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.
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 currently operating as a human capital outsourcing solutions provider that offers 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 as well as additional services ancillary to those labor sources.
The Company offers a variety of human capital
services to its clients, including staffing, employment administrative services (“EAS”), payroll processing, human resources
consulting, and workers’ compensation coverage and administration related services, as permitted by applicable law. We offer these
services through various wholly-owned subsidiaries, including the following: (i) ShiftPixy Staffing, Inc., which provides traditional
staffing services; (ii) ReThink Administrative Services, Inc., which operates as an administrative services organization, or “ASO”,
often in conjunction with ShiftPixy Staffing; and (iii) Rethink Human Capital Management, Inc., which offers a combination of services
provided by ShiftPixy Staffing and ReThink Administrative Services, including EAS. We have built a human resources information systems
(“HRIS”) 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.
The Company also announced, in late 2020, its
“ShiftPixy Labs” initiative, which includes the creation of incubator “ghost kitchens” to be operated under its
wholly-owned subsidiary, ShiftPixy Ghost Kitchens, Inc. Through this initiative, the Company intends to provide resources and guidance
to entrepreneurs seeking to bring their food delivery concepts to market, in return for the opportunity to combine with the ShiftPixy
HRIS platform to create a co-branded, or “ghost” branded, food preparation and delivery solution. The initial phase of this
initiative will be implemented in a dedicated showcase kitchen facility located in close proximity to our Miami headquarters, which is
currently under renovation and which we expect to be operational no later than the beginning of the fourth quarter of our fiscal year
ending August 31, 2021 (“Fiscal 2021”). We intend to partner with various culinary training organizations and experts in testing
these concepts, and to showcase these efforts through the distribution of video programming on social media produced and distributed by
our wholly owned subsidiary, ShiftPixy Productions, Inc. If successful, we intend to replicate this initiative in similarly constructed
facilities throughout the United States and in selected international locations. We also intend to provide similar services via mobile
kitchen concepts, all of which will be heavily reliant on our HRIS platform and which we believe will capitalize on trends observed during
the COVID-19 pandemic toward providing customers with a higher quality prepared food delivery product that is more responsive to their
needs.
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.
On March 31, 2021, stockholders representing a majority of the Company’s outstanding shares of capital stock approved a further
amendment to the Restated Articles of Incorporation (the “Amended Restated Articles of Incorporation”), which makes the federal
district courts of the United States the exclusive forum for the resolution of any complaint asserting a cause of action against the Company
arising under the Securities Act of 1933, as amended. The Company is in the process of filing the Amended Restated Articles of Incorporation
with the Wyoming Secretary of State.
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 six months ended February 28, 2021 are
not necessarily indicative of the results that may be expected for the full year ending Fiscal 2021.
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:
|
·
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Liability for legal contingencies;
|
|
|
|
|
·
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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;
|
|
|
|
|
·
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Valuation of long-lived assets including
fair value and net realizable value of long term notes receivable; and
|
|
|
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|
·
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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.
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 February 28, 2021 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 Fiscal 2021,
there were no material revenues to date that 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 currently 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 February
28, 2021 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 February 28, 2021, there was $3,238,000 of cash in excess of the amounts insured by
the FDIC.
No individual client represented more than 10%
of revenues for the three months and six months ended February 28, 2021 and February 29, 2020, respectively. However, four clients
represented 94% of total accounts receivable at February 28, 2021.
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 condensed consolidated statements of operations.
Computer Software Development
Software development costs relate primarily to
software coding, systems interfaces and testing of the Company’s proprietary employer information systems and are accounted for
in accordance with 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 three and six months ended February 28, 2021 or February 29, 2020. 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 exceeds the fair value of the asset. Fair value is generally determined using
an estimate of discounted future net cash flows from operating activities or upon disposal of the asset. There were no indicators noted
of impairments during the periods ended February 28, 2021 or February 29, 2020, 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. The Company is currently engaged in litigation regarding such a demand
for additional premium payments, which we believe to be without legal basis, as discussed at Note 9, Contingencies, Everest Litigation,
below.
Sunz Program
From July 2018 through February 28, 2021,
the Company’s workers’ compensation program for its WSEs was provided primarily through an arrangement with United Wisconsin
Insurance Company and administered by the Sunz Insurance Solutions, LLC (“Sunz”). Under this program, the Company has financial
responsibility for the first $0.5 million of claims per occurrence. The Company provides and maintains a loss fund that is earmarked to
pay claims and claims related expenses. The workers’ compensation insurance carrier establishes monthly funding requirements comprised
of premium costs and funds to be set aside for payment of future claims (“claim loss funds”). The level of claim loss funds
is primarily based upon anticipated WSE payroll levels and expected workers’ compensation loss rates, as determined by the insurance
carrier. Monies funded into the program for incurred claims expected to be paid within one year 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. The Company is currently engaged in litigation regarding demands by Sunz for additional claims
loss funds, which we believe to be without legal basis, as discussed at Note 10, Subsequent Events, Sunz Litigation, below.
Current Program
Effective March 1, 2021, the Company migrated its clients to a guaranteed
cost program. Under this program, the Company’s financial responsibility is limited to the cost of the workers’ compensation
premium.
Under 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 February 28, 2021, the Company had $0.3
million in Deposit – workers’ compensation classified as a short-term asset and $0.6 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 February 28, 2021, the Company
had short term accrued workers’ compensation costs of $0.5 million and long term accrued workers’ compensation costs of $1.2
million.
The Company retained workers’ compensation
asset reserves and workers’ compensation related liabilities for former WSEs of clients transferred to Shiftable HR Acquisition,
LLC, a wholly-owned subsidiary of Vensure Employer Services, Inc. (“Vensure”), in connection with the Vensure Asset Sale
described in Note 3. As of February 28, 2021, the retained workers’ compensation assets and liabilities are presented as a
discontinued operation net asset or liability. As of February 28, 2021, the Company had $0.8 million in short term assets and $1.6 million
of short term liabilities, and had $2.1 million of long term assets and $4.1 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 that are primarily based upon the WSE’s job responsibilities, their location, the historical frequency and severity of workers’
compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial assumptions resulting
from changes in actual claims experience and other trends are incorporated into the Company’s workers’ compensation claims
cost estimates. The estimated incurred claims are based upon: (i) the level of claims processed during each quarter; (ii) estimated
completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan.
The Company has had very limited and immaterial
COVID-19 related claims between March 2020 through the date of this Quarterly Report, although there is a possibility of additional
workers’ compensation claims being made by furloughed WSEs as a result of the employment downturn caused by the pandemic. On May 4,
2020, the State of California indicated that workers who become ill with COVID-19 would have a potential claim against workers’
compensation insurance for their illnesses. There is a possibility that additional workers’ compensation claims could be made by
employees required to work by their employers during the COVID-19 pandemic, which could have a material impact on our 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 February 28, 2021, we continue to monitor closely 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 February 28, 2021 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 was valued at estimated fair value as described below as of August 31, 2020 and through December 31, 2020 (end of the
earnout period), and at estimated net realizable value as of February 28, 2021.
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:
|
·
|
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; and
|
|
|
|
|
o
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
|
·
|
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 February 28, 2021 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 as of August 31, 2020 and through December 31, 2020 (end
of the earnout period).
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 August 31, 2020 and through December
31, 2020 using a 15% discount rate, which contemplates the risk and probability assessments of the expected future cash flows. 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 estimated gross wages
billed for the clients transferred to Vensure pursuant to the Vensure Asset Sale as of the measurement date. 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 was fairly recorded as of 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
Company used the following assumptions to value the Note Receivable as of August 31, 2020:
|
·
|
Actual monthly wages billed to the extent available to the Company
|
For the period ended February 28, 2021, the Company
estimated the net realizable value based on the available information through the date of this report as described in Note 3.
In March 2021, the Company received an initial
demand for approximately $10.7 million of working capital adjustments and no adjustments for the actual 2020 wages billed. The Company
used those adjustments as a starting point and considered each potential adjustment based on items deemed to be more or less likely and
the level of the dispute for any disputed items. The Company disputes a significant portion of the working capital adjustments, as described
in Notes 3 and 10. We identified approximately $2.6 million of adjustments deemed to be likely and retained a $2.9 million additional
reserve for a total reserve of $5.5 million. The $2.9 million general reserve was developed using a weighted probability approach of the
known claims and demands and combined with an estimate of legal and collection costs. The total reserve of $5.5 million is approximately
50% of the difference between the Vensure demand and the gross carrying value of the $9.5 million Note Receivable. Based on this analysis,
we made no material changes to the carrying value of the Note Receivable between November 30, 2020, the last reporting date, or December
31, 2020, the last internal measurement date, to the current reporting date of February 28, 2021.
By the same token, as discussed in Note 10, Subsequent
Events, the Company believes that the actual amount that Vensure owes pursuant to the Note Receivable may be significantly higher than
the current valuation, and we are actively seeking recovery of this higher amount from Vensure.
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.
Research and Development
During the three months ended February 28, 2021
and February 29, 2020, the Company incurred research and development costs of approximately $1.4 million and $0.8 million, respectively.
During the six months ended February 28, 2021 and February 29, 2020, the Company incurred research and development costs of approximately
$2.8 million and $2.1 million, respectively. All costs were related to internally developed or externally contracted software and related
technology for the Company’s HRIS platform and related mobile application. No software costs were capitalized for the three months
and six months ended February 28, 2021 and February 29, 2020, respectively.
Advertising Costs
The Company expenses all advertising as incurred.
The Company incurred advertising costs totaling $719,000 and $921,000 for the three months and six months ended February 28, 2021, respectively,
and expenses of $179,000 and $183,000 for the three and six months ended February 29, 2020, 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, as described in Note 5. 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. Securities that are excluded from the calculation
of weighted average dilutive common stock, because their inclusion would have been antidilutive, are:
|
|
For the
Three and Six
Months Ended
February 28,
2021
|
|
|
For the
Three and Six
Months Ended
February 29,
2020
|
|
Options
|
|
|
1,822,173
|
|
|
|
43,406
|
|
Senior Secured Convertible Notes
|
|
|
-
|
|
|
|
298,954
|
|
Warrants (Note 5)
|
|
|
4,396,209
|
|
|
|
131,558
|
|
Total potentially dilutive shares
|
|
|
6,218,382
|
|
|
|
473,918
|
|
For the table above, “Options”
represent all options granted under the Company’s 2017 Stock Option/Stock Issuance Plan, as described in Note 6, below, including
options granted contingent upon stockholder approval, which approval was obtained on March 31, 2021. “Senior Secured Convertible
Notes” represent shares issuable upon conversion of convertible notes outstanding as of the period in question. All Senior Secured
Convertible Notes were converted or repaid during Fiscal 2020.
Stock-Based Compensation
At February 28, 2021, 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.
Revisions and Reclassifications of Financial
Statements for the Three and Six months ended February 29, 2020
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.
Reclassification of Discontinued Operations
During the preparation of the consolidated financial
statements for Fiscal 2020, the Company determined that it had included in continuing operations certain customer revenues, cost of revenues,
and commission expense related to customers transferred to Vensure as part of the Vensure Asset Sale. For consistency of presentation,
those customer activities were reclassified to discontinued operations for the three and six months ended February 29, 2020. Such reclassifications
had no material impact on the Company’s financial condition, operating results, cash flows or stockholder’s equity. Reclassifications
to discontinued operations and the impact on earnings (loss) per share have been represented in the table below.
The
effect of the revisions and reclassifications on the line items within the Company’s condensed consolidated statement of operations
for the three and six months ended February 29, 2020, was as follows :
|
|
For
the three months ended February 29, 2020
(unaudited)
|
|
|
|
As
Previously
Reported
|
|
|
Revision
Adjustments
|
|
|
As
Restated
|
|
|
Discontinued
Operations
Reclassification
|
|
|
As
Restated and
Reclassified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,583,000
|
|
|
$
|
-
|
|
|
$
|
2,583,000
|
|
|
$
|
(576,000
|
)
|
|
$
|
2,007,000
|
|
Cost of revenue
|
|
|
2,124,000
|
|
|
$
|
-
|
|
|
|
2,124,000
|
|
|
|
(191,000
|
)
|
|
|
1,933,000
|
|
Gross profit
|
|
$
|
459,000
|
|
|
$
|
-
|
|
|
$
|
459,000
|
|
|
$
|
(385,000
|
)
|
|
$
|
74,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
239,000
|
|
|
|
(162,000
|
)
|
|
|
77,000
|
|
|
|
-
|
|
|
|
77,000
|
|
All other
operating expenses
|
|
$
|
4,211,000
|
|
|
$
|
-
|
|
|
$
|
4,211,000
|
|
|
$
|
6,000
|
|
|
$
|
4,217,000
|
|
Operating
loss
|
|
$
|
(3,991,000
|
)
|
|
$
|
162,000
|
|
|
$
|
(3,829,000
|
)
|
|
$
|
(391,000
|
)
|
|
$
|
(4,220,000
|
)
|
Net loss
from continuing operations
|
|
$
|
(4,453,000
|
)
|
|
$
|
162,000
|
|
|
$
|
(4,291,000
|
)
|
|
$
|
(391,000
|
)
|
|
$
|
(4,682,000
|
)
|
Total income
from discontinued operations
|
|
$
|
13,898,000
|
|
|
$
|
-
|
|
|
$
|
13,898,000
|
|
|
$
|
391,000
|
|
|
$
|
14,289,000
|
|
Net
loss
|
|
$
|
9,445,000
|
|
|
$
|
162,000
|
|
|
$
|
9,607,000
|
|
|
$
|
-
|
|
|
$
|
9,607,000
|
|
Net loss per common share - continuing
operations, Basic and diluted
|
|
$
|
(0.26
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
per common share
|
|
$
|
0.82
|
|
|
$
|
-
|
|
|
$
|
0.82
|
|
|
$
|
0.02
|
|
|
$
|
0.84
|
|
Net income (loss) per common
share, Basic and diluted
|
|
$
|
0.56
|
|
|
$
|
0.01
|
|
|
$
|
0.57
|
|
|
$
|
-
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
stock shares, Basic and diluted
|
|
|
16,971,339
|
|
|
|
|
|
|
|
16,971,339
|
|
|
|
|
|
|
|
16,971,339
|
|
|
|
For
the six months ended February 29, 2020
(unaudited)
|
|
|
|
As
Previously
Reported
|
|
|
Revision
Adjustments
|
|
|
As
Restated
|
|
|
Discontinued
Operations
Reclassification
|
|
|
As
Restated and
Reclassified
|
|
Revenues
|
|
$
|
4,761,000
|
|
|
$
|
-
|
|
|
$
|
4,761,000
|
|
|
$
|
(494,000
|
)
|
|
$
|
4,267,000
|
|
Cost of revenue
|
|
|
4,178,000
|
|
|
|
-
|
|
|
|
4,178,000
|
|
|
|
(227,000
|
)
|
|
|
3,951,000
|
|
Gross profit
|
|
$
|
583,000
|
|
|
$
|
-
|
|
|
$
|
583,000
|
|
|
$
|
(267,000
|
)
|
|
$
|
316,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
480,000
|
|
|
|
(324,000
|
)
|
|
|
156,000
|
|
|
|
-
|
|
|
|
156,000
|
|
All other operating expenses
|
|
$
|
8,412,000
|
|
|
$
|
-
|
|
|
$
|
8,412,000
|
|
|
$
|
112,000
|
|
|
$
|
8,524,000
|
|
Operating loss
|
|
$
|
(8,309,000
|
)
|
|
$
|
324,000
|
|
|
$
|
(7,985,000
|
)
|
|
$
|
(379,000
|
)
|
|
$
|
(8,364,000
|
)
|
Net loss from continuing operations
|
|
$
|
(8,990,000
|
)
|
|
$
|
324,000
|
|
|
$
|
(8,666,000
|
)
|
|
$
|
(379,000
|
)
|
|
$
|
(9,045,000
|
)
|
Total income from discontinued operations
|
|
$
|
15,879,000
|
|
|
$
|
-
|
|
|
$
|
15,879,000
|
|
|
$
|
379,000
|
|
|
$
|
16,258,000
|
|
Net loss
|
|
$
|
6,889,000
|
|
|
$
|
324,000
|
|
|
$
|
7,213,000
|
|
|
$
|
-
|
|
|
$
|
7,213,000
|
|
Net loss per common share - continuing operations, Basic
and diluted
|
|
$
|
(1.01
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.97
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(1.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) per common
share
|
|
$
|
1.78
|
|
|
$
|
-
|
|
|
$
|
1.78
|
|
|
$
|
0.04
|
|
|
$
|
1.82
|
|
Net income (loss) per common share, Basic and diluted
|
|
$
|
0.77
|
|
|
$
|
0.04
|
|
|
$
|
0.81
|
|
|
$
|
-
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common stock shares, Basic
and diluted
|
|
|
8,932,217
|
|
|
|
|
|
|
|
8,932,217
|
|
|
|
|
|
|
|
8,932,217
|
|
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 identification of 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.
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 that have not issued financial statements
under Topic 842 are required to adopt this standard 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 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.
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 (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 was to 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 and six months ended February 28, 2021, the Company identified an additional $41,000 of net cash paid
on behalf of the Company and adjusted the Note Receivable accordingly.
On March 12, 2021, the Company received correspondence
from Vensure proposing approximately $10.7 million of working capital adjustments under the terms of the Asset Purchase Agreement governing
the Vensure Asset Sale. As indicated in the reconciliation table below, the Company has initially recorded $2.6 million of working capital
adjustments, subject to final review and acceptance and has provided for a reserve for an additional $2.9 million of additional potential
claims and reserves. By letter dated April 6, 2021 the Company disputed Vensure’s proposed adjustments, and maintains that the amount
Vensure owes the Company pursuant to the Note Receivable is as much as $9.5 million. As discussed in Note 10, below, any disputes regarding
working capital adjustments under the Asset Purchase Agreement are subject to a resolution process that includes a 30-day negotiation
period followed by binding arbitration. The parties are in the negotiation period as of the date of this filing.
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 February 28, 2021.
Gross proceeds
|
|
$
|
19,166,000
|
|
Cash received at closing – asset sale
|
|
|
(9,500,000
|
)
|
Cash received at closing – working capital
|
|
|
(166,000
|
)
|
Gross note receivable
|
|
$
|
9,500,000
|
|
|
|
|
|
|
Less: Transaction reconciliation – estimated working capital adjustments
|
|
|
(2,604,000
|
)
|
Adjusted Note Receivable
|
|
|
6,896,000
|
|
Reserve for estimated potential claims
|
|
|
(2,892,000
|
)
|
Long-term note receivable, estimated net realizable value
|
|
$
|
4,004,000
|
|
The Vensure Asset Sale met the criteria
of discontinued operations set forth in ASC 205. 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.
Until December 31, 2020, the Company estimated
the fair value of the adjustments to the Note Receivable using Level 3 inputs. For the period ended February 28, 2021, the Company estimated
the net realizable value of the Note Receivable, which approximates the fair value as of December 31, 2020.
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 February 28, 2021, 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. Although Vensure provided the Company
with its working capital reconciliation on March 12, 2021, it failed to provide adequate documentation to support its calculations. Accordingly,
the working capital adjustment recorded as of February 28, 2021, represents the Company’s estimate of the reconciliation by using
Vensure’s claims and the limited supporting information Vensure provided as a starting point, and then making adjustments for amounts
in dispute based upon our internal records and best estimates. There is no assurance that the working capital change identified as of
February 28, 2021 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. For the year ended August
31, 2020 and the quarter ended November 30, 2020, the Company had recorded a reserve of for its estimate of a gross billings adjustment.
Vensure did not identify any such adjustments in their March 2021 correspondence. Based on the information available, the Company reclassified
the previously recorded gross wages claim to a general potential claims reserve during the quarter ended February 28, 2021.
The $2.9 million reserve for estimated potential
claims is based on an evaluation of the disputed claims made by Vensure that are in excess of the $2.6 million of likely working capital
claims previously identified.
The entire Note Receivable is recorded as a long
term note receivable as of February 28, 2021. Any adjustments to the gross $9.5 million note receivable are to be applied against payments
in the order they are due to be paid. Under the terms of the Vensure Asset Sale, the dispute is subject to a reconciliation and arbitration
process. As such, although we are hopeful for a prompt resolution of our dispute, we do not currently anticipate any collections prior
to February 28, 2022, and therefore have classified the note receivable as long-term.
The carrying amounts of the classes of assets
and liabilities from the Vensure Asset Sale included in discontinued operations were as follows:
|
|
February 28,
2021
|
|
|
August 31,
2020
|
|
Cash
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts receivable and unbilled account receivable
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
-
|
|
Deposits – workers’ compensation
|
|
|
821,000
|
|
|
|
1,030,000
|
|
Total current assets
|
|
|
821,000
|
|
|
|
1,030,000
|
|
Fixed assets, net
|
|
|
-
|
|
|
|
-
|
|
Deposits – workers’ compensation
|
|
|
2,071,000
|
|
|
|
2,582,000
|
|
Total assets
|
|
$
|
2,892,000
|
|
|
$
|
3,612,000
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Payroll related liabilities
|
|
|
-
|
|
|
|
-
|
|
Accrued workers’ compensation cost
|
|
|
1,620,000
|
|
|
|
1,746,000
|
|
Total current liabilities
|
|
|
1,620,000
|
|
|
|
1,746,000
|
|
Accrued workers’ compensation cost
|
|
|
4,085,000
|
|
|
|
4,377,000
|
|
Total liabilities
|
|
|
5,705,000
|
|
|
|
6,123,000
|
|
|
|
|
|
|
|
|
|
|
Net liability
|
|
$
|
(2,813,000
|
)
|
|
$
|
(2,511,000
|
)
|
Reported results for the discontinued operations by period were as
follows:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
February 28,
2021
|
|
|
February 29,
2020
|
|
|
February 28,
2021
|
|
|
February 29,
2020
|
|
Revenues (gross billings of $0 and $27.8 million less worksite employee payroll cost of $0 million and $23.8 million, respectively for the three months ended; gross billings of $0 million and $120.6 million less worksite employee payroll cost of $0 million and $103.0 million, respectively for the six months ended)
|
|
$
|
-
|
|
|
$
|
4,026,000
|
|
|
$
|
-
|
|
|
$
|
17,632,000
|
|
Cost of revenue
|
|
|
221,000
|
|
|
|
5,228,000
|
|
|
|
1,535,000
|
|
|
|
15,762,000
|
|
Gross profit (loss)
|
|
|
(221,000
|
)
|
|
|
(1,202,000
|
)
|
|
|
(1,535,000
|
)
|
|
|
1,870,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
|
-
|
|
|
|
153,000
|
|
|
|
-
|
|
|
|
553,000
|
|
Commissions
|
|
|
-
|
|
|
|
38,000
|
|
|
|
-
|
|
|
|
741,000
|
|
Total operating expenses
|
|
|
-
|
|
|
|
191,000
|
|
|
|
-
|
|
|
|
1,294,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
(221,000
|
)
|
|
$
|
(1,393,000
|
)
|
|
$
|
(1,535,000
|
)
|
|
$
|
576,000
|
|
The loss from discontinued operations for the three months
ended February 28, 2021, represents the change in the estimated workers’ compensation accruals required for the residual workers’
compensation liabilities retained after the Vensure Asset Sale.
Note 4: Going Concern
As of February 28, 2021, the Company had cash
of $3.5 million and a working capital deficit of $4.3 million. During the six months ended February 28, 2021, the Company used approximately
$9.2 million of cash from its continuing operations. The Company has incurred recurring losses, which has resulted in an accumulated deficit
of $132.6 million as of February 28, 2021. The recurring losses and cash used in operations raise substantial doubt as to our ability
to continue as a going concern within one year from the issuance date of these financial statements.
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 HRIS platform.
During Fiscal 2021, the Company has continued
to invest in its HRIS platform, ShiftPixy Labs, and other growth initiatives, all of which have required significant cash expenditures.
The Company expects to deploy significant additional capital resources to continue with these growth initiatives, which include making
ShiftPixy Labs and our ghost kitchens fully operational.
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 human capital and 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 offering 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. Further, the recent acceleration in the roll-out of COVID-19 vaccines throughout California and the entire country has
resulted in an easing of business operating restrictions. Nevertheless, if lockdowns resume, the Company’s clients delay hiring
or rehiring employees, or if our clients shut down operations, our ability to generate operational cash flows may be significantly impaired.
In August 2020, the Company 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 the Company’s
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 the quarter ending February 28, 2021.
The Company’s management believes that
the Company’s current cash position will not be sufficient to fund our operations for at least a year from the date these financials
are issued without additional capital funding. While the Company has successfully raised capital from debt and equity investors in the
past, if these sources do not provide the capital necessary to fund the Company’s operations during the twelve months following
the issuance of this Quarterly Report, 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 condensed consolidated financial statements do not include any adjustments for this uncertainty.
Note 5: Stockholders’ Equity
Preferred Stock
As previously disclosed, in September 2016,
the founding shareholders of the Company were granted options to acquire ShiftPixy preferred stock (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 may 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 Amended 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. During the fiscal quarter
and six months ended February 28, 2021 an additional 12,500 Preferred Options were exercised and exchanged for a like number shares of
common stock. As of the date of this Quarterly Report, 11,827,570 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 options to purchase up to 50,000,000
shares of preferred stock 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 our
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, 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 equivalent to 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 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 equivalent to 110% of the
public offering price per share.
Common Stock and Warrants
During the six months ended February 28,
2021, the Company issued 4,000,000 shares of common stock pursuant to the October 2020 Offering at $3.00 per share, as described
above.
The following table summarizes the changes in the Company’s common
stock warrants from August 31, 2020 to February 28, 2021:
|
|
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, February 28, 2021
|
|
|
4,396,209
|
|
|
|
4.5
|
|
|
|
5.51
|
|
Warrants exercisable, February 28, 2021
|
|
|
4,396,209
|
|
|
|
4.5
|
|
|
$
|
5.51
|
|
The following table summarizes the Company’s
warrants outstanding as of February 28, 2021:
|
|
Warrants
Outstanding
|
|
|
Weighted average
Life of
Outstanding
Warrants
in years
|
|
|
Exercise
price
|
|
October 2020 Common Warrants
|
|
|
2,300,000
|
|
|
|
4.6
|
|
|
$
|
3.30
|
|
October 2020 Underwriter Warrants
|
|
|
200,000
|
|
|
|
4.6
|
|
|
|
3.30
|
|
May 2020 Common Warrants
|
|
|
1,277,580
|
|
|
|
4.2
|
|
|
|
5.40
|
|
May 2020 Underwriter Warrants
|
|
|
111,108
|
|
|
|
4.2
|
|
|
|
5.40
|
|
March 2020 Exchange Warrants
|
|
|
423,669
|
|
|
|
4.6
|
|
|
|
10.17
|
|
Amended March 2019 Warrants
|
|
|
66,288
|
|
|
|
3.0
|
|
|
|
40.00
|
|
March 2019 Services Warrants
|
|
|
3,366
|
|
|
|
3.0
|
|
|
|
70.00
|
|
June 2018 Warrants
|
|
|
6,276
|
|
|
|
2.8
|
|
|
|
40.00
|
|
June 2018 Services Warrants
|
|
|
5,422
|
|
|
|
2.8
|
|
|
|
99.60
|
|
2017 PIPE Warrants
|
|
|
2,500
|
|
|
|
1.3
|
|
|
|
276.00
|
|
|
|
|
4,396,209
|
|
|
|
4.5
|
|
|
$
|
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 of common stock for issuance under the Plan as of February 28, 2021, which was previously
approved by the Company’s shareholders. Of these 250,000 approved shares, as of February 28, 2021, approximately 93,000 options
and 7,000 shares had been designated by the Board of Directors for issuance and approximately 40,000 of the options had been forfeited
and returned to the option pool under the Plan due to employment terminations. As of February 28, 2021, approximately 209,000 shares remained
issuable, of which 167,000 were eligible to be issued as ISOs and 209,000 as either share grants or NQs. Under the Plan, as previously
approved by the Company’s shareholders, a total of 40,818 options were outstanding as of February 28, 2021 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 stockholders. As of February 28, 2021 the Company has granted 1,781,355 options under the Plan that
are subject to stockholder 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. On March 31, 2021, the Company’s stockholders approved the increase in the number of shares of
common stock issuable under the Plan from 250,000 to 3,000,000 shares, as well as the various grant awards under the Plan since July 1,
2020.
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
$441,000 and $863,000 of compensation expense for the three and six months ended February 28, 2021, respectively. The Company recognized
approximately $556,000 and $670,000 of compensation expense for the three and six months ended February 28, 2020, respectively.
At February 28, 2021, the total unrecognized
deferred stock-based compensation expected to be recognized over the remaining weighted average vesting periods of 3.3 years for outstanding
grants was $5.3 million.
The following table summarizes option activity
during the six months ended February 28, 2021:
|
|
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
|
|
|
550,000
|
|
|
|
10.0
|
|
|
|
3.21
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(126,567
|
)
|
|
|
9.5
|
|
|
|
5.03
|
|
Balance Outstanding at February 28, 2021
|
|
|
1,822,173
|
|
|
|
9.4
|
|
|
$
|
6.73
|
|
Balance not Exercisable at February 28, 2021
|
|
|
1,781,355
|
|
|
|
|
|
|
|
|
|
Balance Exercisable at February 28, 2021
|
|
|
40,818
|
|
|
|
|
|
|
|
|
|
Options outstanding as of February
28, 2021 had aggregate intrinsic value of $116,000.
Option vesting activity during the six months
ended February 28, 2021 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
|
|
|
3,916
|
|
|
|
7.5
|
|
|
|
93.49
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(655
|
)
|
|
|
7.2
|
|
|
|
50.33
|
|
Balance at February 28, 2021
|
|
|
31,671
|
|
|
|
7.2
|
|
|
$
|
113.76
|
|
The following table summarizes information about
stock options outstanding and vested at February 28, 2021:
|
|
Options Outstanding
|
|
|
Options Vested
|
|
Exercise Prices
|
|
Number of
Options not
Exercisable
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
(In Years)
|
|
|
|
|
|
|
|
|
(In Years)
|
|
|
|
|
$2.23-10.00
|
|
|
1,781,355
|
|
|
|
-
|
|
|
|
9.5
|
|
|
$
|
4.70
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
$10.01-$40.00
|
|
|
-
|
|
|
|
3,500
|
|
|
|
8.3
|
|
|
|
21.69
|
|
|
|
1,680
|
|
|
|
8.3
|
|
|
|
21.65
|
|
$40.01–$80.00
|
|
|
-
|
|
|
|
13,396
|
|
|
|
8.1
|
|
|
|
51.21
|
|
|
|
8,986
|
|
|
|
8.1
|
|
|
|
51.22
|
|
$80.01–$120.00
|
|
|
-
|
|
|
|
10,303
|
|
|
|
7.2
|
|
|
|
102.90
|
|
|
|
8,096
|
|
|
|
7.3
|
|
|
|
102.74
|
|
$120.01–$160.00
|
|
|
-
|
|
|
|
12,495
|
|
|
|
6.5
|
|
|
|
155.24
|
|
|
|
11,784
|
|
|
|
6.5
|
|
|
|
155.64
|
|
$160.01-$391.60
|
|
|
-
|
|
|
|
1,125
|
|
|
|
6.4
|
|
|
|
391.60
|
|
|
|
1,125
|
|
|
|
6.4
|
|
|
|
391.60
|
|
|
|
|
1,781,355
|
|
|
|
40,818
|
|
|
|
9.4
|
|
|
$
|
6.73
|
|
|
|
31,671
|
|
|
|
7.2
|
|
|
$
|
113.76
|
|
The options not exercisable were conditionally
granted by our Board of Directors between July 1, 2020 and February 28, 2021 and are not exercisable until stockholder approval is received
for the increase in the option pool. As discussed above, stockholder approval was obtained on March 31, 2021.
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 and $360,000 in professional fees for services
provided by Mr. Holmes in each of the three and six month periods ended February 28, 2021, and February 29, 2020, respectively.
During the three and six month periods ended February
28, 2021, we made one-time payments to certain of our employees totaling approximately $53,000 and $600,000, respectively, in connection
with their agreement to relocate from California to our new principal executive offices in Miami, Florida. Included among these were payments
to the following related parties, in the amounts indicated: (i) Mr. Absher, $160,000; (ii) Amanda Murphy, our Director of Operations and
a member of our Board, $80,000; (iii) David May, a member of our business development team, and the son-in-law of Mr. Absher, $80,000;
(iv) Phil Eastvold, the Executive Producer of ShiftPixy Productions, Inc., and the son-in-law of Mr. Absher, $88,000; and (v) Hannah Absher,
an employee of the Company and the daughter of Scott Absher, $18,000.
Note 8: Commitments
Operating Leases & License Agreements
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 and licensing payments under
non-cancelable operating leases at February 28, 2021, are as follows:
Years ended August 31,
|
|
|
|
2021
|
|
$
|
697,000
|
|
2022
|
|
|
1,302,000
|
|
2023
|
|
|
1,014,000
|
|
2024
|
|
|
1,075,000
|
|
2025
|
|
|
1,108,000
|
|
Thereafter
|
|
|
1,652,000
|
|
Total minimum payments
|
|
$
|
6,848,000
|
|
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 three or six months ended February 28, 2021 and February 29, 2020.
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,
which has now expired.
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. The Court has stayed all discovery
pending its ruling on our motion to dismiss, which remains under consideration.
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, and seeks damages of approximately $600,000. On February
5, 2021, we filed an Answer to Plaintiff’s Complaint denying its claims for relief, and also filed a cross-claim against the third
party claims administrator, Gallagher Bassett Services, Inc., for claims sounding in breach of contract and negligence based upon its
administration of claims arising under the policy. By order dated April 7, 2021, the Court dismissed the Company’s complaint against
Gallagher Bassett without prejudice to re-filing in another forum. Discovery is underway in the case against Everest, and the Court has
set a trial date of February 22, 2022.
Note 10: Subsequent Events
Benchmark Litigation
On March 8, 2021, we were served with a Complaint
filed in the United States District Court for the Southern District of New York by Benchmark Investments, Inc. d/b/a Kingswood Capital
Markets, asserting a single claim for breach of contract arising from a non-binding engagement letter pursuant to which plaintiff offered
to provide certain investment banking services to an affiliate of the Company. The Complaint seeks damages in an unspecified amount. On
April 8, 2021, we filed an Answer to Plaintiff’s Complaint denying its claims for relief, and asserting various affirmative defenses.
Sunz Litigation
On March 19, 2021, we were served with a Complaint filed in the
Circuit Court for the 11th Judicial Circuit, Manatee County, Florida, by our former workers’ compensation insurance carrier, Sunz
Insurance Solutions, LLC. The Complaint asserts claims for breach of contract, alleging that the Company owes payments for loss reserve
funds totaling approximately $10 million. The Company denies plaintiff’s allegations and intends to defend the lawsuit vigorously.
Vensure Note Receivable
Effective January 1, 2020, the Company entered
into an Asset Purchase Agreement (the “APA”) with a wholly-owned subsidiary of Vensure, pursuant to which Vensure agreed to
purchase certain of the Company’s assets for total consideration of $19 million in cash, with $9.5 million to be paid at closing,
and the remainder to be paid in 48 equal monthly installments (the “Installment Sum”). The Installment Sum is subject to certain
adjustments to account for various post-closing payments made by the parties to the APA. The APA provides a framework for the resolution
of any disputes concerning the calculation of the Installment Sum, which includes submission of the matter to binding arbitration in the
event that the parties are unable to resolve their differences themselves. By letter dated March 12, 2021, Vensure notified the Company
for the first time that it believes it owes nothing under the APA, and that the Company owes Vensure approximately $1.5 million. We responded
to Vensure by letter dated April 6, 2021, stating our belief that Vensure’s calculations lack any basis, are unsupported by sufficient
documentation, and are directly contradicted by the Company’s internal records. We further advised Vensure that, based on the information
currently within the Company’s possession, we calculate the Installment Sum that Vensure owes to be within the range of approximately
$7 million to $9.5 million, not including any recoveries to which the Company may be entitled based upon Vensure’s conduct in connection
with the APA. The Company has also requested that Vensure produce various financial records that would support its calculations, and which
we are entitled to examine under the terms of the APA. Now that the parties have exchanged their respective calculations with respect
to the Installment Sum, we are attempting to negotiate a resolution of this dispute with Vensure in good faith, as required by certain
provisions of the APA. If these negotiations fail to yield an agreement, then we intend to pursue our claim for payment through the binding
arbitration and other procedures outlined in the APA.