such options were issued. Accordingly, in order to confirm the original intent of the granting
of up to 50,000,000 of such options to two of our founding shareholders, Mr. Absher and J. Stephen Holmes, at some point in
the future the Company intends to adopt a second grant of options, exercisable upon the occurrence of certain specified events,
granting an additional 12,500,000 options to each of Messrs. Absher and Holmes, whereby each option permits the holder to
acquire one share of preferred stock of the Company for $0.0001 per share. Each share of preferred stock will be convertible
into common stock on a one-for-one basis.
October 2020 Public Offering
On October 8, 2020, the Company entered
into an underwriting agreement (the “October Underwriting Agreement”) with A.G.P./Alliance Global Partners (“AGP”)
in connection with a public offering (the “October 2020 Offering”) of an aggregate of (i) 4,000,000 shares
of its common stock and (ii) warrants to purchase 2,300,000 shares of common stock (the “October 2020 Common Warrants”),
which included the partial exercise of AGP’s over-allotment option to purchase 300,000 additional October 2020 Common
Warrants.
Each share of common stock was sold together
with an October 2020 Common Warrant as a fixed combination, with each share of common stock sold being accompanied by an October 2020
Common Warrant to purchase 0.5 shares of common stock. Each share of common stock and accompanying October 2020 Common Warrant
was sold at a price to the public of $3.00. The October 2020 Common Warrants were immediately exercisable and will expire
on October 13, 2025 and have an exercise price of $3.30 per share, subject to anti-dilution and other adjustments for certain
stock splits, stock dividends, or recapitalizations.
The October 2020 Offering closed on
October 14, 2020 for gross proceeds of approximately $12.0 million, prior to deducting $1.3 million of costs consisting of
underwriting discounts and commissions and offering expenses payable by the Company, which includes a partial exercise of the underwriter’s
over-allotment option to purchase additional October 2020 Common Warrants. Pursuant to the October Underwriting Agreement,
the Company, upon closing of the October 2020 Offering, issued to AGP warrants to purchase up to 200,000 shares of common
stock (the “October Underwriter Warrants”), which is 5.0% of the aggregate number of shares of common stock sold
in the October 2020 Offering. The October Underwriter Warrants are exercisable at any time and from time to time, in
whole or in part, commencing from six months after the closing date and ending five years from the closing date, at a price per
share equal to $3.30, which is 110% of the public offering price per share.
Common Stock and Warrants
During
the quarter ended November 30, 2020, the Company issued 4,000,000 shares of common stock pursuant to the October 2020
Offering at $3.00 per share, as described above.
Table of Contents
The following table summarizes the changes in the Company’s
common stock warrants from August 31, 2020 to November 30, 2020:
|
|
Number
of
shares
|
|
|
Weighted
average
remaining
life
(years)
|
|
|
Weighted
average
exercise
price
|
|
Warrants outstanding, August 31, 2020
|
|
|
1,896,209
|
|
|
|
4.7
|
|
|
$
|
7.91
|
|
Issued
|
|
|
2,500,000
|
|
|
|
5.0
|
|
|
|
3.30
|
|
(Cancelled)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Exercised)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding, November 30, 2020
|
|
|
4,396,209
|
|
|
|
4.7
|
|
|
$
|
5.51
|
|
Warrants exercisable, November 30, 2020
|
|
|
4,396,209
|
|
|
|
4.7
|
|
|
$
|
5.51
|
|
The following table summarizes the Company’s
warrants outstanding as of November 30, 2020:
|
|
Warrants
Outstanding
|
|
|
Weighted
average
Life of
Outstanding
Warrants
in years
|
|
|
Exercise
price
|
|
October 2020
Common Warrants
|
|
|
2,300,000
|
|
|
|
4.9
|
|
|
$
|
3.30
|
|
October 2020
Underwriter Warrants
|
|
|
200,000
|
|
|
|
4.9
|
|
|
|
3.30
|
|
May 2020 Common
Warrants
|
|
|
1,277,580
|
|
|
|
4.5
|
|
|
$
|
5.40
|
|
May 2020 Underwriter
Warrants
|
|
|
111,108
|
|
|
|
4.5
|
|
|
|
5.40
|
|
March 2020
Exchange Warrants
|
|
|
423,669
|
|
|
|
4.8
|
|
|
|
10.17
|
|
Amended March 2019
Warrants
|
|
|
66,288
|
|
|
|
3.3
|
|
|
|
40.00
|
|
March 2019
Services Warrants
|
|
|
3,366
|
|
|
|
3.0
|
|
|
|
70.00
|
|
June 2018 Warrants
|
|
|
6,276
|
|
|
|
3.0
|
|
|
|
40.00
|
|
June 2018 Services
Warrants
|
|
|
5,422
|
|
|
|
3.0
|
|
|
|
99.60
|
|
2017
PIPE Warrants
|
|
|
2,500
|
|
|
|
1.6
|
|
|
|
276.00
|
|
|
|
|
4,396,209
|
|
|
|
4.7
|
|
|
$
|
5.51
|
|
Note 6: Stock Based Compensation
In March 2017, the Company
adopted its 2017 Stock Option/Stock Issuance Plan (the “Plan”). The Plan provides incentives to eligible employees,
officers, directors and consultants in the form of incentive stock options (“ISOs”), non-qualified stock options (“NQs”),
(each of which is exercisable into shares of common stock) (collectively, “Options”) or shares of common stock (“Share
Grants”). The Company had reserved a total of 250,000 shares of common stock for issuance under the Plan as of November 30,
2020, which was previously approved by the Company’s shareholders. Of these 250,000 approved shares, as of November 30,
2020, approximately 93,000 options and 7,000 shares have been designated by the Board of Directors for issuance and approximately
40,000 of the options have been forfeited and returned to the option pool under the Plan due to employment terminations. As of
November 30, 2020, approximately 200,000 shares remain issuable, of which 167,000 are eligible to be issued as ISOs and 200,000
are eligible to be issued as either share grants or NQs. Under the Plan, as previously approved by the Company’s shareholders,
a total of 40,818 options are outstanding as of November 30, 2020 and are reported as exercisable in the table below.
For all options granted prior
to July 1, 2020, each option is immediately exercisable and has a term of service vesting provision over a period of time
as follows: 25% vest after a 12-month service period following the award, with the balance vesting in equal monthly installments
over the succeeding 36 months. All options granted to date have a ten-year term.
On July 1, 2020, our Board of Directors
unanimously approved an increase in the number of shares of common stock issuable under the Plan from 250,000 to 3,000,000, subject
to approval by a majority of the Company’s shareholders no later than the next regularly scheduled annual shareholders meeting.
As of November 30, 2020 the Company has granted 1,517,189 options under the Plan that are subject to shareholder approval
and are reported as non-exercisable in the table below. The options granted since July 1, 2020, typically vest over four
years, with 25% of the grant vesting one year from the grant date, and the remainder in equal quarterly installments over the
succeeding 12 quarters.
Stock grants are issued at fair value,
considered to be the market price on the grant date. The fair value of option awards is estimated on the grant date using the Black-Scholes
stock option pricing model.
Following our adoption of ASU 2016-09,
we elected to account for forfeitures under the Plan as they occur. Any compensation cost previously recognized for an unvested
award that is forfeited because of a failure to satisfy a service condition is reversed in the period of the forfeiture.
The Company recognized approximately
$421,000 and $114,000 of compensation expense for the quarters ended November 30, 2020, and 2019, respectively.
At November 30, 2020, the
total unrecognized deferred stock-based compensation expected to be recognized over the remaining weighted average vesting periods
of 1.7 years for outstanding grants was $5.1 million.
The following table summarizes option activity
during the quarter ended November 30, 2020:
|
|
|
Options
Outstanding and Exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
|
Remaining
|
|
|
|
Average
|
|
|
|
|
of
|
|
|
|
Contractual
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
|
Life
|
|
|
|
Price
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
Balance
Outstanding, August 31, 2020
|
|
|
1,398,740
|
|
|
|
9.5
|
|
|
$
|
8.18
|
|
Granted
|
|
|
210,000
|
|
|
|
10.0
|
|
|
$
|
3.85
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Forfeited
|
|
|
(50,733
|
)
|
|
|
5.2
|
|
|
$
|
6.37
|
|
Balance Outstanding
at November 30, 2020
|
|
|
1,558,007
|
|
|
|
9.6
|
|
|
$
|
7.46
|
|
Balance not Exercisable
at November 30, 2020
|
|
|
1,517,189
|
|
|
|
|
|
|
|
|
|
Balance
Exercisable at November 30, 2020
|
|
|
40,818
|
|
|
|
|
|
|
|
|
|
Options outstanding as of November 30,
2020 had aggregate intrinsic value of $2,000.
Option vesting activity during the quarter
ended November 30, 2020 was as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Options
Vested
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
Balance,
August 31, 2020
|
|
|
28,410
|
|
|
|
7.2
|
|
|
$
|
115.10
|
|
Vested
|
|
|
1,576
|
|
|
|
7.6
|
|
|
$
|
98.00
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Forfeited
|
|
|
(655
|
)
|
|
|
7.2
|
|
|
$
|
50.33
|
|
Balance
at November 30, 2020
|
|
|
29,331
|
|
|
|
6.9
|
|
|
$
|
115.62
|
|
The following table summarizes information
about stock options outstanding and vested at November 30, 2020:
|
|
|
Options
Outstanding
|
|
|
|
Options
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
|
Number
|
|
|
|
Remaining
|
|
|
|
Average
|
|
|
|
Number
|
|
|
|
Remaining
|
|
|
|
Average
|
|
|
|
|
of Options not
|
|
|
|
of Options
|
|
|
|
Contractual
|
|
|
|
Exercise
|
|
|
|
of
|
|
|
|
Contractual
|
|
|
|
Exercise
|
|
Exercise
Prices
|
|
|
Exercisable
|
|
|
|
Exercisable
|
|
|
|
Life
|
|
|
|
Price
|
|
|
|
Options
|
|
|
|
Life
|
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
$2.23-10.00
|
|
|
1,517,189
|
|
|
|
-
|
|
|
|
9.6
|
|
|
$
|
5.09
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
$10.01-$40.00
|
|
|
-
|
|
|
|
3,500
|
|
|
|
8.5
|
|
|
|
21.69
|
|
|
|
1,422
|
|
|
|
8.5
|
|
|
|
21.73
|
|
$40.01–$80.00
|
|
|
-
|
|
|
|
13,396
|
|
|
|
8.3
|
|
|
|
51.21
|
|
|
|
8,084
|
|
|
|
8.3
|
|
|
|
51.22
|
|
$80.01–$120.00
|
|
|
-
|
|
|
|
10,303
|
|
|
|
7.5
|
|
|
|
102.90
|
|
|
|
7,615
|
|
|
|
7.5
|
|
|
|
102.67
|
|
$120.01–$160.00
|
|
|
|
|
|
|
12,495
|
|
|
|
6.8
|
|
|
|
155.24
|
|
|
|
11,086
|
|
|
|
6.8
|
|
|
|
155.52
|
|
$160.01-$391.60
|
|
|
-
|
|
|
|
1,124
|
|
|
|
6.6
|
|
|
|
391.60
|
|
|
|
1,124
|
|
|
|
6.6
|
|
|
|
391.60
|
|
|
|
|
1,517,189
|
|
|
|
40,818
|
|
|
|
9.6
|
|
|
$
|
7.46
|
|
|
|
29,331
|
|
|
|
7.4
|
|
|
$
|
115.62
|
|
The options not exercisable were conditionally
granted by our Board of Directors between July 1, 2020 and November 30, 2020 and are not exercisable until shareholder
approval is received for the increase in the option pool as discussed above.
Note 7: Related Parties
J. Stephen Holmes, our non-employee sales
manager, is an advisor to and significant stockholder of the Company. The Company incurred $180,000 in professional fees for services
provided by Mr. Holmes in each of the three month periods ended November 30, 2020, and 2019, respectively.
During
the three month period ended November 30, 2020, we made one-time payments to certain of our employees totaling approximately $570,000
in connection with their agreement to relocate from California to our new principal executive offices in Miami, Florida. Included
among these was a payment to Mr. Absher of $160,000, and to Amanda Murphy, our Director of Operations and a member of our Board,
of $80,000.
Note 8: Commitments
Operating Leases
Effective April 15, 2016, the Company
entered into a non-cancelable five-year operating lease for its Irvine, California facility. On July 25, 2017, the Company
entered into a non-cancelable operating lease for expansion space at its Irvine offices with a termination date that coincides
with the termination date of the prior lease and extended the terms of the original lease until 2022. The leases for certain facilities
contain escalation clauses relating to increases in real property taxes as well as certain maintenance costs.
Effective August 13, 2020,
the Company entered into a non-cancelable seven-year operating lease for its Miami, Florida office facility commencing October 2020
through September 2027. The lease contains escalation clauses relating to increases in real property taxes as well as certain
maintenance costs.
Effective October 1, 2020, the Company
entered into a non-cancelable 64-month lease for 23,500 square feet of primarily industrial space located in Miami, Florida, to
house ghost kitchens, production facilities, and certain marketing and technical functions, including those associated with ShiftPixy
Labs. The lease contains escalation clauses relating to increases in real property taxes as well as certain maintenance costs.
Future minimum lease payments under non-cancelable
operating leases at November 30, 2020, are as follows:
Years ended August 31,
|
|
|
|
2021
|
|
$
|
906,000
|
|
2022
|
|
|
1,302,000
|
|
2023
|
|
|
1,014,000
|
|
2024
|
|
|
1,075,000
|
|
2025
|
|
|
1,108,000
|
|
Thereafter
|
|
|
1,652,000
|
|
Total minimum payments
|
|
$
|
7,057,000
|
|
Non-contributory 401(k) Plan
The Company has a non-contributory 401(k) Plan (the “401(k) Plan”). The 401(k) Plan covers all non-union employees who are at least 21 years of age and have completed 3 months of service. There were no employer contributions to the 401(k) Plan for the quarters ended November 30, 2020 and 2019.
|
Stock Repurchase Plan
On July 9, 2019, the Board of Directors
authorized the repurchase of up to 10 million shares of the Company’s outstanding common stock as market conditions warrant
over a period of 18 months. The Company has not implemented the stock repurchase plan to date and has not repurchased any stock
under this authorization.
Note 9: Contingencies
Certain conditions may exist as of the
date the financial statements are issued, which may result in a loss to the Company, but which will be resolved only when one or
more future events occur or fail to occur. The Company’s management, 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.
Kadima Litigation
The Company is in a dispute with its former
software developer, Kadima Ventures (“Kadima”), over incomplete but paid for software development work. In May 2016,
the Company entered into a contract with Kadima for the development and deployment of user features that were proposed by Kadima
for an original build cost of $2.2 million to complete. This proposal was later revised upward to approximately $7.2 million to
add certain features to the original proposal. As of the date of this Quarterly Report, the Company has paid approximately $11
million to Kadima, but has never been provided access to the majority of the promised software. Kadima refused to continue development
work, denied access to developed software, and refuses to surrender to the Company any software that it has developed unless the
Company pays an additional $12.0 million above the $11.0 million already paid. In addition to the non-delivery of the paid for
user features, Kadima asserts that it is owed additional funds to turn over the work completed. In April 2019, Kadima filed
a complaint against the Company in the Superior Court of the State of Arizona, Maricopa County, alleging claims for breach of contract,
promissory estoppel and unjust enrichment, and seeking damages in excess of $11.0 million. The Company vigorously disputes and
denies each of Kadima’s claims, including that it owes any sums to Kadima, and further believes that it is entitled, at a
minimum, to a refund of a substantial portion of the sums that it has already paid, along with the release of the software modules
currently being withheld. In June 2020 the Company engaged in a mediation with Kadima in an attempt to resolve the matter,
which was unsuccessful. On July 14, 2020 the Company filed an answer to Kadima’s complaint, which denied Kadima’s
claims and asserted counter-claims for breach of contract and fraud. Discovery is underway, and a trial date has not been set.
Splond Litigation
On April 8, 2019, claimant, Corey
Splond, filed a class action lawsuit, on behalf of himself and other similarly situated individuals, in the Eighth Judicial District
Court for the State of Nevada, Clark County, naming the Company and its client as defendants, and alleging violations of certain
wage and hour laws. This lawsuit is in the initial stages, and the Company denies any liability. Even if the plaintiff ultimately
prevails, the potential damages recoverable will depend substantially upon whether the Court determines in the future that this
lawsuit may appropriately be maintained as a class action. Further, in the event that the Court ultimately enters a judgment
in favor of plaintiff, the Company believes that it would be contractually entitled to be indemnified by its client against at
least a portion of any damage award.
Radaro Litigation
On July 9, 2020, we were served with
a complaint filed by one of our former software vendors, Radaro Inc., in the United States District Court for the Central District
of California, alleging damages arising from claims sounding in breach of contract and fraud. By Order filed October 21, 2020,
the Court dismissed plaintiff’s claims for fraud and for punitive damages, with leave to replead. On January 4, 2021, plaintiff
filed its Second Amended Complaint, in which it abandoned its claims for fraud and punitive damages. The Company denies plaintiff’s
remaining claims and is defending the lawsuit vigorously. Discovery is underway, and the Court has set a trial date of March 1,
2022.
Diamond Litigation
On September 8, 2020, a former financial
advisor to the Company filed a Complaint in the United States District Court for the Southern District of New York naming the Company
and one of its officers as defendants. The Complaint asserts multiple causes of action, all of which stem from plaintiff’s
claim that he is entitled to compensation from the Company, in the form of warrants to purchase ShiftPixy common stock, based upon
a prior agreement to provide financial advisory services to the Company in connection with a prior transaction. The Company and
the named officer deny the plaintiff’s allegations, and have moved to dismiss plaintiff’s complaint in its entirety.
Note 10: Subsequent Events
Everest Litigation
On December 18, 2020, we were
served with a Complaint filed in the United States District Court for the Central District of California by our former
workers’ compensation insurance carrier, Everest National Insurance Company. The Complaint asserts claims for breach of
contract, alleging that the Company owes certain premium payments to plaintiff under a retrospective rated policy. Although
the Company was only recently served with the Complaint, and its deadline to respond has not yet occurred, we deny
plaintiff’s claims and intend to defend the lawsuit vigorously.