Filed pursuant to Rule 424(b)(4)
Registration No. 333-237457
1,898,850 Shares of Common Stock
323,310 Pre-Funded Warrants to Purchase
Shares of Common Stock
Warrants to Purchase 1,111,080 Shares
of Common Stock
We are offering 1,898,850
shares of our common stock, par value $0.0001 per share and warrants to purchase up to 1,111,080 shares of our common stock (and
the common stock issuable from time to time upon the exercise of the warrants). Each share of our common stock is being sold together
with a warrant, or a purchase warrant, to purchase up to 0.5 shares of our common stock. Each purchase warrant has an exercise
price per share of $5.40, will be exercisable immediately and will expire on the fifth anniversary of the original issuance date.
We are also offering
323,310 pre-funded warrants to certain purchasers whose purchase of shares of common stock in this offering would otherwise result
in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or at the election
of the purchaser, 9.99%) of our outstanding common stock immediately following the consummation of this offering. Each pre-funded
warrant will be immediately exercisable for one share of our common stock and may be exercised at any time until all of the pre-funded
warrants are exercised in full. The purchase price of each pre-funded warrant will equal the price per share at which the shares
of common stock are being sold to the public in this offering, minus $0.001, and the exercise price of each pre-funded warrant
will be $0.001 per share. Each pre-funded warrant purchased in this offering in lieu of common stock is also being sold together
with a purchase warrant. This offering also relates to the shares of common stock issuable upon exercise of the purchase warrants
and the pre-funded warrants sold in this offering. Pursuant to this prospectus, we are also offering the shares of common stock
issuable upon the exercise of the purchase warrants and pre-funded warrants offered hereby.
The shares of common
stock and pre-funded warrants can each be purchased only with the accompanying purchase warrants (other than the over-allotment
option), but will be issued separately, and will be immediately separable upon issuance.
Our common stock is
listed on The Nasdaq Capital Market (“Nasdaq”), under the symbol “PIXY.” On May 20, 2020, the last reported
sale price of our common stock was $7.16 per share.
There is no established
public trading market for the purchase warrants or pre-funded warrants, and we do not expect a market to develop. In addition,
we do not intend to apply for a listing of the purchase warrants or the pre-funded warrants on any national securities exchange.
We are an “emerging
growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”),
and, as such, have elected to comply with certain reduced public disclosure requirements for this prospectus and future filings.
This prospectus complies with the requirements that apply to an issuer that is an emerging growth company. See “Prospectus
Summary — Implications of Being an Emerging Growth Company.”
Investing in
our securities involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus to read
about factors you should consider before investing in our securities.
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Per Share of Common Stock and accompanying Purchase Warrant
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Per
Pre-Funded
Warrant and accompanying Purchase Warrant
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Total
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Public offering price(1)
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$
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5.40
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$
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5.399
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$
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11,999,340.69
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Underwriting discounts and commissions(2)
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$
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0.378
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$
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0.37793
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$
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839,953.85
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Proceeds, before expenses, to us
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$
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5.022
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$
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5.02107
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$
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11,159,386.84
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(1)
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The public offering price is $5.40 per share of common stock and accompanying purchase warrant and $5.399 per pre-funded warrant and accompanying purchase warrant.
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(2)
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In addition, we have agreed to reimburse the underwriter for certain expenses and issue warrants to the underwriter in an amount equal to 5% of the aggregate number of shares and shares issuable upon exercise of the pre-funded warrants. See “Underwriting.”
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Neither the Securities
and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The
offering is being underwritten on a firm commitment basis. We have granted the underwriter a
45-day option from the date of this prospectus to purchase up to 333,324 additional shares of our common stock and/or additional
purchase warrants to purchase up to 166,662 shares of common stock from us solely to cover over-allotments, if any.
The
underwriter expects to deliver the shares of common stock, purchase warrants and
any pre-funded warrants to the purchasers on or about May 26, 2020.
Sole Book-Running Manager
A.G.P.
The date of this prospectus is May 20,
2020
TABLE OF CONTENTS
You
should rely only on the information contained in this prospectus or in any free writing prospectus that we may provide to you
in connection with this offering. Neither we nor the underwriter has authorized anyone
to provide you with information different from, or in addition to, that contained in this prospectus or any such free writing
prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We can provide no assurance
as to the reliability of any other information that others may give you. Neither we nor the underwriter is
making an offer to sell or seeking offers to buy these securities in any jurisdiction where or to any person to whom the offer
or sale is not permitted. The information in this prospectus is accurate only as of the date on the front cover of this prospectus,
and the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as
of the date of such free writing prospectus. Our business, financial condition, results of operations and prospects may have changed
since those dates.
Unless otherwise
indicated, information contained in this prospectus concerning our industry, competitive position and the markets in which we
operate is based on information from independent industry and research organizations, other third-party sources and
management estimates. Management estimates are derived from publicly available information released by independent industry
analysts and other third-party sources, as well as data from our internal research, and are based on assumptions we made
upon reviewing such data and our experience in, and knowledge of, such industry and markets, which we believe to be
reasonable. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate
and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those
described in “Risk Factors” on page 8, “Cautionary Note Regarding Forward-Looking Statements” on
page 29 and elsewhere in this prospectus. These and other factors could cause results to differ materially from those
expressed in the estimates made by the independent parties and by us.
PROSPECTUS SUMMARY
This summary
highlights information contained in greater detail elsewhere and does not contain all of the information that you should consider
before deciding to invest in our common stock, pre-funded warrants or purchase warrants. You should read the entire prospectus
carefully, including the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our financial statements and the related notes included in this prospectus, before making
an investment decision. Unless otherwise indicated in this prospectus or the context otherwise requires, all references to “we,”
“us,” and “our” refer to ShiftPixy, Inc.
Company Overview
Our current business,
and the primary source of our revenues to date, has been under a traditional staffing services business model. Our initial market
focus is to use this traditional approach, coupled with developed technology, to address an underserved market containing predominately
lower wage employees with high turnover in light industrial, services, and food and hospitality. We provide human resources, employment
compliance, insurance, payroll, and operational employment services solutions for our business clients (“clients”
or “operators”) and shift work or gig opportunities for worksite employees (“WSEs” or “shifters”).
As consideration for providing these services, we receive administrative or processing fees as a percentage of a client’s
gross payroll, process and file payroll taxes and payroll tax returns, provide workers’ compensation insurance, and provide
employee benefits. We have built a substantial business on a recurring revenue model since our inception in 2015. For the fiscal
year ended August 31, 2019, including our discontinued operations related to the Vensure Asset Transfer described below, we processed
over $350 million of payroll billings. Our business has significantly grown for each year since inception and we expect to continue
our high degree of growth. However, we have experienced losses to date as we have invested in both our technology solutions as
well as the back-office operations required to service a large employee base under a traditional staffing model.
We are currently
focused on clients in the restaurant and hospitality industries, traditionally market segments with high employee turnover and
low pay rates. We believe that our focus on these industries will be better served by our Human Resources Information System (“HRIS”)
technology platform which provides payroll and human resources tracking for our clients and will result in lower operating costs,
improved customer experience and revenue growth acceleration. All of our clients enter into service agreements with us or our
wholly-owned subsidiary, ReThink Human Capital Management, Inc. (“ReThink”).
Our revenues for
the year ended August 31, 2019 primarily consist of administrative fees calculated as a percentage of gross payroll processed,
payroll taxes due on WSEs billed to the client and remitted to the applicable taxation authority, and workers’ compensation
premiums billed to the client for which we facilitate workers’ compensation coverage. Our costs of revenues consist of accrued
and paid payroll taxes and our costs to provide the workers’ compensation coverage including premiums and loss reserves.
A significant portion of our assets and liabilities is for our workers’ compensation reserves. Our cash balances related
to these reserves are carried as assets and our estimates of projected workers’ compensation claims are carried as liabilities.
Since 2019, we have provided a self-funded workers’ compensation policy for up to $500,000 and purchase reinsurance for
claims in excess of $500,000. We actively monitor and manage our clients and WSEs’ workers’ compensation claims which
we believe allows us to provide a lower cost workers’ compensation option for our clients than they would otherwise be able
to purchase on their own.
In January 2020,
in connection with an asset purchase agreement, we assigned client contracts representing approximately 70% of our billable clients
which comprised approximately 88% of our quarterly revenue as of November 30, 2019 and certain operating assets for $19.1 million
in cash of which $9.6 million was received at closing and $9.5 million is due over the next four years, commencing in April 2020,
subject to certain conditions, including the performance of the assigned contracts. For the three months ended February 29, 2020,
we billed 83 clients in total, billed approximately 3,500 total WSEs. This represents an annualized growth rate of over 100% for
WSEs compared to the three months ending February 28, 2019. We have also entered into an agreement with a large customer with
multiple locations representing approximately 1,000 additional WSEs. In addition, we retained approximately 35,000 unbilled WSEs
in our HRIS platform as of March 31, 2020. These new WSEs were added to our HRIS platform through our new automated onboarding
process which was placed into service in 2019. We believe there is significant business interest in our HRIS platform and scheduling
tools for multi-location client opportunities.
Our Services
Our core business is
to provide regular payroll processing services to clients under an employer administration services (“EAS”) model in
addition to individual services, such as payroll tax compliance, workers’ compensation insurance, and employee HR compliance
management. In addition, in November, 2019, we launched our employee onboarding and scheduling functions to our customers in the
mobile application. We expect to complete the full commercial launch of our mobile application software later this year which will
provide additional services including “white label” food delivery functionality.
Our core EAS are
typically provided to our clients for one-year renewable terms. Through February 29, 2020, we have not had any material revenues
or billings generated within our HRIS from additional services. We expect that our future service offerings, including technology-based
services provided through our HRIS system and mobile application, will provide for additional revenue streams and support cost
reductions for existing and future clients. We expect that our future services will be offered through “a la carte”
pricing via customizable on-line contracts.
The new market trend
towards flexible, temporary or freelance jobs, often involving connecting with clients or customers through an online platform
(the “Gig Economy”) has created legal issues regarding the classification of workers as independent contractors or
employees. In addition, the rising trend of predictive scheduling creates logistical issues for our clients regarding worker’s
schedules. We provide solutions to businesses struggling with these compliance issue primarily by absorbing our clients’
workers, who we refer to as WSEs but are also referred to as “shift workers,” “shifters,” “gig workers,”
or “assigned employees.” WSEs are included under our corporate employee umbrella and we handle certain employment-related
compliance responsibilities for our clients as part of our services. This arrangement benefits WSEs by providing additional work
opportunities through access to our clients. WSEs further benefit from employee status benefits through our benefit plan offerings,
including minimum essential health insurance coverage plans and 401(k) plans, as well as enjoying the protections of workers’
compensation coverage.
Competition
We have two primary
sources of competition. Competitors to our gig business model include businesses such as ShiftGig, Instawork, Snag, Jobletics and
other comparable businesses that seek to arrange short-term work assignments for both employees and independent contractors. Competitors
to our HRIS system include businesses such as Kelly Services, ManpowerGroup, and Barrett Business Services which provide human
resource software solutions. We believe our service offering competes effectively based on our strategy of combining an ecosystem
of employment services with the individualized ability to link trained workers to specific shift-work opportunities.
Recent Developments
Reverse Stock Split
On November 13,
2019, our board of directors authorized a one-for-forty (1:40) reverse split of our issued and outstanding common stock that became
effective on December 16, 2019 (the “Reverse Stock Split”). As a result of the Reverse Stock Split, each forty (40)
shares of our issued and outstanding common stock were automatically combined and converted into one issued and outstanding share
of common stock. The Reverse Stock Split affected all issued and outstanding shares of our common stock, as well as common stock
underlying stock options to purchase shares of common stock and warrants outstanding immediately prior to the effectiveness of
the Reverse Stock Split. The Reverse Stock Split did not alter the number of shares of preferred stock underlying the Preferred
Options (as defined below) and did not decrease the number of authorized shares of our common stock or preferred stock, alter
the par value of our common stock or preferred stock, both of which remain at $0.0001 per share, nor modify any voting rights
or other terms of our capital stock. Unless otherwise indicated, all information set forth in this prospectus gives effect to
the Reverse Stock Split.
Vensure Asset Transfer
As previously reported,
on January 3, 2020, effective January 1, 2020, we entered into an asset purchase agreement with Shiftable HR Acquisition, LLC,
part of Vensure Employer Services, Inc. (“Vensure”), that assigned client contracts representing approximately 70%
of our billable clients which comprised approximately 88% of our quarterly revenue as of November 30, 2019 and certain operating
assets in exchange for up to approximately $19.1 million of consideration (the “Vensure Asset Transfer”). We received
$9.6 million upon closing and expect to receive additional proceeds of approximately $2.4 million per year, payable monthly, for
the next four years if certain transaction conditions are met, including the performance of the assigned client contracts. This
transaction required us to relinquish our service rights to certain clients but allowed us to retain the clients’ WSE information
in our HRIS platform which now represents approximately 35,000 potential gig employees. We also retained all of our intellectual
property rights, including our HRIS and our mobile application technology, and 47 clients with approximately 2,400 billable WSEs.
Preferred Option
As previously disclosed,
in September 2016, our founding shareholders (the “Option Shareholders”) were granted options to acquire our preferred
stock (the “Preferred Options”). The number of Preferred Options granted were based upon the number of shares held
by the Option Shareholders at that time. The Preferred Options are nontransferable and forfeited upon the sale of the related
founding shares of common stock. Upon the occurrence of the Vensure Asset Transfer in January 2020, the Option Shareholders
could exercise each Preferred Option to purchase one share of our preferred stock for $0.0001 per share. As of the date
of this prospectus, the Preferred Options are exercisable to purchase up to 24,634,560 shares of preferred stock which are convertible
into 24,634,560 shares of common stock. 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 the Option Shareholders
at the time the Preferred Options were issued. Accordingly, in order to confirm the original intent of the granting of up to 50,000,000
Preferred Options to Messrs. Absher and Holmes, at some point in the future we intend to adopt a second grant of Preferred Options
granting an additional 12,500,000 Preferred Options to each of Messrs. Absher and Holmes whereby each option permits the holder
to acquire one share of our preferred stock for $0.0001 per share. Each share of preferred stock will be convertible into common stock on a one-for-one basis. See
“Risk Factors— Purchasers in the offering will suffer immediate and substantial dilution if our Option Shareholders
exercise their Preferred Options” for a further discussion of the Preferred Options.
Convertible Note
Settlements
Between December
5, 2019 and March 24, 2020, we entered into a series of settlements, agreed upon note conversions, note exchanges, and principal
repayments (the “Convertible Note Settlements”) for (i) our 8% Senior Secured Convertible Notes we issued on June
4, 2018 (the “June 2018 Notes”), (ii) certain of our 8% Senior Secured Convertible Notes we issued pursuant to a Limited
Settlement Agreement and Mutual Release, dated December 20, 2018, with certain holders of the June 2018 Notes (the “December
2018 Notes”), (iii) certain of our Convertible Notes issued on March 12, 2019 (the “March 2019 Notes”) and,
together with the June 2018 Notes and the December 2018 Notes, the “Convertible Notes”) and (iv) all of our warrants
issued in connection with the March 2019 Notes (the “March 2019 Warrants”) that previously included full-ratchet anti-dilution
price protection. Pursuant to the Convertible Note Settlements, we issued an adjustment of 302,271 shares of common stock for
conversions and 123,358 shares of common stock for inducements and cashless warrant exercises for the Convertible Notes and to
extinguish the remaining March 2019 Notes and March 2019 Warrants with full-ratchet anti-dilution protection. On December 5, 2019,
we exchanged $2,445,000 of the March 2019 Notes and $222,000 of the June 2018 Notes for new Senior Convertible Notes in an aggregate
principal amount of $2,934,000 (the “December 2019 Exchange Notes” and, together with the June 2018 Notes, the December
2018 Notes and the March 2019 Notes, the “Senior Convertible Notes”). On March 23, 2020 and March 24, 2020, we (i)
further amended the December 2019 Exchange Notes to fix the conversion price at $9.20 per share of common stock, (ii) exchanged
$772,000 of the March 2019 Notes with full-ratchet anti-dilution price protection for $997,000 of amended March 2019 Notes with
a fixed conversion price at $9.20 per share of common stock and (iii) amended, cancelled or exercised for shares of common stock
via cashless exercise all March 2019 Warrants which previously included full-ratchet anti-dilution price protection and issued
new warrants to purchase 423,669 shares of common stock at an exercise price of $10.17 per share. Pursuant to the Convertible
Note Settlements, in January 2020 we also paid cash of approximately $2,600,000 to satisfy all default claims and litigation relating
to our Senior Convertible Notes and as repayment of all remaining principal on our June 2018 Notes and December 2018 Notes. Between
March 23, 2020 and April 15, 2020 the holder of the amended December 2019 Exchange notes converted all of their note holdings
into shares of common stock at $9.20 per share. The remaining gross principal balances of the Senior Convertible Notes as of May
18, 2020 represent $997,000 of the amended March 2019 Notes, convertible at $9.20 per share and due September 12, 2020. For further
discussion of the Senior Convertible Notes, see “Description of Our Capital Stock – Debt and Equity Offerings.”
COVID-19-Related Considerations
Our business, results
of operations and financial condition have been, and may continue to be, materially adversely impacted by the recent outbreak
of respiratory illness caused by a novel coronavirus disease (“COVID-19”). We do not, yet, know the impact that COVID-19
will have on our business in the medium to long-term. As of the date of this prospectus, we have experienced the following COVID-19
impacts to our business:
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We have observed significant staffing reductions
for our Southern California clients since the state lockdown in mid-March and a related reduction in payroll billings from
those clients. Several of our clients have closed operations either temporarily or permanently and most have furloughed staff
or reduced hours.
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We are working closely with our clients to provide additional
capital including through the 2020 stimulus programs such as the Payroll Protection Plan but we have not as yet seen a recovery
of billings from any of the stimulus programs.
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We have observed a significant increase in potential customers
needing the technology solutions we provide and our business activities have been marked by an increase in our sales pipeline
for our delivery and scheduling application features and an increase for franchised restaurant customers. We have not yet
observed new customer billings offset the payroll billings reduction.
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We expect additional workers’ compensation
claims to be made by furloughed employees and in light of California’s Executive Order N-62-20, which creates a rebuttable
presumption for workers’ compensation claims that an employee’s COVID-19 related illness arose out of the course
of their employment if such infection occurred between March 19 and July 5, 2020 and the employee was diagnosed with COVID-19
or tested positive for it within 14 days after performing work for the employer at a location other than the employee’s
home. While we have not observed additional expenses as a result of any such claims, we continue to closely monitor all workers’
compensation claims made during the COVID-19 pandemic.
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Risks Associated with Our Business and
this Offering
Our business and our
ability to implement our business strategy are subject to numerous risks, as more fully described in the section of this prospectus
entitled “Risk Factors”. You should read these risks before you invest in our securities. We may be unable, for many
reasons, including those that are beyond our control, to implement our business strategy. In particular, risks associated with
our business include:
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We have incurred net losses in recent periods and require additional financing. If financing is
not available, we may be required to further downsize or discontinue operations.
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We assume the obligation to make wage, tax, and regulatory payments for our WSEs, and, as a result,
are exposed to client credit risks.
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Our business strategy depends upon our ability to receive future proceeds in connection with the
Vensure Asset Transfer, which are contingent upon profits associated with our former clients that were transferred to Vensure.
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If you purchase our securities in this offering, you will incur immediate and substantial dilution.
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We will have broad discretion in the use of the net proceeds from this offering and may not use
them effectively.
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There is substantial doubt about our ability
to continue as a going concern.
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We depend heavily on our Chief Executive
Officer and director and the loss of his services could harm our business.
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The price of our common stock and warrants
may be volatile.
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Implications of Being an Emerging Growth
Company
We qualify as an “emerging
growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth
company may take advantage of certain reduced disclosure and other requirements that are otherwise generally applicable to public
companies. As a result, the information that we provide to shareholders may be different than the information you may receive from
other public companies in which you hold equity. For example, so long as we are an emerging growth company:
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we are not required to engage an auditor to report
on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);
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we are not required to comply with any requirement
that may be adopted by the Public Company Accounting Oversight Board (the “PCAOB”), regarding mandatory audit firm
rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements
(i.e., an auditor’s discussion and analysis);
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we are not required to submit certain executive compensation
matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes”;
and
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we are not required to comply with certain disclosure
requirements related to executive compensation, such as the requirement to disclose the correlation between executive compensation
and performance and the requirement to present a comparison of our Chief Executive Officer’s compensation to our median
employee compensation.
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We may take advantage
of these reduced disclosure and other requirements until the last day of our fiscal year following the fifth anniversary of the
completion of our initial public offering (“IPO”), or such earlier time that we are no longer an emerging growth company.
For example, if certain events occur before the end of such five-year period, including if we have more than $1.07 billion
in annual revenue, have more than $700 million in market value of our common stock held by non-affiliates or issue more
than $1.0 billion of non-convertible debt over a three-year period, we will cease to be an emerging growth company.
As mentioned above,
the JOBS Act permits us, as an emerging growth company, to take advantage of an extended transition period to comply with new or
revised accounting standards applicable to public companies. We have elected not to opt out of the extended transition period which
means that when an accounting standard is issued or revised, and it has different application dates for public or private companies,
as an emerging growth company, we can adopt the new or revised standard at the time private companies adopt the new or revised
standard. This may make it difficult or impossible because of the potential differences in accounting standards used to compare
our financial statements with the financial statements of a public company that is not an emerging growth company or the financial
statements of an emerging growth company that has opted out of using the extended transition period.
Our Corporate Information
We were incorporated
under the laws of the State of Wyoming on June 3, 2015. Our principal executive office is located at 1 Venture, Suite 150, Irvine, CA 92618,
and our telephone number is (888) 798-9100. Our website address is www.shiftpixy.com. Our website does not form a part of this
prospectus and listing of our website address is for informational purposes only.
THE OFFERING
Common stock offered
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1,898,850 shares.
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Pre-funded warrants offered
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We are also offering 323,310 to certain purchasers whose purchase of shares of common stock in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or at the election of the purchaser, 9.99%) of our outstanding common stock immediately following the consummation of this offering. Each pre-funded warrant will be exercisable for one share of our common stock. The purchase price of each pre-funded warrant is equal the price per share at which the shares of common stock are being sold to the public in this offering, minus $0.001, and the exercise price of each pre-funded warrant will be $0.001 per share. The pre-funded warrants are exercisable immediately and may be exercised at any time until all of the pre-funded warrants are exercised in full. This offering also relates to the shares of common stock issuable upon exercise of any pre-funded warrants sold in this offering.
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Purchase warrants offered
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Purchase warrants to purchase an aggregate of 1,111,080 shares of our common stock. Each share of common stock and each pre-funded warrant is being sold together with a purchase warrant to purchase up to 0.5 shares of our common stock. Each purchase warrant has an exercise price per share of $5.40, will be exercisable immediately and will expire on the fifth anniversary of the original issuance date. Each holder of purchase warrants will be prohibited from exercising its purchase warrant for shares of our common stock if, as a result of such exercise, the holder, together with its affiliates, would own more than 4.99% of the total number of shares of our common stock then issued and outstanding. However, any holder may increase such percentage to any other percentage not in excess of 9.99%. This offering also relates to the offering of the shares of common stock issuable upon the exercise of the purchase warrants.
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Over-allotment option
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The underwriter has a 45-day option to purchase up to an additional 333,324 shares of common stock and/or purchase warrants to purchase up to an aggregate of 166,662 additional shares of common stock from us at the public offering price less underwriting discounts and commissions.
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Common stock to be outstanding after this offering
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3,419,410 shares of common stock, assuming no exercise of the pre-funded warrants or purchase warrants (or 3,752,734 shares of common stock if the underwriter exercises in full its option to purchase additional shares of common stock, assuming no exercise of the pre-funded warrants or purchase warrants).
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Use of proceeds
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We
estimate that the net proceeds to us from this offering from the sale of the shares of our common stock and the accompanying purchase
warrants will be approximately $10.5 million, or approximately $12.2 million if the underwriter exercises its option
to purchase additional shares in full, excluding any proceeds that may be received upon the exercise of the pre-funded warrants
and the purchase warrants, after deducting underwriting discounts and commissions and offering expenses.
We
intend to use the net proceeds of this offering for general corporate purposes, including working capital, operating expenses
and capital expenditures. See “Use of Proceeds.”
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Risk factors
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Investing
in our securities involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus for a
discussion of factors to consider carefully before deciding to invest in shares of our common stock, purchase warrants or
pre-funded warrants in this offering.
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Nasdaq symbol
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Our
common stock is listed on Nasdaq under the symbol “PIXY.” We do not intend
to list the purchase warrants or pre-funded warrants on any securities exchange or nationally
recognized trading system.
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Unless
otherwise indicated, all information contained in this prospectus assumes no exercise by the underwriter of its over-allotment
option, assumes no exercise of the pre-funded warrants, assumes no exercise of the purchase warrants and assumes no exercise of
the warrants to be issued to the underwriter and accounts for the Reverse
Stock Split that became effective on December 16, 2019. The number of shares of our common stock that are and will be outstanding
immediately before and after this offering as shown above is based on 1,520,560 shares outstanding as of May 18, 2020. The number
of shares outstanding as of May 18, 2020, as used throughout this prospectus, unless otherwise indicated, excludes:
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513,797
shares of common stock issuable upon the exercise of warrants to purchase shares of common
stock that were outstanding as of May 18, 2020, with a weighted-average exercise price
of $16.53 per share;
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198,527 shares of common
stock reserved for future issuance under our 2017 Stock Option and Share Issuance Plan (the
“2017 Plan”);
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43,415 shares of common
stock issuable upon the exercise of options to purchase common stock issued pursuant to our
2017 Plan as of May 18, 2020, with a weighted-average exercise price of $99.56 per share;
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108,322 shares of common
stock issuable upon the conversion of the Senior Convertible Notes that were outstanding as
of May 18, 2020 with a weighted-average conversion price of $9.20 per share;
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24,634,560 shares of common stock reserved
for future issuance pursuant to Preferred Options that were granted to our shareholders of record on September 28, 2016 to
purchase preferred stock for $0.0001 per share, with each share of preferred stock being convertible into common stock on
a one-for-one basis; and
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25,000,000 shares of common stock potentially
issuable pursuant to options that are expected to be granted to Messrs. Absher and Holmes, the issuance of which may be subject to any internal corporate,
state, federal or regulatory approvals, following this offering to purchase
preferred stock for $0.0001 per share, with each share of preferred stock being convertible into common stock on a one-for-one
basis.
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RISK FACTORS
An investment
in our common stock, pre-funded warrants or purchase warrants involves a high degree of risk. You should carefully consider the
following risks and all of the other information contained in this prospectus before deciding whether to invest in our common
stock, pre-funded warrants or purchase warrants including the risks and uncertainties described below and under the caption “Risk
Factors” in our most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed with the
SEC, in each case as these risk factors are amended or supplemented by subsequent Annual Reports on Form 10-K or Quarterly
Reports on Form 10-Q. The risks set forth below are those which we believe are the material risks that we face. The occurrence
of any of such risks may materially and adversely affect our business, financial condition, results of operations and future prospects.
In such an event, the market price of our common stock and the value of the pre-funded warrants and purchase warrants could decline,
and you could lose part or all of your investment.
Risks Related to this Offering and Ownership
of Our Common Stock and Warrants
Purchasers in the offering will suffer
immediate dilution.
If you purchase common
stock in this offering, the value of your shares based on our actual book value will immediately be less than the offering price
you paid. This reduction in the value of your equity is known as dilution. At the public offering price of $5.40 per share, purchasers
of common stock in this offering will experience immediate dilution of approximately $1.90 per share, assuming no exercise of the
Preferred Options. Based upon the pro forma as adjusted net tangible book value of our common stock at $0.94 per share, your shares
may be worth less per share than the price you paid in the offering. See “Dilution.” The net tangible book value of
our common stock as used in this prospectus has been adjusted for (i) the Vensure Asset Transfer and (ii) the Convertible Note
Settlements.
If the options, warrants
and convertible securities we previously granted are exercised, additional dilution will occur. As of May 18, 2020, options to
purchase 43,415 shares of common stock at a weighted-average exercise price of $99.56 per share were outstanding, warrants
to purchase up to 513,797 shares of common stock at a weighted-average exercise price of $16.53 per share were outstanding,
Senior Convertible Notes convertible into 108,322 shares of common stock at $9.20 per share were outstanding and Preferred Options
to purchase 24,634,560 shares of preferred stock at an exercise price of $0.0001 per share that are convertible into 24,634,560
shares of common stock were outstanding. See “Risk Factors — Purchasers in the offering will suffer immediate and substantial
dilution if our Option Shareholders exercise their Preferred Options” for a discussion of the Preferred Options.
Furthermore, if we
raise additional funding by issuing additional equity securities, the newly-issued shares will further dilute your percentage
ownership of our shares and may also reduce the value of your investment. The discussion above assumes no exercise of the purchase
warrants or pre-funded warrants.
Purchasers in the offering will suffer
immediate and substantial dilution if our Option Shareholders exercise their Preferred Options.
If the Preferred Options
we previously granted to our Option Shareholders are fully exercised and their preferred stock is converted into shares of common
stock, purchasers in this offering will suffer immediate and substantial dilution. As of the date of this prospectus, there were
outstanding Preferred Options to purchase up to 24,634,560 shares of preferred stock at an exercise price of $0.0001 per share
that are convertible into an aggregate of 24,634,560 shares of common stock. At the public offering price of $5.40 per share, purchasers
of common stock in this offering will experience immediate and substantial dilution of approximately $4.98 per share, assuming
the founders exercise all of their outstanding Preferred Options and convert all of their preferred stock into shares of common
stock. In this case, based upon the pro forma as adjusted net tangible book value of our common stock at $0.94 per share, your
shares would be worth less per share than the price you paid in the offering. Additionally, at some point in the future we intend
to adopt a second grant of options 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 our preferred stock for $0.0001 per share. If those options are issued and the
shares of preferred stock underlying the options are converted into common stock, additional substantial dilution would occur.
Our common stock is closely held
by our founders which may limit a minority shareholder from influencing corporate governance.
Approximately 39.9%
of our issued and outstanding common stock is held by our founders, Scott Absher, our Chief Executive Officer, and Steven Holmes.
Following this offering, Messrs. Absher and Holmes will hold approximately 17.8% of our issued and outstanding common stock, assuming
no exercise of the underwriter’s option, no exercise of the purchase warrants or pre-funded warrants and no exercise of the
Preferred Option. Messrs. Absher and Holmes are the beneficial owners of approximately 49.0% and 46.6% of our outstanding voting
securities, respectively, prior to the offering and 45.7% and 43.5%, respectively, of our outstanding voting securities after the
offering, assuming Messrs. Absher and Holmes both exercised their options to purchase common stock and all of the Preferred Options
to purchase 24,634,560 shares of preferred stock held by our Option Shareholders (including Messrs. Absher and Holmes) are exercised
and the preferred stock is converted into 24,634,560 shares of our common stock. As majority shareholders, Messrs. Absher and Holmes
can continue to possess significant influence and can elect and can continue to elect a majority of our board of directors and
authorize or prevent proposed significant corporate transactions. Their ownership and control may also have the effect of delaying
or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage
a potential acquirer from making a tender offer. Individual shareholders with a minority stake may have limited influence over
shareholder matters. See “Risk Factors — Purchasers in the offering will suffer immediate and substantial dilution
if our Option Shareholders exercise their Preferred Options” for a further discussion of the Preferred Options.
In addition, as previously
disclosed, in September 2016, our founding shareholders, or Option Shareholders were granted options to acquire our preferred stock,
or Preferred Options. The number of Preferred Options granted were based upon the number of shares held by the Option Shareholders
at that time. The Preferred Options are nontransferable and forfeited upon the sale of the related founding shares of common
stock. Upon the occurrence of the Vensure Asset Transfer in January 2020, the Option Shareholders could exercise each Preferred
Option to purchase one share of our preferred stock for $0.0001 per share. As of the date of this prospectus, the Preferred
Options are exercisable to purchase up to 24,634,560 shares of preferred stock which are convertible into 24,634,560 shares of
common stock. 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 the Option Shareholders at the time the Preferred Options
were issued. Accordingly, in order to confirm the original intent of the granting of up to 50,000,000 Preferred Options to Messrs.
Absher and Holmes, at some point in the future we intend to adopt a second grant of Preferred Options granting an additional 12,500,000
Preferred Options to each of Messrs. Absher and Holmes whereby each option permits the holder to acquire one share of our preferred
stock for $0.0001 per share. Each share of preferred stock will be convertible into common stock on a one-for-one basis. See “Risk
Factors— Purchasers in the offering will suffer immediate and substantial dilution if our Option Shareholders exercise their
Preferred Options” for a further discussion of the Preferred Options.
We have a significant number of outstanding
warrants, some of which contain full-ratchet anti-dilution protection, which may cause significant dilution to our
shareholders, have a material adverse impact on the market price of our common stock and make it more difficult for us to raise
funds through future equity offerings.
As of May 18,
2020, we had 1,520,560 shares of common stock outstanding. In addition, as of that date we had outstanding warrants to acquire
up to 513,797 shares of common stock. The issuance of shares of common stock upon the exercise of warrants would dilute the percentage
ownership interest of all shareholders, might dilute the book value per share of our common stock and would increase the number
of our publicly traded shares, which could depress the market price of our common stock.
Historically, certain
of our outstanding warrants contain full-ratchet anti-dilution provisions which, subject to limited exceptions, would reduce the
exercise price of the warrants (and increase the number of shares issuable) in the event that we in the future issue common stock,
or securities convertible into or exercisable to purchase common stock, at a price per share lower than the exercise price then
in effect, to such lower price. On June 4, 2018, in connection with the issuance of June 2018 Notes, we issued warrants (the “June
2018 Warrants”) which are exercisable for 12,552 shares of common stock at an exercise price of $5.29 per share and contain
a price protection anti-dilution provision. At the public offering price of $5.40, the anti-dilution provision in the June 2018
Warrants will not be triggered in connection with this offering. In addition, on March 12, 2019, in connection with the issuance
of March 2019 Notes, we issued the March 2019 Warrants, which were exercisable for 74,390 shares of common stock at an exercise
price of $70.00 per share and contain a full-ratchet anti-dilution provision. As of May 18, 2020, all such warrants were either
cancelled, exercised or exchanged for warrants without such a full-ratchet anti-dilution provision.
In addition to the
dilutive effects described above, the perceived risk of dilution as a result of the significant number of outstanding warrants
may cause our common shareholders to be more inclined to sell their shares, which would contribute to a downward movement in the
price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our common stock price
could encourage investors to engage in short sales of our common stock, which could further contribute to price declines in our
common stock. The fact that our shareholders and warrant holders can sell substantial amounts of our common stock in the public
market, whether or not sales have occurred or are occurring, as well as the existence of full-ratchet anti-dilution provisions
in our warrants, could make it more difficult for us to raise additional funds through the sale of equity or equity-related securities
in the future at a time and price that we deem reasonable or appropriate, or at all.
We have warrants and convertible
notes, including the Senior Convertible Notes, that may be converted into shares of our common stock in the future, which would
dilute your ownership interest.
On June 4, 2018,
December 20, 2018, and March 12, 2019 we issued the June 2018 Notes, the December 2018 Notes and the March 2019 Notes, respectively,
to certain institutional investors pursuant to which, at any time while there is an outstanding balance, the notes may be converted
for shares of our common stock, at the option of the holders, at a conversion price for the principal and interest, subject to
adjustment from down round price protection. In March 2020, we modified all remaining Senior Convertible Notes to a fixed conversion
price at $9.20 per share. As of May 18, 2020, the Senior Convertible Notes, if converted at the applicable discount price, would
be convertible into approximately 108,322 shares of common stock. We also have warrants outstanding to purchase up to 513,797
shares of common stock, which may be exercised for up to five years from their issuance date. Of the warrants outstanding, 12,552
of the June 2018 Warrants require us to reduce the exercise price if a future financing is entered into at a price per share below
the warrant exercise price, which is currently $5.29 per share. Further, any additional financing that we secure may require the
granting of rights, preferences or privileges senior to those of our common stock and which result in additional dilution of the
existing ownership of our common shareholders.
The agreements governing our Senior
Convertible Notes contain a mandatory default amount when an event of default occurs.
The indentures governing
our Senior Convertible Notes contain mandatory default amounts when an event of default occurs. These notes accrue default interest
at an annual rate of 18%, include a conversion feature that provides for a default conversion rate at a 15% discount to market
price, and provide for mandatory redemption for up to 130% of the remaining principal balance.
If we are unable to meet the
continued listing requirements of Nasdaq, Nasdaq will delist our common stock.
In the future,
if we are not able to meet Nasdaq’s continued listing standards, we could be subject to suspension and delisting proceedings.
A delisting of our common stock and our inability to list on another national securities exchange could negatively impact us by:
(i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire
our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration
statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets; and (iv)
impairing our ability to provide equity incentives to our employees.
There is no public market for
the purchase warrants or pre-funded warrants being offered in this offering.
There is no established
public trading market for the purchase warrants or pre-funded warrants being offered in this offering, and we do not expect a
market to develop. In addition, we do not intend to apply to list the purchase warrants or pre-funded warrants on any securities
exchange or nationally recognized trading system, including Nasdaq. Without an active market, the liquidity of the purchase warrants
and pre-funded warrants will be limited.
Our board of directors and our shareholders
recently approved an amendment to our Articles of Incorporation to add conversion rights to our preferred stock that would be
dilutive to the purchasers and current holders of our common stock.
Our board of directors
and our shareholders recently approved an amendment to the rights of our preferred stock to provide for its conversion into our
common stock on a one-for-one basis which will not take effect until at least 20 days after we file an Information Statement regarding
such shareholder approval with the SEC. The purchase price for such preferred stock was set at $0.0001 per share of preferred
stock. The conversion of the preferred stock to common stock will have an immediate dilutive effect on our then current shareholders.
The aggregate dilution our shareholders will incur will depend on the number of shares of preferred stock that are converted into
common stock. As of the date of this prospectus, two of our Option Shareholders, Scott W. Absher and Steven Holmes, have Preferred
Options which are exercisable to purchase up to 24,290,000 shares of preferred stock which are convertible into 24,290,000 shares
of common stock. See “Risk Factors— Purchasers in the offering will suffer immediate and substantial dilution if our
Option Shareholders exercise their Preferred Options” for a further discussion of the Preferred Options.
Our share price may be volatile,
which could subject us to securities class action litigation and prevent you from being able to sell your shares at or above the
offering price.
Our stock could be
subject to wide fluctuation in response to many risk factors listed in this section and others beyond our control, including:
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Market acceptable and commercialization of our products;
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Our being able to timely demonstrate achievement of milestones, including
those related to revenue generation, cost control, cost effective source supply and regulatory approvals;
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Regulatory developments or enforcements in the United States and non-U.S.
countries with respect to our products or our competitors’ products;
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Failure to achieve pricing acceptable to the market;
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Actual or anticipated fluctuations in our financial condition and
operating results, or our continuing to sustain operating losses;
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Competition from existing products or new products that may emerge;
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Announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures, collaborations or capital commitments;
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Failure of securities analysts to maintain coverage of us, changes
in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors;
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Rumors and market speculation involving us or other companies in our
industry;
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The financial projections we may provide to the public, any changes
in those projections, or our failure to meet those projections;
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Actual or anticipated changes in our results of operations or fluctuations
in our results of operations;
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Actual or anticipated developments in our business, our competitors’
businesses or the competitive landscape generally;
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Litigation involving us, our industry, or both, or investigations
by regulators into our operations or those of our competitors;
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Changes in accounting standards, policies, guidelines, interpretations
or principles;
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Announcement or expectation of additional financing efforts, particularly
if our cash available for operations significantly decreases;
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Fluctuations in the valuation of companies perceived by investors
to be comparable to us;
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Share price and volume fluctuations attributable to inconsistent trading
volume levels of our shares;
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Additions or departures of key management personnel;
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Disputes or other developments related to proprietary rights, including
patents, litigation matters and our ability to obtain patent protection for our technologies;
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Entry by us into any material litigation or other proceedings;
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Sales of our common stock by us, our insiders, or our other shareholders;
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Market conditions for stocks in general; and
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General economic and market conditions unrelated to our performance.
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Furthermore, the stock
markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity
securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of
those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such
as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of
our common stock. In addition, such fluctuations could subject us to securities class action litigation, which could result in
substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
If the market price of shares of our common stock after this offering does not exceed the IPO price, you may not realize any return
on your investment in us and may lose some or all of your investment.
If securities or industry analysts
do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could
decline.
The trading market
for our common stock is impacted by the research and reports that securities or industry analysts publish about us or our business.
We do not have any control over these analysts. We cannot assure that analysts will continue to cover us or provide favorable coverage.
If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our share price would likely
decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility
in the financial markets, which could cause our stock price or trading volume to decline.
We have broad discretion in the use
of the net proceeds from this offering and may not use them effectively.
We currently intend
to allocate the net proceeds that we will receive from this offering as described in this prospectus under the “Use of Proceeds”
section of this prospectus. However, our management will have broad discretion in the actual application of the net proceeds,
and we may elect to allocate proceeds differently from that described herein if we believe it would be in our best interest to
do so. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds.
The failure by our management to apply these funds effectively could have a material adverse effect on our business. Pending their
use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
Future sales, or the possibility
of future sales, of a substantial number of shares of our common stock could adversely affect the price of the shares and dilute
shareholders.
Future sales of a substantial
number of shares of our common stock, or the perception that such sales will occur, could cause a decline in the market price of
our common stock. This is particularly true if we sell our stock at a discount. In addition, in connection with this offering,
our directors and executive officers entered into lock-up agreements. If, after the end of such lock-up agreements, these
shareholders sell substantial amounts of shares of our common stock in the public market, or the market perceives that such sales
may occur, the market price of our common stock and our ability to raise capital through an issue of equity securities in the future
could be adversely affected.
In addition, in the
future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection
with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such issuance could result in substantial
dilution to our existing shareholders and could cause our common share price to decline.
Holders of the purchase warrants
and pre-funded warrants purchased in this offering will have no rights as common shareholders until such holders exercise their
purchase warrants or pre-funded warrants and acquire our common stock.
Until holders of
purchase warrants or pre-funded warrants acquire shares of our common stock upon exercise of the purchase warrants or pre-funded
warrants, holders of purchase warrants and pre-funded warrants will have no rights with respect to the shares of our common stock
underlying such purchase warrants and pre-funded warrants. Upon exercise of the purchase warrants and pre-funded warrants, the
holders will be entitled to exercise the rights of a common shareholder only as to matters for which the record date occurs after
the exercise date.
We have not paid cash dividends in
the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock,
which may decrease in value.
We have never paid
cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common
stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board
of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your
investment will only occur if our stock price appreciates.
If we do not maintain a current
and effective prospectus relating to the common stock issuable upon exercise of the purchase warrants or pre-funded warrants,
public holders will only be able to exercise such purchase warrants or pre-funded warrants on a “cashless basis.”
If we do not maintain
a current and effective prospectus relating to the shares of common stock issuable upon exercise of the purchase warrants or pre-funded
warrants at the time that holders wish to exercise such warrants, they will only be able to exercise them on a “cashless
basis.” As a result, the number of shares of common stock that holders will receive upon exercise of the purchase warrants
or pre-funded warrants will be fewer than it would have been had such holders exercised their purchase warrants or pre-funded
for cash. Under the terms of the purchase warrants and pre-funded warrants, we have agreed to use our best efforts to maintain
a current and effective prospectus relating to the shares of common stock issuable upon exercise of such warrants until the expiration
of such warrants. However, we cannot assure you that we will be able to do so. If we are unable to do so, the potential “upside”
of the holder’s investment in our company may be reduced.
The purchase warrants may not
have any value.
Each purchase warrant
has an exercise price of $5.40 and will expire on the fifth anniversary of the date they first become exercisable. In the event
our common stock price does not exceed the exercise price of the purchase warrants during the period when the warrants are exercisable,
the purchase warrants may not have any value.
Provisions
of the purchase warrants or pre-funded warrants offered by this prospectus could discourage an acquisition of us by a third party.
Certain provisions
of the purchase warrants or pre-funded warrants offered by this prospectus could make it more difficult or expensive for a third
party to acquire us. The purchase warrants and pre-funded warrants prohibit us from engaging in certain transactions constituting
“fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the pre-funded
warrants. Further, the pre-funded warrants provide that, in the event of certain transactions constituting “fundamental
transactions,” with some exception, holders of such warrants will have the right, at their option, to require us to repurchase
such purchase warrants or pre-funded warrants at a price described in such warrants. These and other provisions of the purchase
warrants or pre-funded warrants offered by this prospectus could prevent or deter a third party from acquiring us even where the
acquisition could be beneficial to you.
The exercise price of the purchase
warrants or pre-funded warrants offered by this prospectus will not be adjusted for certain dilutive events.
The exercise price
of the purchase warrants or pre-funded warrants offered by this prospectus is subject to adjustment for certain events, including,
but not limited to, certain issuances of capital stock, options, convertible securities and other securities. However, the exercise
prices will not be adjusted for dilutive issuances of securities considered “excluded securities” and there may be
transactions or occurrences that may adversely affect the market price of our common stock or the market value of such purchase
warrants or pre-funded warrants without resulting in an adjustment of the exercise prices of such purchase warrants or pre-funded
warrants.
We are an “emerging growth
company” as that term is used in the JOBS Act, and we intend to continue to take advantage of reduced disclosure and governance
requirements applicable to emerging growth companies, which could result in our common stock being less attractive to investors
and adversely affect the market price of our common stock or make it more difficult to raise capital as and when we need it.
We are an “emerging
growth company” as that term is used in the JOBS Act, and we intend to continue to take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not emerging growth companies including,
but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act,
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the
requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments
not previously approved, and exemptions from any rules that the Public Company Accounting Oversight Board may adopt requiring mandatory
audit firm rotation or a supplement to the auditor’s report on the financial statements. We currently take advantage of some,
but not all, of the reduced regulatory and reporting requirements that are available to us under the JOBS Act, and intend to continue
to do so as long as we qualify as an “emerging growth company.” For example, so long as we qualify as an “emerging
growth company,” we may elect not to provide you with certain information, including certain financial information and certain
information regarding compensation of our executive officers, that we would have otherwise been required to provide in filings
we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate us.
We cannot predict if
investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common
stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more
volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company, which in certain
circumstances could be for up to five years. See “Prospectus Summary — Implications of Being an Emerging Growth Company.”
Because of the exemptions
from various reporting requirements provided to us as an “emerging growth company,” we may be less attractive to investors
and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business
with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in
our industry. If we are unable to raise additional capital as and when we need it, our business, results of operations, financial
condition and cash flows, and future prospects may be materially and adversely affected.
Risks Relating to Our Business
We have limited operating history,
which makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future
performance.
We are an emerging
business and are in the process of developing our products and services. We have been in business since July 2015. Although we
have processed gross billings of over $350 million for the fiscal year ended August 31, 2019, approximately 88% of which was sold
in January 2020, it is still difficult, if not impossible, to forecast our future results based upon our limited historical operating
data. Because of the related uncertainties, we may be hindered in our ability to anticipate and timely adapt to increases or decreases
in sales, revenues or expenses. If we make poor budgetary decisions as a result of unreliable data, our gross billings in the
future may decline, which may result in a decline in our stock price.
There is uncertainty
regarding our ability to implement our business plan and to grow our business to a greater extent than we can with our existing
financial resources without additional financing. Except from the proceeds of our initial public offering and our recent private
placements of senior secured convertible notes to institutional investors raising $13 million of gross proceeds ($11.9 million
net of costs), we have no binding agreements, commitments or understandings to secure additional financing at this time. We have
no binding agreements, commitments or understandings to acquire any other businesses or assets. Our long-term future growth and
success is dependent upon our ability to generate cash from operating activities. There is no assurance that we will be able to
generate sufficient cash from operations, to borrow additional funds or to raise additional equity capital. Our inability to obtain
additional cash could have a material adverse effect on our ability to fully implement our business plan as described herein and
grow our business to a greater extent than we can with our existing financial resources.
There is substantial doubt as
to our ability to continue as a going concern.
As of February
29, 2020, we had cash of $0.4 million and a working capital deficiency of $5.6 million. During the year ended August 31, 2019,
we used approximately $2.1 million of cash in operations of which $9.5 million was used in our continuing operations and $7.4
million was provided by discontinued operations and an additional $1.2 million on capitalized software and fixed asset purchases. On
January 3, 2020 we received $9.7 million in sale proceeds in connection with the Vensure Asset Transfer, and expect to receive
approximately $0.2 million per month for four years thereafter. Through February 29, 2020 we received additional proceeds
from working capital of $1.0 million from the Vensure Asset Transfer subsequent to closing. During the six months ended February
29, 2020, we used approximately $10.4 million of cash in operations and repaid $1.2 million of convertible notes after receiving
$10.7 million of cash from the Vensure Asset Transfer. After taxes and payments of outstanding obligations, we have retained $1.3
million for current operations as of May 18, 2020. These conditions raise substantial doubt as to our ability to continue as going
concern and our independent registered public accounting firm has included an explanatory paragraph regarding going concern qualification
in its audit report for the year ended August 31, 2019. Management has prepared a liquidity plan to address the going concern
issue and while we believe that these liquidity plan measures will be adequate to satisfy our liquidity requirements for at least
the next twelve months, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully
implement the liquidity plan may have a material adverse effect on our business, results of operations and financial condition,
and may adversely affect our ability to continue as a going concern. If we do not become consistently profitable, our accumulated
deficit will grow larger and our cash balances will decline further, and we will require additional financing to continue operations.
Any such financing may not be accessible on acceptable terms, if at all. If we cannot generate sufficient cash or obtain additional
financing, we may be required to downsize our business further or discontinue our operations altogether.
Our success depends on adoption of
our products and services by our various types of customers, and if these potential customers do not accept and acquire our products
and services then our revenue will be severely limited.
The major customer
groups to whom we believe our products and services will appeal, both employers and employees, particularly related to shift work,
may not embrace our products and services. Acceptance of our products and services will depend on several factors, including: cost,
ease of use, familiarity of use, convenience, timeliness, strategic partnerships, and reliability. If we fail to adequately meet
our customers’ needs and expectations, our product offerings may not be competitive and our ability to commence or continue
generating revenues could be reduced. We also cannot be sure that our business model will gain wide acceptance among all targeted
customer groups. If the market fails to continue to develop, or develops more slowly than we expect, our ability to continue generating
revenues could be reduced.
We assume the obligation to make
wage, tax, and regulatory payments for our WSEs, and, as a result, are exposed to client credit risks.
Under the Contract
Service Agreement, we become a co-employer of WSEs and assume the obligations to pay their salaries, wages and related benefits
costs and payroll taxes. We assume such obligations as an agent, not as a principal, of the client. Our obligations include responsibility
for:
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payment of the salaries and wages for work performed by WSEs, regardless of whether the client timely pays us the associated service fee; and
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withholding and payment of federal and state payroll taxes with respect to wages and salaries reported by us.
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If a client does not
pay us, our ultimate liability for WSE payroll and benefits costs could have a material adverse effect on our financial condition
or results of operations.
If we are unable to effectively manage
growth and maintain low operating costs, our results of operations and financial condition may be adversely affected.
We have experienced
rapid growth since our inception, and our plans contemplate significant expansion of our business. If we are unable to manage our
growth effectively, including having geographically dispersed offices and employees or to anticipate and manage our future growth
accurately, our business may be adversely affected. If we are unable to manage our expansion and growth effectively, we may be
unable to keep our operating costs low or effectively meet the requirements of an ever-growing, geographically dispersed client
base. Our business relies on data systems, billing systems and financial reporting and control systems, procedures and controls.
Our success in managing our expansion and growth in a cost-effective manner will require us to upgrade and improve these systems,
procedures and controls. If we are unable to adapt our systems and put adequate controls in place in a timely manner, our business
may be adversely affected. In addition, our growth may place significant demands on our management, and our overall operational
and financial resources. A failure on our part to meet any of the foregoing challenges inherent in our growth strategy may have
an adverse effect on our results of operations and financial condition.
Our targeted customer base is diverse,
and we face a challenge in adequately meeting each group’s needs.
Because we will serve
both employers and employees, we must work constantly to understand the needs, standards and requirements of each group and must
devote significant resources to developing products and services for their interests. If we do not accurately predict our customers’
needs and expectations, we may expend valuable resources in developing products and services that do not achieve broad acceptance
across the markets, and we may fail to grow our business.
We face intense competition across
all markets for our services, which may lead to lower revenue or operating margins. Competing forms of Gig Economy
oriented staffing management products and services may be more desirable to consumers or may make our products and services obsolete.
Our competitors range
in size from diversified global companies with significant research and development resources to small, specialized firms whose
narrower service lines may let them be more effective in deploying technical, marketing, and financial resources. Barriers to entry
in many of our businesses are low and many of the areas in which we compete evolve rapidly with changing and disruptive technologies,
shifting user needs, and frequent introductions of new products and services. Our ability to remain competitive depends on our
success in making innovative products, devices, and services that appeal to customers.
Companies compete with
us based on a growing variety of business models. The competitive pressures described above may cause decreased sales volumes,
price reductions, and/or increased operating costs, such as for research and development, marketing, and sales incentives. This
may lead to lower revenue, gross margins, and operating income.
There are currently
several different competing Gig Economy oriented staffing management product and service technologies that are being marketed to
our potential customers. Further development of any of these technologies may lead to advancements in technology that will make
our products and services obsolete. Consumers may prefer alternative technologies and products and services. We cannot guarantee
that users of Gig Economy oriented staffing management products and services who will be using our products and services will continue
to grow within the industry as a whole. Any developments that contribute to the obsolescence of our products and services may substantially
impact our business, reducing our ability to sustain generating revenues.
Providing specialized Gig Economy
oriented staffing management products and services is an emerging yet competitive business, and many of our competitors have greater
resources that may enable them to compete more effectively.
We will compete in
the same markets with many companies that offer not only staffing management products and services focused on the Gig Economy but
also more traditional staffing management products and services. There are limited barriers to entry. Price competition in the
industry, particularly from larger, more traditional industry model competitors, is intense, and pricing pressures from competitors
and clients are increasing. New competitors entering our markets may further increase pricing pressures.
Clients may competitively
bid new contracts; a trend is expected to continue for the foreseeable future. Some of our competitors have greater resources than
we do, which may enable them to compete more effectively in this market. Our competitors may devote their resources to developing
and marketing products and services that will directly compete with our product lines, and new, more efficient competitors may
enter the market. If we are unable to successfully compete with existing companies and new entrants to the market this will have
a negative impact on our business and financial condition.
We operate in an immature and rapidly
evolving industry and have a relatively new business model, which makes it difficult to evaluate our business and prospects.
The industry in which
we operate is characterized by rapidly changing regulatory requirements, evolving industry standards and shifting user and client
demands. Our business model is also evolving and is different from models used by other companies in our industry. As a result
of these factors, the success and future revenue and income potential of our business is uncertain. Any evaluation of our business
and our prospects must be considered in light of these risks and uncertainties, some of which relate to our ability to:
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Expand employer and employee client relationships;
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Increase the number of our employer clients and grow a WSE base;
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Develop relationships with third-party vendors such as insurance companies;
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Expand operations and implement and improve our operational, financial and management controls;
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Raise capital at attractive costs, or at all;
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Attract and retain qualified management, employees and independent service providers;
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Successfully introduce new processes, technologies products and services and upgrade our existing processes, technologies, products and services;
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Protect our proprietary processes and technologies and our intellectual property rights; and
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Respond to government regulations relating to the internet, personal data protection, email, software technologies, cyber security and other regulated aspects of our business.
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If we are unable to
successfully address the challenges posed by operating in an immature and rapidly evolving industry and having a relatively new
business model, our business could suffer.
We have claims and lawsuits against
us that may result in adverse outcomes.
We are subject to a variety of claims and
lawsuits. These claims may arise from a wide variety of business practices, significant business transactions, operational claims,
and employment practices. Adverse outcomes in some or all of these claims may result in significant monetary damages or injunctive
relief that could adversely affect our ability to conduct our business. The litigation and other claims are subject to inherent
uncertainties and management’s view of these matters may change in the future. A material adverse impact on our consolidated
financial statements could occur for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.
We have identified material weaknesses
in our internal control over financial reporting. If our internal control over financial reporting is not effective, we may not
be able to accurately report our financial results or file our periodic reports in a timely manner, which may cause adverse effects
on our business and may cause investors to lose confidence in our reported financial information and may lead to a decline in stock
price.
Effective internal
control over financial reporting is necessary in order to provide reliable financial reports in a timely manner. In connection
with the audit of our consolidated financial statements for the year ended August 31, 2019, we concluded that there were material
weaknesses in our internal control over financial reporting relating to our IT environment, controls over cut-off procedures, a
related party transaction, accounting for certain litigation accruals, segregation of duties and corporate oversight functions.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis.
If we are unable to
successfully remediate our material weaknesses or identify any future significant deficiencies or material weaknesses, the accuracy
and timing of our financial reporting may be adversely affected, a material misstatement in our consolidated financial statements
could occur, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports,
which may adversely affect our business and our stock price may decline as a result. In addition, even if we remediate our material
weaknesses, we will be required to expend significant time and resources to further improve our internal controls over financial
reporting, including by further expanding our finance and accounting staff to meet the demands that are placed upon us as a public
company, including the requirements of the Sarbanes-Oxley Act. If we fail to adequately staff our accounting and finance function
to remediate our material weaknesses, or fails to maintain adequate internal control over financial reporting, any new or recurring
material weaknesses could prevent us from concluding our internal control over financial reporting is effective and impair our
ability to prevent material misstatements in our consolidated financial statements, which could cause our business to suffer.
If we are unable to secure or pay
for the insurance coverage required for our business operations, or if we lose any existing coverage, we may not be able to offer
some of our services and our revenues could be reduced.
We are required to
obtain and maintain various types of insurance coverage for our business, in particular health and workers’ compensation
insurance related to our employees. Although we have contracts with all types of providers currently necessary for our business,
if in the future we are unable to secure the insurance coverage required for our business operations, or if we lose any existing
coverage, we may not be able to offer some of our services and our revenues could be reduced. In addition, any increases in the
cost of insurance coverage we are required to maintain could reduce profitability (or increase net losses).
We provide limited self-insurance
for our workers’ compensation services provided to our clients. If we have claims in excess of our collected premiums we
may incur additional losses. Workers’ compensation costs for shifter employees may rise and reduce our margins and require
more liquidity.
We are responsible
for and pay workers’ compensation costs for our shift workers. We currently provide self-insurance for up to $500,000 per
occurrence and purchase reinsurance for claims in excess of $500,000. Our workers’ compensation billings are designed to
cover expected claims based on insurance annuity calculations. These calculations are based on our limited operating history and
claims experiences due to our limited operating history. At times, these costs have risen substantially as a result of increased
claims and claim trends, general economic conditions, changes in business mix, increases in healthcare costs, and government regulations.
Although we carry insurance and currently have reserves in excess of projected losses, unexpected changes in claim trends, including
the severity and frequency of claims, actuarial estimates, and medical cost inflation could result in costs that are significantly
different than initially reported. If future claims-related liabilities increase due to unforeseen circumstances, or if new laws,
rules, or regulations are passed, costs could increase significantly. There can be no assurance that we will be able to increase
the fees charged to clients in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in
claims-related liabilities.
We may be subject to penalties and
interest payable on taxes as a result of data entry into our software or manual error.
Our input of data in
our tax processing software must be entered properly in order to process the data and payments correctly with regard to clients,
employees and applicable tax agencies. If we input incorrect data or input accurate data incorrectly, we could inadvertently overbill
or underbill our clients or overpay or underpay applicable taxes, resulting in the loss of net income and/or clients and/or the
incurrence of tax penalties and interest. Despite our efforts to reconcile taxes on a monthly basis, we may incur additional taxes,
penalties and interest for which we may or may not bill our clients.
Our ability to adjust and collect
service fees for increases in unemployment tax rates may be limited.
We record our State
Unemployment Tax (“SUI”) expense based on taxable wages and tax rates assigned by each state. SUI tax rates vary by
state and are determined, in part, based on prior years’ compensation experience in each state. Prior to the receipt of final
tax rate notices, we estimate our expected SUI tax rate in those states for which tax rate notices have not yet been received for
purposes of pricing. In a period of adverse economic conditions state unemployment funds may experience a significant increase
in the number of unemployment claims. Accordingly, SUI tax rates would likely increase substantially. Some states have the ability
under law to increase SUI tax rates retroactively to cover deficiencies in the unemployment fund.
In addition, taxes
under the Federal Unemployment Tax Act (“FUTA”) may be retroactively increased in certain states in the event the state
fails to timely repay federal unemployment loans. Employers in such states are experiencing higher FUTA tax rates as a result of
not repaying their unemployment loans from the federal government in a timely manner. The credit reduction is an additional tax
on the FUTA wage base for employers in states that continue to have outstanding federal unemployment insurance loans beginning
with the fifth year in which there is a balance due on the loan. States have the option to apply for a waiver before July 1st of
the year in which the credit reduction is applicable.
Generally, our contractual
agreements allow us to incorporate such statutory tax increases into our service fees upon the effective date of the rate change.
However, our ability to fully adjust service fees in our billing systems and collect such increases over the remaining term of
the clients’ contracts could be limited, resulting in a potential tax increase not being fully recovered. As a result, such
increases could have a material adverse effect on our financial condition or results of operations.
Our business, results of operations
and financial condition have been and may continue to be materially adversely impacted by public health epidemics, including the recent
coronavirus outbreak.
Our business, results
of operations and financial condition have been, and may continue to be, materially adversely impacted by public health epidemics,
including the recent outbreak of COVID-19 first identified in Wuhan, China in December 2019. On March 11, 2020, the World Health
Organization declared COVID-19 a pandemic disease. Potential impacts of the spread of COVID-19 include disruptions or restrictions
on our employees’ and worksite employees’ ability to travel and temporary closures of the facilities of our clients.
For example, many of our worksite employees perform services in the restaurant and hospitality industries, and since early March
2020, there has been significant decline in restaurant and hotel traffic. Government agencies have since declared a state of emergency
in the U.S., and some have restricted movement, required restaurant, bar and hotel closures, and advised people not to visit restaurants
or bars and otherwise restrict non-essential travel. In some jurisdictions, people have been instructed to shelter in place to
reduce the spread of COVID-19, in response to which restaurants have temporarily closed and have shifted operations at others
to provide only take-out and delivery service. Travel and tourism across the globe has significantly decreased, in response to
which hotels have temporarily closed and furloughed employees. Additionally, California’s governor recently issued
Executive Order N-62-20, which creates a rebuttable presumption for workers’ compensation claims that an employee’s
COVID-19 related illness arose out of the course of their employment if such such infection occurred between March 19 and July
5, 2020 and the employee was diagnosed with COVID-19 or tested positive for it within 14 days after performing work for the employer
at a location other than the employee’s home. While we have not observed additional expenses as a result of any such claims,
we continue to closely monitor all workers’ compensation claims made during the COVID-19 pandemic. All of these developments
and similar developments that have occurred as a result of the spread of COVID-19 negatively affect our clients and the ability
of our worksite employees to perform services. As a result, we expect our results of operations to continue to be materially and
negatively affected by these actions.
Additionally, our headquarters
are located in Irvine, CA in Orange County, a region that has seen a recent rise of confirmed cases of COVID-19. We are continuing
to monitor and assess the effects of the COVID-19 outbreak on our commercial operations, including any potential impact on our
revenue in 2020. However, we cannot at this time accurately predict what effects these conditions will ultimately have on our operations
due to uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the
outbreak, and the length of the travel restrictions and business closures imposed by the governments of impacted countries. In
addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that
could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect
demand for our products and likely impact our operating results.
Risks Relating to Technology
We collect, use, transmit and store
personal and business information with the use of data service vendors, and a security or privacy breach may damage or disrupt
our businesses, result in the disclosure of confidential information, damage our reputation, increase our costs or cause losses.
In connection with
our business, we collect, use, transmit and store with data services vendors large amounts of personal and business information
about our clients and shift employees, including payroll information, healthcare information, personal and limited business financial
data, social security numbers, bank account numbers, tax information and other sensitive personal and business information. In
addition, as we continue to grow the scale of our business, we will process and store with data services vendors an increasing
volume of personally identifiable information of our users. Our data services vendors include PrismHR, Amazon Web Services, Microsoft
OneDrive, ShareFile, Dropbox, Egnyte, Smartsheet, MasterTax, Microsoft Outlook, Microsoft Office 365, and RightSignature; we believe
these vendors implement industry standard or more stringent data security measures to protect the data that we transmit through
and/or store with them. Despite our efforts to protect customer data, perceptions that the collection, use, and storage of personal
information are not satisfactorily protected could inhibit sales of our services and could limit adoption of our services. In addition,
the continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information
security.
We are focused on ensuring
that our operating environments safeguard and protect personal and business information, and we will devote significant resources
to maintain and regularly update our systems and processes. The cost to maintain these safeguards is significant and may increase
as we grow, which may limit our ability to employ our resources elsewhere and slow our ability to grow. Despite our efforts to
maintain security controls across our business, it is possible our security controls over personal data, our training of employees
and vendors on data security, and other practices we follow may not prevent the improper disclosure of customer data we or our
vendors store and manage. In addition, attacks on information technology systems continue to grow in frequency, complexity and
sophistication, and we may be targeted by unauthorized parties using malicious tactics, code and viruses.
We have third party
contractors who monitor our activities in a manner designed to prevent, detect and respond to data security incidents. However,
because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and
may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive
measures. In addition, hardware, software, or applications we develop or procure from third-parties may contain defects in design
or manufacture or other problems that could unexpectedly compromise the confidentiality, integrity or availability of data or our
systems. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third-parties with whom
we do business, through fraud, trickery, or other methods of deceiving our employees, contractors, or temporary staff. As these
threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information
security and controls or to investigate and remediate any security vulnerabilities. In addition, while our operating environment
is designed to safeguard and protect personal and business information, we do not have the ability to monitor the implementation
of similar safeguards by our clients, vendors or their respective employees, and, in any event, third-parties may be able to circumvent
those security measures.
Any cyber-attack,
unauthorized intrusion, malicious software infiltration, network disruption, denial of service, corruption of data, theft of non-public
or other sensitive information, any similar act by a malevolent party, or inadvertent acts by our own employees, could result
in the disclosure or misuse of confidential or proprietary information, harm our reputation, and could have a materially adverse
effect on our business operations, or that of our clients, create financial liability, result in regulatory sanction, or generate
a loss of confidence in our ability to serve clients or cause current or potential clients to choose another service provider,
or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. Although we
believe that through our third-party contractors we maintain a program of information security and controls and any threats that
we might have encountered to date have not materially impacted us, the impact of a data security incident could have a materially
adverse effect on our business, results of operations and financial condition. While we have insurance coverage for risks for
exchanging and maintaining data electronically that is designed to address certain aspects of cyber-risks, such insurance coverage
may be denied or be insufficient to cover all losses or all types of claims that may arise in the continually evolving area of
cyber-risk. In addition, any further security measures we may undertake to address further protections may cause higher operating
expenses.
We are also subject
to various federal and state laws, rules and regulations relating to the collection, use, transmission and security of personal
and business information. In addition, the possession and use of personal information and data in conducting our business subjects
us to laws that may require notification to regulators, clients or employees in the event of a privacy breach and may impose liability
on us for privacy deficiencies, including but not limited to liability under laws that protect the privacy of personal information,
such as the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and regulatory penalties. These
laws continue to develop, the number of jurisdictions adopting such laws continues to increase, and these laws may be inconsistent
from jurisdiction to jurisdiction. The future enactment of more restrictive laws, rules or regulations could have a materially
adverse impact on us through increased costs or restrictions on our businesses and noncompliance could result in regulatory penalties
and significant legal liability. In addition, enforcement actions and investigations by regulatory authorities related to data
security incidents and privacy violations continue to increase.
Some of the activities
in which our shift workers could become involved include health care information-related responsibilities that could invoke the
need for compliance with HIPAA as amended by the Health Information Technology for Economic and Clinical Health Act (the “HITECH
Act”). The United States Department of Health and Human Services issued regulations that establish uniform standards governing
the conduct of certain electronic health care transactions and protecting the privacy and security of protected health information
used or disclosed by health care providers and other covered entities. Three principal regulations with which we are required to
comply have been issued in final form under HIPAA: privacy regulations, security regulations, and standards for electronic transactions,
which establish standards for common health care transactions. The privacy regulations cover the use and disclosure of protected
health information by health care providers. They also set forth certain rights that an individual has with respect to his or her
protected health information maintained by a health care provider, including the right to access or amend certain records containing
protected health information or to request restrictions on the use or disclosure of protected health information. The security
regulations establish requirements for safeguarding the confidentiality, integrity, and availability of protected health information
that is electronically transmitted or electronically stored. The HITECH Act, among other things, establishes certain health information
security breach notification requirements. A covered entity must notify any individual whose protected health information is breached.
The HIPAA privacy and security regulations establish a uniform federal “floor” and do not supersede state laws that
are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their
records containing protected health information. These laws contain significant fines and other penalties for wrongful use or disclosure
of protected health information. Additionally, to the extent that we submit electronic health care claims and payment transactions
that do not comply with the electronic data transmission standards established under HIPAA and the HITECH Act, payments to us may
be delayed or denied.
We may be vulnerable to security
breaches that could disrupt our operations and adversely affect our business.
Despite security measures
and business continuity plans, our information technology networks and infrastructure may be vulnerable to damage, disruptions,
or shutdowns due to unauthorized access, computer viruses, cyber-attacks, distributed denial of service, and other security breaches.
An attack on or security breach of our network could result in interruption or cessation of access and services, our inability
to meet our access and service level commitments, and potentially compromise customer data transmitted over our network. We cannot
guarantee that our security measures will not be circumvented, resulting in network failures or interruptions that could impact
our network availability and have a material adverse effect on our business, financial condition, and results. We may be required
to expend significant resources to protect against such threats. If an actual or perceived breach of our security occurs, the market
perception of the effectiveness of our security measures could be harmed, and we could lose customers. Any such events could result
in legal claims or penalties, disruption in operations, misappropriation of sensitive data, damage to our reputation, and/or costly
response measures, which could adversely affect our business. Although we maintain insurance coverage that may, subject to policy
terms and conditions (including self-insured deductibles, coverage restrictions and monetary coverage caps), cover certain aspects
of our cyber risks, such insurance coverage may be unavailable or insufficient to cover our losses.
If we are unable to protect
our proprietary and technology rights our operations will be adversely affected.
Our success will depend
in part on our ability to protect our proprietary rights and technologies, including those related to our products and services.
Protecting our intellectual property rights and combating unlicensed copying and use of our software and other intellectual property
is difficult. Except as otherwise noted herein, we have not applied for any formal patent, trademark or similar protection. Our
failure to adequately protect our proprietary rights may adversely affect our operations. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use trade secrets or other information
that we regard as proprietary. Based on the nature of our business, we may or may not be able to adequately protect our rights
through patent, copyright and trademark laws. Our means of protecting our proprietary rights in the United States or abroad may
not be adequate, and competitors may independently develop similar technologies. In addition, litigation may be necessary in the
future to:
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Enforce intellectual property rights;
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Protect our trade secrets;
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Determine the validity and scope of the rights of others; or
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Defend against claims of infringement or invalidity.
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Any such litigation
could result in substantial costs if we are held to have willfully infringed or to expend significant resources to develop non-infringing
technology and would divert the attention of management from the implementation of our business strategy. Furthermore, the outcome
of litigation is inherently difficult to predict and we may not prevail in any litigation in which we become involved.
Software products we use in our business
may contain defects which will make it more difficult for us to establish and maintain customers.
We are currently using
PrismHR software for our payroll processing. We also use MasterTax to process our tax reports and filings. We also use a host of
other software products in the course of conducting our business. The mobile app component of our mobile application, along with
the client portal and the ShiftPixy Command Hub, constitute our proprietary software and contain components that are licensed from
third parties and that are public domain software. Our payroll processing software and other software products, including our mobile
application, we use in our business may contain undetected design faults and software errors, or “bugs” that are discovered
only after they has been installed and used by a greater number of customers. Any such defect or error in new or existing software
or applications could cause delays in delivering our technology or require design modifications. These could adversely affect our
competitive position and cause us to lose potential customers or opportunities. Since our technologies are intended to be utilized
to supply human resources related services, the effect of any such bugs or delays will likely have a detrimental impact on us.
In addition, given that our specialized human resources software and services has yet to gain widespread acceptance in the market,
any delays or other problems caused by software bugs would likely have a more detrimental impact on our business than if we were
a more established company.
If a contract relating to our mission
critical software that we use in our business is terminated or not renewed, our business could be seriously disrupted and our revenues
significantly reduced.
If a contract relating
to our mission-critical software services, such as that applicable to payroll and payroll tax processing, is terminated or non-renewed,
and we do not have an effective replacement software, our business and revenues would suffer. Although there are other software
vendors we can use, it may take time to negotiate an agreement and make operational this replacement software. Accordingly, if
the software agreements that we use in our business are terminated or not renewed, our business could be seriously disrupted and
our revenues significantly reduced until we locate and make operational replacement software.
Our systems may be subject to disruptions
that could have a materially adverse effect on our business and reputation.
Our business is and
will continue to be highly dependent on our ability to process, on a daily basis, a large number of complicated transactions. We
rely heavily on our payroll, financial, accounting, and other data processing systems. We may not be successful in preventing the
loss of client data, service interruptions or disruptions to our operations from system failures. If any of these systems fails
to operate properly or becomes disabled even for a brief period of time, we could suffer financial loss, a disruption of our businesses,
liability to clients, regulatory intervention, or damage to our reputation, any of which could have a materially adverse effect
on our results of operation or financial condition.
Because we store data in the cloud
with providers such as Microsoft and Amazon, any disruptions in our ability to access this data or any breach of security concerning
this data in the cloud could have a materially adverse effect on our business and reputation.
Our business is and
will continue to be highly dependent on data storage in the cloud with providers such as Microsoft and Amazon. These cloud storage
systems may fail to operate properly or become disabled even for a brief period of time. There could also be security breaches
of our data stored in the cloud. If there is loss of client data, service interruptions or disruptions to our operations related
to our cloud data storage, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention,
or damage to our reputation, any of which could have a materially adverse effect on our results of operation or financial condition.
We make significant investments in
our software that may not achieve our expectations.
Developing new technologies
is complex. It can require long development and testing periods. Significant delays in new releases or significant problems in
creating new products or services could adversely affect our revenue.
Third parties may claim we infringe
their intellectual property rights.
From time to time,
others claim we infringe their intellectual property rights. The number of these claims may grow because of constant technological
change in the markets in which we compete, the extensive patent coverage of existing technologies and the rapid rate of issuance
of new patents. To resolve these claims, we may enter into royalty and licensing agreements on terms that are less favorable than
currently available, stop selling or redesign affected products or services, or pay damages to satisfy indemnification commitments
with our customers. These outcomes may cause operating margins to decline. Besides money damages, in some jurisdictions plaintiffs
can seek injunctive relief that may limit or prevent importing, marketing, and selling our products or services that have infringing
technologies.
We may not be able to protect our
source code from copying if there is an unauthorized disclosure of source code.
Source code, the detailed
program commands for our operating systems and other software programs, is critical to our business. We take significant measures
to protect the secrecy of large portions of our source code. If a significant portion of our source code leaks, we might lose future
trade secret protection for that source code. It may become easier for third parties to compete with our products by copying functionality,
which could adversely affect our revenue and operating margins. Unauthorized disclosure of source code also could increase the
security risks described in the next paragraph.
We may have outages, data losses,
and disruptions of our online services if we fail to maintain an adequate operations infrastructure.
Our increasing user
traffic, growth in services, and the complexity of our services demand more computing power. We spend substantial amounts to build,
purchase, or lease datacenters and equipment and to upgrade our technology and network infrastructure to handle more data. These
demands continue to increase as we grow our workforce. Maintaining, securing, and expanding this infrastructure is expensive and
complex. It requires that we maintain an internet connectivity infrastructure that is robust and reliable within competitive and
regulatory constraints that continue to evolve. Inefficiencies or operational failures, including temporary or permanent loss
of customer data or insufficient internet connectivity, could diminish the quality of our products, services, and user experience
resulting in contractual liability, claims by users and other third parties, regulatory actions, damage to our reputation, and
loss of current and potential users, subscribers, and advertisers, each of which may harm our operating results and financial
condition.
Our software may experience quality
or supply problems.
Our software may experience
quality or reliability problems. The highly-sophisticated software we have been developing may contain bugs and other defects that
interfere with their intended operation. Any defects we do not detect and fix in pre-release testing could cause reduced sales
and revenue, damage to our reputation, repair or remediation costs, delays in the release of new products or versions, or legal
liability. Although our license agreements typically contain provisions that eliminate or limit our exposure to liability, there
is no assurance these provisions will withstand legal challenge.
We intend to use open source blockchain
technology in our technology platform. This technology has been scrutinized by regulatory agencies and therefore we may be impacted
by unfavorable regulatory action in one or more jurisdictions.
We intend to use open
source blockchain technology as a secure repository for “device reputation” information acquired by our technology
platform. Blockchain technologies have been the subject of scrutiny by various regulatory bodies around the world. We could be
impacted by one or more regulatory inquiries or actions, including but not limited to restrictions on the use of blockchain technology,
which could impede or limit the use of this technology within our product offerings.
We intend to use and leverage open
source technology in our technology platform which may create risks of security weaknesses.
Some parts of our technology
may be based on open-source technology, including the blockchain technology that we intend to use in our technology platform. There
is a risk that the development team, or other third parties may intentionally or unintentionally introduce weaknesses or bugs into
the core infrastructure elements of our technology solutions interfering with the use of such technology or causing loss to us.
Risks Relating to Management and Personnel
We depend heavily on Scott W. Absher,
our Chief Executive Officer and a director. The loss of his services could harm our business.
Our future business
and results of operations depend in significant part upon the continued contributions Scott W. Absher, our Chief Executive Officer
and a director. If we lose his services or if he fails to perform in his current position, or if we are not able to attract and
retain skilled employees in addition to Mr. Absher, this could adversely affect the development of our business plan and harm our
business.
Mr. Absher has limited experience
managing a public company, which may inhibit our ability to implement successfully our business plan.
Mr. Absher has limited
experience managing a public company, which is required to establish and maintain disclosure controls and procedures and internal
control over financial reporting. We are endeavoring to comply with all of the various rules and regulations, which are required
for a public company that is reporting company with the Securities and Exchange Commission. However, if we cannot operate successfully
as a public company, your investment may be materially adversely affected.
If we are not recognized as an employer
of WSEs under federal and state regulations, or we are deemed to be an insurance agent or third-party administrator, we and our
clients could be adversely impacted.
While in our client
engagements we typically arrange for clients to act as sponsor of employee benefit plans, we sponsor the benefit
plans applicable to its employees. In order for us to sponsor employee benefit plan offerings for our WSEs, we must qualify as
an employer of our WSEs for certain purposes under the Code and the Employee Retirement Income Act of 1974, as amended (“ERISA”).
In addition, our status as an employer is important for purposes of ERISA’s preemption of certain state laws. The definition
of employer under various laws is not uniform, and under both the Code and ERISA, the term is defined in part by complex multi-factor
tests.
Generally, these tests
are designed to evaluate whether an individual is an independent contractor or employee and they provide substantial weight to
whether a purported employer has the right to direct and control the details of an individual’s work. Some factors that the
IRS has considered important in the past have included the employer’s degree of behavioral control (the extent of instructions,
training and the nature of the work), the financial control and the economic aspects of the relationship, and the intent of the
parties, as evidenced by the specific benefit, contract, termination and other similar arrangements between the parties and the
on-going versus project-oriented nature of the work to be performed. However, a definitive judicial interpretation of “employer”
in the context of joint employer relationships such as those in which we engage has not been established. For ERISA purposes, for
example, courts have held that test factors relating to ability to control and supervise an individual are less important, while
the U.S. Department of Labor has issued guidance that certain entities in the HR outsourcing industry do not qualify as common
law employers for ERISA purposes. Moreover, when our app is fully functional, the scope of our employer status will increase, changing
the legal analysis. Although we believe that we qualify as an employer of our WSEs under ERISA, and the U.S. Department of Labor
has not provided guidance otherwise, we are not able to predict the outcome of any future regulatory challenge.
If we are not recognized
as an employer under the Code or ERISA, we may be required to change the method by which we report and remit payroll taxes to the
tax authorities and the method by which we provide, or discontinue providing, certain employee benefits to our WSEs, which could
have a material adverse effect on our business and results of operations.
We may also need to
qualify as an employer of our WSEs under state regulations, which govern licensing, certification and registration requirements.
Nearly all states have enacted laws and regulations in this regard. While we believe that we qualify as an employer of our WSEs
under these state regulations, these requirements vary from state to state and change frequently and if we are not able to satisfy
existing or future licensing requirements or other applicable regulations of any states, we may be prohibited from doing business
in that state.
Our business depends on our ability
to attract and retain talented employees.
Our business is
based on successfully attracting and retaining talented employees. The market for highly skilled workers and leaders in our industry
is extremely competitive. If we are less successful in our recruiting efforts, or if we cannot retain key employees, our ability
to develop and deliver services successfully may be adversely affected. If we cannot hire additional qualified personnel, we may
continue to have internal control weaknesses. Effective succession planning is also important to our long-term success. Failure
to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and
execution. How employment-related laws are interpreted and applied to our workforce practices may result in increased operating
costs and less flexibility in how we meet our workforce needs.
Lapses in our employee screening
process may harm our reputation or relationship with clients, or result in litigation, which may impact our financial condition.
Our business model
is dependent on hiring employees who will provide high quality service for our clients. Lapses in our screening process my result
in employees being hired who are not up to the standard expected by our clients. This may hurt our relationship with our clients
or result in their decision to look elsewhere, which would negatively impact our ability to remain in business. Criminal behavior
by our employees resulting from a lapse in our screening process may subject us to litigation from our clients or government regulators,
which may also be costly and/or damage our reputation.
We are in the business of providing
employees to clients, and there is a risk that we will be sued and/or held liable for claims resulting from actions by or against
our employees.
We employ people internally
and in the workplaces of other businesses. Our ability to control the workplace environment of our clients is limited. Further,
many of these individuals have access to client information systems and confidential information. As the employer of record of
our contract professionals, we incur a risk of liability to our contract professionals for various workplace events, including
claims of physical injury, discrimination, harassment or failure to protect confidential personal information. Other inherent risks
include possible claims of errors and omissions; intentional misconduct; release, misuse or misappropriation of client intellectual
property; employment of illegal aliens; criminal activity; torts; or other claims. The claims can carry significant financial penalties
and damages.
We have not had significant
claims for damages or losses from actions of our employee workers to date. However, there is a risk that we will be subject to
such claims in the future and may be held liable even if our contribution to the injury is minimal or absent. We may also be required
to indemnify our clients against claims brought against them by or against our employees. Even if we are successful in defending
against these claims the costs of mounting our defense may be significant and damaging to us. We may incur reputational costs and/or
be subject to investigations by public agencies, along with the associated negative publicity. We may lose clients as a result
claims against us.
To protect ourselves,
we carry a staffing liability program commercial insurance policy. We believe the insurance coverage is appropriate for a company
of our size and function. The policy provides coverage with respect to: (1) “wrongful employment acts” committed against
our “employees” pursuant to our agreement with that client; and (2) A “staffing services worker’s acts”
committed while in the service of our client that result in a “wrongful business environment.” No insurance policy
is without risk. A claim against us may not be covered by this plan, such as wage and hour disputes which are on the rise nationally.
The insurer may seek to disclaim liability as not covered or for other reasons or the amount of judgment against us may exceed
the policy limits. If we are unable to maintain adequate insurance coverage,
we may be exposed to substantial liabilities. Any claims for damages against us as a result of actions of our work employees
could damage our reputation, increase our expenses and reduce our profitability (or increase net losses) and revenues.
Catastrophic events or geopolitical
conditions may disrupt our business.
Monetary and fiscal
policies and political and economic conditions may substantially change. When there is a slowdown in the economy, employment levels
may decrease with a corresponding impact on our businesses.
Clients may react to
worsening conditions by reducing their spending on payroll and other outsourcing services or renegotiating their contracts with
us.
Worsening economic
conditions, including inflation, recession, or other changes in economic conditions, may cause businesses to rely less on vendors
in our business, which could adversely affect our revenue. If demand for our services declines, or business spending for such services
declines, our revenue will be adversely affected.
Challenging economic
conditions also may impair the ability of our customers to pay for products and services they have purchased. As a result, allowances
for doubtful accounts and write-offs of accounts receivable may increase.
We are dependent upon
various large banks to execute Automated Clearing House and wire transfers as part of our client payroll and tax services. A systemic
shutdown of the banking industry would impede our ability to process funds on behalf of our payroll and tax services clients and
could have an adverse impact on our financial results and liquidity.
A disruption or
failure of our systems or operations because of a major earthquake, weather event, cyber-attack, terrorist attack, fire, pandemic,
or other catastrophic event could cause delays in completing sales, providing services, or performing other critical functions.
Our corporate headquarters, a significant portion of our research and development activities, and certain other essential business
operations are in the Irvine, California area, which is a seismically active region. A catastrophic event that results in the
destruction or disruption of any of our critical business or IT systems could harm our ability to conduct normal business operations.
California has also experienced destructive fires recently. As a result of these fires, power and utilities are occasionally shut
off to parts of the State. A fire or risk of fire may result in damage to our facilities, the temporary or permanent shut down
of our or our clients’ facilities, disruption to our power supply or utilities, or other disruptions that may harm our ability
to conduct business.
Abrupt political change
and terrorist activity may pose threats to our business and increase our operating costs. These conditions also may add uncertainty
to the timing and budget for technology investment decisions by our customers and may cause supply chain disruptions for hardware
manufacturers. Geopolitical change may result in changing regulatory requirements that could impact our operating strategies, hiring,
and profitability.
Risks Relating to Regulations and Compliance
Failure to comply with, or changes
in, laws and regulations applicable to our business, particularly potential changes to the Patient Protection and Affordable Care
Act (the “ACA”), could have a materially adverse effect on our marketing plan as well as our reputation, results of
operations or financial condition, or have other adverse consequences.
Our business is
subject to a wide range of complex laws and regulations. For example, many states regulate entities offering the employment related
services such as those offered by us directly or through our subsidiary and require licenses as a prerequisite to operation of
such enterprises in their respective jurisdictions. There can be no assurance that either we or our subsidiary, ReThink, will
be successful in either securing or maintaining a license or licenses in compliance with a particular state’s laws and regulations.
Further, many states require variously that workers’ compensation policies offered by employment related firms such as ours
to be managed according to strict rules and/or that unemployment insurance filings be administered according to strict rules.
Failure to comply with
such laws and regulations could result in the suspension or revocation of licenses or registrations, the limitation, suspension
or termination of services, and the imposition of consent orders or civil and criminal penalties, including fines, that could damage
our reputation and have a materially adverse effect on our results of operation or financial condition.
In addition, changes
in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, may decrease our revenues
and earnings and may require us to change the manner in which we conduct some aspects of our business. For example, a change in
regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to government authorities
would adversely impact interest income from investing client funds before such funds are remitted to the applicable taxing authorities.
Changes in taxation regulations could adversely affect our effective tax rate and our net income. Changes in laws that govern the
co-employment arrangement between a professional employer organization (“PEO”) and its WSEs may require us to change
the manner in which we conduct some aspects of our business.
Changes to the ACA,
as amended, related state laws, and the regulations adopted or to be adopted thereunder, have the potential to impact substantially
the way that employers provide health insurance to employees and the health insurance market for the small and mid-sized businesses
that constitute our business’s clients and prospects. If the ACA is repealed or replaced, the elimination of employer mandates
and similar employer requirements currently imposed by the ACA, and other regulatory changes could in the future reduce our revenues.
Amendments to money transmitter statutes have required us to obtain licenses in some jurisdictions. The adoption of new money transmitter
statutes in other jurisdictions, changes in regulators’ interpretation of existing state and federal money transmitter or
money services business statutes or regulations, or disagreement by a regulatory authority with our interpretation of such existing
statutes or regulations, could require additional registration or licensing, limit certain business activities until they are appropriately
licensed, and expose us to financial penalties. These occurrences could also require changes to our compliance programs and to
the manner in which we conduct some aspects of our money movement business or client funds investment strategy, which could adversely
impact interest income from investing client funds before such funds are remitted.
Failure to secure any necessary registrations
or licensure could affect our ability to operate certain segments of our business in certain jurisdictions.
Some states require
licensure or registration of businesses offering PEO services. While some elements of our service offering overlap with PEO services,
our human capital platform is more in line with a traditional staffing model. However, if we need and are unable to secure registration
or licensure of such service offering in a particular state, our ability to grow that segment of our business in such state would
be impaired and could affect our ability to increase our revenues and meet certain customer requirements in such states.
We may be subject to Private Attorney
General’s Act (“PAGA”) claims which we may require additional capital to defend.
Our work force resides
mostly in the State of California. Employment laws in the State of California can be complex and undefined where a co-employment
or human capital platform relationship exists, both of which are contemplated in our current business and our future plans. The
existence of a PAGA allows plaintiffs’ attorneys to bring class action-like lawsuits against employers which can result in
substantial costs to defend and may result in large fines for seemingly insignificant or inadvertent clerical errors. As we move
more into these areas, the risk will increase that such PAGA claims will be filed and litigated which may result in increased costs
to us.
Laws related to the classification
of a Gig Economy workers are changing, and we may be subject to state and local regulations impacting how we classify our workers.
A significant portion
of our business is located in the State of California which recently passed AB-5 relating to the classification of certain gig
workers as employees instead of independent contractors. Other states such as New York and New Jersey, two of our potential markets,
are also considering similar legislation. We anticipate that classification status will continue to be an unsettled area of law
for the foreseeable future. Changes in classification can result in a change to the payment of wages, tax withholding, and providing
unemployment, health, and other traditional employer-employee related benefits. While we currently classify all of our WSEs as
employees, our business plans potentially include the use of large numbers of independent contractors. If we are unable to utilize
independent contractors, or the cost to use independent contractors is more expensive, our future growth opportunities may be limited
or reduced. Costs or delays associated with revising our services to account for changes in the status of employees and independent
contractors may have a significant impact on our future growth. Changes to the law may impact the desirability or applicability
of our business model, which could impact our ability to continue as a going concern.
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial
risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance.
In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,”
“should,” “expects,” “plans,” “anticipates,” “could,” “intends,”
“target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of these words or other similar terms or expressions that concern
our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited
to, statements about:
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our future financial performance, including our revenue, costs of revenue and operating expenses;
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our ability to achieve and grow profitability;
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the sufficiency of our cash, cash equivalents and investments to meet our liquidity needs;
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our predictions about industry and market trends;
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our ability to successfully expand internationally;
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our ability to effectively manage our growth and future expenses;
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our estimated total addressable market;
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our ability to maintain, protect and enhance our intellectual property;
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our ability to comply with modified or new laws and regulations applying to our business;
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the attraction and retention of qualified employees and key personnel;
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the effect COVID-19 could have on our business
and financial condition and the economy in general;
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our ability to successfully defend litigation brought against us; and
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our use of the net proceeds from this offering.
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We
caution you that the forward-looking statements highlighted above do not encompass all of the forward-looking statements made in
this prospectus.
We
have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about
future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The
outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described
in the section of this prospectus entitled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in
a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for
us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus.
We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or
occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The
forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake
no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date
of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may
not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place
undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures, other strategic transactions or investments we may make or enter into.
USE OF PROCEEDS
We
estimate that the net proceeds to us from this offering from the sale of the shares of our common stock, pre-funded warrants and
the accompanying purchase warrants will be approximately $10.5 million, or approximately $12.2 million if the underwriter
exercises its option to purchase additional shares in full, at the public offering price
of $5.40, and after deducting underwriting discounts and commissions and offering expenses, and excluding the proceeds, if any,
from the exercise of the pre-funded warrants and the purchase warrants issued in this offering.
We
are undertaking this offering in order to access the public capital markets and to increase our liquidity. We intend to use the
net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital
expenditures. Our management will have broad discretion in the application of the net proceeds.
The amounts and timing
of our use of the net proceeds from this offering for general corporate purposes will depend on a number of factors, such as the
timing and progress of our research and development efforts and the timing and progress of any collaborative or strategic partnering
efforts. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to
us from this offering. Accordingly, our management will have broad discretion in the timing and application of these proceeds.
DIVIDEND POLICY
We have never declared
dividends on our equity securities, and currently do not plan to declare dividends on shares of our common stock in the foreseeable
future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. The payment of
cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as
earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors.
Accordingly, you may
need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares
at or above the price you paid for them. See “Risk Factors — Risks Related to this Offering and Ownership of Our Common
Stock.” We have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment
may be limited to the value of our common stock.”
CAPITALIZATION
The following table
sets forth our cash and cash equivalents, as well as our capitalization, as of February 29, 2020 as follows:
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on an actual basis;
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on a pro forma basis, as adjusted for Senior Convertible Note exchanges and conversions to common shares between March 1, 2020 and April 15, 2020 (the “Convertible Note Exchanges and Conversions”), and;
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as adjusted basis, giving further effect to the receipt of estimated net proceeds from the sale of shares of common stock, pre-funded warrants and accompanying purchase warrants in this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and excluding the proceeds, if any, from the exercise of the pre-funded warrants and purchase warrants issued in this offering.
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As of February 29,
2020
Unaudited Selected
Condensed Balance Sheet Items
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Actual
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|
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Pro Forma Adjustments
for the Convertible Note Settlements(1)
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Total Pro Forma
Amounts
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Pro Forma
Adjustments for this
Offering(3)
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Pro Forma
as Adjusted for this
Offering(3)
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Cash
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$
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397,000
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|
|
$
|
-
|
|
|
$
|
397,000
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|
|
$
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10,530,000
|
|
|
$
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10,927,000
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All other current assets
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|
|
6,041,000
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|
|
|
-
|
|
|
|
6,041,000
|
|
|
|
|
|
|
|
6,041,000
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Transaction proceeds receivable
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|
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5,730,000
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|
|
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-
|
|
|
|
5,730,000
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|
|
|
|
|
|
|
5,730,000
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All other assets
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|
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6,804,000
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-
|
|
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6,804,000
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|
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6,804,000
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Total assets
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|
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18,972,000
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|
|
|
-
|
|
|
|
18,972,000
|
|
|
|
10,530,000
|
|
|
|
29,502,000
|
|
|
|
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|
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|
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Accounts Payable and Accrued Payroll
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|
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7,874,000
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|
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-
|
|
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7,874,000
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|
|
|
|
|
|
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7,874,000
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Convertible notes, net
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2,036,000
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(2,036,000
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)
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|
|
-
|
|
|
|
|
|
|
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-
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All other liabilities
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|
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9,503,000
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|
|
|
161,000
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)
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9,664,000
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|
|
|
|
|
|
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9,664,000
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Total liabilities
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|
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19,413,000
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(1,875,000
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)
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17,538,000
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|
|
-
|
|
|
|
17,538,000
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|
|
|
|
|
|
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|
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|
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Preferred stock, par value $0.0001 per share
— 50,000,000 shares authorized and no shares outstanding, actual; shares issued and outstanding, as adjusted
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|
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-
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|
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-
|
|
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Common stock, par value $0.0001 per share, 750,000,000
shares authorized, 1,103,593 shares deemed issued and outstanding, actual; shares issued and outstanding, as adjusted
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|
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-
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|
|
-
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|
|
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|
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Additional paid-in capital
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|
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37,620,000
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|
|
|
5,711,000
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|
|
43,331,000
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|
|
|
10,530,000
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|
|
|
53,861,000
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Accumulated deficit
|
|
|
(38,061,000
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)
|
|
|
(3,836,000
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)
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|
|
(41,897,000
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)
|
|
|
|
|
|
|
(41,897,000
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)
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Total shareholders’ equity (deficit)
|
|
|
(441,000
|
)
|
|
|
1,845,000
|
|
|
|
1,434,000
|
|
|
|
10,530,000
|
|
|
|
11,964,000
|
|
Total liabilities and shareholders’ equity (deficit)
|
|
$
|
18,972,000
|
|
|
$
|
-
|
|
|
$
|
18,972,000
|
|
|
$
|
10,530,000
|
|
|
$
|
29,502,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
29,600,000
|
|
|
|
-
|
|
|
|
29,600,000
|
|
|
|
10,530,000
|
|
|
|
40,130,000
|
|
|
(1)
|
In March 2020, we amended the December 2019 Exchange Notes to fix the conversion price at $9.20 per share of common stock and we exchanged $772,000 of the March 2019 Notes with full-ratchet anti-dilution price protection for $997,000 of amended March 2019 Notes with a fixed conversion price at $9.20 per share. We also amended, cancelled or had holders exercise for shares of common stock via cashless exercise all March 2019 Warrants which previously included full-ratchet anti-dilution protection in exchange for 82,653 shares of common stock and we issued 423,669 new warrants at an exercise price of $10.17 per share pursuant to the amendments to the March 2019 Notes and December 2019 Exchange Notes. Between March 1, 2019 and April 15, 2020 holders of $2,901,000 of note principal and accrued interest was converted into 315,308 shares of common stock. As of May 18, 2020, $997,000 of principal due September 12, 2020 remains which is carried at $0 for the purposes of the pro forma figures above. For further discussion of the Senior Convertible Notes, see “Description of Our Capital Stock – Debt and Equity Offerings.”
|
You should read this information in conjunction
with the information contained in “Use of Proceeds” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our financial statements and related notes in this prospectus.
DILUTION
If you invest in our
securities in this offering, your ownership interest will be diluted immediately to the extent of the difference between the public
offering price per share of our common stock and pre-funded warrant and the as adjusted net tangible book value per share of our
common stock after this offering.
Our historical net
tangible book deficit as of February 29, 2020 was $441,000, or $(0.02) per share of common stock. Historical net tangible book
value per share is calculated by subtracting our total liabilities from our total tangible assets, which is total assets less intangible
assets, and dividing this amount by the number of shares of common stock outstanding as of such date.
Our pro forma net tangible
book value as of February 29, 2020, as adjusted for the Convertible Note Exchanges and Conversions was approximately $1,434,000,
or $0.05 per share of common stock.
After giving effect
to the sale by us of 1,898,850 shares of common stock and an accompanying purchase warrant in this offering at the public offering
price of $5.40 per share and 323,310 pre-funded warrants and an accompanying purchase warrant at the public offering price of $5.399
per pre-funded warrant, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses
payable by us, and excluding the proceeds, if any, from the exercise of the pre-funded warrants and the purchase warrants, our
pro forma as-adjusted net tangible book value as of February 29, 2020 would have been approximately $11,964,000 or $0.42 per
share of common stock. This represents an immediate increase in the net tangible book value of $0.37 per share to our existing
shareholders and an immediate and substantial dilution in net tangible book value of $4.98 per share to new investors. The
following table illustrates this hypothetical per share dilution:
Offering price per share
|
|
$
|
5.40
|
|
Historical net tangible book value per share as of February 29, 2020
|
|
$
|
(0.02
|
)
|
Increase in net tangible book value per share attributable to pro forma adjustments
|
|
$
|
0.07
|
|
Pro forma net tangible book value per share as of February 29, 2020,
|
|
$
|
0.05
|
|
Increase in net tangible book value per share attributable to this offering
|
|
$
|
0.37
|
|
Pro forma as adjusted net tangible book value per share as of February 29, 2020, after giving effect to this offering and as adjusted for the Convertible Note Exchanges and Conversions
|
|
$
|
0.42
|
|
Dilution per share to new investors purchasing shares in this offering
|
|
$
|
4.98
|
|
The
information above assumes that the underwriter does not exercise its over-allotment option. If the underwriter exercises its over-allotment
option in full, the pro forma as adjusted net tangible book value will increase to $13,638,000, representing an immediate increase
to existing stockholders of $0.42 per share and an immediate dilution of $4.93 per share to new investors.
The foregoing discussion
and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding options
or warrants, including the pre-funded warrants having a per share exercise price less than the per share offering price to the
public in this offering, and the purchase warrants offered hereby. In addition, we may choose to raise additional capital due
to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating
plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance
of these securities could result in further dilution to our stockholders.
The foregoing discussion
and table are based on 1,520,560 shares of common stock outstanding as of May 18, 2020 and 24,634,560 shares of common stock reserved
for future issuance pursuant to Preferred Options that were granted to our Option Shareholders, and excludes the following securities:
|
·
|
513,797 shares of common stock issuable
upon the exercise of warrants to purchase shares of common stock that were outstanding as of May 18, 2020, with a weighted-average
exercise price of $16.53 per share;
|
|
·
|
198,527 shares of common stock reserved for future issuance under our 2017 Stock Option and Share Issuance Plan (the “2017 Plan”);
|
|
·
|
43,415 shares of common stock issuable upon the exercise
of options to purchase common stock issued pursuant to our 2017 Plan as of May 18, 2020, with a weighted-average exercise
price of $99.56 per share;
|
|
·
|
108,322 shares of common stock issuable upon the conversion
of the Senior Convertible Notes that were outstanding as of May 18, 2020 with a weighted-average conversion price of $9.20
per share; and
|
|
·
|
25,000,000 shares of common stock potentially issuable pursuant
to options that are expected to be granted to Messrs. Absher and Holmes, the issuance of which may be subject to any internal corporate,
state, federal or regulatory approvals, following this offering to purchase preferred stock
for $0.0001 per share, with each share of preferred stock being convertible into common stock on a one-for-one basis.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management’s
discussion and analysis should be read in conjunction with our historical financial statements and the related notes included
in this prospectus. Management’s discussion and analysis contains forward-looking statements that involve risks and uncertainties,
including those we detail under “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements”
and elsewhere in this prospectus, such as statements of our plans, objectives, expectations and intentions. Any statements that
are not statements of historical fact are forward-looking statements. When used, the words “anticipate,” “believe,”
“could,” “estimate,” “expect,” “intend,” “may,” “plan,”
“potential,” “predict,” “project,” “should,” “will,” “would”
or the negative of those terms, or similar expressions, identify certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed
or implied by the forward-looking statements in this prospectus. Our actual results and the timing of events could differ materially
from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation
to update forward-looking statements to reflect events or circumstances occurring after the date of this prospectus.
Overview
Our current business,
and the primary source of our revenues to date, has been under a traditional staffing services business model. Our initial market
focus is to use this traditional approach, coupled with developed technology, to address an underserved market containing predominately
lower wage employees with high turnover in light industrial, services, and food and hospitality. We provide human resources, employment
compliance, insurance, payroll, and operational employment services solutions for our clients and shift work or gig opportunities
for worksite WSEs. As consideration for providing these services, we receive administrative or processing fees as a percentage
of a client’s gross payroll, process and file payroll taxes and payroll tax returns, provide workers’ compensation
insurance, and provide employee benefits. We have built a substantial business on a recurring revenue model since our inception
in 2015. For the fiscal year ended August 31, 2019, including our discontinued operations related to the Vensure Asset Transfer,
we processed over $350 million of payroll billings. Our business has significantly grown for each year since inception and we
expect to continue our high degree of growth. However, we have experienced losses to date as we have invested in both our technology
solutions as well as the back-office operations required to service a large employee base under a traditional staffing model.
We are currently
focused on clients in the restaurant and hospitality industries, traditionally market segments with high employee turnover and
low pay rates. We believe that our focus on these industries will be better served by our HRIS platform which provides payroll
and human resources tracking for our clients and will result in lower operating costs, improved customer experience and revenue
growth acceleration. All of our clients enter into service agreements with us or our wholly-owned subsidiary, ReThink Human Capital
Management, Inc.
Our revenues for
the year ended August 31, 2019 primarily consist of administrative fees calculated as a percentage of gross payroll processed,
payroll taxes due on WSEs billed to the client and remitted to the applicable taxation authority, and workers’ compensation
premiums billed to the client for which we facilitate workers’ compensation coverage. Our costs of revenues consist of accrued
and paid payroll taxes and our costs to provide the workers’ compensation coverage including premiums and loss reserves.
A significant portion of our assets and liabilities is for our workers’ compensation reserves. Our cash balances related
to these reserves are carried as assets and our estimates of projected workers’ compensation claims are carried as liabilities.
Since 2019, we have provided a self-funded workers’ compensation policy for up to $500,000 and purchase reinsurance for
claims in excess of $500,000. We actively monitor and manage our clients and WSEs’ workers’ compensation claims which
we believe allows us to provide a lower cost workers’ compensation option for our clients than they would otherwise be able
to purchase on their own.
In January 2020,
in connection with an asset purchase agreement, we assigned client contracts representing approximately 70% of our billable clients
which comprised approximately 88% of our quarterly revenue as of November 30, 2019 and certain operating assets for $19.1 million
in cash of which $9.6 million was received at closing and $9.5 million is due over the next four years, commencing in April 2020,
subject to certain conditions, including the performance of the assigned contracts. For the three months ended February 29, 2020,
we billed 83 clients in total and billed approximately 3,500 total WSEs. This represents an annualized growth rate of over 100%
for WSEs compared to the three months ending February 28, 2019. We have also entered into an agreement with a large customer with
multiple locations representing approximately 1,000 additional WSEs. In addition, we retained approximately 35,000 unbilled WSEs
in our HRIS platform as of March 31, 2020. These new WSEs were added to our HRIS platform through our new automated onboarding
process which was placed into service in 2019. We believe there is significant business interest in our HRIS platform and scheduling
tools for multi-location client opportunities.
Results of Operations
Year Ended August 31, 2019 Compared to Year Ended August
31, 2018
The following table
summarizes the condensed consolidated results of our operations for the years ended August 31, 2019 and 2018. These figures include
the discontinued operations.
|
|
For the
Years Ended
|
|
|
|
August
31,
2019
|
|
|
August
31,
2018
|
|
|
|
|
|
|
|
|
Revenues (gross billings
of $39.3 million and $12.1 million less worksite employee payroll cost of $33.9 million and $10.3 million, respectively)
|
|
$
|
5,423,000
|
|
|
$
|
1,819,000
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
4,594,000
|
|
|
|
1,488,000
|
|
Gross profit
|
|
|
829,000
|
|
|
|
331,000
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll
taxes
|
|
|
4,670,000
|
|
|
|
2,941,000
|
|
Stock-based compensation
|
|
|
632,000
|
|
|
|
363,000
|
|
Commissions
|
|
|
200,000
|
|
|
|
93,000
|
|
Professional fees
|
|
|
3,918,000
|
|
|
|
2,078,000
|
|
Software development
|
|
|
1,209,000
|
|
|
|
3,828,000
|
|
Marketing and advertising
|
|
|
1,208,000
|
|
|
|
547,000
|
|
General and administrative
|
|
|
3,823,000
|
|
|
|
3,005,000
|
|
Depreciation
and amortization
|
|
|
839,000
|
|
|
|
274,000
|
|
Operating expenses
|
|
|
16,499,000
|
|
|
|
13,129,000
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(15,670,000
|
)
|
|
|
(12,798,000
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(8,507,000
|
)
|
|
|
(1,751,000
|
)
|
Loss on debt extinguishment
|
|
|
(3,927,000
|
)
|
|
|
-
|
|
Change in fair value of derivative
|
|
|
2,569,000
|
|
|
|
-
|
|
Gain (Loss) associated with note
defaults, net
|
|
|
811,000
|
|
|
|
(3,500,000
|
)
|
Total Other income (expense)
|
|
|
(9,054,000
|
)
|
|
|
(5,251,000
|
)
|
Loss from continuing operations
|
|
|
(24,724,000
|
)
|
|
|
(18,049,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Income from discontinued
operations, net of tax
|
|
|
5,997,000
|
|
|
|
1,226,000
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(18,727,000
|
)
|
|
$
|
(16,823,000
|
)
|
We report our revenues as gross billings,
net of related direct labor costs for our EAS clients and revenues without reduction of labor costs for staffing services clients.
For the years ended August 31, 2019 and 2018, revenues associated with staffing services were insignificant.
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net Revenues (in millions)
|
|
$
|
5.4
|
|
|
$
|
1.8
|
|
Increase, year over year (in millions)
|
|
|
3.6
|
|
|
|
1.2
|
|
% Increase, year over year
|
|
|
198.1
|
%
|
|
|
199.7
|
%
|
|
|
|
|
|
|
|
|
|
Cost of Revenues (in millions)
|
|
$
|
4.6
|
|
|
$
|
1.5
|
|
Increase, year over year (in millions)
|
|
|
3.2
|
|
|
|
1.0
|
|
Increase, year over year
|
|
|
208.7
|
%
|
|
|
199.4
|
%
|
|
|
|
|
|
|
|
|
|
Gross Profit (in millions)
|
|
$
|
0.8
|
|
|
$
|
0.3
|
|
Increase, year over year (in millions)
|
|
|
0.5
|
|
|
|
0.2
|
|
Increase, year over year
|
|
|
150.4
|
%
|
|
|
200.9
|
%
|
Gross Profit % of Revenues
|
|
|
15.3
|
%
|
|
|
18.2
|
%
|
Our net revenue excludes
the payroll cost component of gross billings. With respect to employer payroll taxes, employee benefit programs, workers’
compensation insurance, we believe that we are the primary obligor, have latitude in establishing price, selecting suppliers, and
determining the service specifications and, as such, the billings for those components are included as revenue. Revenues are recognized
ratably over the payroll period as WSEs perform their service at the client worksite.
Net Revenue
Our net revenue
increase of $3.6 million or 198.1% from $1.8 million in 2018 to $5.4 million in 2019 is primarily driven by the increase in business
clients and the workplace employees associated with those clients. Active worksite employees increased by 1,000 or 200% from 500
at the end of 2018 to 1,500 at the end of 2019.
Cost of Revenue
Our cost of revenue
includes the costs of employer side taxes and workers’ compensation insurance coverage. Cost of revenues increased $3.1
million or 208.7% from $1.5 million in 2018 to $4.6 million in 2019. The change in cost of revenues was due to the 198.1% increase
in worksite employees.
Gross Profit
Gross profit increased
$0.5 million or 150.5% from $0.3 million in 2018 to $0.8 million in 2019. The increase is due to the combination of increased
net revenues and improvement in gross profit percentages. Gross profit percentage had a decrease of 2.9% from 18.2% of revenues
for the year ended August 31, 2018 to 15.3% for the year ended August 31, 2019 due to larger increase of cost of revenue compared
to net revenue as noted above.
Operating Expenses
The following table presents certain
information related to our operating expenses
|
|
Year ended
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
$
|
4,670
|
|
|
$
|
2,941
|
|
|
|
58.8
|
%
|
Share-based compensation
|
|
|
632
|
|
|
|
363
|
|
|
|
74.1
|
%
|
Commissions
|
|
|
200
|
|
|
|
93
|
|
|
|
115.1
|
%
|
Professional fees
|
|
|
3,918
|
|
|
|
2,078
|
|
|
|
88.5
|
%
|
General and Administrative
|
|
|
3,823
|
|
|
|
3,005
|
|
|
|
27.2
|
%
|
Marketing and Advertising
|
|
|
1,208
|
|
|
|
547
|
|
|
|
120.8
|
%
|
Software development
|
|
|
1,209
|
|
|
|
3,828
|
|
|
|
(68.4
|
)%
|
Depreciation and amortization
|
|
|
839
|
|
|
|
274
|
|
|
|
206.2
|
%
|
Total operating expenses
|
|
$
|
16,499
|
|
|
$
|
13,129
|
|
|
|
25.7
|
%
|
Operating expenses
increased $3.4 million or 25.7% from $13.1 million in 2018 to $16.5 million in 2019. The components of operating expenses changed
as follows:
Salaries,
wages and payroll taxes consist of gross salaries, benefits, and payroll taxes associated with our executive management
team and corporate employees for the fiscal year ended August 31, 2019, increased by $1.7 million or 58.8% to $4.6 million from
$2.9 million for the fiscal year ended August 31, 2018. The increase is due to the increase in corporate employees including the
addition of our technical team hired to replace outside software developers at a higher average salary than previously hired corporate
employees.
Share-Based
compensation increased by $0.3 million or 74.1% to $0.6 million for the fiscal year ended August 31, 2019. This increase
was primarily due to additional stock option awards granted to our corporate employees in 2018 and 2019 and share grants issued
to our non-employee board of directors.
Commissions
consist of commissions payments made to third party brokers and inside sales personnel. Commissions increased by $0.1
million or 115.1% to $0.2 million from $0.1 million in the fiscal year ended August 31, 2018. Commissions are primarily associated
with compensation to our sales force for sales as well as to our property and casualty agents. Commission expenses approximates
0.5% and 0.8% of our gross billings for the years ended August 31, 2019, and 2018, respectively.
Professional
fees consist of legal fees, accounting and public company costs, board fees, and consulting fees. Professional fees for
the year ended August 31, 2019, increased by $1.8 million or 88.5% to $3.9 million, from $2.1 million for the year ended August
31, 2018. The increase is due to $1.1 million of increased legal fees and legal settlements, $0.3 million in increased sales and
marketing related consulting, $0.3 million increase for outsourced development related consulting costs, $0.3 million for increased
administrative costs associated with our Sunz workers compensation policy, and a $0.3 million reduction in public company related
costs, primarily due to reduced accounting and audit related costs.
General and Administrative Expenses
Our general and
administrative expenses consist of office rent and related overhead, software licenses, insurance, penalties, business taxes,
travel and entertainment, and other general business expenses. General and administrative expenses for the fiscal year ended August
31, 2019, increased by $0.8 million or 27.2% to $3.8 million, from $3.0 million for the fiscal year ended August 31, 2018. The
increase is due to $0.3 million in higher software license fees related to our mobile application, $0.2 million in increased accrued
tax penalties, and $0.3 million higher rent and overhead relating to our increased revenues, personnel, and the support required
for the business growth.
Marketing and Advertising
Our marketing and advertising
expenses consist of advertising, website costs, marketing promotions, corporate marketing, and tradeshow related costs. Marketing
and advertising costs increased by $0.7 million or 120.8% to $1.2 million in fiscal 2019 from $0.5 million in the prior year. The
increase is due to increased marketing, improvements to our website, increased tradeshows and advertising, and increased costs
associated with marketing our mobile application.
Software Development
Our software development
expenses consist of outsourced research and development to third parties. Software development costs decreased $2.6 million or
68.4% to $1.2 million for the fiscal year ended August 31, 2019 from $3.8 million in the prior year. The decrease is due to $2.8
million lower expenses in 2019 related to work contracted to Kadima, who we are currently in arbitration over non-delivery of the
software and represented the entire expense in 2018. In 2019, Kadima represented $1.0 million of the expense and we incurred $0.2
million for contracted offshore developers in India and South America to support our U.S. based mobile application development.
Depreciation and Amortization
Depreciation and amortization
increased by $0.6 million or 206.2% from our previous fiscal year. We capitalized $2.8 million of software development costs related
to the application development stage during the fiscal year ended August 31, 2018 and $0.9 million in 2019 for a total of $3.7
million in capitalized software development. The increase is due to increased amortization on that capitalized software.
Other
expenses increased from $5.3 million for the fiscal year ended August 31, 2018 to $6.8 million for the fiscal year ended August
31, 2019:
|
|
For the Year Ended August 31,
|
|
|
|
2019
|
|
|
2018
|
|
Interest expense
|
|
|
(8,507,000
|
)
|
|
|
(1,751,000
|
)
|
Loss on debt extinguishment
|
|
|
(3,927,000
|
)
|
|
|
-
|
|
Change in fair value of derivatives
|
|
|
2,569,000
|
|
|
|
-
|
|
Gain (Loss) associated with note defaults, net
|
|
|
811,000
|
|
|
|
(3,500,000
|
)
|
Total Other income (expense)
|
|
|
(9,054,000
|
)
|
|
|
(5,251,000
|
)
|
Interest Expense
Interest expense consists
of cash interest on interest bearing notes, financing charges for the excess of fair value over carrying amounts of notes issued
during any reporting period, amortization of recorded discount and associated deferred financing costs, and acceleration of discounts
and deferred financing costs due to early conversions on notes payable. Interest expense increased $6.7 million to $8.5 million
from $1.8 million in 2018. The increase is due to the increased interest expense and financing costs associated with the June
2018 Notes and the March 2019 Notes. The 2019 balances include: $2.6 million financing charge for the excess fair value over the
carrying amount of the June 2019 Notes, non-cash interest expense related to amortization of convertible notes discount of $5.6
million and cash based interest of $0.9 million offset by the recovery of a $0.6 million interest accrual recorded into 2018 as
part of the registration rights penalties that was cured and reversed in December 2018. The 2018 balances include $0.6 million
for the accrual of the guaranteed twelve months of interest as part of the mandatory default clause of the debentures that was
triggered following the event of default, $0.9 million of non-cash interest related to the amortization of the debt discount and
debt issuance costs related to the June 2018 Notes, and $0.2 million is related to the cash basis coupon payments on the outstanding
principal amount of the convertible notes.
Loss on Debt Extinguishment
The balance in 2019
represents the additional loss required to be recorded for note conversions below the stated conversion rate and associated with
$8.4 million of principal conversions that were converted into common stock in fiscal 2019. No such conversions occurred in 2018.
Change in Fair Value of Derivative
The balance
in 2019 represents the reduction in fair value of the derivative liabilities recorded with the March 2019 Notes payable. No such
derivative existed in 2018. See also Note 8 to the Financial Statements.
Gain (Loss) Associated with
Note default, Net
For 2018,
the loss of $3.5 million relates to the accrual of penalties and liquidated damages associated with technical defaults under the
registration rights agreements relating to our 8% senior secured convertible notes. Those penalties were settled in fiscal 2019
by the issuance of $0.9 million of additional convertible notes in December 2018 resulting in a gain of $2.6 million recorded in
fiscal 2019. The gain was offset by $1.8 million of accrued potential default damages related to our senior secured notes in default
as of August 31, 2019.
Loss from Continuing
Operations
As
a result of the explanations described above, the net loss from continuing operations for the fiscal year ended August 31, 2019
was $24.7 million compared to a net loss of $18.0 million in the prior year representing an increase of $6.7 million or 37.0%.
Discontinued Operations
Results for the discontinued operations
by period were as follows:
|
|
For
the Year Ended
|
|
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
Revenues (gross billings of $313.3 million and $210.3 million
less worksite employee payroll cost of $265.3 million and $177.2 million for the years ended respectively
|
|
$
|
48,013,000
|
|
|
$
|
33,139,000
|
|
Cost of revenue
|
|
|
36,452,000
|
|
|
|
27,970,000
|
|
Gross profit
|
|
|
11,561,000
|
|
|
|
5,169,000
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
|
3,032,000
|
|
|
|
2,442,000
|
|
Commissions
|
|
|
2,532,000
|
|
|
|
1,501,000
|
|
Total operating expenses
|
|
|
5,564,000
|
|
|
|
3,943,000
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued
operations, net of tax
|
|
|
5,997,000
|
|
|
|
1,226,000
|
|
(Loss) Income from Discontinued
Operations
This represents
the operations for the clients transferred to Vensure pursuant to the Vensure Asset Transfer, effective as of January 1, 2020,
related to the activity for the years ended August 31, 2019 and August 31, 2019.
Our net revenue
from discontinued operations increase of $14.9 million or 44.9% increase from $33.1 million in 2018 to $48.0 million in 2019 is
primarily driven by the increase in business clients and the workplace employees associated with those clients. Active WSEs increased
by 3,500 or 43.8% from 8,000 at the end of 2018 to 11,500 at the end of 2019.
Cost of Revenue
Our cost of revenue
includes the costs of employer side taxes and workers’ compensation insurance coverage. Cost of revenues increased $8.5
million or 30.3% to $36.5 million in 2019 from $28.0 million in 2018.
The change in cost
of revenues was due to the net effect of the increase in WSEs net revenues, supported by the increase in WSEs offset by a reduction
in employer tax expenses of $0.8 million due to the combination of favorable rate exchanges and a non-recurring reversal of a
tax expense accrual made in fiscal 2018 and reversed in fiscal 2019 due to a tax reimbursement between the U.S. federal government
and the State of California.
Workers’
compensation decreased due to the combination of our operational focus on loss reduction, the full implementation of the Sunz
Insurance Company (“Sunz”) workers’ compensation policy for 2019 and expense reduction due to a non-recurring
return of premium related to prior reporting periods. We implemented the Sunz policy in July, 2018, and therefore the cost reduction
only impacted our workers’ compensation cost for two out of twelve months in 2018 compared to a full year for 2019.
Gross Profit
Gross profit from
discontinued operations increased $6.4 million or 123.7% to $11.6 million in 2019 from $5.2 million in 2018. The increase is due
to the combination of increased net revenues and improvement in gross profit percentages. Gross profit percentage improved 8.4%
from 15.6% of revenues for the fiscal year ended August 31, 2018 to 24.0% for the fiscal year ended August 31, 2019 due to the
cost of revenue improvements noted above and including the $0.8 million tax accrual and other cost savings and tax rate improvements.
Operating Expenses
Operating expenses
related to discontinued operations represent the salaries and commissions for our employees transferred to Vensure as a result
of the Vensure Asset Transfer.
Salaries, Wages and Payroll Taxes
Salaries consist
of gross salaries, benefits, and payroll taxes associated with the sales and support employees transferred to Vensure. Discontinued
salaries for the fiscal year ended August 31, 2019, increased by $0.6 million to $3.0 million from $2.4 million for the fiscal
year ended August 31, 2018. The increase is due to the increase in staff required to support the increase in business levels.
Commissions
Commissions include
payments made to third party brokers and inside sales personnel for business activity that was transferred in the Vensure transaction.
Discontinued commissions increased by $1.0 million or 68.7% to $2.5 million, from $1.5 million for the fiscal year ended August
31, 2018. Commissions are primarily associated with compensation to our sales force for sales as well as to our property and casualty
agents and the increase is due to increased business levels. Commission expenses approximates 0.77% and 0.72% of our gross billings
for the fiscal years ended August 31, 2019, and 2018, respectively.
Income from Discontinued Operations
Income from Discontinued
Operations represents the income from the business transferred to Vensure. The income increased 389.2% to $6.0 million from $1.2
million due to increased business activity as described above.
Net Loss
As
a result of the explanations described above, the net loss for the fiscal year ended August 31, 2019, was $18.7 million, representing
a $24.7 million loss from continuing operations, offset by $6.0 million income from discontinued operations and compared to a
net loss of $16.8 million in the prior year representing a loss from discontinued operations of $18.0 million offset by income
from discontinued operations of $1.2 million.
Three Months and Six Months Ended
February 29, 2020 Compared to the Three and Six Months Ended February 28, 2019
The following table
summarizes the condensed consolidated results of our operations for the three and six months ended February 29, 2020, and February
28, 2019, prior to the reclassification of discontinued operations.
|
|
For the Three
Months Ended
|
|
|
For the
Six Months Ended
|
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
Revenues (gross billings of $16.1 million and $8.2 million less worksite
employee payroll cost of $13.5 million and $7.0 million, respectively for the three months ended; gross billings of $32.6
million and $14.0 million less worksite employee payroll cost of $27.8 million and $12.0 million, respectively for six months
ended)
|
|
$
|
2,583,000
|
|
|
$
|
1,186,000
|
|
|
$
|
4,761,000
|
|
|
$
|
2,020,000
|
|
Cost of revenue
|
|
|
2,124,000
|
|
|
|
1,011,000
|
|
|
|
4,178,000
|
|
|
|
1,659,000
|
|
Gross profit
|
|
|
459,000
|
|
|
|
175,000
|
|
|
|
583,000
|
|
|
|
361,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and payroll taxes
|
|
|
1,802,000
|
|
|
|
1,089,000
|
|
|
|
3,452,000
|
|
|
|
2,030,000
|
|
Stock-based compensation – general and administrative
|
|
|
619,000
|
|
|
|
81,000
|
|
|
|
745,000
|
|
|
|
158,000
|
|
Commissions
|
|
|
40,000
|
|
|
|
34,000
|
|
|
|
111,000
|
|
|
|
66,000
|
|
Professional fees
|
|
|
997,000
|
|
|
|
895,000
|
|
|
|
1,837,000
|
|
|
|
1,519,000
|
|
Software development
|
|
|
350,000
|
|
|
|
718,000
|
|
|
|
703,000
|
|
|
|
1,028,000
|
|
Depreciation and amortization
|
|
|
239,000
|
|
|
|
191,000
|
|
|
|
480,000
|
|
|
|
379,000
|
|
General and administrative
|
|
|
403,000
|
|
|
|
988,000
|
|
|
|
1,564,000
|
|
|
|
2,116,000
|
|
Total operating expenses
|
|
|
4,450,000
|
|
|
|
3,996,000
|
|
|
|
8,892,000
|
|
|
|
7,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(3,991,000
|
)
|
|
|
(3,821,000
|
)
|
|
|
(8,309,000
|
)
|
|
|
(6,935,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(806,000
|
)
|
|
|
(969,000
|
)
|
|
|
(1,967,000
|
)
|
|
|
(1,926,000
|
)
|
Expense related to modification of warrants
|
|
|
(21,000
|
)
|
|
|
-
|
|
|
|
(21,000
|
)
|
|
|
-
|
|
Loss from debt conversion
|
|
|
(657,000
|
)
|
|
|
--
|
|
|
|
(657,000
|
)
|
|
|
--
|
|
Inducement loss
|
|
|
(567,000
|
)
|
|
|
(1,555,000
|
)
|
|
|
(567,000
|
)
|
|
|
(1,555,000
|
)
|
Change in fair value derivative and warrant liability
|
|
|
829,000
|
|
|
|
-
|
|
|
|
1,771,000
|
|
|
|
-
|
|
Gain on convertible note settlement
|
|
|
-
|
|
|
|
2,611,000
|
|
|
|
-
|
|
|
|
2,611,000
|
|
Gain on convertible note penalties
accrual
|
|
|
760,000
|
|
|
|
-
|
|
|
|
760,000
|
|
|
|
-
|
|
Total other (expense) income
|
|
|
(462,000
|
)
|
|
|
87,000
|
|
|
|
(681,000
|
)
|
|
|
(870,000
|
)
|
Loss from continuing operations
|
|
|
(4,453,000
|
)
|
|
|
(3,734,000
|
)
|
|
|
(8,990,000
|
)
|
|
|
(7,805,000
|
)
|
Income (Loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations
|
|
|
(1,784,000
|
)
|
|
|
1,594,000
|
|
|
|
197,000
|
|
|
|
3,418,000
|
|
Gain from asset sale
|
|
|
15,682,000
|
|
|
|
-
|
|
|
|
15,682,000
|
|
|
|
-
|
|
Total Income from discontinued operations, net of tax
|
|
|
13,898,000
|
|
|
|
1,594,000
|
|
|
|
15,879,000
|
|
|
|
3,418,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,445,000
|
|
|
$
|
(2,140,000
|
)
|
|
$
|
6,889,000
|
|
|
$
|
(4,387,000
|
)
|
Revenue
Revenue for the
three months ended February 29, 2020, increased by $1.4 million, or 117.8%, to $2.6 million, compared to $1.2 million for the
three months ended February 28, 2019. Revenue for the six months ended February 29, 2020 increased by $2.7 million or 135.7% to
$4.7 million, compared to $2.0 million for the six months ended February 28, 2019.
Gross billings
are a non-GAAP measurement and are the metric in which we currently earn our revenue. Gross billings for the three months ended
February 29, 2020, were earned from billings to clients to whom we provide staff or workforce management support. Gross billings
for the three months ended February 29, 2020, increased by $7.9 million or 96.9% to $16.1 million, compared to $8.2 million for
the three months ended February 28, 2019. Gross billings for the six months ended February 29, 2020, increased by $18.6 million
or 132.1% to $32.6 million from 14.0 million for the six months ended February 28, 2019.
The gross payroll
cost of our WSEs accounted for 84.0% and 85.5% of our gross billings for the three months ended February 29, 2020 and February
28, 2019, respectively. As such, the mark-up components of gross billings account for 16.0% and 14.5% for the three months ended
February 29, 2020 and February 28, 2019, respectively.
The gross payroll
cost of our WSEs accounted for 85.4% and 85.6% of our gross billings for the six months ended February 29, 2020 and February 28,
2019, respectively. As such, the mark-up components of gross billings account for 14.6% and 14.4% for the three months ended February
29, 2020 and February 28, 2019, respectively.
The revenue increase
was primarily due to the increase in WSEs from an average of 1,650 WSEs in the three months ended February 28, 2019 to an average
of 3,100 WSEs in the three months ended February 29, 2020. Revenues are recognized ratably over the payroll period as WSEs perform
their service at the client worksite.
Cost of Revenues
Cost of revenues
mainly includes the costs of employer-side taxes and workers’ compensation insurance coverage and employee benefits. Cost
of revenues in the three months ended February 229, 2020 increased by $1.1 million, or 110.0%, to $2.1 million, compared to the
three months ended February 28, 2019. Our cost of revenues for the six months ended February 29, 2020 increased by $2.5 million,
or 151.9%, to $4.2 million, compared to $1.7 million in the six months ended February 28, 2019. The increase in cost of revenue
can be attributed to the additional WSEs the Company is servicing, which increased by 1,450 WSEs from a billed average of 1,650
WSEs for the three months ended February 28, 2019, to an average of 3,100 WSEs for the three months ended February 29, 2020.
Gross Profit
Gross profit increased
162.3% to $459,000 for the three months ended February 29, 2020 from $175,000 for the three months ended February 28, 2019. The
gross profit, as a percentage of revenues, increased from 14.8% for the three months ended February 28, 2019, to 17.8% for the
three months ended February 29, 2020. Gross Profit increased 61.6% to $583,000 for the six months ended February 29, 2020 from
$361,000 for the six months ended February 28, 2019. The gross profit, as a percentage of revenues, decreased from 17.8% for the
three months ended February 28, 2019, to 12.2% for the three months ended February 29, 2020. Such changes to our gross profit
as a percent of revenue is attributable to changes in paid losses and the development of open workers’ compensation claims
during the period.
Operating Expenses
The following table
presents certain information related to our operating expenses (unaudited):
|
|
For the Three
Months Ended
|
|
|
For the
Six Months Ended
|
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
$
|
1,802,000
|
|
|
$
|
1,089,000
|
|
|
$
|
3,452,000
|
|
|
$
|
2,030,000
|
|
Stock-based compensation – general and admin
|
|
|
619,000
|
|
|
|
81,000
|
|
|
|
745,000
|
|
|
|
158,000
|
|
Commissions
|
|
|
40,000
|
|
|
|
34,000
|
|
|
|
111,000
|
|
|
|
66,000
|
|
Professional fees
|
|
|
997,000
|
|
|
|
895,000
|
|
|
|
1,837,000
|
|
|
|
1,519,000
|
|
Software development
|
|
|
350,000
|
|
|
|
718,000
|
|
|
|
703,000
|
|
|
|
1,028,000
|
|
Depreciation and amortization
|
|
|
239,000
|
|
|
|
191,000
|
|
|
|
480,000
|
|
|
|
379,000
|
|
General and administrative
|
|
|
403,000
|
|
|
|
988,000
|
|
|
|
1,564,000
|
|
|
|
2,116,000
|
|
Total operating expenses
|
|
$
|
4,450,000
|
|
|
$
|
3,996,000
|
|
|
$
|
8,892,000
|
|
|
$
|
7,296,000
|
|
Operating expenses
for the three months ended February 29, 2020 increased by $0.5 million or 11.4% to $4.5 million compared to $4.0 million for the
three months ended February 28, 2019. The increase is due to increases in salaries of $0.7 million, stock based compensation of
$0.5 million and professional fees of $0.1 million, offset by decreases of external software development of $0.4 million and a
reduction of $0.5 million of marketing related general and administrative expenses.
Operating expenses
for the six months ended February 29, 2020 increased by $1.6 million or 21.9% to $8.9 million compared to $7.3 million for the
six months ended February 28, 2019. The increase is due to increases in salaries of $1.4 million, stock based compensation of
$0.6 million and professional fees of $0.3 million, offset by decreases of external software development of $0.3 million and a
reduction of $0.5 million of marketing related general and administrative expenses. The components of operating expenses changed
as follows:
Salaries, Wages and Payroll Taxes
These consist of
gross salaries, benefits, and payroll taxes associated with our executive management team and corporate employees as well as share
based compensation. For the three months ended February 29, 2020, salaries, wages and payroll taxes $0.7 million or 65.5% to $1.8
million compared to $1.1 million for the three months ended February 28, 2019. For the six months ended February 29, 2020, salaries,
wages and payroll taxes increased by $1.4 million or 70.0% to $3.5 million compared to $2.1 million for the three months ended
February 28, 2019. The increase for both periods is due to the increase is in corporate employees, primarily the hiring of our
internal research and development team in the third quarter of fiscal 2019.
Stock based compensation
Stock based compensation
consists of expenses related to vested stock options granted to our employees. Stock based compensation increased $0.5 million,
or 664.2%, to $0.6 million for the three months ended February 29, 2020 compared to the three months ended February 28, 2019 and
increased $0.6 million, or 371%, to $0.7 million for the six months ended February 29, 2020 compared to the six months ended February
28, 2019. The increase was due to one-time vesting of all options granted to employees transferred under the Vensure Asset Transfer.
Commissions
Commissions consist
of commission payments made to third party brokers and inside sales personnel. Commissions for the three and six months ended
February 29, 2020 and February 28, 2019 remained consistent at less than $0.1 million for both periods.
Professional Fees
Professional fees
consist of legal fees, accounting and public company costs, board fees, and consulting fees. Professional fees for the three months
ended February 29, 2020, increased by $0.1 million, or 11.4%, to $1.0 million, from $0.9 million for the three months ended February
28, 2019. Professional fees for the six months ended February 29, 2020, increased by $0.3 million, or 20.9%, to $1.8 million,
from $1.5 million for the six months ended February 28, 2019. Such increase results from additional legal fees paid for litigation
related activities.
External Software Development
External software
development consists of payments to third party contractors for licenses, software development, IT related spending for the development
of our HRIS platform and mobile application. For the three months ended February 29, 2020, external software development decreased
by $0.3 million, or 51.2%, to $0.4 million compared to $0.7 million for the three months ended February 28, 2019. For the six
months ended February 29, 2020, external software development decreased by $0.3 million, or 31.6%, to $0.7 million compared $1.0
million for the six months ended February 28, 2019. The decrease is due to the management decision to bring software development
in-house that began in the third quarter of the 2019 fiscal year.
General and Administrative
General and administrative
expenses consist of office rent and related overhead, marketing, insurance, penalties, business taxes, travel and entertainment,
depreciation and amortization and other general business expenses. General and administrative expenses for the three months ended
February 29, 2020, decreased by $0.5 million, or 45.5%, to $0.6 million from $1.2 million in the three months ended February 28,
2019 and decreased by $0.5 million, or 18.1%, to $2.0 million for the six months ended February 29, 2020 from $2.5 million for
the six months ended February 28, 2019. The decrease was due to a reduction in marketing expenses driven by a reversal of a $0.3
million accrual recorded in fiscal 2017.
Operations Loss
(Continuing Operations)
As a result of
the explanations described above, the operations loss was $4.0 million for the three months ended February 29, 2020, compared
to a net operating loss of $6.8 million for the three months ended February 28, 2019 and a loss of $8.3 million for the six months
ended February 29, 2020 compared to a loss of $6.9 million for the six months ended February 28, 2019.
Other Income and Expenses
|
|
For the Three
Months Ended
|
|
|
For the
Six Months Ended
|
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(806,000
|
)
|
|
$
|
(969,000
|
)
|
|
$
|
(1,967,000
|
)
|
|
$
|
(1,926,000
|
)
|
Expense related to modification of warrants
|
|
|
(21,000
|
)
|
|
|
|
|
|
|
(21,000
|
)
|
|
|
|
|
Loss from debt conversion
|
|
|
(657,000
|
)
|
|
|
-
|
|
|
|
(657,000
|
)
|
|
|
-
|
|
Inducement loss
|
|
|
(567,000
|
)
|
|
|
(1,555,000
|
)
|
|
|
(567,000
|
)
|
|
|
(1,555,000
|
)
|
Change in fair value derivative and warrant liability
|
|
|
829,000
|
|
|
|
-
|
|
|
|
1,771,000
|
|
|
|
-
|
|
Gain on convertible note settlement
|
|
|
-
|
|
|
|
2,611,000
|
|
|
|
-
|
|
|
|
2,611,000
|
|
Gain on convertible note penalties
accrual
|
|
|
760,000
|
|
|
|
-
|
|
|
|
760,000
|
|
|
|
-
|
|
Total other income (expense)
|
|
$
|
(462,000
|
)
|
|
$
|
87,000
|
|
|
$
|
(681,000
|
)
|
|
$
|
(870,000
|
)
|
Interest Expense
Interest expense
represents cash interest paid and non-cash expense resulting from the amortization of our note discount and deferred financing
fees on our convertible notes payable. Interest expense decreased $0.2 million, or 16.8%, to $0.8 million and increased less than
$0.1 million, or, 2.0% to $2.0 million for the three and six months ended February 29, 2020, respectively, from the prior year
periods. The changes are due to differences in the amortization of the different series of convertible notes outstanding.
Expenses Related to Modification
of Warrants
Expenses related
to modification of warrants represents the difference in fair value for the June 2018 Warrants which had their exercise price
reduced from $70 per share to $40 per share in December 2019.
Loss from Debt Conversion
Loss from debt
conversion represents the acceleration of the pro-rated remaining note discount and deferred financing fees associated with the
March 2019 Notes that were either converted or repaid in cash during the three months ended February 29, 2020.
Inducement Loss
Inducement loss
represents the difference in fair value on the date of note conversion between the closing market price and the conversion price
per share Interest loss decreased $1.0 million, or 63.6%, for the three and six months ended February 29, 2020 compared to the
prior year periods. This change is the result of less principal converted in the three and six months ended February 29, 2020
compared to the prior year periods.
Change in Fair Value Derivative
and Warrant Liability
Change in fair
value derivative and warrant liability represents the mark to market of our derivative liabilities created by the March 2019 Notes
beneficial conversion feature and the March 2019 Warrants. There were no derivative liabilities in existence during the three
and six months ended February 28, 2019.
Gain on Convertible Note Settlement
This represents
the recovery of previously accrued convertible note penalties related to the June 2018 default. For the three and six months ended
February 28, 2019, we had recorded $3.5 million of penalty accrual as a result of claims by noteholders as of August 31, 2018
and November 30, 2018 and satisfied this liability with the issuance of $889,000 of the December 2018 Notes and recorded a penalty
recovery of $2,611,000 for the three and six months ended February 28, 2019,
Gain on Convertible Note Penalties
Accrual
Gain on convertible
note penalties accrual represents the recovery of previously accrued convertible note penalties related to the June 2019 default.
For the three and six months ended February 29, 2020 we recorded a $1.8 million penalty accrual for litigation damages and default
interest as of August 31 and November 30, 2019 and settled all note related litigation, as described above and in Note 5 to our
January 2020 financial statements, which resulted in a gain for the release of $760,000 for excess damages accrued liabilities
in excess of paid claims.
Loss From Continuing Operations
As a result of
the events described above, the loss from continuing operations was $4.5 million for the three months ended February 29, 2020
compared to a net operating loss of $3.7 million for the three months ended February 28, 2019 and a loss of $9.0 million for the
six months ended February 29, 2020 compared to a loss of $7.8 million for the six months ended February 28, 2019.
Discontinued Operations
Results for the discontinued operations by period were as
follows:
|
|
For the Three
Months Ended
|
|
|
For the
Six Months Ended
|
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
Revenues (gross billings of $26.3 million and $74.4 million less worksite
employee payroll cost of $22.8 million and $62.4 m million respectively for the three months ended; gross billings of $120.4
million and $139.4 million less worksite employee payroll cost of $103.3 million and $117.7 million, respectively for six
months ended)
|
|
$
|
3,450,000
|
|
|
$
|
12,002,000
|
|
|
$
|
17,138,000
|
|
|
$
|
21,688,000
|
|
Cost of revenue
|
|
|
5,038,000
|
|
|
|
8,956,000
|
|
|
|
15,535,000
|
|
|
|
15,442,000
|
|
Gross profit
|
|
|
(1,587,000
|
)
|
|
|
3,046,000
|
|
|
|
1,603,000
|
|
|
|
6,246,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
|
152,000
|
|
|
|
898,000
|
|
|
|
658,000
|
|
|
|
1,752,000
|
|
Commissions
|
|
|
45,000
|
|
|
|
554,000
|
|
|
|
748,000
|
|
|
|
1,076,000
|
|
Total operating expenses
|
|
|
197,000
|
|
|
|
1,452,000
|
|
|
|
1,406,000
|
|
|
|
2,828,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income
from discontinued operations, net of tax
|
|
$
|
(1,784,000
|
)
|
|
$
|
1,594,000
|
|
|
$
|
197,000
|
|
|
$
|
3,418,000
|
|
(Loss) Income from Discontinued
Operations
This represents
the operations for the clients transferred to Vensure pursuant to the Vensure Asset Transfer, effective as of January 1, 2020.
As such, the operating activities represent one month and four months of billings, revenues, cost of revenues and operating expenses
for the three and six months ended February 29, 2020 and six months of billings, revenues, cost of revenues and operating expenses
for the three and six months ended February 28, 2019. For the three months ended February 29, 2020 the change from $1.6 million
of income to $1.8 million of loss is due primarily to having 33% of operations and a $2.2 million workers’ compensation
liability accrual. For the six months ended February 29, 2020 the decrease of $3.2 million to $0.2 million is due to two fewer
months of operations in addition to the $2.2 million workers’ compensation accrual.
Revenues
Revenues decreased
$8.5 million, or 71.3%, to $3.5 million and decreased $4.5 million, or 21.0%, for the three and six months ended February 29,
2020, respectively. The decrease is consistent with the change in billing months recorded, offset by billing growth between the
three and six months ended February 28, 2019 and February 29, 2020.
Cost of Revenue
Cost of revenue
decreased $3.9 million, or 43.7%, and increased 0.1 million, or 0.6%, for the three and six months ended February 29, 2020. The
changes were the net effect of the revenue decreases offset by a $2.2 million additional workers’ compensation reserve accrual
recorded for the residual workers’ compensation claim liability estimates associated with the existing WSEs being transferred
under the Vensure Asset Transfer.
Gross Profit
Gross profit decreased
by $4.6 million and $4.6 million for the three and six months ended February 29, 2020, respectively, as a result of the combined
gross profit decrease from decreased revenues in addition to the $2.2 million additional workers’ compensation expense accrual
recorded in the three and six months ended February 29, 2020.
Operating Expenses
Operating expenses
represents the salaries and commissions for our employees transferred to Vensure as a result of the Vensure Asset Transfer.
Gain from asset sale
Gain from
asset sale of $15.7 million for the three and six months ended February 29, 2020 represents the net present value of the
proceeds received or receivable, as reduced by the net financial assets transferred. The terms of the transaction consisted
of a total of $19 million of cash proceeds including $9.5 million upon closing and $9.5 million paid over the next four
years, beginning in April 2020. The gain represents the $19.1 million, reduced by the $1.5 million of financial assets to be
provided, and further reduced by a $1.8 million discount recorded to long-term portion of the four-year note receivable. We
evaluated the transaction and believe that we will be able to utilize existing tax NOL’s to offset any material tax
liabilities generated by this transaction.
Gain on Discontinued Operations
Gain on Discontinued
Operations represents the gain or loss on discontinued operations, adjusted for the $15.7 million gain from asset sale as described
above.
Net Income (Loss)
Net income (loss)
increased to net income of $9.4 million from a loss of $2.1 million for the three months ended February 29, 2020 and February
28, 2019, respectively. Net income (loss) increased to net income of $6.9 million from a net loss of $4.4 million for the six
months ended February 29, 2020 and February 28, 2019, respectively. The change to net income is due to the one-time gain on asset
sale of $15.7 million from the Vensure Asset Transfer.
Liquidity and Capital Resources
Going Concern
As of February
29, 2020, we had cash of $0.4 million and a working capital deficiency of $5.6 million. During the six months ended February 29,
2020, we used approximately $10.4 million of cash in our operations, and repaid $1.2 million of convertible notes, after receiving
$10.7 million of cash from the Vensure Asset Transfer. We have incurred recurring losses resulting in an accumulated deficit of
$38.1 million as of February 29, 2020. These conditions raise substantial doubt as to our ability to continue as a going concern
within one year from issuance date of the financial statements.
Our ability to
continue as a going concern is dependent upon generating profitable operations in the future and obtaining additional funds by
way of public or private offering to meet our obligations and repay our liabilities when they become due. We have a recurring
revenue business model that generated $12.4 million of gross profit for the year ended August 31, 2019 and $0.4 million for the
quarter ended February 29, 2020.
Our plans and expectations
for the next twelve months include raising additional capital to help fund expansion of our operations, including the continued
development and support of our IT and HR platform and settling our outstanding debt as it comes due. We engaged an investment banking
firm to assist us in (i) preparing information materials, (ii) advising us concerning the structure, price and conditions and (iii)
organizing the marketing efforts with potential investors in connection with a financing transaction.
Historically, our
principal source of financing has come through the sale of our common stock and issuance of convertible notes. We successfully
completed an IPO on Nasdaq on June 29, 2017, raising a total of $12 million ($10.9 million net of costs). In June 2018, we completed
a private placement of the June 2018 Notes to institutional investors raising $9 million of gross proceeds ($8.4 million net of
costs). In March 2019, we completed a private placement of the March 2019 Notes to institutional investors raising $3.75 million
($3.3 million net of costs). As of November 30, 2019, all of the $6.8 million of principal was in default. Subsequent to November
30, 2019, approximately $2.7 million of the Senior Convertible Notes in default were exchanged for new convertible notes payable.
In January 2020, an additional $1.2 million of the Senior Convertible Notes was repaid in cash and $2.1 million was converted
into shares of common stock. In March 2020, the remaining $1.0 million of the Senior Convertible Notes were converted into shares
of common stock. The remaining $0.8 million of March 2019 Notes were amended to increase the amount of March 2019 Notes
outstanding to $1.0 million and remove the anti-dilution provisions, and the remaining $1.8 million of the December 2019 Exchange
Notes were amended to remove the anti-dilution provisions. As of May 18, 2020, there was $997,000 of the Senior Convertible Note
Principal outstanding, comprised of $997,000 of the March 2019 Notes convertible at $9.20 per share of common stock due in September
2020.
Subsequent to November
30, in January 2020, we assigned client contracts representing approximately 70% of our billable clients which comprised approximately
88% of our quarterly revenue as of November 30, 2019 in exchange for $9.7 million in cash and expect to receive an additional
$9.5 million ratably over the four years following the transaction close, subject to certain closing conditions. We transferred
approximately $1.6 million of working capital after closing the Vensure Asset Transfer and will transfer approximately $6 million
of our annualized gross profit subject to certain adjustments.
We continue to
experience significant growth in the number of WSEs, which would generate additional administrative fees that would offset the
current level of operational cash burn. We retained the high growth business which increased over 100% of billings and revenue
growth. We also retained the rights to monetize the existing pool of WSEs and has begun to roll out its delivery and scheduling
applications to its customers.
Our management
believes that our current cash position, along with our revenue growth and the financing from potential institutional investors
will be sufficient to fund our operations for at least the next twelve months. If these sources do not provide the capital necessary
to fund our operations during the next twelve months, we may need to curtail certain aspects of our operations or expansion activities,
consider the sale of our assets, or consider other means of financing. We can give no assurance that we will be successful in
implementing our business plan and obtaining financing on terms advantageous to us or that any such additional financing would
be available to us as these conditions would raise substantial doubt as to our ability to continue as a going concern within one
year from the issuance date of the financial statements. Additionally, the recent COVID-19 outbreak has caused additional uncertainty
and management is still evaluating the full extent of the threat and its potential impact on our operations. These condensed consolidated
financial statements do not include any adjustments from this uncertainty. See “Prospectus Summary — Recent Developments
— COVID-19.”
Cash Flows
The following table
sets forth a summary of changes in cash flows for the twelve months ended August 31, 2019 and 2018:
|
|
For the Year Ended
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(2,086,000
|
)
|
|
$
|
(9,538,000
|
)
|
Net cash used in investing activities
|
|
|
(1,492,000
|
)
|
|
|
(3,019,000
|
)
|
Net cash provided by financing activities
|
|
|
3,489,000
|
|
|
|
8,310,000
|
|
Change in cash
|
|
$
|
(89,000
|
)
|
|
$
|
(4,247,000
|
)
|
As of August 31,
2019, we had cash and cash equivalents of $1.6 million and a working capital deficiency of $15.9 million. During the fiscal year
ended August 31, 2019, we used approximately $2.1 million of cash in our operations, of which $12.1 million was used in continuing
operations and $10.0 million was provided by discontinued operations. Cash used in continuing operations consisted of a net loss
of $24.7 million, reduced by net non-cash charges of $10.6 million and working capital changes of $2.0 million. Cash provided
by discontinued operations consisted of income of $6.0 million and $4.0 million in working capital changes. The working capital
changes were primarily in accounts payable and accrued payroll. During the year our workers’ compensation cash reserves
increased by $4.4 million and our accrued workers’ compensation liabilities increased by $4.7 million. A significant portion
of our continued operations cash spending for 2019 was attributable to approximately $4.0 million of expensed development and
marketing costs associated with the development of our mobile application.
During the fiscal
year ended August 31, 2018, we used approximately $9.5 million of cash consisting of $11.4 million used in continuing operations
and $1.9 million provided by discontinued operations. Cash used in continuing operations consisted of a continuing operations
loss of $18.0 million, reduced by net non-cash charges of $5.1 million and working capital changes of $7.1 million, primarily
in accrued payroll. Cash used in discontinued operations consisted of $1.2 million income from discontinued operations and working
capital changes of $0.7 million. During the year our workers’ compensation cash reserves increased by $1.5 million and our
accrued workers’ compensation liabilities increased by $1.2 million. A significant portion of our operating cash spending
for 2018 was attributable to approximately $4.7 million of expensed development and marketing costs associated with the development
of our mobile application.
The cash used in investing
activities was primarily due to the capitalization of the mobile application development costs performed by outside software consultants
for both 2019 and 2018.
For
the fiscal year ended August 31, 2019, cash from financing activities of $3.5 million were primarily due to $3.75 million in gross
proceeds ($3.3 million net of original issue discount and closing costs) from the issuance of the March 2019 Notes, exercise of
warrants for common stock of $0.7 million, and $0.4 million repayment of the Senior Convertible Notes in cash.
Non-GAAP Financial Measures
In addition to
financial measures presented in accordance with GAAP, we monitor other non-GAAP measures that we use to manage our business, make
planning decisions and allocate resources. These key financial measures provide an additional view of our operational performance
over the long-term and provide useful information that we use to maintain and grow our business. The presentation of these non-GAAP
financial measures is used to enhance the understanding of certain aspects of our financial performance. It is not meant to be
considered in isolation, superior to, or as a substitute for the directly comparable financial measures presented in accordance
with GAAP.
We report our revenues
as gross billings, net of related direct labor costs, for our EAS clients and revenues without reduction of labor costs for staffing
services clients. For the years ended August 31, 2019 and 2018, we had no revenues associated with staffing services or generated
through our technology services. Gross billings represent billings to our business clients and include WSE gross wages, employer
payroll taxes, and workers’ compensation premiums as well as admin fees for our value-added services and other charges for
workforce management support. Gross billings are a non-GAAP measurement and represent a key operating metric for management along
with number of WSEs and number of clients. Gross billings and the number of active WSEs represent the primary drivers of our business
operations. Active WSEs are defined as an employee in our HRIS ecosystem that has provided services for at least one of our client
customers for any reported period. Our primary profitability metrics are gross profit, gross profit per WSE, and gross profit
percentage of gross billings.
|
|
February 29,
2020
|
|
|
|
February 28,
2019
|
|
Active
worksite employees (unaudited)
|
|
|
3,100
|
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP to Non-GAAP
Measure
|
|
Three Months
Ended,
|
|
|
Six Months
Ended,
|
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
Gross Billings
|
|
$
|
16,098,000
|
|
|
$
|
8,175,000
|
|
|
$
|
32,603,000
|
|
|
$
|
14,046,000
|
|
Less: Adjustment to gross billings
|
|
|
13,515,000
|
|
|
|
6,989,000
|
|
|
|
27,842,000
|
|
|
|
12,026,000
|
|
Revenues
|
|
$
|
2,583,000
|
|
|
$
|
1,186,000
|
|
|
$
|
4,761,000
|
|
|
$
|
2,020,000
|
|
Material Commitments
We do not have
any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment and software necessary
to conduct our operations on an as needed basis.
Off-Balance Sheet Arrangements
We did not have during the periods
presented, and we do not currently have, any off-balance sheet arrangements.
Share Repurchase Plan
On July 9, 2019, our
board of directors authorized the repurchase of up to 10 million shares of our outstanding shares of common stock as market conditions
warrant over a period of 18 months. We have not implemented the share repurchase plan to date and have not repurchased any shares
under the plan.
Critical Accounting Policies and
Significant Judgment and Estimates
Our management’s
discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which
have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions,
which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
The notes to our audited
consolidated financial statements contain a summary of our significant accounting policies. We consider the following accounting
policies critical to the understanding of the results of our operations:
Use of Estimates
The preparation
of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
include:
|
·
|
Liability for legal contingencies;
|
|
·
|
Useful lives of property and equipment;
|
|
·
|
Assumptions made in valuing equity instruments;
|
|
·
|
Assumptions made in valuing embedded derivatives and freestanding equity-linked instrument classified
as liabilities;
|
|
·
|
Deferred income taxes and related valuation allowance; and
|
|
·
|
Projected development of workers’ compensation claims
|
Revenue and Direct Cost Recognition
We provide an array
of human resources and business solutions designed to help improve business performance.
We account for our
revenues in accordance with Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition, Principal Agent
Considerations. Our EAS solutions revenue is primarily derived from our gross billings, which are based on (i) the payroll
cost of our WSEs and (ii) a mark-up computed as a percentage of payroll costs for payroll taxes and workers’ compensation
premiums.
Our revenues are
primarily attributable to fees for providing staffing solutions, EAS and human capital management services. We recognize 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. We enter into
contracts with our clients for EAS based on a stated rate and price in the contract. Our contracts generally have a term of twelve
months, but are cancellable at any time by either party with thirty days’ notice.
Gross billings
are invoiced to each client concurrently with each periodic payroll of our 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 service at the client
worksite. Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on our consolidated
balance sheets and were $1,137,000 and $310,000 for the years ended August 31, 2019 and August 31, 2018, respectively.
Consistent with our
revenue recognition policy, our direct costs do not include the payroll cost of our WSEs. Our cost of revenue associated with our
revenue generating activities are primarily comprised of all other costs related to our WSEs, such as the employer portion of payroll-related
taxes, employee benefit plan premiums and workers’ compensation insurance costs.
We have evaluated our
revenue recognition policies in conjunction with our future expected business which may be migrating to a staffing business model.
For fiscal years 2018 and 2019, we determined that we did not have any 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.
We reviewed the costs
associated with acquiring our customers under ASC 340-40 Other Assets and Deferred Costs and determined that no such costs
should be capitalized. Costs relating to our customers are typically commissions paid as a percentage of some of our revenue components
and are expensed as they are incurred because the terms of our contracts generally are cancellable by either party with a 45-day
notice. These costs are recorded in commissions in our Consolidated Statement of Operations.
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 being 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 for purposes of computing depreciation for equipment is five years and for furniture and fixtures
is five to seven years. The amortization of leasehold improvements and the depreciation of equipment and furniture is
included in depreciation expense on the consolidated statements of operations.
Computer Software Development
Software
development costs relate primarily to software coding, systems interfaces and testing of our 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.
We determined
that there were no material internal software development costs for the years ended August 31, 2018 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 five years.
The amortization
of these assets is included in depreciation expense on the consolidated statements of operations.
Impairment and Disposal of Long-Lived
Assets
We periodically
evaluate our 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,
we would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset.
In addition, we 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. During the fiscal year ended August 31, 2019 we conducted an impairment analysis of our capitalized software
and determined that there was no impairment loss required.
Workers’ Compensation
Everest Program
Up to July 2018, a
portion of our workers’ compensation risk was covered by a retrospective rated policy, which calculates the final policy
premium based on our loss experience during the term of the policy and the stipulated formula set forth in the policy. We fund
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 us or a combination of both. If our losses under that policy exceed the expected losses
under that policy, then we could receive a demand for additional premium payments.
We utilize a third-party
to estimate our 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 our workers’ compensation claims cost estimates. As of August 31, 2019, we classified $0.1 million in short term accrued
workers’ compensation and $0.1 million in long-term accrued workers’ compensation in our consolidated balance sheets.
Sunz Program
Starting in July
2018, our workers’ compensation program for our WSEs has been provided through an arrangement with United Wisconsin Insurance
Company and administered by Sunz. Under this program, we have financial responsibility for the first $0.5 million of claims per
occurrence. We provide and maintain a loss fund that will be used to pay claims and claim related expenses. The workers’
compensation insurance carrier established monthly funding requirements comprised of premium costs and funds to be set aside for
payment of future claims (“claim loss funds”). The level of claim loss funds is primarily based upon anticipated 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 deposits- workers’ compensation, a long-term asset in our consolidated
balance sheets.
As of August 31,
2019, we had $0.2 million in “deposit – workers’ compensation”, classified as a short-term asset and $0.8
million, classified as a long-term asset.
Our estimate of
incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred
claim costs expected to be paid beyond one year is included in long-term liabilities on our consolidated balance sheets. As of
August 31, 2019, we had short term accrued workers’ compensation costs of $0.2 million and long-term accrued workers’
compensation costs of $0.5 million.
Because we bear the
financial responsibility for claims up to the level noted above, such claims, which are the primary component of our workers’
compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and
indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related
incurred costs in each reporting period includes estimates, which takes into account the ongoing development of claims and therefore
requires a significant level of judgment. In estimating ultimate loss rates, we utilize 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 our workers’ compensation claims cost estimates. The estimated incurred claims are based upon: (i)
the level of claims processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns
under the plan; and (iii) the number of participants in the plan.
Debt Issuance Costs and Debt Discount
Debt issuance costs
and debt discounts are being amortized over the lives of the related financings on a basis that approximates the effective interest
method. Costs and discounts are presented as a reduction of the related debt in the accompanying balance sheets. Portions attributable
to notes converted into equity are accelerated to interest expense upon conversion.
Beneficial Conversion Features
The intrinsic value
of a beneficial conversion feature (“BCF”) inherent to a convertible note payable, which is not bifurcated and accounted
for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the
convertible note payable. This discount is amortized over the period from the date of issuance to the stated maturity using the
straight-line method which approximates the effective interest method. If the note payable is retired prior to the end of the contractual
term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the BCF is measured by
comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing
transaction, if any, to the fair value of the common stock at the commitment date to be received upon conversion.
Derivative Financial Instruments
When a company issues
debt that contains a conversion feature, it first evaluates whether the conversion feature meets the requirement to be treated
as a derivative: a) the settlement amount is determined by one or more underlying, typically the price of our stock, b) the settlement
amount is determined by one or more notional amounts or payments provisions or both, generally the number of shares upon conversion;
c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provision, which in the case
of convertible debt generally means the stock received upon conversion can be readily sold for cash. There are certain scope exceptions
from derivative treatment, but these typically exclude conversion features that provide for a variable number of shares. When we
issue warrants to purchase our common stock, we evaluate whether they meet the requirements to be treated as derivative. Generally,
warrants would be treated as a derivative if the provisions of the warrants agreements create uncertainty as to a) the number of
shares to be issued upon exercise, or b) whether shares may be issued upon exercise. If the conversion feature within convertible
debt or warrants meet the requirements to be treated as a derivative, we estimate the fair value of the derivative liability using
the lattice-based option valuation model upon the date of issuance. If the fair value of the derivative liability is higher than
the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of
the derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount
of the debt. The derivative liability is revalued at the end of each reporting period and any change in fair value is recorded
as a change in fair value in the consolidated statement of operations. The debt discount is amortized through interest expense
over the life of the debt. Derivative instrument liabilities and the host debt agreements are classified on the consolidated balance
sheets as current or non-current based on whether settlement of the derivative instrument could be required within twelve months
of the consolidated balance sheet date.
The accounting treatment
of derivative financial instruments requires that we record the embedded conversion option and warrants at their fair values as
of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is
recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. We reassess the classification
of our derivative instruments at each balance sheet date. If the classification changes as a result of events during the period,
the contract is reclassified as of the date of the event that caused the reclassification.
Share-Based Compensation
At February 29,
2020 and February 28, 2019, we had one stock-based compensation plan under which we may issue both share and stock option awards.
We account for this plan under the recognition and measurement principles of ASC 718, Compensation- Stock Compensation, which
requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated
statements of operations on their fair values. Share grants are valued at the closing market price on the date of issuance which
approximates fair value.
For option grants,
the grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. Our option
grants are typically issued with vesting depending on a term of service. For all employee stock options granted, we recognize
expense over the requisite service period over the employee’s requisite service period (generally the vesting period of
the equity grant).
Our 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 our historical volatility since our IPO. Any changes in these highly subjective assumptions significantly
impact stock-based compensation expense.
Following the adoption
of Accounting Standards Update ASU 2016-09, we elected to account for forfeitures 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.
Off-Balance Sheet Arrangements
We did not have during
the periods presented, and we do not currently have, any off-balance sheet arrangements.
Contingencies
Certain conditions
may exist as of the date the financial statements are issued, which may result in a loss to us, but which will only be resolved
when one or more future events occur or fail to occur. Our management, in consultation with our legal counsel, as appropriate,
assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we, in consultation
with legal counsel, evaluate the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits
of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that
a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued
in our financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably
possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the
range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not
disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Emerging Growth Reporting
Requirements
We are a public reporting
company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are required to publicly report
on an ongoing basis as an “emerging growth company” (as defined in the JOBS Act) under the reporting rules set forth
under the Exchange Act. For so long as we remain an “emerging growth company”, we may take advantage of certain exemptions
from various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging
growth companies”, including but not limited to:
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not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act;
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taking advantage of extensions of time to comply with certain new or revised financial accounting
standards;
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being permitted to comply with reduced disclosure obligations regarding executive compensation
in our periodic reports and proxy statements; and
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being exempt from the requirement to hold a non-binding advisory vote on executive compensation
and shareholder approval of any golden parachute payments not previously approved.
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We expect to take
advantage of these reporting exemptions until we are no longer an emerging growth company. We would remain an “emerging
growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds
$700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following
December 31.
BUSINESS
Business Overview
Our current business,
and the primary source of our revenues to date, has been under a traditional staffing services business model. Our initial market
focus is to use this traditional approach, coupled with developed technology, to address an underserved market containing predominately
lower wage employees with high turnover in light industrial, services, and food and hospitality. We provide human resources, employment
compliance, insurance, payroll, and operational employment services solutions for our clients and shift work or gig opportunities
for WSEs. As consideration for providing these services, we receive administrative or processing fees as a percentage of a client’s
gross payroll, process and file payroll taxes and payroll tax returns, provide workers’ compensation insurance, and provide
employee benefits. We have built a substantial business on a recurring revenue model since our inception in 2015. For the fiscal
year ended August 31, 2019, we processed over $350 million of payroll billings. Our business has significantly grown for each
year since inception and we expect to continue our high degree of growth. However, we have experienced losses to date as we have
invested in both our technology solutions as well as the back-office operations required to service a large employee base under
a traditional staffing model.
We are currently
focused on clients in the restaurant and hospitality industries, traditionally market segments with high employee turnover and
low pay rates. We believe that our focus on these industries will be better served by our Human Resources Information System (“HRIS”)
technology platform which provides payroll and human resources tracking for our clients and will result in lower operating costs,
improved customer experience and revenue growth acceleration. All of our clients enter into service agreements with us or our
wholly-owned subsidiary, ReThink Human Capital Management, Inc. (“ReThink”).
Our revenues for
the year ended August 31, 2019 primarily consist of administrative fees calculated as a percentage of gross payroll processed,
payroll taxes due on WSEs billed to the client and remitted to the applicable taxation authority, and workers’ compensation
premiums billed to the client for which we facilitate workers’ compensation coverage. Our costs of revenues consist of accrued
and paid payroll taxes and our costs to provide the workers’ compensation coverage including premiums and loss reserves.
A significant portion of our assets and liabilities is for our workers’ compensation reserves. Our cash balances related
to these reserves are carried as assets and our estimates of projected workers’ compensation claims are carried as liabilities.
Since 2019, we have provided a self-funded workers’ compensation policy for up to $500,000 and purchase reinsurance for
claims in excess of $500,000. We actively monitor and manage our clients and WSEs’ workers’ compensation claims which
we believe allows us to provide a lower cost workers’ compensation option for our clients than they would otherwise be able
to purchase on their own.
In January 2020,
in connection with an asset purchase agreement, we assigned client contracts representing approximately 70% of our billable clients
which comprised approximately 88% of our quarterly revenue as of November 30, 2019 and certain operating assets for $19.1 million
in cash of which $9.6 million was received at closing and $9.5 million is due over the next four years, commencing in April 2020,
subject to certain conditions, including the performance of the assigned contracts. For the three months ended February 29, 2020,
we billed 83 clients in total, billed approximately 3,500 total WSEs. This represents an annualized growth rate of over 100% for
WSEs compared to the three months ending February 28, 2019. We have also entered into an agreement with a large customer with
multiple locations representing approximately 1,000 additional WSEs. In addition, we retained approximately 35,000 unbilled WSEs
in our HRIS platform as of March 31, 2020. These new WSEs were added to our HRIS platform through our new automated onboarding
process which was placed into service in 2019. We believe there is significant business interest in our HRIS platform and scheduling
tools for multi-location client opportunities.
We believe that our
customer value proposition is to provide the combination of overall net cost savings to the client as follows:
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Payroll tax compliance and management services
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Governmental HR compliance such as for ACA compliance requirements
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Reduced client workers’ compensation premiums or enhanced coverage
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Access to an employee pool of potential applicants to reduce turnover costs
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Offset by increased administrative fee cost to the client payable to us
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Our founders and
management believe that providing this baseline business, coupled with a technology solution to address additional concerns
such as employee scheduling and turnover, will provide a unique, cost effective solution to the HR compliance, staffing, and
scheduling problems that businesses face. Our next goal, currently underway, is to match the needs of small businesses with
paying “gigs” with a fully compliant and lower cost staffing solution. For this, we need to acquire a significant
number of WSEs to provide our clients with a variety of solutions for their unique staffing needs and to facilitate the
employment relationship.
Managing, recruiting,
and scheduling a large number of low wage employees can be both difficult and expensive. The acquisition and recruiting of such
an employee population is highly labor intensive and costly in part due to high onboarding and maintenance costs such as tax information
capture or I-9 verification. Early in our history, we evaluated these costs and determined that proper process flows, automated
with blockchain and cloud technology and coupled with access to lower cost workers’ compensation policies resulting from
economies of scale could result in a profitable and low-cost scalable business model. Over the past four years, we have invested
heavily in a robust, cloud-based HRIS platform in order to:
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reduce WSE management costs,
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automate new WSE and client onboarding, and
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provide
additional value-add services for our business clients resulting in additional revenue
streams to us.
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Beginning in 2017,
we began to develop our HRIS database and front-end desktop and mobile phone application to facilitate easier WSE and client onboarding
processes as well as for additional client functionality and the opportunity for WSEs to find shift work. Beginning in March 2019,
we brought the development of our mobile application in house and launched in 2019. As of August 31, 2019, the initial launch was
completed and we began to provide some of the HRIS and application services to select legacy customers on a test basis. We are
continuing to implement additional HRIS functionality in delivery, gig intermediation services, and scheduling through our mobile
phone application. We see these technology based services as multiple potential revenue drivers with limited additional costs.
Our cloud-based HRIS
platform captures, holds, and processes HR and payroll information for the clients and WSEs through an easy to use customized front
end interface coupled with a secure, remotely hosted database. The HRIS system can be accessed by either a desktop computer or
an easy to use electronic mobile application designed with HR workflows in mind. Once fully implemented, we expect to reduce the
time, expense, and error rate for onboarding our client employees into our HRIS ecosystem. Once onboarded, the client employees
are included as our WSEs and who are available for shift work within our business ecosystem. This allows our HRIS platform to serve
as a gig marketplace for WSEs and allows for client businesses to better manage their staffing needs.
Our Services
Our core business is to provide regular
payroll processing services to clients under an EAS model in addition to individual services, such as payroll tax compliance, workers’
compensation insurance, and employee HR compliance management. In addition, in November, 2019, we launched our employee onboarding
function and employee scheduling functions to our customers in the mobile application. Beginning later in fiscal 2020, with the
full commercial launch of our mobile application software, we expect to provide additional services including “white label”
food delivery functionality.
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Figure 1
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Our core EAS are
typically provided to our clients for one-year renewable terms. Through February 29, 2020, we have not had any material revenues
or billings generated within our HRIS from additional services. We expect that our future service offerings, including technology-based
services provided through our HRIS system and mobile application, will provide for additional revenue streams and support cost
reductions for existing and future clients. We expect that our future services will be offered through “a la carte”
pricing via customizable on-line contracts.
The new Gig Economy
has created legal issues regarding the classification of workers as independent contractors or employees. In addition, the rising
trend of predictive scheduling creates logistical issues for our clients regarding worker’s schedules. We provide solutions
to businesses struggling with these compliance issue primarily by absorbing our clients’ workers, who we refer to as WSEs
but are also referred to as “shift workers,” “shifters,” “gig workers,” or “assigned
employees.” WSEs are included under our corporate employee umbrella and we handle certain employment-related compliance responsibilities
for our clients as part of our services. This arrangement benefits WSEs by providing additional work opportunities through access
to our clients. WSEs further benefit from employee status benefits through our benefit plan offerings, including minimum essential
health insurance coverage plans and 401(k) plans, as well as enjoying the protections of workers’ compensation coverage.
Technological Solution
At the heart of our employment service solutions is a secure, cloud-based HRIS database accessible by a desktop or mobile device through which our WSEs will be enabled to find available shift work at our client locations. This solution solves a problem of finding available shift work for both the WSEs seeking additional work and clients looking to fill open shifts. For new WSEs, the mobile application includes an easy to use WSE onboarding functionality which we believe will increase our pool of WSEs that will provide a deep bench of worker talent for our business clients. The onboarding feature of our software enables us to capture all application process related data regarding our assigned employees and to introduce employees to and integrate them into the ShiftPixy Ecosystem. The mobile application features a chatbot that leverages artificial intelligence to aid in gathering the data from workers via a series of questions designing to capture all required information, including customer specific and governmental information. Final onboarding steps requiring signatures can also be prepared from the HRIS onboarding module.
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Figure 2
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In 2019, we implemented
additional functionality to provide a scheduling component of our software, which enables each client worksite to schedule workers
and to identify shift gaps that need to be filled. We utilize artificial intelligence to maintain schedules and fulfillment, using
an active methodology to engage and move people to action. We began using this functionality at the end of fiscal 2019 on a test
basis.
The final phase of
our initial platform, deployed in late fiscal 2019 on a test basis, consists of our “shift intermediation” functionality,
which is designed to enable our WSEs to receive information regarding and to accept available shift work opportunities. The intermediation
functionality becomes useful only to the extent that we have meaningful numbers of WSEs and client shift opportunities in the same
geographic region. We reached geographical concentration in Southern California during 2019 and we activated these key features
in August 2019 to a limited group of customers on a test basis.
Our goal is to have
a mature and robust hosted cloud-based HRIS platform coupled with a seamless and technically sophisticated mobile application that
will act as both a revenue generation system as well as a “viral” customer acquisition engine through the combination
of the scheduling, delivery, and intermediation features and interactions. We believe that once a critical mass of clients and
WSEs is achieved, additional shift opportunities will be created in the food service and hospitality industries. Our approach to
achieving this critical mass is to market our services to restaurant owners and franchisees, focusing on specific brands and geographical
locations. We expect critical mass to be a function of both geography, such as in Southern California for viral adoption by WSEs
and clients, or by adoption within franchise brands.
Markets and Marketing
Our initial market
focus was chosen based on our understanding of the issues and challenges facing “Quick Service Restaurants” (“QSRs”),
including fast food franchises and local restaurants. We have chosen to invest in two key features of our mobile application to
this end consisting of: i) scheduling functionality, which is designed to enhance the client’s experience through scheduling
of employees and reducing the impact of turnover and ii) delivery functionality, which is designed to increase revenues through
delivery fulfillment and bring “in house” delivery fulfillment and thereby reducing delivery costs.
One of the most recent developments in the food and hospitality industry is the rapid rise of third-party restaurant delivery providers such as Uber Eats, GrubHub, and DoorDash. These providers have successfully increased QSR revenue in many local markets by providing food delivery to a wide-scale audience using contract delivery drivers. We have observed two significant issues with our clients and third-party delivery providers which is increasingly being reported in the news media. The first issue is the large revenue share typically being paid to third-party delivery providers as delivery fees. These additional costs erode the profit for the QSRs from additional sales made through the delivery channel. The second issue is that our QSR customers have encountered logistical problems with food deliveries - late deliveries, cold food, missing accessories, and unfriendly delivery people. This has caused significant “brand erosion” and has caused these clients to reconsider third-party delivery.
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Figure 3
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We provide a solution
to the third-party delivery issues. We designed our HRIS platform to manage food deliveries by the QSRs using internal personnel
and a customized “white label” mobile application. Our recently released delivery feature links this “white label”
delivery ordering system to our delivery solution, thereby freeing the QSR to have their own brand showcasing an ordering mobile
application but retaining similar back-office delivery technology including scheduling, ordering, and delivery status pushed to
a customer’s smart phone. Our technology and approach to human capital management provides a unique window into the daily
demands of QSR operators and the ability to extend our technology and engagement to enable this self-delivery proposition. Our
new driver management layer for operators in the ShiftPixy Ecosystem will now allow clients to use their own team members to deliver
a positive customer experience. Our mobile application now provides the HR compliance, management and insurance solutions necessary
to support a delivery option and created a turnkey self-delivery opportunity for the individual QSR operator. Our solution saves
delivery costs to the QSR client and allows them to retain the customer information and quality control over the food delivery.
The first phase of
this component of our platform is the driver onboarding, which was completed in 2019. The enhanced features will also “micro
meter” the essential commercial insurance coverages required by our operator clients on a delivery-by-delivery basis (workers’
compensation and auto coverages) which has been a significant barrier for some QSRs to provide their own delivery services. We
began using the “delivery features” of our mobile application for selected customers on a trial basis in the fourth
quarter of fiscal 2019 and expect to fully deploy the solution in fiscal 2020.
A significant problem
for small businesses, particularly in the food service industry, such as QSRs, involve compliance with employment related regulations
imposed by federal, state and local governments. Requirements associated with workers’ compensation insurance, and other
traditional employment compliance issues, including the employer mandate provisions of the ACA create compliance challenges and
increased costs. The compliance challenges are often complicated by “workaround” solutions that many employers resort
to in order to avoid characterizing employees as “full-time” and requires increased compliance to avoid fines and penalties.
To date, the United States Congress has considered but not passed an amendment to replace the ACA other than the removal of the
individual mandate provision in 2017. Despite the removal of the individual mandate, employers still face regulatory issues and
overhead costs for which we believe our services are a cost-effective solution.
Other regulation is
prevalent at the state and local levels. Recently in California, where most of our WSEs reside, legislation was passed that more
clearly defines gig workers for companies such as Lyft or Uber as employees rather than their previous classification as independent
contractors. We believe that legislation such as this is a direct response to a considerable loss of tax revenue from the gig companies’
contract employees, and that there is an increasing likelihood that workers in other states will have to be treated as employees
within the next few years. The effective date for the California legislation is January, 2020. Both Lyft and Uber are filing appeals
to avoid these reclassifications. Our business model provides a solution to this regulatory change by absorbing workers for these
types of gig economy companies as our employees, eliminating any risk of litigation, fines and other worker misclassification problems
for these types of gig economy companies to the extent they become our clients.
Figure 4
The worldwide trend
toward a gig economy resulting from the market adoption of smart phones and mobile telephones and remote office workers moving
away from the traditional office or factory workplace. For our target WSE audience, as of February 2019, over 92% of 18-30-year-old
workers have, or use, a smart phone. This development has created opportunities for companies catering to the use of these devices.
We have designed our mobile application to utilize the smart phone adoption to create an easy to use on-boarding tool for potential
employees. The migration towards a gig economy trend is also significant and according to a 2016 study conducted by Ardent partners,
nearly 42% of the world’s total workforce is now considered ‘non-employee,’ which includes contingent/contract
workers, temporary staff, gig workers, freelancers, professional services, and independent contractors. Our initial focus in the
marketing of our product to the larger gig economy is to small and medium sized businesses with high worker turnover such as the
restaurant and hospitality industries who have high turnover and often contract with independent contractor workers to perform
less than full-time gig engagements, primarily in the form of shift work.
Figure 5
Our headquarters is
currently situated in Irvine, California, from which it can reach the California market.
We believe we will
experience business and revenue growth in the gig economy from the following factors:
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Large Potential Market. Current statistics show that there are over 14.7 million employees
working in our current target market--the restaurant and hospitality industries representing over $300 billion of annual revenues.
Compared to the total workforce in all industries, workers in the restaurant industry have a notably higher percentage of part-time
workers. At our current monetization rate per employee, this represents an annual revenue opportunity of over $9 billion per year
for the United States. Our intention is to expand both our geographic footprint and our service offerings into other industries,
particularly where part-time work is a significant component of the applicable labor force, including the retail and health care
sectors.
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Rapid Rise of Independent Workers. The number of independent workers, totaling approximately
41 million in 2018, is expected to increase to 40% of the private, non-farm U.S. workforce by 2021. As of early 2019, approximately
48% of the U.S. workforce has worked as an independent employee as either part time or on a contract basis.
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Technology Affecting and Attitudes towards Employment Related Engagements. Gig-economy
platforms have changed the way part-time workers can identify and connect to work opportunities, and Millennials and others have
embraced such technologies as a means to secure short-term employment related engagements. The significant increase in the adoption
of smart phone devices has provided the “last mile” platform to enable technology solutions such as ours to provide
a gig economy platform. Most importantly, for our target audience of 18-35 year old workers as of February 2019, 92% of these workers
regularly use a smart phone.
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New ShiftPixy Mobile App is Designed to Provide Additional Benefits to Employers and Shift
Workers. Millennials represent approximately 40% of the independent workforce who are over the age of 21 and who work
15 hours or more each week. Mindful that most of our shifters will be Millennials who connect with the outside world primarily
through a mobile device, we are poised to significantly expand our business through our mobile app. Our mobile app is a proprietary
application downloaded to mobile devices, allowing our shifters to access shift work opportunities at all of our clients, not just
their current restaurant or hospitality provider, and with an added feature, anticipated to be available in the first calendar
quarter of 2020, also allowing shift employees not working at our clients to access shift work opportunities at all of our clients.
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Figure 6
The ShiftPixy Ecosystem Solution
We have developed an
HRIS Ecosystem comprised of a closed proprietary operating and processing information system that provides a tool for businesses
needing staffing flexibility to schedule existing employees and to post open schedule slots to be filled by an available pool of
shift workers (the “ShiftPixy Ecosystem”). The ShiftPixy Ecosystem provides the following benefits to our clients:
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Compliance: We assume a substantial portion of a business’s employment regulatory compliance issues by having all of client shifter employees become employees of us. As the employer of the WSEs, we can assist our clients with the staffing of their shift employee requirements by providing a qualified pool of potential applicants or as shift workers. The individual WSE is a legal employee of ours and we thereby provide employment regulatory compliance reporting, taking this burden away from our clients. The client’s management time spent on compliance issues substantially reduced and allows client management to focus on their business.
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Operational improvements: Our service can reduce the impact of high turnover, which is a consistent problem across the restaurant industry and a significant issue to our clients. Our service provides pre-screened applicants for permanent positions as well as the access to the ShiftPixy Ecosystem population of potential shift workers. The flexibility inherent in the Ecosystem approach can better tailor the staffing needs of a client to the talent pool available.
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Cost Savings: The payroll and related costs associated WSEs such as workers’ compensation and benefits are consolidated and charged, in effect, in conjunction with the shifters’ applicable rates of pay, allowing the clients to fund the employment related costs as the services are used--thereby avoiding various lump sum employment-related cost impositions. Cost savings for our clients can vary but they experience cost reductions in reduced overhead costs related to HR compliance, payroll processing, and elimination of non-compliance fines and related penalties. Clients also experienced reduced turnover and the related costs. We exploit economies of scale in purchasing employer related solutions such as workers’ compensation and other benefits and can provide a WSE to a business at a lower cost than the business can otherwise typically staff a particular position.
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Improved human resources management: By having access to our entire part-time workforce, a client business is enabled to scale up or down more rapidly, making it easier to contain and manage operational costs. The two largest costs for a restaurant are food and labor. We charge a fixed percentage on wages that allows the client business to budget and plan more effectively without the full weight associated with the threats of penalties or missteps in dealing with employment law compliance related issues.
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As of November
30, 2019, we served an aggregate of 252 clients, with an aggregate of approximately 13,000 employees. None of these clients represents
more than 10% of our revenues for fiscal year 2019. Effective January 1, 2020, we assigned client contracts representing approximately
70% of our billable clients which comprised approximately 88% of our quarterly revenue as of November 30, 2019 and certain operating
assets as part of the Vensure Asset Transfer. As of February 29, 2020, our retained customer base was an aggregate of 83 clients
with an aggregate of approximately 3,500 billed WSEs and approximately 35,000 additional unbilled WSEs retained in our HRIS system.
None of these clients represents more than 10% of our revenues for the three or six month periods ending February 29, 2020.
Competition
We have two primary
sources of competition. Competitors to our gig business model include businesses such as ShiftGig, Instawork, Snag, Jobletics and
other comparable businesses that seek to arrange short-term work assignments for both employees and independent contractors. Competitors
to our HRIS system include businesses such as Kelly Services, ManpowerGroup, and Barrett Business Services which provide human
resource software solutions.
We believe our service
offering competes effectively based on our strategy of combining an ecosystem of employment services with the individualized ability
to link trained workers to specific shift-work opportunities.
Governmental Regulation
Our business operates
in an environment that is affected by numerous federal, state and local laws and regulations relating to labor and employment
matters, benefit plans and income and employment taxes. Moreover, because our client engagements involve some form of co-employer
relationship with regard to the employees who provide services in employment to our clients, the application of such laws to these
non-traditional employer relationships can become complex. Nearly all states have adopted laws or regulations regarding the licensure,
registration or certifications of organizations that engage in co-employer relationships. While our model is currently not included
in such regulations, we may become subject to such laws and regulations when we enter into co- employer relationships with regard
to employees providing services in the jurisdictions where such laws and regulations apply.
Additionally, government
agencies have since declared a state of emergency in the U.S., and some have restricted movement, required restaurant, bar and
hotel closures, and advised people not to visit restaurants or bars and otherwise restrict non-essential travel. In some jurisdictions,
people have been instructed to shelter in place to reduce the spread of COVID-19, in response to which restaurants have temporarily
closed and have shifted operations at others to provide only take-out and delivery service. See “Prospectus Summary —
Recent Developments — COVID-19.”
The following summarizes what we believe
are the most important legal and regulatory aspects of our business:
Federal Regulations
Employer Status
We sponsor certain
employee benefit plan offerings as the “employer” of our shift workers under the Internal Revenue Code of 1986 (the
“Code”) and ERISA. The multiple definitions of “employer” under both the Code and ERISA are not clear and
most are defined in part by complex multi-factor tests under common law. We believe that we qualify as an “employer”
of our shift workers under both the Code and ERISA, as well as various state regulations, but this status could be subject to challenge
by various regulators. For additional information on employer status and its impact on our business and results of operations,
refer to the section entitled “Risk Factors,” under the heading “If we are not recognized as an employer of WSEs
under federal and state regulations, or we are deemed to be an insurance agent or third-party administrator, we and our clients
could be adversely impacted.”
Affordable Care Act and Health Care
Reform
The ACA was signed
into law in March 2010. The ACA implemented substantial health care reforms with staggered effective dates continuing through 2020,
and many provisions in the Act require the issuance of additional guidance from applicable federal government agencies and the
states. There could be significant changes to the ACA and health care in general, including the potential modification, amendment
or repeal of the ACA. For additional information on the ACA and its impact on our business and results of operations, refer to
the section entitled “Risk Factors,” under the heading, “Failure to comply with, or changes in, laws and regulations
applicable to our business, particularly potential changes to the ACA, could have a materially adverse effect on our marketing
plan as well as our reputation, results of operations or financial condition, or have other adverse consequences.” As of
the date of this prospectus, the ACA has not been formally amended or repealed; however, the Tax Cuts and Jobs Act of 2017 effectively
eliminates the individual mandate provisions of the ACA, beginning in 2019.
Health Insurance Portability and Accountability
Act
Maintaining the security
of information regarding our employees is important to us as we sponsor employee benefit plans and may have access to personal
health information of our employees. The manner in which we manage protected health information (PHI) is subject to HIPAA, and
the HITECH Act. HIPAA contains substantial restrictions and health data privacy, security and breach notification requirements
with respect to the use and disclosure of PHI. Further, under the HITECH Act there are steep penalties and fines for HIPAA violations.
Our health plans are covered entities under HIPAA, and we are therefore required to comply with HIPAA’s portability, privacy,
and security requirements. For additional information regarding the information we collect, how we maintain the confidentiality
of our clients’ and employees’ confidential information and the potential impact to our business if we fail to protect
the confidentiality of such data, refer to the section entitled “Risk Factors,” under the heading, “We collect,
use, transmit and store personal and business information with the use of data service vendors, and a security or privacy breach
may damage or disrupt our businesses, result in the disclosure of confidential information, damage our reputation, increase our
costs or cause losses.”
State Regulations
Nearly all states have
adopted provisions for licensing, registration, certification or other formal recognition of co-employers. Such laws vary from
state to state but generally provide for monitoring or ensuring the fiscal responsibility of a PEO, and in some cases codify and
clarify the co-employment relationship for unemployment, workers’ compensation and other purposes under state laws. The scope
of the laws and regulations of states is such that it encompasses our activities. In addition,
many state laws require guarantees by us of the activities of our subsidiary, ReThink, and in some states we may seek licensure,
registration or certification, as applicable, together with our subsidiary, ReThink, because the financials for both organizations
are consolidated. We believe we are in compliance in all material respects with the requirements in the states wherein we are conducting
business.
We must also comply
with state unemployment tax requirements where our clients are located. State unemployment taxes are based on taxable wages and
tax rates assigned by each state. The tax rates vary by state and are determined, in part, based on our prior years’ compensation
and unemployment claims experience in each state. Certain rates are also determined, in part, by each client’s own compensation
and unemployment claims experience. In addition, states have the ability under law to increase unemployment tax rates, including
retroactively, to cover deficiencies in the unemployment tax funds.
In addition, we are
subject to Federal and state laws and regulations regarding privacy and information security. California recently enacted legislation,
the California Consumer Privacy Act of 2018, (the “CCPA”) that went into effect on January 1, 2020. The CCPA affords
consumers expanded privacy protections, including rights to access and require deletion of their personal information, opt out
of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA
also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data
breach litigation. There are also a number of other pending U.S. state privacy laws that contain similar, but potentially stricter
and conflicting, obligations to the CCPA. These laws, if enacted, may require material alteration of our internal procedures and
could potentially limit the ability of data providers or our customers to provide certain personal information to us that is necessary
for our business operations.
Intellectual Property
We have registered
five trademarks, consisting of two names (ShiftPixy and ZiPixy) and three logos (the Pixy image, the Pixy wings image and wings/name
logo). In addition, we have patents pending for certain features of our mobile application in the United States, Australia,
Brazil, European Union, India, Japan, Korea and Hong Kong. We have other intellectual property and related rights as well, particularly
in connection with our software. We believe that our intellectual property is of considerable importance to our business.
Employees
As of February
29, 2020, we employed 46 people on a full-time basis in our corporate offices, and we served approximately 3,500 active, paid
WSEs with an additional 35,000 inactive WSEs carried within our HRIS platform. Effective as of January 1, 2020, we assigned client
contracts representing approximately 70% of our billable clients which comprised approximately 88% of our quarterly revenue as
of November 30, 2019 as part of the Vensure Asset Transfer and transferred 21 of our 64 corporate employees. We retained all WSEs
in our HRIS system. As of February 20, 2020, we had approximately 3,900 billed WSEs for the clients retained or added since December
31, 2019 and had an additional 30,000 unbilled WSEs in our HRIS system.
Legal Proceedings
We are currently involved
in a dispute with our software developer, Kadima Ventures (“Kadima”), over incomplete but paid for software development
work. In May 2016, we 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. As of the date of this prospectus, we have spent approximately
$11 million but have not received the majority of certain software modules. Kadima asserts that it is owed additional funds to
turn over the work completed. We initiated litigation to force the delivery of the software modules paid for through the fiscal
year ended 2019 and to exit the development engagement. In April 2019, Kadima filed a complaint against us in the County of Maricopa,
AZ, alleging breach of contract, promissory estoppel and unjust enrichment and demanded an additional $10 million prior to releasing
the remaining software modules. The parties agreed to a transfer of the matter to an Arizona Commercial Court with the expectation
that the matter would be sent to arbitration or mediation. In October 2019, Kadima provided the software code to a third party
for technical evaluation of the software in question. The parties are currently in discussions to set a date for mediation.
On April 8, 2019, a
former WSE filed a class action lawsuit, naming us and one of our clients as defendants. The plaintiff claimed they were scheduled
to work for more than 8 hours during 24-hour periods without being paid overtime, to which they were entitled. In addition,
the claimant is seeking waiting time penalties for the delay in payment. This lawsuit is in the initial stages and the financial
impact to us, if any, cannot currently be estimated. No liability has been recorded for this matter at this time. In
the event of an unfavorable outcome to us, our client is contractually obligated to indemnify us for misreported hours and portions
of the claim would be covered under our employment practices liability insurance.
On February 6, 2020,
we received a demand letter from a former ShiftPixy employee alleging that we made an oral promise to the employee that they would
receive, among other things, two times their annual salary in unrestricted stock. On February 27, 2020, we sent a written response
to the former employee in which we contested that such a promise had been made. While no proceedings with respect to the demand
letter have been initiated, we believe that the allegations set forth in the demand letter are without merit and plan to vigorously
defend any such proceedings. The financial impact to us, if any, cannot currently be estimated.
In addition, from time
to time, we may become involved in various claims and legal proceedings. We are not currently a party to any legal proceedings
that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation
can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Our Corporate Information
We were incorporated
under the laws of the State of Wyoming on June 3, 2015. Our principal executive office is located at 1 Venture, Suite 150, Irvine, CA 92618,
and our telephone number is (888) 798-9100. Our website address is www.shiftpixy.com. Our website does not form a part of this
prospectus and listing of our website address is for informational purposes only.
MANAGEMENT
Executive Officers and Directors
Our board of directors
elects our executive officers annually, at a meeting following the annual meeting of the shareholders. Our board of directors
can also elect persons to fill any executive officer vacancies. Each officer holds such office until his successor is elected
and qualified, or until his or her death, earlier resignation or removal. The following table sets forth information regarding
our executive officers and directors as of May 18, 2020:
Name
|
|
Position
|
|
Age
|
|
Scott W. Absher
|
|
President, Chief Executive Officer and Director
|
|
|
60
|
|
Kenneth W. Weaver(1) (2) (3)
|
|
Independent Director
|
|
|
63
|
|
Domonic J. Carney
|
|
Chief Financial Officer
|
|
|
54
|
|
Whitney White(1) (2) (3)
|
|
Independent Director
|
|
|
42
|
|
Christopher Sebes
|
|
Independent Director
|
|
|
66
|
|
Amanda Murphy
|
|
Director
|
|
|
36
|
|
|
(1)
|
Member of the Audit Committee.
|
|
(2)
|
Member of the Compensation Committee.
|
|
(3)
|
Member of the Nominations Committee.
|
Executive Officers
Scott W. Absher has
served as our President, Chief Executive Officer and director since our formation in June 2015. Since February 2010 he has also
been President of Struxurety, a business insurance advisory company. As a member of the board of directors, Mr. Absher contributes
significant industry-specific experience and expertise to our insurance products and services and has a deep understanding of all
aspects of our business, products and markets, as well substantial experience developing corporate strategy, assessing emerging
industry trends, and managing business operations.
Domonic Carney
has served as our Chief Financial Officer since August 4, 2019. Mr. Carney began his career at Deloitte & Touche where he audited
high tech startups in Palo Alto, CA. Between 1994 and 2001, Mr. Carney worked for various high tech startups in Silicon Valley,
CA including software development, internet, and Internet Service Providers in increasing levels of responsibility. From 2001 until
2004, Mr. Carney was the Finance Director in San Diego, CA providing Finance support for the Western half of the US Operations
of Danka Office Imaging. Mr. Carney brings substantial experience in small, high-growth companies as well as over fifteen years
of C-Level experience in micro-cap public companies. From 2014 until 2019 Mr. Carney served as the Chief Financial Officer for
Ener-Core, Inc. (ENCR-OTC), an energy technology company located in Irvine, CA. Between 2012 and 2014, Mr. Carney provided C-Level
finance and accounting consulting services to manufacturing, health care, energy, and technology companies in San Diego and Irvine,
CA. Mr. Carney holds a Masters in Accounting degree from Northeastern University, a Bachelors of Arts in Economics from Dartmouth
College, and is licensed as a Certified Public Accounting (inactive status) in the State of California.
Non-Employee Directors
Kenneth W.
Weaver has served as an independent director since December 5, 2016. Mr. Weaver currently serves as the chairman of
the Audit Committee and is also a member of the Compensation Committee and the Nominations Committee. From 2005 to 2012, Mr.
Carney served as the Chief Financial Officer for Composite Technology Corporation (CPTC-OTC), an energy equipment and
technology company that grew from pre-revenue to over $75 million a year between 2005 and 2008. Since April, 2012, Mr. Weaver
has been the sole proprietor of Ken Weaver Consulting, providing operations consulting for TVV Capital, a Nashville Private
Equity firm. Before his service with TVV, Mr. Weaver spent over 30 years with Bridgestone Corporation, having served in
various responsible leadership roles, including as President, Bridgestone North American Tire Commercial Sales, Chief
Financial Officer, Bridgestone Americas and Chairman, CEO and President, Firestone Diversified Products. Mr. Weaver earned
both his bachelor’s degree in business and his Master of Business Administration degree from Pennsylvania State
University. Mr. Weaver’s substantial financial background qualifies him as an audit committee financial expert under
applicable rules.
Whitney White
has served as an independent director since September 28, 2017. Mr. White serves as the chairman of the Compensation Committee
and the Nominations Committee, and is also a member of the Audit Committee. Since April, 2017, Mr. White has been Chief Operating
Officer and Chief Technology Officer of Prime Trust, LLC, a Nevada chartered trust company. Before his service with Prime Trust,
Mr. White spent 17 years with W.R. Hambrecht + Co., LLC, an investment banking, advisory and brokerage firm that was the underwriter
of our recently completed Regulation A offering. At W.R. Hambrecht + Co., LLC, Mr. White served in various executive roles, including
Chief Technology Officer and as Managing Director, Equity Capital Markets. Mr. White earned a bachelor’s degree in computer
science & psychology from Hamilton College, a Master of Business Administration degree in finance and accounting from Columbia
University’s Graduate School of Business, and a Master of Business Administration degree in technology and entrepreneurship
from the University of California Berkeley’s Hass School of Business. Mr. White holds a Series 79 license as an Investment
Banking Representative, a Series 24 license as a General Securities Principal, and a Series 7 license as a General Securities
Representative. As a member of the board of directors, Mr. White contributes the benefits of decades of leadership and management
experience building and advising early stage, technology-driven companies. Based on his investment banking experience, Mr. White
has significant corporate finance and governance expertise. As an experienced senior technologist, Mr. White provides years of
experience applying technology to enhance traditional business processes.
Christopher Sebes
has served as an independent director since February 7, 2020. From August 2004 to July 2014, he served as the CEO of XPIENT Solutions,
a full-service, global provider of solutions for food ordering, digital menus, drive-thru management, kitchen management, inventory,
labor and scheduling analytics. From November 2014 to July 2019, Mr. Sebes served as the President of Xenial, Inc., a cloud-based
restaurant and retail management platform. Since August, 2019, Mr. Sebes has been a partner and member of the board of directors
of Results Thru Strategy, Inc., a strategic advisory firm specializing on restaurants, hotels, and technology companies serving
those industries. Since September 2019, he has also served as a member of the board of advisors of Valyant AI which has developed
a proprietary conversational AI platform that integrates with existing mobile, web, call ahead, kiosk and drive through platforms.
Mr. Sebes received his degree in Hotel and Restaurant Management from the University of Portsmouth (Hampshire, United Kingdom)
in 1975. Mr. Sebes brings to our board of directors his innovative thought leadership and extensive knowledge of restaurant industry
technology both in the United States and abroad.
Amanda Murphy
has served as a director since February 10, 2020. Prior to her election to our board of directors, Ms. Murphy served as our Director
of Operations and has been vital to our success and growth in that position. Ms. Murphy has been active as in the operations side
of the staffing industry at a senior level since 2007. Ms. Murphy received her certificate in HR Management from California State
University – Long Beach in 2007. Ms. Murphy Also studied law at Taylor University in Selango, Malaysia.
Family Relationships
There are no family
relationships between any of our current officers or directors.
Board of Directors
Composition of Our Board of Directors
Our directors are elected
at our annual meeting of the shareholders. In addition, directors may be elected to fill vacancies and newly created directorships
by our board of directors. Each director holds the office until the next annual meeting of shareholders and until his or her successor
shall have been elected and qualified; provided, however, that directors can be elected for a term not to exceed five (5) years.
As of May 18, 2020,
our board of directors consisted of six members. Each director serves until the next annual meeting of the shareholders and until
his or successor is elected and duly qualified, or until his or her earlier death, resignation or removal.
We have no formal policy
regarding board diversity. In selecting board candidates, we seek individuals who will further the interests of our shareholders
through an established record of professional accomplishment, the ability to contribute positively to our collaborative culture,
knowledge of our business and understanding of our prospective markets.
Committees of Our Board of Directors
Audit Committee
Our Audit Committee
consists of Messrs. Weaver and White. Mr. Weaver serves as the chairman of the Audit Committee and qualifies as an audit committee
financial expert within the meaning of SEC regulations and the Nasdaq Listing Rules. In making a determination on which member
will qualify as a financial expert, our board of directors expects to consider the formal education and nature and scope of such
members’ previous experience.
Our Audit Committee
assists our board of directors in its oversight of our accounting and financial reporting process and the audits of our consolidated
financial statements. Our Audit Committee’s responsibilities include:
|
·
|
appointing, approving the compensation of, and assessing the independence of our registered public
accounting firm;
|
|
·
|
overseeing the work of our registered public accounting firm, including through the receipt and
consideration of reports from such firm;
|
|
·
|
reviewing and discussing with management and the registered public accounting firm our annual and
quarterly consolidated financial statements and related disclosures;
|
|
·
|
monitoring our internal control over financial reporting, disclosure controls and procedures and
code of business conduct and ethics;
|
|
·
|
overseeing our internal accounting function;
|
|
·
|
discussing our risk management policies;
|
|
·
|
establishing policies regarding hiring employees from our registered public accounting firm and
procedures for the receipt and retention of accounting-related complaints and concerns;
|
|
·
|
meeting independently with our internal accounting staff, registered public accounting firm and
management;
|
|
·
|
reviewing and approving or ratifying related party transactions; and
|
|
·
|
preparing audit committee reports required by SEC rules.
|
Compensation Committee
Our Compensation
Committee consists of Messrs. Weaver and White, with Mr. White serving as chairman. Our Compensation Committee assists our board
of directors in the discharge of its responsibilities relating to the compensation of our executive officers. The Compensation
Committee’s responsibilities include:
|
·
|
reviewing and approving corporate goals and objectives with respect to Chief Executive Officer
compensation;
|
|
·
|
making recommendations to our board of directors with respect
to the compensation of our Chief Executive Officer and our other executive officers;
|
|
·
|
overseeing evaluations of our senior executives;
|
|
·
|
reviewing and assessing the independence of compensation advisers;
|
|
·
|
overseeing and administering our equity incentive plans;
|
|
·
|
reviewing and making recommendations to our board of directors
with respect to director compensation;
|
|
·
|
reviewing and discussing with management our “Compensation Discussion and Analysis”
disclosure; and
|
|
·
|
preparing the compensation committee reports required by SEC rules.
|
Compensation Committee Interlocks and
Insider Participation
None of the members
of our Compensation Committee, at any time, have been one of our officers or employees. None of our executive officers currently
serves, or in the past year has served, as a member of our board of directors or the compensation committee of any entity that
has one or more executive officers on our board of directors or Compensation Committee.
Nominating Committee
Our Nominating
Committee consists of Messrs. Weaver and White, with Mr. White serving as chairman. The Nominating Committee’s responsibilities
include:
|
·
|
identifying individuals qualified to become board members;
|
|
·
|
recommending to our board of directors the persons to be nominated
for election as directors and to be appointed to each committee of our board of directors;
|
|
·
|
reviewing and making recommendations to the board of directors
with respect to management succession planning;
|
|
·
|
overseeing periodic evaluations of board members.
|
Board Leadership Structure and Risk
Oversight
Our board of directors oversees our business and considers the
risks associated with our business strategy and decisions. The board of directors currently implements its risk oversight function
as a whole. Each of the board committees also provides risk oversight in respect of its areas of concentration and reports material
risks to the board of directors for further consideration.
Code of Business Conduct and Ethics
We have adopted a written
code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer or controller, or persons performing similar functions. The code of
conduct is posted on our website, and we will post all disclosures that are required by law or Nasdaq rules in regard to any amendments
to, or waivers from, any provision of the code.
Director Independence
Rule 5605 of the Nasdaq
Listing Rules requires a majority of a listed company’s board of directors to be comprised of independent directors within
one year of listing. In addition, the Nasdaq Listing Rules require that, subject to specified exceptions, each member of a listed
company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee
members also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act.
In selecting our
independent directors, our board of directors considered the relationships that each such person has with our company and all
the other facts and circumstances our board of directors deemed relevant in determining independence, including the beneficial
ownership of our capital stock by each such person. Using this definition of independence, we have determined that two directors,
Ken Weaver and Whitney White, are independent directors.
Legal Proceedings
Administrative Order and Settlement
with State Securities Commissions
On June 25, 2013, the
Alabama Securities Commission issued a Cease and Desist Order (the “Order”) against Scott W. Absher and other named
persons and entities, requiring that they cease and desist from further offers or sales of any security in the State of Alabama.
The Order asserts that Mr. Absher was the president of a company that issued unregistered securities to certain Alabama residents,
that he was the owner of a company that was seeking investments, and that in March 2011 he spoke to an Alabama resident who was
an investor in one of the named entities. The Order concludes that Mr. Absher and others caused the offer or sale of unregistered
securities through unregistered agents. While Mr. Absher disputes many of the factual statements and specifically that he was an
owner or officer of any of the entities involved in the sale of the unregistered securities to Alabama residents or that he authorized
any person to solicit investments for his company, in the interest of allowing the matter to become resolved, he did not provide
a response.
Legal Matters Related to J. Stephen
Holmes
J. Stephen Holmes is
a co-founder and currently an independent contractor and major shareholder. As a condition of certifying our common stock for a
Nasdaq listing, Mr. Holmes agreed to the disclosure of his prior conviction for acts related to making false statements in relation
to two quarterly IRS Form 941 Employer Federal Quarterly tax returns, one in 1996 and the second 1997, for a company for which
he was at the time an officer. The former company is not affiliated or related in any way. As an independent contractor with us,
Mr. Holmes is focusing upon building a sales network and providing consulting in relation to workers’ compensation programs
as well as ACA health insurance programs, and as such is not involved in any part of the accounting or tax paying and IRS return
filing areas of our operations.
EXECUTIVE COMPENSATION
Set forth below is
certain information regarding the historical compensation of our named executive officers during the years ended August 31,
2019 and 2018. For additional information about our current officers and directors, see the section titled “Management.”
Executive Compensation
Summary Compensation Table
The following table
provides information regarding the compensation paid during the last two fiscal years to the named executive officers.
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Stocks
Awards
($)
|
|
|
Option
Awards
($)(1)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Scott W. Absher
|
|
|
2019
|
|
|
|
750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750,000
|
|
President, Chief Executive Officer and Director
|
|
|
2018
|
|
|
|
750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750,000
|
|
Domonic J. Carney(2)
|
|
|
2019
|
|
|
|
12,115
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,115
|
|
Chief Financial Officer
|
|
|
2018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Patrice H. Launay(3)
|
|
|
2019
|
|
|
|
285,558
|
|
|
|
—
|
|
|
|
50,875
|
(4)
|
|
|
|
|
|
|
|
|
|
|
336,433
|
|
Former Chief Financial Officer
|
|
|
2018
|
|
|
|
180,000
|
|
|
|
—
|
|
|
|
50,875
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
230,875
|
|
Mark Absher(6)
|
|
|
2019
|
|
|
|
300,000
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
300,000
|
|
Former In-House Counsel, Director and Secretary
|
|
|
2018
|
|
|
|
275,000
|
|
|
|
—
|
|
|
|
50,875
|
(7)
|
|
|
—
|
|
|
|
—
|
|
|
|
325,875
|
|
(1)
|
The amount shown for option awards represent the grant date fair value of such awards granted to the named executive officers as computed in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 718, Compensation-Stock Compensation. For each award, the grant date fair value is calculated using the closing price of our common stock on the grant date. This amount does not correspond to the actual value that may be realized by the named executive officers upon vesting or exercise of such award. For information on the assumptions used to calculate the value of the awards, refer to Note 6 to the Consolidated Financial Statements.
|
|
|
(2)
|
Mr. Carney joined our company on August
4, 2019 and receives an annual salary of $350,000.
|
(3)
|
Mr. Launay joined our company as Chief Financial Officer on January 24, 2018, and resigned on July 30, 2019. Mr. Launay initially received an annual salary of $240,000, which was later increased to $350,000 on February 1, 2019.
|
|
|
(4)
|
Represents 1,250 options issued pursuant to the 2017 Plan at an exercise price of $51.20 per share on April 1, 2019, estimated to have been the fair market value price per share at the time of the award.
|
|
|
(5)
|
Represents the following grants pursuant to the 2017 Plan: 1,250 options issued at an exercise price of $118.00 per share on February 1, 2018 and 156 options issued at an exercise price of $100.00 per share on May 10, 2018, estimated to have been the fair market value price per share at the time of the awards.
|
|
|
(6)
|
Mr. Mark Absher resigned from his position as In-House Counsel,
Director and Secretary on February 6, 2019.
|
|
|
(7)
|
Represents 1,250 options issued pursuant to the 2017 Plan at an exercise price of $51.20 per share on May 10, 2018, estimated to have been the fair market value price per share at the time of the award.
|
Outstanding Equity Awards at Fiscal
Year End
The following table
summarizes the outstanding equity awards held by each director and named executive officer as of August 31, 2019. This table includes
unexercised and unvested options and equity awards
Name
|
|
Fees
Earned or
Paid in
Cash
($)(1)
|
|
|
Stock
Awards
($)(2)
|
|
|
Option
Awards
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Scott Absher(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Kenneth W. Weaver
|
|
|
91,000
|
|
|
|
75,000
|
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
166,000
|
|
Whitney J. White
|
|
|
90,500
|
|
|
|
37,500
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
128,000
|
|
Sean C. Higgins(6)
|
|
|
85,000
|
|
|
|
37,500
|
(7)
|
|
|
—
|
|
|
|
—
|
|
|
|
122,500
|
|
Christopher Sebes(8)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amanda Murphy(9)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
Represents monthly board of director fees paid or payable in cash for the fiscal year ended August 31, 2019.
|
|
|
(2)
|
Represents annual value of stock awards issued during fiscal 2019 under our 2017 Plan.
|
|
|
(3)
|
Mr. Absher did not receive any compensation for his services as a director for the fiscal year ended August 31, 2019.
|
|
|
(4)
|
Pursuant to the terms of Mr. Weaver’s director agreement, we issued 1,202 shares of common stock on May 15, 2019 valued at $37,500, or $31.20 per share and 1,995 shares of common stock on August 19, 2019, or $18.80 per share.
|
|
|
(5)
|
Pursuant to the terms of Mr. White’s director agreement, we issued 411 shares of common stock on April 16, 2019, valued at $37,500 or $91.20 per share.
|
|
|
(6)
|
Mr. Higgins resigned from our board of directors on February
10, 2020, effective April 1, 2020.
|
|
|
(7)
|
Pursuant to the terms of Mr. Higgins’s director agreement,
we issued 411 shares of common stock on April 16, 2019, valued at $37,500 or $91.20 per share.
|
|
|
(8)
|
Mr. Sebes joined our board of directors on February 7, 2020.
|
|
|
(9)
|
Ms. Murphy joined our board of directors on February 10,
2020.
|
Director Compensation
Our directors classified
as employees receive no additional compensation for services as directors of the Company. The following table summarizes the compensation
paid to our non-employee directors for the fiscal year ended August 31, 2019:
|
|
Number of
Securities
Underlying
Unexercised
Options
(#) Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Unearned Options (#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
Scott Absher
President, Chief Executive Officer and Director
|
|
|
1,250
|
|
|
|
—
|
|
|
|
160.00
|
|
|
|
3/15/2027
|
|
Domonic J. Carney
Chief Financial
Officer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Patrice H. Launay
Former Chief Financial
Officer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mark Absher
Former Secretary
and Director
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity Incentive Plans
In addition, in
March 2017, we adopted the 2017 Plan. The 2017 Plan provides incentives to eligible employees, officers, directors and consultants
in the form of incentive stock options, non-qualified stock options and stock. We have reserved a total of 250,000 shares of common
stock for issuance under the 2017 Plan. Of these shares, approximately 43,415 shares have been designated by our board of directors
for issuance through May 18, 2020. Approximately 38,000 of the options have been forfeited and returned to the option pool under
the 2017 Plan as a consequence of employment terminations. Unless the 2017 Plan administrator otherwise provides, each option
is immediately exercisable, but the shares subject to such option will vest over a period of time as follows: 25% vest after a
12-month service period following the award, and the balance vest in equal monthly installments over the next 36 months of service.
Employment Agreements with our Named Executive Officers
On March 23, 2016,
we entered into an offer letter agreement with Scott W. Absher, our President and Chief Executive Officer (the “Absher Offer
Letter”), which included certain provisions related to the executive’s compensation. The Absher Offer Letter provides
for a full-time exempt position, an annual base salary and standard employee benefit plan participation.
On July 16, 2019, we
entered into an offer letter agreement with Domonic J. Carney, our Chief Financial Officer (the “Carney Offer Letter”).
The Carney Offer Letter provides for at-will employment, a monthly salary of $29,166.67, participation in the 2017 Plan and standard
employee benefit plan participation.
PRINCIPAL SHAREHOLDERS
The following
table sets forth certain information known to us regarding beneficial ownership of our capital stock as of May 18, 2020, for (i)
all executive officers and directors as a group and (ii) each person, or group of affiliated, known by us to be the beneficial
owner of more than five percent (5%) of our capital stock. The percentage of beneficial ownership in the table below is based
on 1,520,560 shares of common stock deemed to be outstanding as of May 18, 2020. In addition, shares of common stock that may
be acquired by the shareholder within 60 days of May 18, 2020, pursuant to the exercise of stock options are deemed to be outstanding
for the purpose of computing the percentage ownership of such shareholder but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the table. Unless otherwise indicated, the business address
for each stockholder listed is c/o ShiftPixy, Inc., 1 Venture, Suite 150, Irvine, CA 92618.
|
|
|
|
|
Percentage of Common Stock Beneficially Owned
|
|
5% Stockholders
|
|
Number of
Shares
Beneficially
Owned
|
|
|
Before Offering
|
|
|
After Offering
|
|
Stephen Holmes
|
|
|
12,196,000
|
(1)
|
|
|
90.9
|
%
|
|
|
79.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Common Stock
Beneficially Owned
|
|
Directors and Named Executive Officers
|
|
Number of
Shares
Beneficially
Owned
|
|
|
Before Offering
|
|
|
After Offering
|
|
Scott W. Absher
|
|
|
12,813,750
|
(2)
|
|
|
91.4
|
%
|
|
|
80.5
|
%
|
Domonic J. Carney
|
|
|
--
|
|
|
|
*
|
|
|
|
*
|
%
|
Kenneth W. Weaver
|
|
|
5,062
|
(3)
|
|
|
*
|
|
|
|
*
|
%
|
Whitney J. White
|
|
|
1,498
|
(3)
|
|
|
*
|
|
|
|
*
|
%
|
Christopher Sebes
|
|
|
--
|
|
|
|
*
|
|
|
|
*
|
%
|
Amanda Murphy
|
|
|
--
|
|
|
|
*
|
|
|
|
*
|
%
|
Mark Absher(4)
|
|
|
--
|
|
|
|
*
|
|
|
|
*
|
%
|
Patrice H. Launay(5)
|
|
|
--
|
|
|
|
*
|
|
|
|
*
|
%
|
All Executive Officers and Directors as a Group (7 persons)
|
|
|
12,820,310
|
|
|
|
91.4
|
%
|
|
|
80.5
|
%
|
*
|
Less than 1%
|
|
|
(1)
|
Represents 294,750 shares
of common stock, 1,250 shares underlying options exercisable within 60 days of May 18, 2020
and 11,900,000 shares of common stock underlying Preferred Options to purchase shares of Preferred
Stock exercisable within 60 days of May 18, 2020. The business address for Mr. Holmes is 22
Trailing Ivy, Irvine, CA 92620.
|
|
|
(2)
|
Represents 312,500 shares
of common stock, 1,250 shares underlying options exercisable within 60 days of May 18, 2020
and 12,500,000 shares of common stock underlying Preferred Options to purchase shares of Preferred
Stock exercisable within 60 days of May 18, 2020.
|
|
|
(3)
|
Represents shares of common stock issued in conjunction with
services rendered as a director.
|
|
|
(4)
|
Mr. Absher resigned as our Registered In-House Counsel, Director
and Secretary on February 6, 2019.
|
|
|
(5)
|
Mr. Launay resigned as our Chief Financial Officer on July
30, 2019.
|
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Party Transactions
Except as set forth
below, none of our directors or executive officers, nor any proposed nominee for election as a director, nor any person who beneficially
owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to all of our outstanding shares, nor
any members of the immediate family (including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons
has any material interest, direct or indirect, in any transaction since our incorporation, or in any presently proposed transaction
which, in either case, has or will materially affect us:
On September 28,
2017, Whitney White, our independent director and Sean Higgins, our independent director who resigned effective April 1, 2020,
were each awarded 26,316 shares of our common stock for services pursuant to the 2017 Plan. The fair value at the time of issuance
was $75,000, or $2.85 per share.
On August 9, 2018,
Ken Weaver, our Chairman of the Audit Committee and independent director, was granted 24,592 shares of our common stock pursuant
to the 2017 Plan. The fair value at the time of issuance was approximately $75,000, or $3.05 per share. 12,296 of the shares issued
to Mr. Weaver were deemed to have been purchased and immediately vested on August 9, 2018, as a consequence of Mr. Weaver’s
continued service as director through that date. The other 12,296 shares of our common stock issued to Mr. Weaver on August 9,
2018 were deemed to have been purchased and immediately vested on November 30, 2018, contingent upon Mr. Weaver’s continued
service as director through that date.
On April 16, 2019,
Messrs. White and Higgins were each issued 16,448 shares of our common stock for services valued at $37,500 at a fair value of
$2.28 per share.
On June 6, 2019,
we advanced $325,000 in cash to Mr. Steven Holmes as payment for consulting services. Mr. Holmes is one of our founders and owns
19.4% of our outstanding shares of common stock as of May 18, 2020. On July 18, 2019, Mr. Holmes repaid the advance by returning
558,132 shares of common stock valued at $0.58 per share.
On August 19, 2019,
we issued Mr. Weaver 79,788 shares of our common stock for services valued at $37,500 at a fair value of $0.47 per share.
On January 3, 2020,
effective January 1, 2020, we entered into the Vensure Asset Transfer. Upon the occurrence of the Vensure Asset Transfer,
the holders of our Preferred Options could exercise each Preferred Option to purchase one share of our preferred stock for $0.0001
per share. Each share of preferred stock is convertible into common stock on a one-for-one basis. As of the date of this
prospectus, the Preferred Options are exercisable to purchase up to 24,634,560 shares of preferred stock which are convertible
into 24,634,560 shares of common stock. Scott Absher, our Chief Executive Officer and director, owns 12,500,000 Preferred Options
and Steven Holmes, our founder and owner of 19.4% of our outstanding common stock, owns 11,900,000 Preferred Options. The Preferred
Options held by Messrs. Absher and Holmes became exercisable to purchase preferred stock upon the occurrence of the Vensure Asset
Transfer. Additionally, at some point in the future we intend to adopt a second grant of options 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 our preferred stock
for $0.0001 per share. See “Risk Factors — Purchasers in the offering will suffer immediate and substantial dilution
if our Option Shareholders exercise their Preferred Options” for a further discussion of the Preferred Options.
Director Independence
Our board of directors has determined that
we have three board members that qualify as “independent” as the term is used in Item 7(d)(3)(iv)(B) of Schedule 14A
under the Exchange Act, and as defined by Rule 4200(a)(15) of the Nasdaq Marketplace Rules.
DESCRIPTION OF CAPITAL STOCK
As of the date of this
prospectus, we are authorized to issue up to 750,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 shares
of preferred stock, par value $0.0001 per share.
The following is a
summary of the material terms of our capital stock and certain provisions of our certificate of incorporation and bylaws. Since
the terms of our certificate of incorporation and bylaws, and Wyoming law, are more detailed than the general information provided
below, you should only rely on the actual provisions of those documents and Wyoming law. If you would like to read those documents,
they are on file with the SEC, as described under the heading “Where You Can Find More Information” below. The summary
below is also qualified by provisions of applicable law.
On November 13,
2019, our board of directors authorized the Reverse Stock Split. As a result of the Reverse Stock Split, each forty (40) shares
of our issued and outstanding common stock were automatically combined and converted into one issued and outstanding share of
common stock. The Reverse Stock Split affected all issued and outstanding shares of our common stock, as well as common stock
underlying stock options to purchase shares of common stock and warrants outstanding immediately prior to the effectiveness of
the Reverse Stock Split. The Reverse Stock Split did not alter the number of shares of preferred stock underlying the Preferred
Options (as defined below) and did not decrease the number of authorized shares of our common stock or preferred stock, alter
the par value of our common stock or preferred stock, both of which remain at $0.0001 per share, nor modify any voting rights
or other terms of our capital stock. Unless otherwise indicated, all information set forth in this prospectus gives effect to
the Reverse Stock Split.
As of May 18, 2020,
there were 1,520,560 shares of common stock outstanding.
Common Stock
Voting Rights.
Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the
shareholders. Wyoming law provides for cumulative voting for the election of directors. As a result, any shareholder may cumulate
his or her votes by casting them all for any one director nominee or by distributing them among two or more nominees. This may
make it easier for minority shareholders to elect a director.
Dividends.
Subject to preferences that may be granted to any then outstanding preferred stock, holders of our common stock are entitled to
receive ratably such dividends as may be declared by the board of directors out of funds legally available therefor as well as
any distributions to the shareholders. The payment of dividends on our common stock will be a business decision to be made by our
board of directors from time to time based upon results of our operations and our financial condition and any other factors that
our board of directors considers relevant. Payment of dividends on our common stock may be restricted by loan agreements, indentures
and other transactions we enter into from time to time.
Liquidation Rights.
In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in all of
our assets remaining after payment of liabilities and the liquidation preference of any then outstanding preferred stock.
Absence of
Other Rights or Assessments. Holders of our common stock have no preferential, preemptive, conversion or exchange rights.
There are no redemption or sinking fund provisions applicable to our common stock. When issued in accordance with our articles
of incorporation and bylaws, shares of our common stock are fully paid and not liable to further calls or assessment by us.
Preferred Stock
Our board of
directors is authorized by our articles of incorporation to establish classes or series of preferred stock and fix the
designation, powers, preferences and rights of the shares of each such class or series and the qualifications, limitations or
restrictions thereof without any further vote or action by our shareholders. Any shares of preferred stock so issued would
have priority over our common stock with respect to dividend or liquidation rights. Any future issuance of preferred stock
may have the effect of delaying, deferring or preventing a change in our control without further action by our shareholders
and may adversely affect the voting and other rights of the holders of our common stock.
Class A Preferred Stock
Voting Rights.
Holders of preferred stock shall not have voting rights other than those described under the section below entitled “Description
of Capital Stock – Preferred Stock – Protective Provisions.”
Dividends.
Holders of our preferred stock shall not be entitled to receive annual or other dividends.
Liquidation Preference.
In the event of our liquidation or winding up, the holders of the preferred stock will be entitled to receive in preference to
the holders of common stock an amount equal to their purchase price, subject to proportional adjustment for stock splits, stock
dividends, recapitalizations, and the like on a pro rata basis with the common stock.
Conversion.
Our board of directors and our shareholders recently approved an amendment to our Articles of Incorporation to add conversion
rights to our preferred stock. Holders of our preferred stock shall have the right to convert their preferred stock, on a one-for-one
basis, into shares of our common stock at any time, following at least 20 days after we file an Information Statement with the
SEC regarding such shareholder approval.
Anti-dilution
Protection. There is anti-dilution protection afforded to the preferred stock solely for proportional adjustments for
stock splits, stock dividends, recapitalizations, and the like and not for other matters such as additional stock issuances or
price adjustments.
Protective
Provisions. Consent of the holders of 75% of the voting rights of the outstanding preferred stock is required for any amendment
or change of the rights, preferences, privileges, or powers of, or the restrictions provided for the benefit of, the preferred
stock.
Option to Acquire Preferred Stock
As previously disclosed,
in September 2016, our founding shareholders, or Option Shareholders, were granted options to acquire our preferred stock, or
Preferred Options. The number of Preferred Options granted were based upon the number of shares held by the Option Shareholders
at that time. The Preferred Options are nontransferable and forfeited upon the sale of the related founding shares of common stock.
Upon the occurrence of certain specified events, the Option Shareholders could exercise each Preferred Option to purchase one
share of our preferred stock for $0.0001 per share. One such event occurred upon the Vensure Asset Transfer in January 2020. As
of the date of this prospectus, the Preferred Options are exercisable to purchase up to 24,634,560 shares of our preferred stock
which are convertible into 24,634,560 shares of common stock. As stated above, the amount of Preferred Options, and the number
of shares of preferred stock issuable upon exercise of the Preferred Options, is based upon the number of shares of common stock
held by the Option 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 Preferred Options to Messrs. Absher and Holmes, at some point in the future we intend to adopt
a second grant of options 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 our preferred stock for $0.0001 per share. Each share of preferred stock will be convertible
into common stock on a one-for-one basis. See “Risk Factors — Purchasers in the offering will suffer immediate and substantial dilution if our Option
Shareholders exercise their Preferred Options” for a further discussion of the Preferred Options.
The Preferred Option
described above has the following general rights, preferences, privileges and restrictions:
Exercisability.
The Preferred Option may only be exercised upon (i) the acquisition of a Controlling Interest by a shareholder other than the original
holders. “Controlling Interest” means the ownership of our outstanding voting shares sufficient to enable the acquiring
person, directly or indirectly and individually or in association with others, to exercise one-fifth or more of all of our voting
power in the election of directors or any other business matter on which shareholders have the right to vote under Wyoming law
and (ii) prior to any proposed merger, consolidation (in which our common stock is changed or exchanged) or sale of at least 50%
of our assets or earning power (other than a reincorporation). The right to exercise the Preferred Option shall terminate on December
31, 2023.
Proportional
Adjustment to Preferred Option. In the event that, at the time the Preferred Option becomes exercisable, the total number
of authorized preferred stock is less than the lesser of (a) the number of shares of common stock held by holders of our common
stock on September 28, 2016, or (b) the number of shares of common stock held by holders of our common stock on the date on which
the Preferred Option becomes exercisable (such lesser amount of shares of common stock hereinafter referred to as the “Total
Holder Shares”), then the number of shares of the preferred stock that each holder can purchase in connection with the Preferred
Option shall be proportionally reduced to a percentage (of such holder’s Total Holder Shares) that is equal to the percentage
calculated by dividing the total number of authorized shares of preferred stock by the Total Holder Shares.
Transferability.
The Preferred Option is not assignable except to any person or entity deemed an Affiliate of the Preferred Option holder as the
term Affiliate is defined under SEC Rule 144.
Effective January 1,
2020, we entered into the Vensure Asset Transfer, in which, pursuant to an asset purchase agreement with Shiftable HR Acquisition,
LLC, part of Vensure Employer Services, Inc., we assigned client contracts representing approximately 70% of our billable clients
which comprised approximately 88% of our quarterly revenue as of November 30, 2019 and certain operating assets, which triggered
the Option Shareholders right to acquire preferred stock.
Pre-Funded Warrants
The following summary
of certain terms and provisions of pre-funded warrants that are being offered hereby is not complete and is subject to, and qualified
in its entirety by, the provisions of the pre-funded warrant, the form of which is filed as an exhibit to the registration statement
of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form
of pre-funded warrant for a complete description of the terms and conditions of the pre-funded warrants.
Duration and
Exercise Price. Each pre-funded warrant has an initial exercise price per share equal to $0.001. The pre-funded warrants
will be immediately exercisable and may be exercised at any time until the pre-funded warrants are exercised in full. The exercise
price and number of shares of common stock issuable upon exercise is subject to appropriate adjustment in the event of stock dividends,
stock splits, reorganizations or similar events affecting our common stock and the exercise price. The pre-funded warrants will
be issued separately from the accompanying warrants, and may be transferred separately immediately thereafter.
Exercisability.
The pre-funded warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed
exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except
in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of
the pre-funded warrant to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after
exercise, except that upon at least 61 days' prior notice from the holder to us, the holder may increase the amount of ownership
of outstanding stock after exercising the holder's pre-funded warrants up to 9.99% of the number of shares of our common stock
outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the
terms of the pre-funded warrants. Purchasers of pre-funded warrants in this offering may also elect prior to the issuance of the
pre-funded warrants to have the initial exercise limitation set at 9.99% of our outstanding common stock. No fractional shares
of common stock will be issued in connection with the exercise of a pre-funded warrant. In lieu of fractional shares, we will either
pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price or round up to the next whole
share.
Cashless Exercise.
If, at the time a holder exercises its pre-funded warrants, a registration statement registering the issuance of the shares of
common stock underlying the pre-funded warrants under the Securities Act is not then effective or available and an exemption from
registration under the Securities Act is not available for the issuance of such shares, then in lieu of making the cash payment
otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead
to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula
set forth in the pre-funded warrants.
Transferability.
Subject to applicable laws, a pre-funded warrant may be transferred at the option of the holder upon surrender of the pre-funded
warrant to us together with the appropriate instruments of transfer.
Exchange Listing.
We do not intend to list the pre-funded warrants on Nasdaq or any other national securities exchange or nationally recognized trading
system. The common stock issuable upon exercise of the pre-funded warrants is currently listed on Nasdaq.
Right as a Shareholder.
Except as otherwise provided in the pre-funded warrants or by virtue of such holder's ownership of shares of our common stock,
the holders of the pre-funded warrants do not have the rights or privileges of holders of our common stock, including any voting
rights, until they exercise their pre-funded warrants.
Fundamental
Transaction. In the event of a fundamental transaction, as described in the pre-funded warrants and generally
including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other
disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person,
the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50%
of the voting power represented by our outstanding common stock, the holders of the pre-funded warrants will be entitled to
receive upon exercise of the pre-funded warrants the kind and amount of securities, cash or other property that the holders
would have received had they exercised the pre-funded warrants immediately prior to such fundamental transaction. In
addition, upon a fundamental transaction, the holder will have the right to require us to repurchase its pre-funded warrants
at their fair value using the Black Scholes option pricing formula; provided, however, that we will pay such holder using the
same type or form of consideration (and in the same proportion) that is being offered and paid to the holders of our common
stock in connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any
combination thereof, or whether the holders of our common stock are given the choice to receive from among alternative forms
of consideration in connection with the fundamental transaction.
Purchase Warrants
The following summary
of certain terms and provisions of purchase warrants that are being offered hereby is not complete and is subject to, and qualified
in its entirety by, the provisions of the purchase warrant, the form of which is filed as an exhibit to the registration statement
of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form of purchase
warrant for a complete description of the terms and conditions of the purchase warrants.
Duration and
Exercise Price. Each purchase warrant has an exercise price of $5.40 per share. The exercise price is subject
to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications
or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property
to our stockholders. The purchase warrants are exercisable immediately, and at any time
up to the date that is five years after their original issuance.
Exercisability. The
purchase warrants will be exercisable, at the option of each holder, in whole or in
part by delivering to us a duly executed exercise notice and, at any time a registration statement registering the issuance of
the shares of common stock underlying the purchase warrants under the Securities Act is effective and available for the issuance
of such shares, or an exemption from registration under the Securities Act is available for the issuance of such shares, by payment
in full in immediately available funds for the number of shares of common stock purchased upon such exercise. A holder
will not have the right to exercise any portion of the purchase warrant if the holder (together with its affiliates) would beneficially
own in excess of 4.99% (or, upon election of the holder, 9.99%) of the number of shares of our common stock outstanding immediately
after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the purchase warrants.
However, any holder may increase or decrease such percentage, provided that any increase will not be effective until the 61st
day after such election.
Cashless
Exercise. If a registration statement registering the issuance of the
shares of common stock underlying the purchase warrants under the Securities Act is not effective or available and an exemption
from registration under the Securities Act is not available for the issuance of such shares, the holder may elect to exercise
the purchase warrant only through a cashless exercise, in which case the holder would receive upon such exercise the net number
of shares of common stock determined according to the formula set forth in the purchase warrant. No fractional shares of common
stock will be issued in connection with the exercise of a purchase warrant. In lieu of fractional shares, we will pay the holder
an amount in cash equal to the fractional amount multiplied by the exercise price. Notwithstanding anything to the contrary, in
the event we do not have or maintain an effective registration statement, there are no circumstances that would require us to
make any cash payments or net cash settle the purchase warrants to the holders.
Transferability. Subject
to applicable laws, the purchase warrants may be offered for sale, sold, transferred or assigned without our consent.
Exchange
Listing. There is no established trading market for the purchase warrants and we do not expect a market to
develop. In addition, we do not intend to apply for the listing of the purchase warrants on any national securities exchange or
other trading market. Without an active trading market, the liquidity of the purchase warrants will be limited.
Rights as
a Stockholder. Except as otherwise provided in the purchase warrants or by virtue of such holder’s ownership of
shares of our common stock, the holder of a purchase warrant does not have the rights or privileges of a holder of our common
stock, including any voting rights, until the holder exercises the purchase warrant.
Fundamental
Transactions. If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted
for us, and may exercise every right and power that we may exercise and will assume all of our obligations under the purchase
warrants with the same effect as if such successor entity had been named in the purchase warrant itself. If holders of our common
stock are given a choice as to the securities, cash or property to be received in a fundamental transaction, then the holder shall
be given the same choice as to the consideration it receives upon any exercise of the purchase warrant following such fundamental
transaction.
Outstanding Warrants
Prior to this offering,
as of May 18, 2020, we had outstanding warrants to purchase shares of common stock as follows:
|
|
Total
Outstanding and
Exercisable
|
|
|
Exercise
Price Per
Share
|
|
|
Expiration
Date
|
Warrants issued for placement fees
|
|
|
2,500
|
|
|
$
|
276.00
|
|
|
June 26, 2022
|
Warrants issued in June 2018 financing
|
|
|
12,552
|
|
|
$
|
5.29
|
|
|
December 4, 2023
|
Warrants issued for June 2018 placement fees
|
|
|
5,422
|
|
|
$
|
99.60
|
|
|
December 4, 2023
|
Warrants issued in March 2019 financing
|
|
|
66,288
|
|
|
$
|
40.00
|
|
|
March 12, 2024
|
Warrants issued for March 2019 placement fees
|
|
|
3,366
|
|
|
$
|
70.00
|
|
|
March 12, 2024
|
Settlement warrants
|
|
|
423,669
|
|
|
$
|
10.17
|
|
|
March 24, 2025
|
The June 2018 Warrants
(as defined below) include certain exercise price protection provisions pursuant to which the exercise price will be adjusted downward
if we issue or sell any shares of common stock or securities convertible into shares of common stock, including in this offering,
at an exercise price per share less than the outstanding warrant’s exercise price listed in the table above.
For additional information
on our outstanding warrants, see the section entitled “Description of Capital Stock—Debt and Equity Offerings.”
Debt and Equity Offerings
The June 2018 Financing Transaction
On June 4, 2018, we
completed an offer and sale to certain accredited investors, in a private placement, of the following unregistered securities (the
“June 2018 Financing Transaction”):
$10,000,000 of
8% Senior Secured Convertible Notes. A total of 250,000 shares of our common stock have been reserved for the repayment
and/or conversion of the June 2018 Notes. The June 2018 Notes may be converted at a conversion price of $99.60 per share.
The June 2018 Notes are amortized as follows: commencing on November 1, 2018 and continuing on the first day of each of the
following successive months thereafter until the maturity date of the June 2018 Notes, provided that such date is a Business
Day (as defined in the June 2018 Note (each an “Amortization Payment Date”)), we shall redeem the June 2018
Notes, plus interest and make whole according to an amortization schedule attached to each June 2018 Note (each, an
“Amortization Payment”). Each Amortization Payment shall, at our option, be made in whole or in part, in cash
equal to the sum of the Amortization Payment provided for in the schedule attached to the June 2018 Notes, or, subject to our
compliance with the equity conditions set forth in the June 2018 Note, in common stock at a 15% discount to the lowest volume
weighted average price during the ten trading days prior to the Amortization Payment Date (the “Amortization Conversion
Rate”); provided, however, that in the event that a June 2018 Note holder elects to defer an Amortization Payment, the
Amortization Conversion Rate shall be calculated based on the date that the June 2018 Note holder provides us with notice of
its intent to receive an Amortization Payment. Any Amortization Payment or portion thereof made in cash will be subject to a
10% premium on such payment. No Amortization Payment may be made in common stock if the price of such common stock is trading
below a price of $1.00 on the Amortization Payment Date. Any holder of a June 2018 Note, at its option and without regard to
the actions of any other June 2018 Note holder, shall be entitled to accelerate each Amortization Payment in up to three
separate Amortization Payments each month and demand such payments in common stock pursuant to the then-current Amortization
Conversion Rate. In the event that such a holder elects to accelerate an Amortization Payment, such accelerated Amortization
Payment shall be effected from the last Amortization Payment due. Any holder of a June 2018 Note, at its option and without
regard to the actions of any other June 2018 Note holder, shall be entitled to defer each and any Amortization Payment in its
sole discretion and for as long as it wishes to defer such Amortization Payment and receive such payments in common stock
pursuant to the Amortization Conversion Rate, to be calculated when requested and received. Such deferring holder shall be
entitled to receive such deferred Amortization Payment upon three hours’ written notice, which Amortization Payment
shall be settled no later than two trading days after notice has been provided. Each June 2018 Note contains certain
ownership limitations that may restrict its conversion.
Warrants to
purchase up to an aggregate of 30,526 shares of common stock. In connection with the issuance of the June 2018 Notes, we issued
a total of 30,526 June 2018 Warrants, consisting of 25,104 warrants issued to investors and 5,422 warrants issued to the placement
agent. The 25,104 June 2018 Warrants issued to investors (a) have an initial exercise price of $99.60 per share (subject to adjustment
as set forth therein), (b) become exercisable at any time on or after December 4, 2018, and on or prior to December 4, 2023, (c)
contain certain ownership limitations that may restrict their exercise and (d) became exercisable on a cashless basis on December
4, 2018. The 5,422 June 2018 Warrants issued to the placement agent are exercisable on a cashless basis without any conditions.
The Registration Statement on Form S-3 for the described securities did not register the offer or sale of any of the June 2018
Warrants.
Registration
Statement on Form S-3 for the June 2018 securities. On October 1, 2018, we filed a Registration Statement on Form S-3 (the
“October Registration Statement”) for the resale, from time to time, by certain selling shareholders of up to 255,526
shares of our common stock, 225,000 shares of which are issuable upon the repayment and/or conversion of the June 2018 Notes and
30,526 shares of which are issuable upon exercise of the June 2018 Warrants, all issued by us to the selling shareholders on June
4, 2018. The October Registration Statement was declared effective on October 29, 2018, and as of the date of this prospectus,
152,005 shares of our common stock have been issued and sold following conversion and/or amortization under the October Registration
Statement.
As of the date
of this prospectus, no June 2018 Notes remain outstanding. A total of 12,052 June 2018 Warrants issued to investors are exercisable
at $5.29 per share and 5,222 of the June 2018 Warrants issued to the placement agent are exercisable at $99.60 per share.
The December 2018 Settlement Transaction
Limited Settlement
Agreement and Mutual Release dated December 20, 2018. Due to certain material failures under the June 2018 Financing Transaction,
we entered into a Limited Settlement Agreement and Mutual Release with the investors in the June 2018 Financing Transaction pursuant
to which we issued the December 2018 Notes in the principal amount of $888,888, increasing the total amount due to the investors
under the June 2018 Notes and December 2018 Notes to $10,888,888. The December 2018 Notes have identical terms to the June 2018
Notes.
Registration
Statement on Form S-3 for the December 2018 securities. On December 24, 2018, we filed a Registration Statement on
Form S-3 (the “December Registration Statement”) for the resale, from time to time, by certain selling
shareholders of up to 17,778 shares of our common stock upon the repayment and/or conversion of the December 2018 Notes. The
December Registration Statement was declared effective on February 1, 2019. As of the date of this prospectus, 460 shares of
our common stock have been issued or sold following conversion and/or amortization under the December Registration
Statement.
As of the date of this
prospectus, no December 2018 Notes remain outstanding. All December 2018 Notes were either repaid, converted into shares of common
stock, or exchanged for December 2019 Exchange Notes which are no longer outstanding. See “Description of Capital Stock –
Debt and Equity Offerings – The 2019 and 2020 Exchange and Settlement Transactions.”
Amendments to the June 2018 Notes and the December 2018 Notes
On March 11, 2019,
we entered into certain amendment agreements with the holders of the June 2018 Notes and December 2018 Notes which, among other
things, reduced the floor price for amortization payments eligible to be paid, subject to conversion limitations, in shares of
our common stock from $1.25 per share to $1.00 per share. We filed a Current Report on Form 8-K with the SEC on March 13, 2019
describing these amendments.
The March 2019 Financing Transaction
On March 12, 2019,
we completed an offer and sale to certain accredited investors, in a private placement, of the following unregistered securities:
$4,750,000 of Senior
Convertible Notes. A total of 766,129 shares of common stock that have been reserved for the repayment and/or conversion
of the March 2019 Notes. The terms of the March 2019 Notes provide for payment of 110% of all amounts outstanding thereunder (including,
the principal amount of each March 2019 Note together with any accrued and unpaid interest and any other accrued and unpaid charges
thereunder, if any) at maturity on September 12, 2020 (the “Maturity Date”), subject to extension in certain circumstances
at the option of the March 2019 Note holder.
Subject to a 4.99%
beneficial ownership limitation (which may be increased to 9.99%) and an additional 19.9% limitation (collectively with the June
2018 and December 2018 transactions) under the rules and regulations of the principal market until shareholder approval is obtained
(collectively, the “Conversion Limitations”), the holders of the March 2019 Notes are entitled, at any time at their
option, to convert all, or any portion, of the outstanding and unpaid principal, accrued and unpaid interest and fees on the March
2019 Notes into fully paid, nonassessable shares of our common stock. Subject to the Conversion Limitations, each March 2019 Note
may be converted, at the option of the holder thereof, at the fixed price of $66.80, subject to adjustment as described below or,
alternatively, at a variable price calculated by dividing (x) such portion of the principal, accrued and unpaid interest and fees
subject to conversion by (y) the greater of (i) $0.31, and (ii) the lower of the Conversion Price and 85% (subject to downward
adjustment in the case of conversion upon an event of default or bankruptcy) of the lowest volume-weighted average price per share
during the ten consecutive trading days prior to conversion as described more fully below.
Conversion of the March
2019 Notes and exercise of the March 2019 Warrants (defined and described below) would have a potentially dilutive effect to our
existing shareholders for two primary reasons: (i) conversion or exercise would result in the issuance of additional shares of
our common stock thereby reducing the percentage ownership interest of all of our current shareholders; and (ii) conversion or
exercise at a price lower than the price at which our common stock is trading increases the number of shares we will issue and
creates downward pressure on our stock price and value.
Amounts due and owing
under the March 2019 Notes are convertible into shares of our common stock at an initial conversion price of $66.80 (the “initial
conversion price”). The March 2019 Notes contain anti-dilution protection provisions for the lenders whereby the initial
conversion price will be adjusted downward upon the occurrence of any one of more of the following events if such events are for
a consideration per share lower than $66.80 (however, the conversion price of the March 2019 Notes may never be lower than $0.31
per share (the “floor price”)):
|
1.
|
Issuance of shares of our common stock;
|
|
|
|
|
2.
|
Issuance of options to purchase shares of our common stock;
|
|
|
|
|
3.
|
Issuance of convertible securities;
|
|
|
|
|
4.
|
Change in existing option price or rate of conversion;
|
|
|
|
|
5.
|
A subdivision or combination of our common stock (such as a stock split, stock dividend, stock combination, recapitalization, or similar transaction);
|
|
|
|
|
6.
|
Issuance of variable price securities;
|
|
|
|
|
7.
|
Any other event which would have a dilutive effect on the March 2019 Notes; and
|
|
|
|
|
8.
|
A voluntary adjustment of the initial conversion price by us with the consent of the March 2019 Note holders.
|
Due to the floor price,
we calculate the maximum number of shares of common stock issuable under the March 2019 Notes to be 383,065 shares if all amounts
under the March 2019 Notes are converted and 71,023 shares if all warrants are exercised for a total of 454,088 shares.
The March 2019 Notes
are also convertible pursuant to alternate conversion features in the event of the following:
|
1.
|
In the event of either a bankruptcy or failure to pay any amounts due under the agreements, the March 2019 Notes are convertible at an alternate conversion price of the greater of (x) $0.31 and (y) the lower of (i) the conversion price then in effect, and (ii) 75% of the lowest volume-weighted average price per share of our common stock during the ten consecutive trading day period ;
|
|
|
|
|
2.
|
In the event of a default under the agreements (other than a bankruptcy or failure to pay as described above), the March 2019 Notes are convertible at an alternate conversion price of the greater of (x) $0.31 and (y) the lower of (i) the conversion price then in effect, and (ii) 80% of the lowest volume-weighted average price per share of our common stock during the ten consecutive trading day period; and
|
|
|
|
|
3.
|
At any time, at the option of the holder, the March 2019 Notes are convertible at an alternate conversion price of the greater of (x) $0.31 and (y) the lower of (i) the conversion price then in effect, and (ii) 85% of the lowest volume-weighted average price per share of tour common stock during the ten consecutive trading day period.
|
We have the right to
redeem the full amount of unpaid principal, accrued and unpaid interest and any fees on the March 2019 Notes at any time upon notice
to the holders of the March 2019 Notes at a price that is equal to the greater of (i) 100% of the amount of unpaid principal, accrued
and unpaid and fees on the March 2019 Note then outstanding during the 45 day calendar period commencing on the issuance date and
thereafter at 115% of the amount of unpaid principal, accrued and unpaid interest and fees on the March 2019 Notes then outstanding
and (ii) the product of (x) the aggregate number of shares then issuable upon conversion of such portion of the March 2019 Notes
subject to redemption multiplied by (y) the greatest closing sale price of our common stock on any trading day during the period
commencing on the date immediately preceding our notice of optional redemption and ending on the trading day immediately prior
to the date we make the entire redemption payment.
Warrants to
purchase up to an aggregate of 74,390 shares of common stock. In connection with the issuance of the March 2019
Notes, we issued a total of 74,390 March 2019 Warrants, consisting of 71,024 warrants issued to investors and 3,366 warrants
issued to the placement agent. The 71,024 March 2019 Warrants issued to investors (a) have an initial exercise price of
$40.00 per share (subject to adjustment as set forth therein), (b) are exercisable at any time between March 12, 2019 and on
or prior to March 12, 2024, (c) contain certain ownership limitations that may restrict their exercise and (d) are
exercisable on a cashless basis if at the time of exercise there is no effective registration statement registering, or the
prospectus contained therein is not available for, the resale of shares of common stock for which the March 2019 Warrants are
exercisable. The 3,366 March 2019 Warrants issued to the placement agent have an exercise price of $70.00. The Registration
Statement on Form S-3 for the described securities did not register the offer or sale of any of the March 2019 Warrants.
Registration
Statement on Form S-3 for the March 2019 securities. On April 2, 2019, we filed a Registration Statement on Form S-3, amended
on April 29, 2019 (the “April Registration Statement”) for the resale, from time to time, by certain selling shareholders
of up to 910,305 shares of our common stock, 766,129 shares of which are issuable upon the repayment and/or conversion of the March
2019 Notes and 144,176 shares of which are issuable upon exercise of the March 2019 Warrants. The April Registration Statement
was declared effective on May 22, 2019, and as of the date of this prospectus, 98,514 shares of our common stock have been issued
and sold following conversion and/or amortization under the April Registration Statement.
The 2019 and 2020 Exchange and Settlement
Transactions
December 2019 Exchange.
In December 2019, we exchanged $2,445,000 of the March 2019 Notes and $222,000 of the June 2018 Notes for $2,933,944 of the June
2018 Exchange Notes. The December Exchange 2019 Notes (a) have a fixed conversion price of $12.20 per share for $293,000 of the
note principal until January 31, 2020, (b) have a fixed conversion price of $40.00 per share for all note principal remaining after
January 31, 2020, (c) have amortization of 12.5% of the note principal balance as of February 1, 2020 each quarter beginning on
April 1, 2020, with payments to be made in cash or in shares of common stock at the fixed conversion price and (d) may be converted
at a default conversion price of a 15% discount to the volume-weighted average price, subject to a minimum conversion price of
$1.84 per share, in the event we do not make an amortization payment. In addition, in connection with this exchange, the investor
who received the December 2019 Exchange Notes also had their March 2019 Warrants amended to fix the exercise price at $40.00 per
share.
January 2020
Settlements. In January 2020, we paid approximately $2,600,000 and converted or issued 148,804 shares of common stock to certain
investors to repay all of our outstanding June 2018 Notes and December 2018 Notes. We also fully settled with two investors including
the cancellation of their March 2019 Warrants.
March 2020 Settlements.
In March 2020, we (i) further amended the December 2019 Exchange Notes to fix the conversion price at $9.20 per share of common
stock (ii) exchanged $772,000 of the March 2019 Notes with full-ratchet anti-dilution price protection for $997,000 of amended
March 2019 Notes with a fixed conversion price at $9.20 per share of common stock and (iii) amended, cancelled or had holders
exercise for shares of common stock via cashless exercise all March 2019 Warrants which previously included full-ratchet anti-dilution
price protection and issued new warrants to purchase 423,669 shares of common stock at an exercise price of $10.17 per share.
As of May 18, 2020,
there were no convertible notes with variable conversion prices, no warrants with full-ratchet anti-dilution protection outstanding
and 12,552 June 2018 Warrants outstanding with price protection anti-dilution provisions.
2017 Stock Option and Share Issuance
Plan
In addition, in
March 2017, we adopted the 2017 Plan. The 2017 Plan provides incentives to eligible employees, officers, directors and consultants
in the form of incentive stock options, non-qualified stock options and stock. We have reserved a total of 250,000 shares of common
stock for issuance under the 2017 Plan. Of these shares, approximately 43,415 shares have been designated by our board of directors
for issuance through May 18, 2020. Approximately 38,000 of the options have been forfeited and returned to the option pool under
the 2017 Plan as a consequence of employment terminations. Unless the 2017 Plan administrator otherwise provides, each option
is immediately exercisable, but the shares subject to such option will vest over a period of time as follows: 25% vest after a
12-month service period following the award, and the balance vest in equal monthly installments over the next 36 months of service.
Certain Anti-Takeover Effects
Certain provisions
of Wyoming law may have an anti-takeover effect and may delay or prevent a tender offer or other acquisition transaction that
a shareholder might consider to be in his or her best interest. The summary of the provisions of Wyoming law set forth below does
not purport to be complete and is qualified in its entirety by reference to Wyoming law.
The issuance of shares of preferred stock,
the issuance of rights to purchase such shares, and the imposition of certain other adverse effects on any party contemplating
a takeover could be used to discourage an unsolicited acquisition proposal. For instance, the issuance of the preferred stock,
if the option to acquire such shares is exercised, would impede a business combination by the voting rights that would enable
a holder to block such a transaction. In addition, under certain circumstances, the issuance of other preferred stock could adversely
affect the voting power of holders of our common stock.
Under Wyoming law,
a director, in determining what he reasonably believes to be in or not opposed to the best interests of the corporation, does
not need to consider only the interests of the corporation’s shareholders in any matter but may also, in his discretion,
consider any of the following:
|
(i)
|
The interests of the corporation’s employees, suppliers, creditors and customers;
|
|
|
|
|
(ii)
|
The economy of the state and nation;
|
|
|
|
|
(iii)
|
The impact of any action upon the communities in or near which the corporation’s facilities or operations are located;
|
|
|
|
|
(iv)
|
The long-term interests of the corporation and its shareholders, including the possibility that those interests may be best served by the continued independence of the corporation; and
|
|
|
|
|
(v)
|
Any other factors relevant to promoting or preserving public or community interests.
|
The Preferred Options
to acquire 24,634,560 shares of preferred stock held by our Option Shareholders will, if exercised, deter a takeover.
Because our board of directors is not required to make any determination
on matters affecting potential takeovers solely based on its judgment as to the best interests of our shareholders, our board of
directors could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority, of
our shareholders might believe to be in their best interests or in which such shareholders might receive a premium for their stock
over the then market price of such stock. Our board of directors presently does not intend to seek shareholder approval prior to
the issuance of currently authorized stock, unless otherwise required by law or applicable stock exchange rules.
MATERIAL U.S.
FEDERAL INCOME TAX CONSEQUENCES
The
following summary describes the material U.S. federal income tax consequences of the acquisition, ownership and disposition of
our common stock and the acquisition, ownership, exercise, expiration or disposition of warrants acquired in this offering by Non-U.S.
Holders (as defined below). This discussion does not address all aspects of U.S. federal income taxes, does not discuss the potential
application of the alternative minimum tax or Medicare Contribution tax and does not discuss with state or local taxes, U.S. federal
gift and estate tax laws, or any non-U.S. tax consequences that may be relevant to Non-U.S. Holders in light of their particular
circumstances.
Special
rules different from those described below may apply to certain Non-U.S. Holders that are subject to special treatment under the
Code, such as:
|
·
|
insurance companies, banks and other financial institutions;
|
|
·
|
tax-exempt organizations (including private foundations)
and tax-qualified retirement plans;
|
|
·
|
foreign governments and international organizations;
|
|
·
|
broker-dealers and traders in securities;
|
|
·
|
U.S. expatriates and certain former citizens or long-term
residents of the United States;
|
|
·
|
persons that own, or are deemed to own, more than 5%
of our capital stock;
|
|
·
|
"controlled foreign corporations," "passive
foreign investment companies" and corporations that accumulate earnings to avoid U.S. federal income tax;
|
|
·
|
persons that hold our common stock or warrants as part
of a "straddle," "hedge," "conversion transaction," "synthetic security" or integrated
investment or other risk reduction strategy;
|
|
·
|
persons who do not hold our common stock or warrants
as a capital asset within the meaning of Section 1221 of the Code (generally, for investment purposes); and
|
|
·
|
partnerships and other pass-through entities, and investors
in such pass-through entities (regardless of their places of organization or formation).
|
Such Non-U.S.
Holders are urged to consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that
may be relevant to them.
Furthermore,
the discussion below is based upon the provisions of the Code, and United States Treasury Regulations, IRS rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified, possibly retroactively,
and are subject to differing interpretations which could result in U.S. federal income tax consequences different from those discussed
below. We have not requested a ruling from the Internal Revenue Service, or IRS, with respect to the statements made and the conclusions
reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions or
will not take a contrary position regarding the tax consequences described herein, or that any such contrary position would not
be sustained by a court.
Finally,
the discussion below assumes that the pre-funded warrants are characterized for U.S. federal income tax purposes in accordance
with their form as warrants to acquire our common stock. Given the terms of the pre-funded warrants, it is possible that the IRS
could successfully assert that the pre-funded warrants in substance represent direct ownership of our common stock prior to exercise.
Under this treatment, a Non-U.S. Holder of a pre-funded warrant could be subject to the tax consequences described below that
are applicable to a holder of our common stock, including under the heading "Distributions." Persons considering
the acquisition of a pre-funded warrant are encouraged to consult their own tax advisors concerning the tax characterization of
the pre-funded warrants and the consequences of acquiring, owning or disposing of a pre-funded warrant.
PERSONS
CONSIDERING THE PURCHASE OF OUR COMMON STOCK OR WARRANTS PURSUANT TO THIS OFFERING SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK OR WARRANTS IN LIGHT OF THEIR PARTICULAR
SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION, INCLUDING ANY STATE, LOCAL OR NON-U.S.
TAX CONSEQUENCES OR ANY U.S. FEDERAL NON-INCOME TAX CONSEQUENCES, AND THE POSSIBLE APPLICATION OF TAX TREATIES.
For
the purposes of this discussion, a "Non-U.S. Holder" is, for U.S. federal income tax purposes, a beneficial owner of
common stock or warrants that is not a U.S. Holder or a partnership for U.S. federal income tax purposes. A "U.S. Holder"
means a beneficial owner of our common stock or warrants that is for U.S. federal income tax purposes (a) an individual citizen
or resident of the United States, (b) a corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes), created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (c) an
estate the income of which is subject to U.S. federal income taxation regardless of its source, or (d) a trust if it (1) is
subject to the primary supervision of a court within the United States and one or more U.S. persons (within the meaning of Section 7701(a)(30)
of the Code) have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a U.S. person.
If
you are an individual non-U.S. citizen, you may, in some cases, under a “look-back” rule, be deemed to be a resident
alien (as opposed to a nonresident alien) by virtue of being present in the United States for at least 31 days in the calendar
year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. Generally,
for this purpose, all the days present in the current year, one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year, are counted.
Resident
aliens are generally subject to U.S. federal income tax as if they were U.S. citizens. Individuals who are uncertain of their status
as resident or nonresident aliens for U.S. federal income tax purposes are urged to consult their own tax advisors regarding the
U.S. federal income tax consequences of the ownership or disposition of our common stock or warrants.
Exercise
of Warrants
In
general, a Non-U.S. Holder will not recognize gain or loss for U.S. federal income tax purposes upon exercise of a warrant, except
to the extent the Non-U.S. Holder receives a cash payment for any such fractional share that would otherwise have been issuable
upon exercise of the warrant, which will be treated as a sale subject to the rules described under "Gain on Disposition of
Our Common Stock" below. The Non-U.S. Holder will take a tax basis in the shares acquired on the exercise of a warrant equal
to the exercise price of the warrant. The Non-U.S. Holder's holding period in the shares of our common stock acquired on exercise
of the warrant will begin on the date of exercise of the warrant, and will not include any period for which the Non-U.S. Holder
held the warrant.
Expiration
of Warrants
Expiration
of warrants will be treated as if the Non-U.S. Holder sold or exchanged the warrant and recognized a capital loss equal to the
Non-U.S. Holder's tax basis in the warrant. However, a Non-U.S. Holder will not be able to utilize a loss recognized upon expiration
of a warrant against the Non-U.S. Holder's U.S. federal income tax liability unless the loss is effectively connected with the
Non-U.S. Holder's conduct of a trade or business within the United States (and, if an income tax treaty applies, is attributable
to a permanent establishment in the United States) or is treated as a U.S.-source loss and the Non-U.S. Holder is present 183 days
or more in the taxable year of disposition and certain other conditions are met.
Certain
Adjustments to the Warrants
Under
Section 305 of the Code, an adjustment to the number of shares of common stock that will be issued on the exercise of the
warrants, or an adjustment to the exercise price of the warrants, may be treated as a constructive distribution to a Non-U.S. Holder
of the warrants if, and to the extent that, such adjustment has the effect of increasing such Non-U.S. Holder's proportionate interest
in our "earnings and profits" or assets, depending on the circumstances of such adjustment (for example, if such adjustment
is to compensate for a distribution of cash or other property to our shareholders). Adjustments to the exercise price of warrants
made pursuant to a bona fide reasonable adjustment formula that has the effect of preventing dilution of the interest
of the holders of the warrants generally should not be considered to result in a constructive distribution. Such constructive distribution
would be treated as a dividend, return of capital or capital gain as described under the heading "Distributions" below.
Any such constructive distribution would be taxable whether or not there is an actual distribution of cash or other property.
In
addition, regulations governing "dividend equivalents" under Section 871(m) of the Code should apply to the pre-funded
warrants. Under those regulations, an implicit or explicit payment under the pre-funded warrants that references a dividend distribution
on our common stock (including an adjustment to the amount due on the pre-funded warrant to take into account a dividend distribution
on our common stock) would be taxable to a Non-U.S. Holder as described under the heading "Distributions" below. Such
dividend equivalent amount would be taxable and subject to withholding whether or not there is actual payment of cash or other
property. Non-U.S. holders are encouraged to consult their own tax advisors regarding the application of Section 871(m) to
the pre-funded warrants.
On
April 12, 2016, the IRS issued proposed regulations addressing the amount and timing of deemed distributions, obligations
of withholding agents and filing and notice obligations of issuers. If adopted as proposed, the regulations would generally provide
that (i) the amount of a deemed distribution is the excess of the fair market value of a warrant immediately after the number-of-shares
or exercise-price adjustment over the fair market value of the warrant without the adjustment, (ii) the deemed distribution
occurs at the earlier of the date the adjustment occurs under the terms of the warrant and the date of the actual distribution
of cash or property that results in the deemed distribution, (iii) subject to certain limited exceptions, a withholding agent
is required to impose any applicable withholding on deemed distributions to a Non-U.S. Holder and, if there is no associated cash
payment, may set off its withholding obligations against other payments to or funds of such holder and (iv) we are required
to report the amount of any deemed distributions on our website or to the IRS and all holders of warrants (including holders of
warrants that would otherwise be exempt from reporting). The final regulations will be effective for deemed distributions occurring
on or after the date of adoption, but holders of warrants and withholding agents may rely on them prior to that date under certain
circumstances.
Distributions
We
do not expect to make any distributions on our common stock in the foreseeable future. If we do make distributions on our common
stock, however, such distributions made to a Non-U.S. Holder of our common stock (including constructive distributions or dividend
equivalents deemed paid) will constitute dividends for U.S. tax purposes to the extent paid out of our current or accumulated earnings
and profits (as determined under U.S. federal income tax principles). Distributions in excess of our current and accumulated earnings
and profits will constitute a return of capital that is applied against and reduces, but not below zero, a Non-U.S. Holder's adjusted
tax basis in our common stock. Any remaining excess will be treated as gain realized on the sale or exchange of our common stock
as described below under the section titled "Gain on Disposition of Our Common Stock or Warrants."
Any
distribution on our common stock that is treated as a dividend paid to a Non-U.S. Holder (including constructive
distributions or dividend equivalents deemed paid) that is not effectively connected with the holder's conduct of a trade or
business in the United States will generally be subject to withholding tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty between the United States and the Non-U.S. Holder's country of residence. To
obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder generally will be required to provide the applicable
withholding agent with a properly executed IRS Form W-8BEN, IRS Form W-8BEN-E or other appropriate form, certifying
the Non-U.S. Holder's entitlement to benefits under that treaty. Such form must be provided prior to the payment of dividends
and must be updated periodically. If a Non-U.S. Holder holds stock through a financial institution or other agent acting on
the holder's behalf, the holder will be required to provide appropriate documentation to such agent. The holder's agent may
then be required to provide certification to the applicable withholding agent, either directly or through other
intermediaries. If you are eligible for a reduced rate of U.S. withholding tax under an income tax treaty, you should consult
with your own tax advisor to determine if you are able to obtain a refund or credit of any excess amounts withheld by timely
filing an appropriate claim for a refund with the IRS.
We
generally are not required to withhold tax on dividends paid (or constructive dividends or dividend equivalents deemed paid) to
a Non-U.S. Holder that are effectively connected with the holder's conduct of a trade or business within the United States (and,
if required by an applicable income tax treaty, are attributable to a permanent establishment that the holder maintains in the
United States) if a properly executed IRS Form W-8ECI, stating that the dividends are so connected, is furnished to us (or,
if stock is held through a financial institution or other agent, to the applicable withholding agent). In general, such effectively
connected dividends will be subject to U.S. federal income tax on a net income basis at the regular graduated rates applicable
to U.S. persons. A corporate Non-U.S. Holder receiving effectively connected dividends may also be subject to an additional "branch
profits tax," which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an
applicable treaty) on the corporate Non-U.S. Holder's effectively connected earnings and profits, subject to certain adjustments.
See
also the section below titled “Foreign Accounts” for additional withholding rules that may apply to dividends paid
to certain foreign financial institutions or non-financial foreign entities.
Gain
on Disposition of Our Common Stock or Warrants
Subject
to the discussions below under the sections titled “Backup Withholding and Information Reporting” and “Foreign
Accounts,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax with respect to gain
realized on a sale or other disposition of our common stock or warrants unless (a) the gain is effectively connected with
a trade or business of the holder in the United States (and, if required by an applicable income tax treaty, is attributable to
a permanent establishment that the holder maintains in the United States), (b) the Non-U.S. Holder is a nonresident alien
individual and is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions
are met, or (c) we are or have been a "United States real property holding corporation" within the meaning of Code
Section 897(c)(2) at any time within the shorter of the five-year period preceding such disposition or the holder's holding
period in the common stock or warrants.
If
you are a Non-U.S. Holder described in (a) above, you will be required to pay tax on the net gain derived from the sale at
the regular graduated U.S. federal income tax rates applicable to U.S. persons. Corporate Non-U.S. Holders described in (a) above
may also be subject to the additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable
income tax treaty. If you are an individual Non-U.S. Holder described in (b) above, you will be required to pay a flat 30%
tax on the gain derived from the sale, which gain may be offset by U.S. source capital losses (even though you are not considered
a resident of the United States), provided you have timely filed
U.S. Federal
Income Tax Returns with Respect to Such Losses
With
respect to (c) above, in general, we would be a United States real property holding corporation if U.S. real property interests
as defined in the Code and the Treasury Regulations comprised (by fair market value) at least half of our assets. We believe that
we are not, and do not anticipate becoming, a United States real property holding corporation. However, there can be no assurance
that we will not become a United States real property holding corporation in the future. Even if we are treated as a U.S. real
property holding corporation, gain realized by a Non-U.S. Holder on a disposition of our common stock or warrants will not be subject
to U.S. federal income tax so long as (1) the Non-U.S. Holder owned, directly, indirectly or constructively, no more than
five percent of our common stock at all times within the shorter of (i) the five-year period preceding the disposition or
(ii) the holder's holding period and (2) our common stock is regularly traded on an established securities market. There
can be no assurance that our common stock will qualify as regularly traded on an established securities market.
See
the section titled “Foreign Accounts” for additional information regarding withholding rules that may apply to proceeds
of a disposition of our common stock or warrants paid to foreign financial institutions or non-financial foreign entities.
Backup
Withholding and Information Reporting
Generally,
we or certain financial middlemen must report information to the IRS with respect to any dividends we pay on our common stock including
the amount of any such dividends (including constructive distributions or dividend equivalents deemed paid), the name and address
of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder to whom any such dividends are
paid. Pursuant to tax treaties or certain other agreements, the IRS may make its reports available to tax authorities in the recipient's
country of residence.
Dividends
paid by us (or our paying agents) to a Non-U.S. Holder (including constructive distributions or dividend equivalents deemed paid)
may also be subject to U.S. backup withholding. U.S. backup withholding generally will not apply to a Non-U.S. Holder who provides
a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable, or otherwise establishes an exemption, provided
that the applicable withholding agent does not have actual knowledge or reason to know the holder is a U.S. person.
Under
current U.S. federal income tax law, U.S. information reporting and backup withholding requirements generally will apply to the
proceeds of a disposition of our common stock or warrants effected by or through a U.S. office of any broker, U.S. or non-U.S.,
unless the Non-U.S. Holder provides a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable, or otherwise
meets documentary evidence requirements for establishing non-U.S. person status or otherwise establishes an exemption. Generally,
U.S. information reporting and backup withholding requirements will not apply to a payment of disposition proceeds to a Non-U.S.
Holder where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. Information
reporting and backup withholding requirements may, however, apply to a payment of disposition proceeds if the broker has actual
knowledge, or reason to know, that the holder is, in fact, a U.S. person. For information reporting purposes, certain brokers with
substantial U.S. ownership or operations will generally be treated in a manner similar to U.S. brokers.
Backup
withholding is not an additional tax. If backup withholding is applied to you, you should consult with your own tax advisor to
determine whether you have overpaid your U.S. federal income tax, and whether you are able to obtain a tax refund or credit of
the overpaid amount.
Foreign
Accounts
In
addition, U.S. federal withholding taxes may apply under the Foreign Account Tax Compliance Act (“FATCA”), on certain
types of payments, including dividends, constructive dividends or dividend equivalents deemed paid and, on or after January 1,
2019, the gross proceeds of a disposition of our common stock or warrants, paid to non-U.S. financial institutions and certain
other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends (including constructive dividends and
dividend equivalents) on, or, on or after January 1, 2019, gross proceeds from the sale or other disposition of, our common
stock or warrants paid to a "foreign financial institution" or a "non-financial foreign entity" (each as defined
in the Code), unless (1) the foreign financial institution agrees to undertake certain diligence and reporting obligations,
(2) the non-financial foreign entity either certifies it does not have any "substantial United States owners" (as
defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign
financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. The 30% federal withholding
tax described in this paragraph cannot be reduced under an income tax treaty with the United States. If the payee is a foreign
financial institution and is subject to the diligence and reporting requirements in (1) above, it must enter into an agreement
with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain
"specified United States persons" or "United States-owned foreign entities" (each as defined in the Code),
annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial
institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental
agreement with the United States governing FATCA may be subject to different rules.
Prospective
investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment
in our common stock or warrants.
EACH
PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING
OF OUR COMMON STOCK OR WARRANTS, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAW, AS WELL AS TAX
CONSEQUENCES ARISING UNDER ANY STATE, LOCAL, NON-U.S. OR U.S. FEDERAL NON-INCOME TAX LAWS SUCH AS ESTATE AND GIFT TAX.
UNDERWRITING
We have entered into
an underwriting agreement dated May 20, 2020 with A.G.P./Alliance Global Partners (“AGP”), as underwriter, with respect
to the securities being offered hereby. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell
to the underwriter and the underwriter has agreed to purchase from us, at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this prospectus, shares of our common stock, purchase warrants and pre-funded warrants.
Pursuant to the terms
and subject to the conditions contained in the underwriting agreement, we have agreed to sell to the underwriter named below, and
the underwriter has agreed to purchase from us, the respective number of shares of common stock, purchase warrants and pre-funded
warrants set forth opposite its name below:
Underwriter
|
|
Number of
Shares
|
|
|
Number of
Pre-Funded
Warrants
|
|
|
Number of
Purchase
Warrants
|
|
|
Total
Securities
|
|
A.G.P./Alliance Global Partners
|
|
|
1,898,850
|
|
|
|
323,310
|
|
|
1,111,080
|
|
|
|
3,333,240
|
|
Total
|
|
|
1,898,850
|
|
|
|
323,310
|
|
|
1,111,080
|
|
|
|
3,333,240
|
|
The
underwriting agreement provides that the obligation of the underwriter to purchase the shares of common stock, purchase warrants
and pre-funded warrants offered by this prospectus is subject to certain conditions. The underwriter is obligated
to purchase all of the shares of common stock, purchase warrants and pre-funded warrants offered hereby if any of the shares, purchase
warrants or pre-funded warrants are purchased.
Underwriting
Discounts, Commissions and Expenses
We have agreed to sell
the securities to the underwriter at the offering price of $5.40 per share of common stock and purchase warrant or $5.399 per pre-funded
warrant and purchase warrant, as applicable, which represents the offering price of such securities set forth on the cover page
of this prospectus, less the applicable 7% underwriting discount.
The
underwriter has advised us that they propose to offer the shares of common stock, purchase warrants and the pre-funded warrants
at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession
not in excess of $0.189 per share of common stock, the purchase warrant and pre-funded
warrant. The underwriter may allow, and certain dealers may reallow, a discount from the concession not in excess of $0.189
per share of common stock, the purchase warrant and the pre-funded warrant to certain brokers
and dealers. After this offering, the public offering price, concession and reallowance to dealers may be changed by the representative.
No such change shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The
shares of common stock, the purchase warrants and the pre-funded warrants are offered by the underwriter as stated herein, subject
to receipt and acceptance by them and subject to its right to reject any order in whole or in part. The underwriter has informed
us that it does not intend to confirm sales to any accounts over which they exercise discretionary authority.
We have also agreed
to reimburse the underwriter for accountable legal expenses not to exceed $100,000 and non-accountable expenses not to exceed 1%
of the aggregate gross proceeds of this offering. We estimate that expenses payable by us in connection with this offering, including
reimbursement of the underwriter’s out-of-pocket expenses, but excluding the underwriting discount referred to above, will
be approximately $630,000.
The following table
shows the underwriting discounts and commissions payable to the underwriter by us in connection with this offering (assuming both
the exercise and non-exercise of the over-allotment option to purchase additional shares of common stock and/or purchase
warrants we have granted to the underwriter):
|
|
Per
Share
and accompanying
Purchase Warrant
|
|
|
Per Pre-
Funded
Warrant
and accompanying
Purchase Warrant
|
|
|
Total
Without
Over-
Allotment
|
|
|
Total With
Over-
Allotment
|
|
Public offering price
|
|
$
|
5.40
|
|
|
$
|
5.399
|
|
|
$
|
11,999,340.69
|
|
|
$
|
13,799,290.29
|
|
Underwriting discounts and commissions (7%)
|
|
$
|
0.378
|
|
|
$
|
0.37793
|
|
|
$
|
839,953.85
|
|
|
$
|
1,673,953.13
|
|
Proceeds, before expenses, to us
|
|
$
|
5.022
|
|
|
$
|
5.02107
|
|
|
$
|
11,159,386.84
|
|
|
$
|
12,125,337.16
|
|
Over-allotment
Option
Pursuant
to the underwriting agreement, we have granted the underwriter an option, exercisable for up to 45 days from the date of this prospectus,
to purchase up to 333,324 additional shares of common stock and/or additional purchase warrants to purchase up to 166,662 shares
of common stock at the public offering price set forth on the cover page hereto, less the underwriting discounts and commissions.
The underwriter may exercise the option solely to cover over-allotments, if any, made in connection with this offering. If any
additional shares of common stock and/or purchase warrants are purchased pursuant to the over-allotment option, the underwriter
will offer these shares of common stock and/or purchase warrants on the same terms as those on which the other securities are being
offered.
Underwriter Warrants
Upon
closing of this offering, we will issue to A.G.P. a compensation warrant entitling A.G.P. or its designees to purchase up to 111,108
shares of our common stock, subject to any reductions necessary to comply with the rules and regulations of the Financial Industry
Regulatory Authority, Inc., or FINRA. This warrant will be exercisable at any time and from time to time, in whole or in part,
during the five-year period commencing six months from the effective date of the registration statement of which this prospectus
forms a part. The warrant will provide for registration rights for the shares underlying the warrant, pursuant to FINRA Rule 5110(f)(2)G),
including a one-time demand registration right and piggyback rights for period of not more than five years and seven years, respectively,
as well as contain customary anti-dilution provisions. Pursuant to FINRA Rule 5110(g), the underwriter warrants and any shares
issued upon exercise of the underwriter warrants shall not be sold, transferred, assigned, pledged, or hypothecated, or be the
subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition
of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales
of this offering, except the transfer of any security: (i) by operation of law or by reason of our reorganization; (ii) to any
FINRA member firm participating in the offering and the officers or partners thereof, if all securities so transferred remain subject
to the lock-up restriction set forth above for the remainder of the time period; (iii) if the aggregate amount of our securities
held by the underwriter or related persons do not exceed 1% of the securities being offered; (iv) that is beneficially owned on
a pro rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs
investments by the fund and the participating members in the aggregate do not own more than 10% of the equity in the fund; or (v)
the exercise or conversion of any security, if all securities remain subject to the lock-up restriction set forth above for the
remainder of the time period.
Indemnification
We have agreed to indemnify
the underwriter against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches
of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriter may
be required to make in respect of those liabilities.
Lock-up Agreements
In connection with
this offering, we, along with our directors and executive officers have agreed with the underwriter that for a 90-day “lock-up”
period, commencing from the date of this prospectus, subject to specified exceptions, without the prior written consent of the
underwriter, we and they will not offer, sell, pledge or otherwise dispose of these securities without the prior written consent
of the underwriter.
Price Stabilization, Short Positions
and Penalty Bids
The underwriter has
advised us that it does not intend to conduct any stabilization or over-allotment activities in connection with this offering.
Passive Market Making
In connection with
this offering, the underwriter and any selling group members may engage in passive market making transactions in our common stock
on Nasdaq in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934, as amended, during a period before
the commencement of offers or sales of common stock and extending through the completion of the distribution. A passive market
maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent
bids are lowered below the passive market maker’s bid that bid must then be lowered when specified purchase limits are exceeded.
Electronic Distribution
This prospectus in
electronic format may be made available on websites or through other online services maintained by the underwriter, or by its affiliates.
Other than this prospectus in electronic format, the information on the underwriter’s website and any information contained
in any other website maintained by the underwriter is not part of this prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or the underwriter in its capacity as underwriter, and should not be
relied upon by investors.
Other
From time to time,
the underwriter and/or its affiliates have provided, and may in the future provide, various investment banking and other financial
services for us for which services they have received and, may in the future receive, customary fees. In the course of their businesses,
the underwriter and its affiliates may actively trade our securities or loans for its own account or for the accounts of customers,
and, accordingly, the underwriter and its affiliates may at any time hold long or short positions in such securities or loans.
Except for services provided in connection with this offering, the underwriter has not provided any investment banking or other
financial services to us during the 180-day period preceding the date of this prospectus, and we do not expect to retain the underwriter
to perform any investment banking or other financial services for at least 90 days after the date of this prospectus.
Selling Restrictions
This prospectus does
not constitute an offer to sell to, or a solicitation of an offer to buy from, anyone in any country or jurisdiction (i) in which
such an offer or solicitation is not authorized, (ii) in which any person making such offer or solicitation is not qualified to
do so or (iii) in which any such offer or solicitation would otherwise be unlawful. No action has been taken that would, or is
intended to, permit a public offer of the securities or possession or distribution of this prospectus or any other offering or
publicity material relating to the securities in any country or jurisdiction (other than the United States) where any such action
for that purpose is required. Accordingly, the underwriter has undertaken that it will not, directly or indirectly, offer or sell
any securities or have in its possession, distribute or publish any prospectus, form of application, advertisement or other document
or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result
in compliance with any applicable laws and regulations and all offers and sales of securities by it will be made on the same terms.
European Economic Area
In relation to each
Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”)
an offer to the public of any securities may not be made in that Relevant Member State, except that an offer to the public in that
Relevant Member State of any securities may be made at any time under the following exemptions under the Prospectus Directive,
if they have been implemented in that Relevant Member State:
|
·
|
to legal entities which are qualified investors as defined
under the Prospectus Directive;
|
|
·
|
by the underwriter to fewer than 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives of the underwriter for any such offer; or
|
|
·
|
in any other circumstances falling within Article 3(2)
of the Prospectus Directive,
|
provided that no such
offer of our common stock shall result in a requirement for us or any underwriter to publish a prospectus pursuant to Article 3
of the Prospectus Directive.
For the purposes of
this provision, (1) the expression an “offer of common stock to the public” in relation to any common stock in any
Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer
and any securities to be offered so as to enable an investor to decide to purchase or subscribe for the common stock, as the same
may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State,
(2) the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD
Amending Directive), and includes any relevant implementing measure in each Relevant Member State and (3) the expression “2010
PD Amending Directive” means Directive 2010/73/EU.
United Kingdom
This prospectus has
only been communicated or caused to have been communicated and will only be communicated or caused to be communicated as an invitation
or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act of 2000
(the “FSMA”)) as received in connection with the issue or sale of the common stock in circumstances in which Section
21(1) of the FSMA does not apply to us. All applicable provisions of the FSMA will be complied with in respect to anything done
in relation to the common stock in, from or otherwise involving the United Kingdom.
Canada
The securities may
be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National
Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined
in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities
must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable
securities laws.
Securities legislation
in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus
(including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised
by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory.
The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory
for particulars of these rights or consult with a legal advisor.
Pursuant
to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriter is not
required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with
this offering.
Australia
No placement document,
prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments
Commission in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other
disclosure document under the Corporations Act 2001, or the Corporations Act, and does not purport to include the information required
for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.
Any offer in Australia
of the securities may only be made to persons, or the Exempt Investors, who are “sophisticated investors” (within the
meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11)
of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that
it is lawful to offer the securities without disclosure to investors under Chapter 6D of the Corporations Act.
The securities applied
for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment
under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be
required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure
document which complies with Chapter 6D of the Corporations Act. Any person acquiring securities must observe such Australian on-sale
restrictions.
This prospectus contains
general information only and does not take account of the investment objectives, financial situation or needs of any particular
person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors
need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances and, if
necessary, seek expert advice on those matters.
Switzerland
The securities may
not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or SIX, or on any other stock exchange
or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance
prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses
under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland.
Neither this document nor any other offering or marketing material relating to the securities or the offering may be publicly distributed
or otherwise made publicly available in Switzerland.
Neither this document
nor any other offering or marketing material relating to the offering, or the securities have been or will be filed with or approved
by any Swiss regulatory authority. This document will not be filed with, and the offer of securities will not be supervised by,
the Swiss Financial Market Supervisory Authority FINMA, and the offer of securities has not been and will not be authorized under
the Swiss Federal Act on Collective Investment Schemes, or CISA. The investor protection afforded to acquirers of interests in
collective investment schemes under the CISA does not extend to acquirers of securities.
Dubai International Financial Centre
This prospectus relates
to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority, or DFSA. This prospectus
is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered
to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents relating to Exempt
Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility
for the prospectus. The securities to which this prospectus relates may be illiquid and/or subject to restrictions on their resale.
Prospective purchasers of the securities offered should conduct their own due diligence on the securities. If you do not understand
the contents of this prospectus, you should consult an authorized financial advisor.
Hong Kong
The securities have
not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional
investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance
or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies
Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement,
invitation or document relating to the securities has been or may be issued or has been or may be in the possession of any person
for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed
or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect
to securities which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors”
as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.
Japan
The securities have
not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended)
and, accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese Person or to
others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person, except in compliance with all applicable
laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities in effect
at the relevant time. For the purposes of this paragraph, “Japanese Person” shall mean any person resident in Japan,
including any corporation or other entity organized under the laws of Japan.
LEGAL MATTERS
The
validity of the shares of common stock, purchase warrants and pre-funded warrants offered hereby will be passed upon for us by
Bailey, Stock, Harmon, Cottam, Lopez LLP. Certain other matters in connection with this offering will be passed upon for us by
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., New York, New York. Sullivan & Worcester LLP, New York, New York. has
acted as counsel for the underwriter.
EXPERTS
Our consolidated financial
statements as of August 31, 2019 and 2018 and for the fiscal years then ended have been audited by Marcum LLP as set forth
in their report (which report includes an explanatory paragraph as to our ability to continue as a going concern). We have included
our consolidated financial statements in the prospectus and elsewhere in the registration statement in reliance on Marcum LLP’s
report, given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with
the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our common stock, purchase
warrants and pre-funded warrants offered hereby. This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For
further information about us and our common stock, the purchase warrants and the pre-funded warrants offered hereby, we refer
you to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding
the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily
complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document
filed as an exhibit to the registration statement. The SEC maintains a website that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the SEC. The address is http://www.sec.gov.
We are subject to the
reporting requirements of the Exchange Act, as amended, and file annual, quarterly and current reports, proxy statements and other
information with the SEC. You can read our SEC filings, including the registration statement, over the Internet at the SEC’s
website at http://www.sec.gov. We also maintain a website at http://www.shiftpixy.com, at which you
may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished
to, the SEC. The information contained in, or that can be accessed through, our website is not part of this prospectus. You
may also request a copy of these filings, at no cost, by writing or telephoning us at: 1 Venture, Suite 150, Irvine, CA 92618,
(888) 798-9100.
INDEX TO FINANCIAL
STATEMENTS
|
|
Page No.
|
Condensed
Consolidated Balance Sheets as of February 29, 2020 and August 31, 2019
|
|
F-2
|
Condensed
Consolidated Statements of Operations for the Three and Six Months Ended February 29, 2020 and February 28, 2019 (Unaudited)
|
|
F-3
|
Condensed
Consolidated Statements of Stockholders’ Deficit for the Three and Six Months Ended February 29, 2020 and February 28,
2019 (Unaudited)
|
|
F-4
|
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended February 29, 2020 and February 28, 2019 (Unaudited)
|
|
F-7
|
Notes to the Condensed
Consolidated Financial Statements (Unaudited)
|
|
F-8
|
Report of Independent
Registered Public Accounting Firm
|
|
F-26
|
Consolidated
Balance Sheets for the Years Ended August 31, 2019 and 2018
|
|
F-27
|
Consolidated
Statements of Operations for the Years Ended August 31, 2019 and 2018
|
|
F-28
|
Consolidated
Statements of Stockholders’ Deficit for the Two Years Ended August 31, 2019 and 2018
|
|
F-29
|
Consolidated
Statements of Cash Flows for the Years Ended August 31, 2019 and 2018
|
|
F-30
|
Notes
to Consolidated Financial Statements
|
|
F-31
|
ShiftPixy, Inc.
Condensed Consolidated Balance Sheets
|
|
February 29,
2020
|
|
|
August 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
397,000
|
|
|
$
|
1,561,000
|
|
Accounts receivable, net
|
|
|
1,197,000
|
|
|
|
86,000
|
|
Unbilled accounts receivable
|
|
|
2,093,000
|
|
|
|
1,402,000
|
|
Note receivable, net
|
|
|
358,000
|
|
|
|
-
|
|
Deposit – workers’
compensation
|
|
|
262,000
|
|
|
|
235,000
|
|
Prepaid expenses
|
|
|
402,000
|
|
|
|
349,000
|
|
Other current assets
|
|
|
163,000
|
|
|
|
244,000
|
|
Current assets
of discontinued operations
|
|
|
1,924,000
|
|
|
|
10,154,000
|
|
Total current assets
|
|
|
6,796,000
|
|
|
|
14,031,000
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
2,923,000
|
|
|
|
3,320,000
|
|
Note receivable, net
|
|
|
5,372,000
|
|
|
|
-
|
|
Deposits – workers’
compensation
|
|
|
453,000
|
|
|
|
754,000
|
|
Deposits and other assets
|
|
|
104,000
|
|
|
|
124,000
|
|
Non current
assets of discontinued operations
|
|
|
3,324,000
|
|
|
|
5,567,000
|
|
Total assets
|
|
$
|
18,972,000
|
|
|
$
|
23,796,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued
liabilities
|
|
$
|
2,673,000
|
|
|
$
|
4,455,000
|
|
Payroll related liabilities
|
|
|
5,801,000
|
|
|
|
2,559,000
|
|
Convertible notes, net
|
|
|
1,427,000
|
|
|
|
3,351,000
|
|
Accrued workers’ compensation
costs
|
|
|
262,000
|
|
|
|
235,000
|
|
Default penalties accrual
|
|
|
-
|
|
|
|
1,800,000
|
|
Derivative liability
|
|
|
294,000
|
|
|
|
3,756,000
|
|
Current liabilities
of discontinued operations
|
|
|
1,924,000
|
|
|
|
16,032,000
|
|
Total current liabilities
|
|
|
12,381,000
|
|
|
|
32,188,000
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Convertible notes, net
|
|
|
609,000
|
|
|
|
-
|
|
Accrued workers’
compensation costs
|
|
|
771,000
|
|
|
|
525,000
|
|
Non-current
liabilities of discontinued operations
|
|
|
5,652,000
|
|
|
|
3,853,000
|
|
Total liabilities
|
|
|
19,413,000
|
|
|
|
36,566,000
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Preferred stock, 50,000,000 authorized
shares; $0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
Common stock, 750,000,000 authorized
shares; $0.0001 par value; 1,103,643 and 907,047 shares issued as of February 29, 2020 and August 31, 2019
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
37,620,000
|
|
|
|
32,505,000
|
|
Treasury stock, at cost-0 and 13,953
shares as of February 29, 2020 and August 31, 2019
|
|
|
-
|
|
|
|
(325,000
|
)
|
Accumulated
deficit
|
|
|
(38,061,000
|
)
|
|
|
(44,950,000
|
)
|
Total stockholders’
deficit
|
|
|
(441,000
|
)
|
|
|
(12,770,000
|
)
|
Total liabilities and stockholders’
deficit
|
|
$
|
18,972,000
|
|
|
$
|
23,796,000
|
|
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
ShiftPixy Inc.
Condensed Consolidated Statements of
Operations
(Unaudited)
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
February 29, 2020
|
|
|
February 28, 2019
|
|
|
February 29, 2020
|
|
|
February 28, 2019
|
|
Revenues (gross billings of $16.1 million and $8.2 million less worksite employee payroll cost of $13.5 million and $7.0 million, respectively for the three months ended; gross billings of $32.6 million and $14.0 million less worksite employee payroll cost of $27.8 million and $12.0 million, respectively for six months ended)
|
|
$
|
2,583,000
|
|
|
$
|
1,186,000
|
|
|
$
|
4,761,000
|
|
|
$
|
2,020,000
|
|
Cost of revenue
|
|
|
2,124,000
|
|
|
|
1,011,000
|
|
|
|
4,178,000
|
|
|
|
1,659,000
|
|
Gross profit
|
|
|
459,000
|
|
|
|
175,000
|
|
|
|
583,000
|
|
|
|
361,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and payroll taxes
|
|
|
1,802,000
|
|
|
|
1,089,000
|
|
|
|
3,452,000
|
|
|
|
2,030,000
|
|
Stock-based compensation – general and administrative
|
|
|
619,000
|
|
|
|
81,000
|
|
|
|
745,000
|
|
|
|
158,000
|
|
Commissions
|
|
|
40,000
|
|
|
|
34,000
|
|
|
|
111,000
|
|
|
|
66,000
|
|
Professional fees
|
|
|
997,000
|
|
|
|
895,000
|
|
|
|
1,837,000
|
|
|
|
1,519,000
|
|
Software development
|
|
|
350,000
|
|
|
|
718,000
|
|
|
|
703,000
|
|
|
|
1,028,000
|
|
Depreciation and amortization
|
|
|
239,000
|
|
|
|
191,000
|
|
|
|
480,000
|
|
|
|
379,000
|
|
General and administrative
|
|
|
403,000
|
|
|
|
988,000
|
|
|
|
1,564,000
|
|
|
|
2,116,000
|
|
Total operating expenses
|
|
|
4,450,000
|
|
|
|
3,996,000
|
|
|
|
8,892,000
|
|
|
|
7,296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(3,991,000
|
)
|
|
|
(3,821,000
|
)
|
|
|
(8,309,000
|
)
|
|
|
(6,935,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(805,000
|
)
|
|
|
(969,000
|
)
|
|
|
(1,966,000
|
)
|
|
|
(1,926,000
|
)
|
Expense related to modification of warrants
|
|
|
(22,000
|
)
|
|
|
-
|
|
|
|
(22,000
|
)
|
|
|
-
|
|
Loss from debt conversion
|
|
|
(657,000
|
)
|
|
|
--
|
|
|
|
(657,000
|
)
|
|
|
--
|
|
Inducement loss
|
|
|
(567,000
|
)
|
|
|
(1,555,000
|
)
|
|
|
(567,000
|
)
|
|
|
(1,555,000
|
)
|
Change in fair value derivative and warrant liability
|
|
|
829,000
|
|
|
|
-
|
|
|
|
1,771,000
|
|
|
|
-
|
|
Gain on convertible note settlement
|
|
|
-
|
|
|
|
2,611,000
|
|
|
|
-
|
|
|
|
2,611,000
|
|
Gain on convertible note penalties accrual
|
|
|
760,000
|
|
|
|
-
|
|
|
|
760,000
|
|
|
|
-
|
|
Total other (expense) income
|
|
|
(462,000
|
)
|
|
|
87,000
|
|
|
|
(681,000
|
)
|
|
|
(870,000
|
)
|
Loss from continuing operations
|
|
|
(4,453,000
|
)
|
|
|
(3,734,000
|
)
|
|
|
(8,990,000
|
)
|
|
|
(7,805,000
|
)
|
Income (Loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations
|
|
|
(1,784,000
|
)
|
|
|
1,594,000
|
|
|
|
197,000
|
|
|
|
3,418,000
|
|
Gain from asset sale
|
|
|
15,682,000
|
|
|
|
-
|
|
|
|
15,682,000
|
|
|
|
-
|
|
Total Income from discontinued operations, net of tax
|
|
|
13,898,000
|
|
|
|
1,594,000
|
|
|
|
15,879,000
|
|
|
|
3,418,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,445,000
|
|
|
$
|
(2,140,000
|
)
|
|
$
|
6,889,000
|
|
|
$
|
(4,387,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) gain per share, Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.26
|
)
|
|
$
|
(4.79
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(10.35
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(0.10
|
)
|
|
|
2.04
|
|
|
|
0.02
|
|
|
|
4.53
|
|
Gain on sale of assets
|
|
|
0.92
|
|
|
|
-
|
|
|
|
1.76
|
|
|
|
-
|
|
Total discontinued operations
|
|
|
0.82
|
|
|
|
2.04
|
|
|
|
1.78
|
|
|
|
4.53
|
|
Net income (loss) per common share – Basic and diluted
|
|
$
|
0.56
|
|
|
$
|
(2.74
|
)
|
|
$
|
0.77
|
|
|
$
|
(5.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic and diluted
|
|
|
16,971,339
|
|
|
|
779,634
|
|
|
|
8,932,217
|
|
|
|
753,808
|
|
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
ShiftPixy Inc.
Condensed Consolidated Statements of Stockholders’
Deficit
For the Three Months Ended February 29,
2020 (Unaudited)
|
|
Common Stock
Issued
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, December 1, 2019
|
|
|
909,222
|
|
|
$
|
-
|
|
|
$
|
32,619,000
|
|
|
$
|
(325,000
|
)
|
|
$
|
(47,506,000
|
)
|
|
$
|
(15,212,000
|
)
|
Treasury Shares retired
|
|
|
(13,953
|
)
|
|
|
-
|
|
|
|
(325,000
|
)
|
|
|
325,000
|
|
|
|
-
|
|
|
|
-
|
|
Common shares issued for note exchange
|
|
|
21,750
|
|
|
|
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
|
|
|
200,000
|
|
Common stock issued for services rendered
|
|
|
856
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
556,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
556,000
|
|
Common shares issued upon conversion of convertible notes and interest
|
|
|
148,122
|
|
|
|
-
|
|
|
|
2,215,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,215,000
|
|
Reclassification of derivative liabilities to paid in capital
|
|
|
-
|
|
|
|
-
|
|
|
|
1,691,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,691,000
|
|
Inducement loss on note conversions
|
|
|
37646
|
|
|
|
-
|
|
|
|
567,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
567,000
|
|
Modification of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
Net Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,445,000
|
|
|
|
9,445,000
|
|
Balance, February 29, 2020
|
|
|
1,103,643
|
|
|
$
|
-
|
|
|
$
|
37,620,000
|
|
|
$
|
-
|
|
|
$
|
(38,061,000
|
)
|
|
$
|
(441,000
|
)
|
See accompanying notes to the
unaudited interim condensed consolidated financial statements.
ShiftPixy Inc.
Condensed Consolidated Statements of Stockholders’
Deficit
For the Six Months Ended February 29,
2020 (Unaudited)
|
|
Common Stock
Issued
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, September 1, 2019
|
|
|
909,222
|
|
|
$
|
-
|
|
|
$
|
32,505,000
|
|
|
$
|
(325,000
|
)
|
|
$
|
(44,950,000
|
)
|
|
$
|
(12,770,000
|
)
|
Treasury Shares retired
|
|
|
(13,953
|
)
|
|
|
-
|
|
|
|
(325,000
|
)
|
|
|
325,000
|
|
|
|
-
|
|
|
|
-
|
|
Common shares issued for note exchange
|
|
|
21,750
|
|
|
|
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
|
|
|
200,000
|
|
Common stock issued for services rendered
|
|
|
856
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
670,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
670,000
|
|
Common shares issued upon conversion of convertible notes and interest
|
|
|
148,122
|
|
|
|
-
|
|
|
|
2,215,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,215,000
|
|
Reclassification of derivative liabilities to paid in capital
|
|
|
-
|
|
|
|
-
|
|
|
|
1,691,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,691,000
|
|
Inducement loss on note conversions
|
|
|
37,646
|
|
|
|
-
|
|
|
|
567,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
567,000
|
|
Modification of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
Net Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,889,000
|
|
|
|
6,889,000
|
|
Balance, February 29, 2020
|
|
|
1,103,643
|
|
|
$
|
-
|
|
|
$
|
37,620,000
|
|
|
$
|
-
|
|
|
$
|
(38,061,000
|
)
|
|
$
|
(441,000
|
)
|
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
ShiftPixy Inc.
Condensed Consolidated Statements of Stockholders’
Deficit
For the Three Months Ended February 28,
2019 (Unaudited)
|
|
Common Stock
Issued
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, December 1, 2018
|
|
|
745,572
|
|
|
$
|
-
|
|
|
$
|
20,963,000
|
|
|
$
|
(28,469,000
|
)
|
|
$
|
(7,506,000
|
)
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
81,000
|
|
|
|
-
|
|
|
|
81,000
|
|
Common shares issued upon conversion of convertible notes and interest
|
|
|
32,846
|
|
|
|
-
|
|
|
|
3,246,000
|
|
|
|
-
|
|
|
|
3,246,000
|
|
Inducement loss from debt conversion
|
|
|
24,517
|
|
|
|
|
|
|
|
1,555,000
|
|
|
|
-
|
|
|
|
1,555,000
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,140,000
|
)
|
|
|
(2,140,000
|
)
|
Balance, February 28, 2019
|
|
|
802,935
|
|
|
$
|
-
|
|
|
$
|
25,845,000
|
|
|
$
|
(30,609,000
|
)
|
|
$
|
(4,764,000
|
)
|
ShiftPixy Inc.
Condensed Consolidated Statements of Stockholders’
Deficit
For the Six Months Ended February 28,
2019 (Unaudited)
|
|
Common Stock
Issued
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, September 1, 2018
|
|
|
721,295
|
|
|
$
|
-
|
|
|
$
|
18,468,000
|
|
|
$
|
(26,222,000
|
)
|
|
$
|
(7,754,000
|
)
|
Warrants exercised for cash
|
|
|
6,688
|
|
|
|
-
|
|
|
|
660,000
|
|
|
|
-
|
|
|
|
660,000
|
|
Common stock issued for services rendered
|
|
|
966
|
|
|
|
-
|
|
|
|
113,000
|
|
|
|
-
|
|
|
|
113,000
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
158,000
|
|
|
|
-
|
|
|
|
158,000
|
|
Common shares issued upon conversion of convertible notes and interest
|
|
|
49,469
|
|
|
|
-
|
|
|
|
4,891,000
|
|
|
|
-
|
|
|
|
4,891,000
|
|
Inducement loss from debt conversion
|
|
|
24,517
|
|
|
|
-
|
|
|
|
1,555,000
|
|
|
|
-
|
|
|
|
1,555,000
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,387,000
|
)
|
|
|
(4,387,000
|
)
|
Balance, February 28, 2019
|
|
|
802,935
|
|
|
$
|
-
|
|
|
$
|
25,845,000
|
|
|
$
|
(30,609,000
|
)
|
|
$
|
(4,764,000
|
)
|
See accompanying notes to the
unaudited interim condensed consolidated financial statements.
ShiftPixy, Inc.
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
|
|
For the Six
Months Ended
|
|
|
|
February 29,
2020
|
|
|
February 28,
2019
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
6,889,000
|
|
|
$
|
(4,387,000
|
)
|
Income from discontinued operations
|
|
|
15,879,000
|
|
|
|
3,418,000
|
|
Net loss from continuing operations
|
|
|
(8,990,000
|
)
|
|
|
(7,805,000
|
)
|
Adjustments to reconcile net loss
from continuing operations to net cash used in continuing operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
480,000
|
|
|
|
379,000
|
|
Gain on convertible note settlement
|
|
|
-
|
|
|
|
(2,611,000
|
)
|
Gain on convertible note penalties accrual
|
|
|
(760,000
|
)
|
|
|
-
|
|
Amortization debt discount and debt
issuance cost
|
|
|
2,313,000
|
|
|
|
1,895,000
|
|
Stock issued for services
|
|
|
75,000
|
|
|
|
113,000
|
|
Stock-based compensation- general
and administrative
|
|
|
670,000
|
|
|
|
158,000
|
|
Expense related to warrant modification
|
|
|
22,000
|
|
|
|
-
|
|
Inducement loss on note conversions
|
|
|
567,000
|
|
|
|
1,555,000
|
|
Non-cash interest
|
|
|
-
|
|
|
|
298,000
|
|
Change in fair value of derivative
and warrant liability
|
|
|
(1,771,000
|
)
|
|
|
-
|
|
Changes in operating assets and
liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,111,000
|
)
|
|
|
(55,000
|
)
|
Unbilled accounts receivable
|
|
|
(691,000
|
)
|
|
|
(195,000
|
)
|
Prepaid expenses
|
|
|
(53,000
|
)
|
|
|
268,000
|
|
Other current assets
|
|
|
81,000
|
|
|
|
39,000
|
|
Deposits – workers’
compensation
|
|
|
(273,000
|
)
|
|
|
(542,000
|
)
|
Deposits and other assets
|
|
|
20,000
|
|
|
|
26,000
|
|
Accounts payable
|
|
|
(901,000
|
)
|
|
|
458,000
|
|
Payroll related liabilities
|
|
|
3,242,000
|
|
|
|
985,000
|
|
Accrued workers’ compensation
|
|
|
(273,000
|
)
|
|
|
302,000
|
|
Other current
liabilities
|
|
|
(1,894,000
|
)
|
|
|
(119,000
|
)
|
Total Adjustments
|
|
|
(257,000
|
)
|
|
|
2,954,000
|
|
Net cash used in continuing operating
activities
|
|
|
(9,247,000
|
)
|
|
|
(4,851,000
|
)
|
Net cash (used in) provided by discontinued
operating activities
|
|
|
(1,348,000)
|
|
|
|
4,837,000
|
|
Net cash used in operating activities
|
|
|
(10,595,000
|
)
|
|
|
(14,000
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(77,000
|
)
|
|
|
(497,000
|
)
|
Disposal of
fixed assets
|
|
|
34,000
|
|
|
|
-
|
|
Proceeds from
working capital adjustment – sale of assets
|
|
|
1,214,000
|
|
|
|
-
|
|
Proceeds from sale of assets
|
|
|
9,500,000
|
|
|
|
-
|
|
Net cash provided by (used in) investing
activities
|
|
|
10,671,000
|
|
|
|
(497,000
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayment of convertible notes
|
|
|
(1,240,000
|
)
|
|
|
-
|
|
Proceeds from
exercise of warrants
|
|
|
-
|
|
|
|
660,000
|
|
Net cash provided by financing activities
|
|
|
(1,240,000
|
)
|
|
|
660,000
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(1,164,000
|
)
|
|
|
149,000
|
|
Cash - Beginning of Period
|
|
|
1,561,000
|
|
|
|
1,650,000
|
|
Cash -End of Period
|
|
$
|
397,000
|
|
|
$
|
1,799,000
|
|
Supplemental Disclosure of Cash Flows Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
315,000
|
|
|
|
145,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Conversion of debt and accrued interest into common stock
|
|
$
|
2,215,000
|
|
|
|
4,891,000
|
|
Additional Principal to settle registration rights penalties
|
|
|
-
|
|
|
|
889,000
|
|
Common shares issued for services
|
|
|
75,000
|
|
|
|
-
|
|
Common shares issued for note exchange
|
|
|
200,000
|
|
|
|
-
|
|
Additional principal issued for note exchange
|
|
|
267,000
|
|
|
|
-
|
|
Discount recorded for asset sale note receivable
|
|
|
1,818,000
|
|
|
|
|
|
Reclassification of derivative liabilities to paid in capital
|
|
|
1,691,000
|
|
|
|
|
|
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
ShiftPixy, Inc.
Notes to the Condensed Consolidated Financial
Statements
(Unaudited)
February 29, 2020
Note 1: Nature of Operations
ShiftPixy, Inc. (the “Company”)
was incorporated on June 3, 2015. The Company is a specialized staffing service provider that provides solutions for large contingent
part-time workforce demands, primarily in the restaurant, hospitality and maintenance service trades. The Company’s focus
is on the restaurant industry in Southern California.
The Company and its wholly-owned subsidiary Rethink, Inc. (“RT”)
function as an employment administrative services (“EAS”) providers including services such as administrative and processing
services, performing functions in the nature of a payroll processor, human resources consultant, administrator of workers’
compensation coverages and claims and provides workers compensation coverage written in the names of the clients (as may be required
by some states). The Company has built a human resources information systems platform to assist in customer acquisition and hopes
that this mechanism may become a way to onboard new clients into the Company’s closed proprietary operating and processing
information system (the “ShiftPixy Ecosystem”) when eligible clients recognize the value of the services provided by
the parent Company. This platform is expected to facilitate additional value added services in future reporting periods. In January
2020, the Company sold Shift Human Capital Management Inc. (“SHCM”), previously a wholly-owned subsidiary of the Company,
and assigned the majority of the Company’s billable clients to a third party for cash as described below in Note 3 and formed
RT.
The Company is currently operating in one
reportable segment.
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, the Company does 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 29, 2020, are not necessarily indicative of the results that may be expected for the year ending
August 31, 2020.
For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended August
31, 2019, filed with the SEC on December 13, 2019.
Principles of Consolidation
The Company and its wholly-owned subsidiary
have been consolidated in the accompanying unaudited condensed consolidated financial statements. All intercompany balances have
been eliminated 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:
|
·
|
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 30 days’ notice. Contract performance obligations are satisfied as services are rendered
and the term 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 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 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 worksite employees 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 worksite employees perform their service at the client
worksite. Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on the Company’s
condensed consolidated balance sheets and were $280,000 and $170,000 as of February 29, 2020 and August 31, 2019, respectively.
Consistent with the Company’s revenue
recognition policy, direct costs do not include the payroll cost of its worksite employees. The cost of revenue associated with
the Company’s revenue generating activities is primarily comprised of all other costs related to its worksite employees,
such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance
costs.
The Company has evaluated its revenue
recognition policies in conjunction with its future expected business which may be migrating to a staffing business model. For
fiscal years 2020 and 2019, 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.
Concentration of Credit Risk
The Company considers all highly liquid
investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash with
a commercial bank and from time to time exceed the federally insured limits. The Company has not experienced losses from these
deposits.
No one individual client represents more
than 10% of revenues for the three and six months ended February 29, 2020, and February 28, 2019, respectively. However, four clients
represent 40% of total accounts receivable at February 29, 2020.
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 impairments recognized for the periods ended February 29, 2020, and February 28, 2019.
Workers’ compensation
Everest Program
Up to July 2018, a portion of the Company’s
workers’ compensation risk was covered by a retrospective rated policy, which calculates the final policy premium based on
the Company’s loss experience during the term of the policy and the stipulated formula set forth in the policy. The Company
funds the policy premium based on standard premium rates on a monthly basis and based on the gross payroll applicable to workers
covered by the policy. During the policy term and thereafter, periodic adjustments may involve either a return of previously paid
premiums or a payment of additional premiums by the Company or a combination of both. If the Company’s losses under that
policy exceed the expected losses under that policy, then the Company could receive a demand for additional premium payments.
The Company utilizes a third-party
to estimate its loss development rate, which is based primarily upon the nature of worksite employees’ job responsibilities,
the location of worksite employees, the historical frequency and severity of workers’ compensation claims, and an estimate
of future cost trends. Each reporting period, changes in the assumptions resulting from changes in actual claims experience and
other trends are incorporated into its workers’ compensation claims cost estimates. As of February 29, 2020, the Company
classified $0.1 million in long-term accrued workers’ compensation in the Company’s condensed consolidated balance
sheets.
Sunz Program
Starting in July 2018, the Company’s
workers’ compensation program for its worksite employees has been provided through an arrangement with United Wisconsin Insurance
Company 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 will be used to pay claims and claim
related expenses. The workers’ compensation insurance carrier established monthly funding requirements comprised of premium
costs and funds to be set aside for payment of future claims (“claim loss funds”). The level of claim loss funds is
primarily based upon anticipated worksite employee payroll levels and expected 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 deposits- workers’
compensation, a long-term asset in its condensed consolidated balance sheets.
As of February 29, 2020, the Company had
$0.2 million in deposit – workers’ compensation classified as a short-term asset and $0.5 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 29,
2020, the Company had short term accrued workers’ compensation costs of $0.2 million and long-term accrued workers’
compensation costs of $0.7 million.
The Company retained workers compensation
asset reserves and workers compensation related liabilities for former worksite employees of clients transferred to Vensure.
As of February 29, 2020, the retained workers compensation assets and liabilities are presented as a discontinued operations net
asset or liability. As of February 29, 2020 the Company had $2.0 million in both short term assets and short term liabilities
and had $3.3 million of long-term assets and $5.6 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 takes into account the ongoing development of claims and therefore requires a significant
level of judgment. In estimating ultimate loss rates, the Company utilizes historical loss experience, exposure data, and actuarial
judgment, together with a range of inputs which are primarily based upon the worksite employee’s job responsibilities, their
location, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. For
each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends
are incorporated into its 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.
We expect additional workers compensation
claims to be made by furloughed worksite employees 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. We expect additional workers compensation claims could be made by employees required
to work by their employers during the COVID-19 pandemic and which could have a material impact to our workers compensation liability
estimates. While we have not seen additional expenses as a result of any such potential claims, and which would be for reporting
periods after February 29, 2020, we will continue to closely monitor all workers compensation claims made during the COVID-19
pandemic.
Fair Value of Financial Instruments
FASB ASC 825, “Financial Instruments,”
requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized
on the balance sheet, for which it is practical to estimate fair value. FASB 825 defines fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current transaction between willing parties. At February 29, 2020 and
August 31, 2019, the carrying value of certain financial instruments (cash, accounts receivable and payable) approximates fair
value due to the short-term nature of the instruments. Convertible notes approximate fair value based on comparison of terms from
similar instruments in the marketplace.
The Company measures fair value under a
framework that utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level
1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of inputs which prioritize
the inputs used in measuring fair value are:
|
·
|
Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
|
|
|
|
|
·
|
Level 2: Inputs to the valuation methodology include:
|
|
o
|
Quoted prices for similar assets or liabilities in active markets;
|
|
|
|
|
o
|
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
|
|
|
o
|
Inputs other than quoted prices that are observable for the asset or liability;
|
|
|
|
|
o
|
Inputs that are derived principally from or corroborated by
observable market data by correlation or other means; 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 and liabilities at February 29, 2020 or August 31, 2019. The valuation of the Note Receivable (as defined below)
from the Vensure Asset Sale described below and the derivative liabilities associated with its March 2019 Notes (as defined below)
(see Note 4), consisted of conversion feature derivatives and warrants, are Level 3 fair value measurements.
Level 3 assets and liabilities:
The Note Receivable, as described in
Note 3 was estimated using a discounted cash flow technique with significant inputs that
are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. We valued the Note
Receivable on the January 1, 2020 transaction date using a 10% discount rate which contemplates the risk and probability assessments
of the expected future cash flows. The fair value assumptions have not changed as of February 29, 2020 and any impact to the fair
value was immaterial. The only impact recorded to the Note Receivable during the quarter related to working capital adjustments
of $1.9 million. 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 acquisitions, appropriately discounted considering the uncertainties associated with
the obligation, and as calculated in accordance with the terms of the acquisition agreements. We believe 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 is based on gross profits generated by the clients transferred to Vensure. Those transferred clients may have their
business impacted due to the pandemic which in turn would result in lower gross profits. While we believe the current valuation
of the Note Receivable is properly recorded as of February 29, 2020, a material change in the business transferred may result
in an impairment 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 table below sets forth a summary of
the changes in the fair value of the Company’s derivative liabilities classified as Level 3 as of February 29, 2020:
|
|
March 2019
Conversion
Feature
|
|
|
March 2019
Warrant
Liability
|
|
|
Total
|
|
Balance at August 31, 2019
|
|
$
|
2,852,000
|
|
|
$
|
904,000
|
|
|
$
|
3,756,000
|
|
Reclassification to APIC due to note settlements, exchanges or conversions
|
|
|
(1,652,000
|
)
|
|
|
(39,000
|
)
|
|
|
(1,691,000
|
)
|
Change in fair value
|
|
|
(1,088,000
|
)
|
|
|
(683,000
|
)
|
|
|
(1,771,000
|
)
|
Balance at February 29, 2020 (unaudited)
|
|
$
|
112,000
|
|
|
$
|
182,000
|
|
|
$
|
294,000
|
|
As of February 29, 2020 and August 31,
2019, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures and the
fair value of the warrant liabilities based on weighted probabilities of assumptions used in the Lattice-based option valuation
model. The key valuation assumptions used consists, in part, of the price of the Company’s common stock, a risk free interest
rate based on the average yield of a Treasury note and expected volatility of the Company’s common stock all as of the measurement
dates, and the various estimated reset exercise prices weighted by probability.
The Company used the following assumptions
to estimate fair value of the derivatives as of February 29, 2020, using the $12.20 per share floor conversion price for the convertible
notes and the exercise price of $40 per share for the warrants:
|
|
March 2019
Conversion
Feature
|
|
|
March 2019
Warrant
Liability
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Risk free rate
|
|
|
0.66
|
%
|
|
|
0.89
|
%
|
Market price per share
|
|
$
|
7.33
|
|
|
$
|
7.33
|
|
Life of instrument in years
|
|
|
0.54
|
|
|
|
4.03
|
|
Volatility
|
|
|
83
|
%
|
|
|
102
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
When the Company changes its valuation
inputs for measuring financial assets and liabilities at fair value, either due to changes in current market conditions or other
factors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The
Company recognizes these transfers at the end of the reporting period that the transfers occur. For the periods ended February
29, 2020 and February 28, 2019, there were no transfers of financial assets or financial liabilities between the hierarchy levels.
Research and Development
During the three months ended February 29, 2020 and February
28, 2019, the Company incurred research and development costs of approximately $0.8 million and $1.6 million, respectively. During
the six months ended February 29, 2020 and February 28, 2019, the Company incurred research and development costs of approximately
$2.1 million and $2.5 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. In addition, $0 and $0.4 million of software costs were capitalized for the three and six months ended February 29,
2020 and February 28, 2019, respectively.
Advertising Costs
The Company expenses all advertising
as incurred. The Company recorded a net costs totaling $179,000 and $183,000 for the three and six months ended February 29, 2020,
respectively, and expenses of $503,000 and $582,000 for the three and six months ended February 28, 2019, respectively.
Convertible Debt
The Company evaluates embedded conversion
features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion
feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value
recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated
under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion features.
Reverse Stock Split
On December 17, 2019, the Company effected
a 1 for 40 reverse stock split. All common shares and common share equivalents are presented retroactively to reflect the reverse
split.
Earnings (Loss) Per Share
The Company utilizes FASB ASC 260, “Earnings
per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss) attributable to common stockholders
by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is
computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common share
equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common share equivalents
include the dilutive effect of in-the-money share equivalents, which are calculated based on the average share price for each
period using the treasury stock method, excluding any common share equivalents if their effect would be anti-dilutive. In periods
in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded
from the calculation.
The number of shares used for the weighted average number of
common shares outstanding for the earnings per share for the three and six months ended February 29, 2020 was increased by 24,634,560
shares effective as of January 1, 2020. This increase reflects the inclusion of common shares issuable upon full exercise of options
to purchase a similar number of preferred shares and full conversion of those preferred shares to common shares. The preferred
share option was deemed to be exercisable into preferred shares on the effective date of the Asset Sale transaction as described
in Note 3. The one to one ratio of conversion of preferred shares to common shares was set on March 25, 2020 as described in Note
10.
Securities used in, or that are excluded
from the calculation of weighted average dilutive common shares, because their inclusion would have been antidilutive are:
|
|
For the
Three Months
Ended
February 29,
2020
|
|
|
For the
Three Months
Ended
February 28,
2019
|
|
|
|
|
|
|
|
|
Options
|
|
|
43,406
|
|
|
|
36,896
|
|
Senior Secured Convertible Notes (Note 4)
|
|
|
298,954
|
|
|
|
118,495
|
|
Warrants
|
|
|
131,558
|
|
|
|
87,783
|
|
Total potentially dilutive shares
|
|
|
473,918
|
|
|
|
243,174
|
|
Stock-Based Compensation
At February 29, 2020, the Company has one
stock-based compensation plan under which the Company may issue awards. The Company accounts for this plan under the recognition
and measurement principles of ASC 718, Compensation- Stock Compensation, which requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the condensed consolidated statements of operations on their fair
values.
The grant date fair value is determined
using the Black-Scholes-Merton pricing model. For all employee stock options, the Company recognizes expense over the requisite
service period on an accelerated basis over the employee’s requisite service period (generally the vesting period of the
equity grant).
The Company’s option pricing model requires the input
of highly subjective assumptions, including the expected stock price volatility and expected term. The expected volatility is based
on the historical volatility of the Company. Any changes in these highly subjective assumptions significantly impact stock-based
compensation expense.
The Company elected to account
for forfeitures as they occur, as such, compensation cost previously recognized for an award that is forfeited because of the failure
to satisfy a service condition is revised in the period of forfeiture.
Treasury Stock
Treasury stock represents shares of common stock provided to
the Company in satisfaction of the related party advance, described in Note 13. Shares of common stock provided are recorded at
cost as treasury stock. The Company retired all of its treasury stock outstanding as of August 31, 2019 in fiscal 2020. Any treasury
stock retired is recorded to additional paid-in capital, limited to the amount previously credited to additional paid-in capital,
if any. Any excess is charged to accumulated deficit.
Reclassifications
Certain reclassifications have
been made to prior year’s data to confirm to the current year’s presentation. Such reclassifications had no impact
on the Company’s financial condition, operating results, cash flows or stockholder’s equity.
Recent Accounting Standards
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.” The standard provides enhancements to the quality and consistency
of how revenue is reported by companies, while also improving comparability in the financial statements of companies reporting
using International Financial Reporting Standards or U.S. GAAP. The new standard also will require enhanced revenue disclosures,
provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element
arrangements. This accounting standard becomes effective for the Company for reporting periods beginning after December 15, 2018,
and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted for
annual reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either
the retrospective or cumulative effect transition method.
In March 2016, the FASB issued ASU No.
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of this standard
is to clarify the implementation of guidance on principal versus agent considerations related to ASU 2014-09. The standard has
the same effective date as ASU 2014-09 described above.
In April 2016, the FASB issued ASU No.
2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarity
related to ASU 2014-09 regarding identifying performance obligations and licensing implementation. The standard has the same effective
date as ASU 2014-09 described above.
In May 2016, the FASB issued ASU 2016-12:
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope
improvements and practical expedients related to ASU 2014-09. The purpose of this standard is to clarify certain narrow aspects
of ASU 2014-09, such as assessing the collectability criterion, presentation of sales taxes, and other similar taxes collected
from customers, noncash considerations, contract modifications at transition, completed contracts are transition, and technical
correction. The standard has the same effective date as ASU 2014-09 described above.
In December 2016, the FASB issued ASU 2016-20:
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this standard affect
narrow aspects of guidance issued in ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above. Topic
606 is effective for the company beginning with the fiscal year ending August 31, 2020.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. For all
entities, amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively
for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should
be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted
to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures
until their effective date. The Company is currently evaluating the potential impact this guidance will have on the condensed consolidated
financial statements, if any.
In February 2016, the FASB issued new
accounting guidance on leases ASU 2016-02, Leases. The new standard requires that a lessee recognize assets and liabilities on
the balance sheet for leases with terms longer than 12 months. The recognition, measurement and presentation of lease expenses
and cash flows by a lessee will depend on its classification as a finance or operating lease. The guidance also includes new disclosure
requirements providing information on the amounts recorded in the financial statements. 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 April 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.
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 (the “Asset Sale”). Gross proceeds from the sale was $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 over the twelve month period
following the Asset Sale.
The following is a reconciliation of the gross proceeds to the
net proceeds from the Asset Sale as presented in the statement of cash flows for the period ending February 29, 2020.
Gross proceeds
|
|
$
|
19,166,000
|
|
Cash received at closing – asset sale
|
|
|
(9,500,000
|
)
|
Cash received at closing – working capital
|
|
|
(166,000
|
)
|
Discount recorded
|
|
|
(1,818,000
|
)
|
Less: Transaction reconciliation – working capital adjustment
|
|
|
(1,943,000
|
)
|
Adjusted Note Receivable
|
|
|
5,739,000
|
|
Short-term note receivable
|
|
|
358,000
|
|
Long-term note receivable
|
|
$
|
5,381,000
|
|
The Asset Sale generated a gain of
$15.7 million for the three months ended February 29, 2020. The Company expects a minimal tax impact from the Asset Sale as it
intends to utilize its net operating losses accumulated since inception to offset the gain resulting discontinued operations tax
provision with a corresponding offset to the valuation allowance.
The 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 its estimated cost of capital as a discount rate of (10%).
The Asset Sale calls for adjustments
to the Note Receivable either for: (i) working capital adjustments or (ii) in the event that the gross profit of the business
transferred is less than the required amount. Through February 29, 2020, the Company has identified $1,943,000 of working capital
adjustments including $88,000 related to lower net assets transferred at closing, $201,000 of liabilities paid on behalf of the
Company, and $1,664,000 of cash remitted to the Company’s bank accounts by former clients. Under the terms of the 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 coronavirus disease 2019 (“COVID-19”),
the reconciliation remains unresolved. The working capital adjustment recorded as of February 29, 2020 represents the Company’s
estimate of the reconciliation. There is no assurance that the working capital change identified as of February 29, 2020 represents
the final working capital adjustment.
The carrying amounts of the classes of assets and liabilities
from the Asset Sale included in discontinued operations were as follows:
|
|
February 29,
2020
|
|
|
August 31,
2019
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
Cash
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts receivable and unbilled account receivable
|
|
|
-
|
|
|
|
8,261,000
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
171,000
|
|
Deposits – workers’ compensation
|
|
|
1,924,000
|
|
|
|
1,722,000
|
|
Total current
assets
|
|
|
1,924,000
|
|
|
|
10,154,000
|
|
Fixed assets, net
|
|
|
-
|
|
|
|
40,000
|
|
Deposits – workers’ compensation
|
|
|
3,324,000
|
|
|
|
5,527,000
|
|
Total assets
|
|
$
|
5,248,000
|
|
|
$
|
15,721,000
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
$
|
-
|
|
|
$
|
457,000
|
|
Payroll related liabilities
|
|
|
-
|
|
|
|
13,583,000
|
|
Accrued workers’ compensation
cost
|
|
|
1,924,000
|
|
|
|
1,722,000
|
|
Total current
liabilities
|
|
|
1,924,000
|
|
|
|
16,032,000
|
|
Accrued workers’ compensation
cost
|
|
|
5,652,000
|
|
|
|
3,853,000
|
|
Total liabilities
|
|
|
7,576,000
|
|
|
|
19,885,000
|
|
|
|
|
|
|
|
|
|
|
Net assets/(liability)
|
|
$
|
(2,328,000
|
)
|
|
$
|
(4,164,000
|
)
|
Reported results for the discontinued operations by period were
as follows:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
February 29, 2020
|
|
|
February 28, 2019
|
|
|
February 29, 2020
|
|
|
February 28, 2019
|
|
Revenues (gross billings of $26.3 million and $74.4 million less worksite employee payroll cost of $22.8 million and $62.4 million, respectively for the three months ended; gross billings of $120.4 million and $139.4 million less worksite employee payroll cost of $103.3 million and $117.7 million, respectively for six months ended)
|
|
$
|
3,450,000
|
|
|
$
|
12,002,000
|
|
|
$
|
17,138,000
|
|
|
$
|
21,688,000
|
|
Cost of revenue
|
|
|
5,038,000
|
|
|
|
8,956,000
|
|
|
|
15,535,000
|
|
|
|
15,442,000
|
|
Gross profit (loss)
|
|
|
(1,587,000
|
)
|
|
|
3,046,000
|
|
|
|
1,603,000
|
|
|
|
6,246,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
|
152,000
|
|
|
|
898,000
|
|
|
|
658,000
|
|
|
|
1,752,000
|
|
Commissions
|
|
|
45,000
|
|
|
|
554,000
|
|
|
|
748,000
|
|
|
|
1,076,000
|
|
Total operating expenses
|
|
|
197,000
|
|
|
|
1,452,000
|
|
|
|
1,406,000
|
|
|
|
2,828,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
(1,784,000
|
)
|
|
$
|
1,594,000
|
|
|
$
|
197,000
|
|
|
$
|
3,418,000
|
|
Note 4: Going Concern
As of February 29, 2020, the Company had
cash of $0.4 million and a working capital deficiency of $5.6 million. During the six months ended February 29, 2020, the Company
used approximately $10.4 million of cash from its continuing operations and repaid $1.2 million of convertible notes, after receiving
$9.5 million of cash from the Asset Sale described below. The Company has incurred recurring losses resulting in an accumulated
deficit of $38.1 million as of February 29, 2020. These conditions raise substantial doubt as to its ability to continue as going
concern within one year from issuance date of the financial statements.
The 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 and settling its outstanding debt as it comes due. The Company engaged an investment banking
firm to assist the Company in (i) preparing information materials, (ii) advising the Company concerning the structure, price and
conditions and (iii) organizing the marketing efforts with potential investors in connection with a financing transaction.
Historically, the Company’s principal
source of financing has come through the sale of its common stock and issuance of convertible notes. The Company successfully completed
an IPO on The Nasdaq Stock Market LLC (“Nasdaq”) on June 29, 2017, raising a total of $12 million ($10.9 million net
of costs). In June 2018, the Company completed a private placement of 8% senior secured convertible notes to institutional investors
raising $9 million of gross proceeds ($8.4 million net of costs). In March 2019, the Company completed a private placement of senior
secured notes to institutional investors raising $3.75 million ($3.3 million net of costs). Between September 1, 2019 and April
15, 2020 all litigation related to the convertible notes was resolved and all June 2018 Notes, all 8% Senior Secured Convertible
Notes issued in December 2018 (the “December 2018 Notes”) and $4.0 million of the Convertible Notes issued in March
2019 (the “March 2019 Notes” and, together with the June 2018 Notes and the December 2018 Notes, the “Convertible
Notes” or the “Senior Secured Convertible Notes Payable”) were repaid or converted into equity. The remaining
$1.0 million of March 2019 Notes are due in September 2020 and were amended in March 2020 to a fixed conversion price of $9.20
per share.
In January 2020, the Company assigned approximately
88% of its customer contracts in exchange for $9.7 million in cash at closing and received an additional $1.0 million of cash,
net of $0.9 million of cash transferred and expects to receive an additional $7.5 million over the four years following the closing
of the Asset Sale, subject to certain closing conditions. The Company transferred $1.6 million of working capital including $0.9
million of cash and the business transfer represented approximately $6 million of the Company’s annualized gross profit.
The Company continues to experience significant
growth in the number of worksite employees, which would generate additional administrative fees that would offset the current level
of operational cash burn. The Company retained the high growth business which increased over 100% of billings and revenue growth.
The Company also retained the rights to monetize the existing pool of worksite employees and has begun to roll out its delivery
and scheduling applications to its customers.
The Company has and will be impacted
by the COVID-19 pandemic. The current business focus is on providing payroll services for the restaurant and hospitality industries
which have seen a significant reduction in payroll and consequently a reduction in payroll processing fees. To date, some of our
clients have received Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) benefits to offset this reduction
but not at significant levels and our business has been impacted since the COVID-19 lockdown starting in March 2020. If the lockdown
continues, our clients delay hiring or rehiring employees, or if our clients shut down operations, our ability to generate operational
cash flows may be significantly impaired.
The Company’s management believes,
but cannot be certain, that the Company’s current cash position, along with its revenue growth and the financing from potential
institutional investors will be sufficient to fund its operations for at least a year from the date these financials are available.
If these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months from
the date of this Report, the Company may need to curtail certain aspects of its operations or expansion activities, consider the
sale of 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
would be available to the Company. These condensed consolidated financial statements do not include any adjustments from this
uncertainty.
Note 5: Senior Secured Convertible Notes
Payable
The Company has issued three series of
senior secured convertible notes payable. In general, each series is convertible into common shares of the Company. Senior Secured
Convertible Notes Payable consist of the following:
|
|
February 29
|
|
|
August 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Senior Secured Convertible notes, Principal
|
|
$
|
3,647,000
|
|
|
$
|
6,808,000
|
|
Less: debt discount and deferred financing costs
|
|
|
(1,611,000
|
)
|
|
|
(3,457,000
|
)
|
Total outstanding convertible notes, net
|
|
$
|
2,036,000
|
|
|
$
|
3,351,000
|
|
Less: current portion of convertible notes payable
|
|
|
(1,427,000
|
)
|
|
|
(3,351,000
|
)
|
Long-term convertible notes payable
|
|
$
|
609,000
|
|
|
$
|
-
|
|
The following table rolls forward the Convertible
Notes Payable balances from August 31, 2019 to February 29, 2020:
|
|
Gross
Principal
|
|
|
Deferred
Financing
Costs
|
|
|
Note
Discount
|
|
|
Net
|
|
Balance at August 31, 2019
|
|
$
|
6,808,000
|
|
|
$
|
(344,000
|
)
|
|
$
|
(3,113,000
|
)
|
|
$
|
3,351,000
|
|
Repayments in cash
|
|
|
(1,240,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,240,000
|
)
|
Conversions to common shares
|
|
|
(2,188,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,188,000
|
)
|
Notes issued for exchange
|
|
|
267,000
|
|
|
|
|
|
|
|
|
|
|
|
267,000
|
|
Additional note discount issued - exchange
|
|
|
|
|
|
|
|
|
|
|
(467,000
|
)
|
|
|
(467,000
|
)
|
Acceleration of discount and deferred financing costs -
|
|
|
-
|
|
|
|
62,000
|
|
|
|
595,000
|
|
|
|
657,000
|
|
Amortization of Interest Expense
|
|
|
-
|
|
|
|
150,000
|
|
|
|
1,506,000
|
|
|
|
1,656,000
|
|
Balance at February 29, 2020
|
|
|
3,647,000
|
|
|
|
(132,000
|
)
|
|
|
(1,479,000
|
)
|
|
|
2,036,000
|
|
Less Current Amount
|
|
|
(2,327,000
|
)
|
|
|
132,000
|
|
|
|
718,000
|
|
|
|
(1,427,000
|
)
|
Long Term Balance at February 29, 2020
|
|
$
|
1,320,000
|
|
|
$
|
-
|
|
|
$
|
(711,000
|
)
|
|
$
|
609,000
|
|
The following table outlines the gross principal balance roll
forward for each series from August 31, 2019 to February 29, 2020. Each series is described in further detail below.
|
|
June 2018
Notes
|
|
|
December 2018
Notes
|
|
|
March 2019
Notes
|
|
|
December 2019
Notes
|
|
|
Total
|
|
Gross Balance at August 31, 2019
|
|
$
|
1,466,000
|
|
|
$
|
867,000
|
|
|
$
|
4,475,000
|
|
|
$
|
-
|
|
|
$
|
6,808,000
|
|
Exchanged for December 2019 Notes
|
|
|
|
|
|
|
(222,000
|
)
|
|
|
(2,445,000
|
)
|
|
|
2,934,000
|
|
|
|
267,000
|
|
Conversions to Common Shares
|
|
|
(759,000
|
)
|
|
|
(422,000
|
)
|
|
|
(714,000
|
)
|
|
|
(293,000
|
)
|
|
|
(2,188,000
|
)
|
Repayments in cash
|
|
|
(707,000
|
)
|
|
|
(223,000
|
)
|
|
|
(310,000
|
)
|
|
|
-
|
|
|
|
(1,240,000
|
)
|
Gross Balance
|
|
|
-
|
|
|
|
-
|
|
|
|
1,006,000
|
|
|
|
2,641,000
|
|
|
|
3,647,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Discount and Debt Issuance Costs:
|
|
|
-
|
|
|
|
-
|
|
|
|
(400,000
|
)
|
|
|
(1,211,000
|
)
|
|
|
(1,611,000
|
)
|
Carrying Balance at February 29, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
606,000
|
|
|
|
1,430,000
|
|
|
|
2,036,000
|
|
Less: Current Amount
|
|
|
-
|
|
|
|
-
|
|
|
|
(606,000
|
)
|
|
|
(821,000
|
)
|
|
|
(1,427,000
|
)
|
Long-term Balance at February 29, 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
609,000
|
|
|
$
|
609,000
|
|
During the three and six months ended February
29, 2020 the Company amortized $802,000 and $1,656,000, respectively, and for the three and six months ended February 28, 2019
the Company amortized $722,000 and $1,433,000, respectively, to interest expense from the combined amortization of deferred financing
costs and note discounts recorded at issuance for the June 2018 Notes, the March 2019 Notes, and the December 2019 Exchange Notes
(as defined below).
On June 3, 2019, an institutional investor
filed a claim in the United States District Court, Southern District of New York seeking preliminary injunctive relief against
the Company to immediately deliver one million shares of the Company’s common stock and to honor all future conversion requests
duly submitted in accordance with the terms of the notes.
On June 7, 2019, and June 10, 2019, the
Company received notices from two of its institutional investors that the Company was in default due to missed principal and interest
payments under the terms of the Convertible Notes. On June 27, 2019, the Company reported that is has informed its Convertible
Note holders that it will cease honoring conversion requests of the 2018 and 2019 Notes forcing a voluntary default of these instruments.
During the three months ended February
29, 2020, the Company resolved all litigation related to its outstanding notes and the Convertible Notes are no longer in default.
On December 6, 2019, the Company entered
into an exchange agreement with the holder of a majority of its March 2019 Notes. The exchange agreement and the related revised
March 2019 note agreement revised the conversion price to $40.00 per share, extended the term of the March 2019 Notes to March
1, 2022, provided for a revised quarterly amortization schedule beginning April 1, 2020 of 12.5% of the principal balance as of
January 31, 2020 payable in cash, and removed certain anti-dilution terms of the related warrants (the “March 2019 Warrants”).
The holder also exchanged $222,000 of December 2018 Notes by extending the term to coincide with the revised term of the March
2019 Notes and for the revised amortization schedule. The Company agreed to issue an additional $200,000 of consideration to the
holder, payable in common stock, as consideration for this exchange and agreed to increase the principal outstanding on the notes
exchanged by 10% from $222,000 for the December 2018 Notes to $244,000 and from $2,445,000 for the March 2019 Notes to $2,690,000
for a combined revised principal balance of $2,934,000. On December 11, 2019, the Company issued 21,750 shares of common stock
to the holder in satisfaction of the additional $200,000 of consideration. The Company provided for up to 10% of the revised combined
principal of $2,934,000 to be converted at a reduced price of $12.20 per share until January 31, 2020. In January 2020, the investor
converted $293,000 into 24,049 shares of common stock. The Company evaluated the exchange under ASC 470 and determined that the
exchange should be treated as a debt modification. The Company recorded an additional note discount of $467,000 representing the
combined additional shares issued, valued at $200,000 and the additional $267,000 in notes issued in the exchange. See also the
section entitled “December 2019 Exchange” below.
One investor received a legal judgement
for $500,000 plus default interest of $52,000. The judgement was paid in cash in January 2020 which included the repayment of $310,000
principal of the March 2019 Notes. Upon payment of the legal judgement, the litigation was resolved with this investor.
The Company settled all legal claims with
two investors by entering into settlement agreements and by payment of $2,047,000 in cash and the issuance of 103,593 shares of
common stock. The settlements resulted in the elimination of combined default penalties, default interest, and $2,194,000 of principal
of the June 2018 Notes, the December 2018 Notes, and the March 2019 Notes.
The Company reduced the conversion price
of the remaining the June 2018 Notes and the December 2018 Notes payable to $12.20 and $500,000 of the June 2018 Notes and the
December 2018 Notes were converted into 41,004 shares of common stock. An additional 4,207 shares of common stock were issued in
settlement of default interest of 51,000.
One investor converted $130,000 of the
March 2019 Note principal and $28,000 of accrued default interest at $12.20 per share into 12,915 shares of common stock.
One investor converted $293,000 of the
December 2019 Notes into 24,049 shares at a conversion price of $12.20 per share.
As a result of these settlements and conversions,
the Company recorded $567,000 of additional expense for debt conversion inducement representing the value of the shares issued
at market and the $12.20 per share conversion price on the date of issuance.
The Company had previously recorded $1,800,000
of accrued interest and penalties as of August 31, 2019. As a result of the settlements and resolution of litigation, the Company
recorded a gain of $760,000 for the three months ended February 29, 2020. The Company retained $210,000 of accrued penalties for
$210,000 of claims made by note holders which were settled in March 2020.
December 2019 Exchange
The terms of the December 2019 Exchange
Notes are summarized as follows:
|
·
|
Term: April 1, 2022;
|
|
·
|
Coupon: 0%;
|
|
·
|
Default interest rate: 18%;
|
|
·
|
10% of the revised note balance may be converted at $12.20 per share until January 31, 2020
|
|
·
|
Remainder Convertible at the option of the holder at any time at a price of $40 per share but subject to down round price protection;
|
|
·
|
Amortization payment of 12.5% of January 31, 2020 principal balance payable in cash
|
|
·
|
Alternate conversion percentage is 75% if the alternate conversion is an alternate conversion event of default as a result of bankruptcy or default related to missed amortization payment, subject to a floor conversion price of $1.84 per share 80% for all alternate event of default conversion or 85% is such alternate conversion is an alternate optional conversion;
|
|
·
|
Redemption at the option of the Company at 15% premium at any time.
|
In March 2020, the terms of the December
2019 Exchange Notes were modified to change the conversion price to a fixed conversion price of $9.20 per share. In April 2020,
all remaining December 2019 Exchange Notes were converted at the revised conversion price. See also Subsequent Events Note 10.
March 2019 Bridge Financing
On March 12, 2019, the Company issued the
March 2019 Notes in the principal amount of $4,750,000 with an original issue discount of $1 million for a purchase price of $3,750,000
to certain of its existing institutional investors which mature on September 12, 2020. The Company received net cash proceeds of
$3.3 million to be used for mobile application development and working capital. The Company incurred approximately $0.5 million
of debt issuance costs that are incremental costs directly related to the issuance of the bridge financing senior convertible notes
payable.
The terms of the March 2019 Notes are summarized
as follows:
|
·
|
Term: September 12, 2020;
|
|
·
|
Coupon: 0%;
|
|
·
|
Default interest rate: 18%;
|
|
·
|
Original issue discount: $1,000,000;
|
|
·
|
Convertible at the option of the holder at any time;
|
|
·
|
Initial conversion price is set at $66.80 but subject to down round price protection;
|
|
·
|
Alternate conversion price at the greater of the floor price of $12.20 and the lower of the conversion price in effect and alternate conversion percentage of the lowest VWAP of the common share during the 10 consecutive trading day prior to the applicable conversion date;
|
|
·
|
Alternate conversion percentage is 75% if the alternate conversion is an alternate conversion event of default as a result of bankruptcy or 80% for all alternate event of default conversion or 85% is such alternate conversion is an alternate optional conversion;
|
|
·
|
Redemption at the option of the Company at 15% premium at any time after 45 days from March 12, 2019.
|
In December 2019, the holder of $2,445,000 of March 2019 Notes
exchanged these notes for December 2019 Notes as described above.
In March 2020, the terms of the March 2019
Notes were modified to change the conversion price to a fixed conversion price of $9.20 per share. See also Subsequent Events Note
10.
Note 6: 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
number of options granted were based upon the number of shares held at that time. These 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 option to purchase one share of preferred stock of the Company for $0.0001 per share. The preferred
stock that is the subject of such 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. The options became exercisable to purchase shares of preferred
stock upon the Asset Sale in January 2020. As of the date of this filing, options exercisable for up to 24,634,560 shares
of preferred stock convertible into 24,634,560 shares of common stock are outstanding. The right to exercise the options terminates
on December 31, 2023. As stated above, the amount of such 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, Scott W. Absher and 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 Scott W. Absher and Stephen 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.
Common Stock and Warrants
On December 17, 2019, the Company effected
a 1 for 40 reverse stock split. All common shares and common share equivalents are presented retroactively to reflect the reverse
split.
During the three and six months ended February
29, 2029, the Company issued the following common shares
|
·
|
185,768 shares of Common Stock were issued for the conversion of 2,187,000 of June 2018 Notes, December 2018 Notes, March 2019 Notes, and December 2019 Notes payable and $79,000 of related default interest payable.
|
|
·
|
21,750 shares of Common Stock valued at $200,000 was issued as an inducement to exchange $2.7 million of March 2019 Notes for $2.9 million of December 2019 Exchange Notes.
|
|
·
|
856 shares of Common Stock were issued to two directors for services valued at $7,000.
|
During the three and six months ended February
29, 2019
The following tables summarize our warrants
outstanding as of February 29, 2020:
|
|
Number
of
shares
|
|
|
Weighted
average
remaining
life
(years)
|
|
|
Weighted
average
exercise
price
|
|
Warrants outstanding, August 31, 2019
|
|
|
107,409
|
|
|
|
4.3
|
|
|
$
|
83.21
|
|
Issued
|
|
|
53,273
|
|
|
|
4.0
|
|
|
|
40.00
|
|
(Cancelled)
|
|
|
(29,124
|
)
|
|
|
3.8
|
|
|
$
|
40.00
|
|
Warrants outstanding, February 28, 2019
|
|
|
131,558
|
|
|
|
3.8
|
|
|
$
|
47.71
|
|
Warrants exercisable, February 28, 2019
|
|
|
131,558
|
|
|
|
3.8
|
|
|
$
|
47.71
|
|
The following tables summarize our warrants
outstanding as of February 29, 2020:
|
|
Warrants
Outstanding
|
|
|
Weighted average
life of outstanding warrants in years
|
|
|
Exercise
price
|
|
March 2019 Warrants (1)
|
|
|
41,430
|
|
|
|
4.0
|
|
|
$
|
40.00
|
|
Amended March 2019 Warrants (2)
|
|
|
66,288
|
|
|
|
4.0
|
|
|
|
40.00
|
|
March 2019 Services Warrants (3)
|
|
|
3,366
|
|
|
|
4.0
|
|
|
|
70.00
|
|
June 2018 Warrants (4)
|
|
|
12,552
|
|
|
|
3.8
|
|
|
|
40.00
|
|
June 2018 Services Warrants (5)
|
|
|
5,422
|
|
|
|
3.8
|
|
|
|
99.60
|
|
2017 PIPE Warrants
|
|
|
2,500
|
|
|
|
2.3
|
|
|
$
|
276.00
|
|
|
|
|
131,558
|
|
|
|
3.8
|
|
|
$
|
47.71
|
|
|
(1)
|
Warrants have full-ratchet price reset provisions. Issuance of certain securities below the then exercise price will result in a reduction of the exercise price and an increase in the warrants outstanding and exercisable. In March 2020 these warrants were exchanged for common shares and are no longer outstanding as of the date of this report.
|
|
(2)
|
Warrants include 13,015 March 2019 warrants that were amended in December 2019 to modify the exercise price to a fixed exercise price of $40.00 per share from $70 per share and an additional 53,273 warrants issued during the December 2019 Note exchange.
|
|
(3)
|
Warrants were issued for services rendered in March 2019.
|
|
(4)
|
Warrants were issued in conjunction with the June 2018 Note
series and have price reset protection. The price was reset to $40 per share in December 2019. The difference
in fair value of the change in exercise price of the June 2018 Warrants was valued using the binomial method and recorded
to other expenses. Issuance of certain securities below the then exercise price will result in a reduction of the exercise
price to the price or value of the shares issued or deemed to be issued.
|
|
(5)
|
Warrants were issued as compensation for services rendered in June 2018.
|
All warrants outstanding and exercise prices
have been adjusted to reflect the 1:40 reverse split.
Note 7: Stock based Compensation
The Company granted no options during the six months ended February
29, 2020. The Company recognized approximately $556,000 and $670,000 of compensation expense for the three and six months ended
February 29, 2020, respectively. During the three months ended February 29, 2020, the Company fully vested all options granted
to personnel who were terminated as a result of the Asset Sale which resulted in the acceleration of 9,737 options and $483,000
of stock based compensation. The Company recognized approximately $81,000 and $158,000 of stock-based compensation in the three
and six months ended February 28, 2019, respectively.
The total intrinsic value of options as
of February 29, 2020, and February 28, 2019, was $0.
At February 29, 2020, the total unrecognized
deferred share-based compensation expected to be recognized over the remaining weighted average vesting periods of 1.1 years for
outstanding grants was $0.7 million.
A summary of option activity was as follows:
|
|
Options Outstanding and Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2019
|
|
|
50,749
|
|
|
|
8.95
|
|
|
$
|
95.20
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(7,343
|
)
|
|
|
8.54
|
|
|
|
69.85
|
|
Balance at February 29, 2020
|
|
|
43,406
|
|
|
|
8.41
|
|
|
$
|
99.55
|
|
Options outstanding as of February 29,
2020 had aggregate intrinsic value of $0.
Option vesting activity was as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Options Vested
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2019
|
|
|
10,291
|
|
|
|
8.04
|
|
|
$
|
152.80
|
|
Vested
|
|
|
13,199
|
|
|
|
8.53
|
|
|
|
108.89
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(1,305
|
)
|
|
|
5.15
|
|
|
|
140.09
|
|
Balance at November 30, 2019
|
|
|
22,185
|
|
|
|
8.05
|
|
|
$
|
127.49
|
|
The following table summarizes information
about stock options outstanding and vested at February 29, 2020:
|
|
Options Outstanding and Exercisable
|
|
|
Options Vested
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Exercise Prices
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$18.80-$40.00
|
|
|
5,375
|
|
|
|
9.27
|
|
|
$
|
24.35
|
|
|
|
250
|
|
|
|
9.42
|
|
|
$
|
20.00
|
|
$40.01–$80.00
|
|
|
13,729
|
|
|
|
9.09
|
|
|
|
51.21
|
|
|
|
4,896
|
|
|
|
9.09
|
|
|
|
51.23
|
|
$80.01–$120.00
|
|
|
10,553
|
|
|
|
8.22
|
|
|
|
102.93
|
|
|
|
6,394
|
|
|
|
8.22
|
|
|
|
102.46
|
|
$120.01–$160.00
|
|
|
12,625
|
|
|
|
7.55
|
|
|
|
155.28
|
|
|
|
9,521
|
|
|
|
7.49
|
|
|
|
155.12
|
|
$160.01-$391.60
|
|
|
1,124
|
|
|
|
7.38
|
|
|
|
391.60
|
|
|
|
1,124
|
|
|
|
7.38
|
|
|
|
391.60
|
|
|
|
|
43,406
|
|
|
|
8.41
|
|
|
$
|
99.55
|
|
|
|
22,185
|
|
|
|
8.05
|
|
|
$
|
127.49
|
|
The number of options and exercise prices
have been presented retroactively for the 1 for 40 December 17, 2019 reverse split.
Note 8: Related Parties
J. Stephen Holmes, our Sales Manager, is an advisor to and significant
shareholder of the Company. The Company incurred $180,000 and $360,000 in professional fees for management consulting services
in the three and six months ended February 28, 2019 in the three and six months ended February 29, 2020, respectively.
On December 23, 2019, the Company issued
428 shares to each of Messrs. Higgins and White, both Directors of the Company, in settlement of shares promised in December 2018
but not issued. The fair value on the date issued for the combined issuance of 856 shares was $7,000.
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.
Convertible Note Related Litigation
During 2019, three of the Company’s
note holders filed legal complaints. During the three months ended February 29, 2020 all Convertible Note related litigation was
resolved as follows:
Alpha Capital v. ShiftPixy, Inc.
On July 3, 2019, the Company was served with a complaint filing
by Alpha Capital Anstalt (“ACA”) in the United States District Court, Southern District of New York alleging breach
of contract in refusing to honor the conversion of certain convertible notes, specifically one for $310,000 submitted on June 20,
2019. ACA sought an injunction requiring the Company to issue 25,000 common shares, damages for the claimed breaches, and attorney’s
fees. In August 2019, the court denied the motion for a preliminary injunction but granted accelerated discovery which was completed
in September 2019. As of November 30, 2019, the Company had convertible notes outstanding with ACA for approximately $1.7 million
consisting of $0.3 million of the June 2018 Notes, $0.2 million of the December 2018 Notes and $1.2 million of the March 2019 Notes.
In January 2020, Alpha was awarded a judgement for $500,000 consisting of the $310,000 notes and $190,000 of damages and accrued
interest of $51,000. On January 16, 2020 Alpha Capital converted all remaining June 2018 Note and December 2018 Note balances at
$12.20 per share. On January 20, 2020 the Company paid the damages award including interest in cash and resolved the litigation.
Dominion Capital LLC v. ShiftPixy, Inc.
On July 18, 2019, the Company was served with a complaint filing
by Dominion Capital LLC in the United States District Court, Southern District of New York alleging breach of contract in refusing
to honor the conversion of certain convertible notes. Dominion sought injunctive relief, injunction to prohibit buyback, breach
of contract on the June 2018 Notes, the December 2018 Notes, and the March 2019 Notes, and declaratory judgment. In August 2019,
the court denied the motion for a preliminary injunction but granted accelerated discovery which was completed in September 2019.
On January 22, 2020, the Company settled all claims and repaid all remaining notes and cancelled all related warrants by issuing
83,593 shares of common stock on the date of issuance and paid cash of $1,322,000.
MEF I, LP v. ShiftPixy, Inc.;
On August 27, 2019, MEF I, LP (“MEF”)
filed a complaint in the United States District Court, Southern District of New York. MEF seeks monetary relief of $2.1 million
and seeks to appoint themselves as receiver of the Company. As of August 31, 2019, the Company had convertible notes outstanding
to MEF at approximately $0.7 million face value consisting of approximately $0.5 million and $0.2 million for the June 2018 Notes
and the December 2018 Notes, respectively. In November 2019, the Company filed a motion in response to the receiver request. On
January 17, 2020, the Company and MEF I settled all claims and repaid all note principal remaining, accrued damages, and accrued
interest and cancelled the June 2018 Warrants with the issuance of 20,000 shares of common stock and payment of $725,000 in cash.
See also Note 5 above.
Kadima Ventures
The Company is in dispute with its 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 $8.5 million to complete. As of the date of this Report, the Company
has spent approximately $11 million but has not received the majority of certain software modules. 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. The Company initiated
litigation to force the delivery of the software modules paid for through fiscal 2019 and exit the development engagement. In April
2019, Kadima filed a complaint against ShiftPixy in the County of Maricopa, AZ alleging breach of contract, promissory estoppel
and unjust enrichment and has demands for an additional $10 million prior to releasing the remaining features. The parties agreed
to a transfer of the matter to an Arizona Commercial Court with the expectation that the matter would be sent to arbitration or
mediation. In October 2019, Kadima provided the software code to a third party for technical evaluation of the software in question.
The Company expects to enter into mediation once the technical evaluation is completed later in fiscal 2020. The parties have agreed
to a stay on the proceedings until July 2020.
Splond Litigation
On April 8, 2019, claimant, Corey Splond,
filed a class action lawsuit, naming ShiftPixy, Inc. and its client as defendants, claiming that he was scheduled to work for more
than 8 hours during 24-hour periods without being paid overtime, to which he was entitled. In addition, claimant is seeking
waiting time penalties for the delay in payment. This lawsuit is in the initial stages; the financial impact to the Company, if
any, cannot be estimated. No liability has been recorded for this matter at this time. In the event of an unfavorable
outcome the Company’s client is contractually obligated to indemnify the Company for misreported hours and portions of the
claim would be covered under the Company’s employment practices liability insurance.
Note 10: Subsequent Events
In March 2020, our business was impacted
by the COVID-19 global pandemic. A significant portion of our business includes restaurants, typically franchise food operators,
which were required by the State of California to cease all in-store dining during the COVID-19 shutdown. This has impacted their
revenue sources and has resulted in staff layoffs and lower payroll billings processed, beginning in the middle of March 2020,
and continuing through the date of this report. In May 2020 the State of California announced that workers who were required to
work outside their homes during the lockdown would be potentially eligible for workers compensation if they became ill for a 60
day period announced to be between March 19 until May 19. To date, we have not been notified of any such claims.
In March 2020, three investors converted
$1,047,000 of the Company’s Convertible Notes and $25,000 of accrued default interest into 135,507 shares of common stock
at a conversion price of $9.20 per share.
On March 23, 2020, the Company entered
into the following Amendment and Exchange Agreements (the “Amendment and Exchange Agreements”) with certain institutional
investors, pursuant to which the Company amended and restated certain existing notes (the “Amended and Restated Notes”)
and issued (i) convertible notes in an aggregate principal amount of $167,000 convertible into shares of common stock at a conversion
price of $9.20 per share of common stock (the “Exchange Notes”), (ii) warrants to purchase an aggregate of 162,950
shares of common stock at an exercise price of $10.17 per share of common stock (the “Exchange Warrants”) and (iii)
an aggregate of 82,654 shares of common stock (collectively, the “Exchange Securities”):
|
·
|
On March 23, 2020, the Company entered into an Amendment and Exchange Agreement (the “Alpha
Amendment and Exchange Agreement”) with Alpha Capital Anstalt (“Alpha”) pursuant to which the Company (a) issued
to Alpha an Amended and Restated Note in an aggregate principal amount of $723,000, and (b) in exchange for outstanding warrants
to purchase shares of common stock held by Alpha, issued to Alpha (i) 66,123 shares of common stock, (ii) an Exchange Warrant to
purchase 130,360 shares of common stock and (iii) an Exchange Note in an aggregate principal amount of $145,000.
|
|
·
|
On March 23, 2020, the Company entered into an Amendment and Exchange Agreement (the “Osher
Amendment and Exchange Agreement”) with Osher Capital Partners LLC (“Osher”) pursuant to which the Company (a)
issued to Osher an Amended and Restated Note in an aggregate principal amount of $108,000, and (b) in exchange for outstanding
warrants to purchase shares of common stock held by Osher, issued to Osher (i) 16,531 shares of common stock, (ii) an Exchange
Warrant to purchase 32,590 shares of common stock and (iii) an Exchange Note in an aggregate principal amount of $22,000.
|
On March 24, 2020, the Company entered
into an Exchange Agreement (the “Exchange Agreement”) with CVI Investments, Inc. (“CVI”) pursuant to which
CVI exchanged its outstanding senior convertible note due 2022 for (i) a warrant (the “Exchange Warrant”) to purchase
260,719 shares of common stock and (b) a senior convertible note in an aggregate principal amount of $1,829,000 convertible into
shares of common stock at a conversion price of $9.20 per share.
On April 15, 2020, CVI converted$1,829,000
of its senior convertible notes into 198,756 shares of common stock.
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 and its shareholders 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.
Management has evaluated subsequent
events pursuant to the issuance of the interim unaudited consolidated financial statements and has determined that other
than listed above, no other subsequent events exist through the date of this Report.
Report
of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
ShiftPixy, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of ShiftPixy, Inc. (the “Company”) as of August 31, 2019 and 2018, the related consolidated statements
of operations, stockholders’ deficit and cash flows for each of the two years in the period ended August 31, 2019, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of August 31, 2019 and 2018, and the results of its
operations and its cash flows for each of the two years in the period ended August 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 4, the
Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet
its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also described in Note 4. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2017.
New York, NY
December 13, 2019, except as to Note 16 as to which the
date is March 27, 2020 and Notes 3 and 13 as to which the date is May 19, 2020
ShiftPixy
Inc.
|
Consolidated
Balance Sheets
|
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,561,000
|
|
|
$
|
1,650,000
|
|
Accounts receivable, net
|
|
|
86,000
|
|
|
|
36,000
|
|
Unbilled accounts receivable
|
|
|
1,402,000
|
|
|
|
547,000
|
|
Deposit – workers’
compensation
|
|
|
235,000
|
|
|
|
83,000
|
|
Prepaid expenses
|
|
|
349,000
|
|
|
|
445,000
|
|
Other current assets
|
|
|
244,000
|
|
|
|
259,000
|
|
Current assets
of discontinued operations
|
|
|
10,154,000
|
|
|
|
7,427,000
|
|
Total current assets
|
|
|
14,031,000
|
|
|
|
10,447,000
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
3,320,000
|
|
|
|
2,990,000
|
|
Deposits – workers’
compensation
|
|
|
754,000
|
|
|
|
110,000
|
|
Deposits and other assets
|
|
|
124,000
|
|
|
|
121,000
|
|
Non current
assets of discontinued operations
|
|
|
5,567,000
|
|
|
|
2,134,000
|
|
Total assets
|
|
$
|
23,796,000
|
|
|
$
|
15,802,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued
liabilities
|
|
$
|
4,455,000
|
|
|
$
|
3,185,000
|
|
Payroll related liabilities
|
|
|
2,559,000
|
|
|
|
976,000
|
|
Convertible notes, net
|
|
|
3,351,000
|
|
|
|
6,172,000
|
|
Accrued workers’ compensation
costs
|
|
|
235,000
|
|
|
|
15,000
|
|
Default penalties accrual
|
|
|
1,800,000
|
|
|
|
3,500,000
|
|
Derivative liability
|
|
|
3,756,000
|
|
|
|
-
|
|
Current liabilities
of discontinued operations
|
|
|
16,032,000
|
|
|
|
8,808,000
|
|
Total current liabilities
|
|
|
32,188,000
|
|
|
|
22,656,000
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Accrued workers’
compensation costs
|
|
|
525,000
|
|
|
|
45,000
|
|
Non-current
liabilities of discontinued operations
|
|
|
3,853,000
|
|
|
|
856,000
|
|
Total liabilities
|
|
|
36,566,000
|
|
|
|
23,557,000
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Preferred stock, 50,000,000 authorized
shares; $0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
Common stock, 750,000,000 authorized
shares; $0.0001 par value; 907,048 and 721,295 shares issued as of August 31, 2019 and August 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
32,505,000
|
|
|
|
18,468,000
|
|
Treasury stock, at cost- 13,953
shares and 0 shares as of August 31, 2019 and August 31, 2018
|
|
|
(325,000
|
)
|
|
|
-
|
|
Accumulated
deficit
|
|
|
(44,950,000
|
)
|
|
|
(26,223,000
|
)
|
Total stockholders’
deficit
|
|
|
(12,770,000
|
)
|
|
|
(7,755,000
|
)
|
Total liabilities and stockholders’
deficit
|
|
$
|
23,796,000
|
|
|
$
|
15,802,000
|
|
See accompanying
notes to the unaudited interim condensed consolidated financial statements.
ShiftPixy Inc.
Condensed Consolidated
Statements of Operations
|
|
|
For the
Years Ended
|
|
|
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
Revenues (gross billings of $39.3 million and $12.1 million less worksite
employee payroll cost of $33.9 million and $10.3 million, respectively for the year ended)
|
|
|
$
|
5,423,000
|
|
|
$
|
1,819,000
|
|
Cost of revenue
|
|
|
|
4,594,000
|
|
|
|
1,488,000
|
|
Gross profit
|
|
|
|
829,000
|
|
|
|
331,000
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and payroll taxes
|
|
|
|
4,670,000
|
|
|
|
2.941,000
|
|
Commissions
|
|
|
|
200,000
|
|
|
|
93,000
|
|
Professional fees
|
|
|
|
3,918,000
|
|
|
|
2,078,000
|
|
Software development
|
|
|
|
1,209,000
|
|
|
|
3,828,000
|
|
General and administrative
|
|
|
|
6,502,000
|
|
|
|
4,189,000
|
|
Total operating expenses
|
|
|
|
16,499,000
|
|
|
|
13,129,000
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
|
(15,670,000
|
)
|
|
|
(12,798,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
(8,507,000
|
)
|
|
|
(1,751,000
|
)
|
Loss on debt extinguishment
|
|
|
|
(3,927,000
|
)
|
|
|
-
|
|
Change in fair value derivative and warrant liability
|
|
|
|
2,569,000
|
|
|
|
-
|
|
Gain (Loss associated with note defaults, net
|
|
|
|
811,000
|
|
|
|
(3,500,000)
|
|
Total other (expense) income
|
|
|
|
(9,054,000
|
)
|
|
|
(5,251,000
|
)
|
Loss from continuing operations
|
|
|
|
(24,724,000
|
)
|
|
|
(18,049,000
|
)
|
Total Income from discontinued operations, net of tax
|
|
|
|
5,997,000
|
|
|
|
1,226,000
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
(18,727,000)
|
|
|
$
|
(16,823,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per share, Basic and diluted
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
$
|
(30.23
|
)
|
|
$
|
(25.06
|
)
|
Discontinued operations
|
|
|
|
7.33
|
|
|
|
1.70
|
|
Net income (loss) per common share – Basic and diluted
|
|
|
$
|
(22.90)
|
|
|
$
|
(23.36
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic
and diluted
|
|
|
|
817,720
|
|
|
|
720,253
|
|
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
ShiftPixy Inc.
Consolidated
Statements of Stockholders’ Deficit
|
|
Common Stock
Issued
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
stock
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, August 31, 2017
|
|
|
719,064
|
|
|
$
|
-
|
|
|
$
|
15,016,000
|
|
|
$
|
-
|
|
|
$
|
(9,400,000
|
)
|
|
$
|
5,616,000
|
|
Warrants exercised for cash
|
|
|
938
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
Warrants issued with convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
859,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
859,000
|
|
Intrinsic value due to beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
2,155,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,155,000
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
Common stock issued for services rendered
|
|
|
1,293
|
|
|
|
-
|
|
|
|
163,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163,000
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,823,000
|
)
|
|
|
(16,823,000
|
)
|
Balance, August 31, 2018
|
|
|
721,295
|
|
|
$
|
-
|
|
|
$
|
18,468,000
|
|
|
$
|
-
|
|
|
$
|
(26,223,000
|
)
|
|
$
|
(7,755,000
|
)
|
Warrants exercised for cash
|
|
|
6,688
|
|
|
|
-
|
|
|
|
660,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
660,000
|
|
Common stock issued for services rendered
|
|
|
4,985
|
|
|
|
-
|
|
|
|
263,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
263,000
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
369,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
369,000
|
|
Reclass of derivative liability upon conversion of related
convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,000
|
|
Common shares issued upon conversion of convertible notes
and interest
|
|
|
105,776
|
|
|
|
-
|
|
|
|
8,904,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,904,000
|
|
Shares issued to induce debt conversion
|
|
|
68,304
|
|
|
|
-
|
|
|
|
3,829,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,829,000
|
|
Treasury stock received for settlement of note receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(325,000
|
)
|
|
|
-
|
|
|
|
(325,000
|
)
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,727,000
|
)
|
|
|
(18,727,000
|
)
|
Balance, August 31, 2019
|
|
|
907,048
|
|
|
$
|
-
|
|
|
$
|
32,505,000
|
|
|
$
|
(325,000
|
)
|
|
$
|
(44,950,000
|
)
|
|
$
|
(12,770,000
|
)
|
The accompanying notes are an integral
part of these consolidated financial statements.
ShiftPixy Inc.
Consolidated
Statements of Cash Flows
|
|
For the
Years Ended
|
|
OPERATING ACTIVITIES
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
Net loss
|
|
$
|
(18,727,000
|
)
|
|
$
|
(16,823,000
|
)
|
Income from discontinued operations
|
|
|
5,997,000
|
|
|
|
1,226,000
|
|
Net loss from continuing operations
|
|
|
(24,724,000
|
)
|
|
|
(18,049,000
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
837,000
|
|
|
|
272,000
|
|
Inducement loss on Note Conversions
|
|
|
3,829,000
|
|
|
|
-
|
|
Excess of derivative liabilities over
Notes at issuance
|
|
|
2,588,000
|
|
|
|
-
|
|
Amortization of note discount and financing
costs
|
|
|
5,607,000
|
|
|
|
951,000
|
|
Stock issued for services
|
|
|
263,000
|
|
|
|
163,000
|
|
Stock based compensation
|
|
|
369,000
|
|
|
|
200,000
|
|
Loss (Gain) associated with note defaults,
net
|
|
|
(811,000
|
)
|
|
|
3,500,000
|
|
Interest paid in common shares
|
|
|
509,000
|
|
|
|
-
|
|
Change in fair value derivative and
warrant liability
|
|
|
(2,569,000
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(50,000
|
)
|
|
|
289,000
|
|
Unbilled accounts receivable
|
|
|
(857,000
|
)
|
|
|
(547,000
|
)
|
Prepaid expenses
|
|
|
97,000
|
|
|
|
(93,000
|
)
|
Other current assets
|
|
|
15,000
|
|
|
|
(243,000
|
)
|
Deposits – workers’ compensation
|
|
|
(794,000
|
)
|
|
|
(124,000
|
)
|
Deposits and other assets
|
|
|
(3,000
|
)
|
|
|
6,000
|
|
Accounts payable
|
|
|
1,372,000
|
|
|
|
76,000
|
|
Payroll related liabilities
|
|
|
1,584,000
|
|
|
|
590,000
|
|
Accrued workers’ compensation
costs
|
|
|
700,000
|
|
|
|
60,000
|
|
Other current
liabilities
|
|
|
(25,000
|
)
|
|
|
1,677,000
|
|
Net cash used in continuing operating
activities
|
|
|
(12,063,000
|
)
|
|
|
(11,352,000
|
)
|
Net cash provided by(used in) discontinued
operating activities
|
|
|
9,978,000
|
|
|
|
1,815,000
|
|
Net cash used in operating activities
|
|
|
(2,086,000
|
)
|
|
|
(9,538,000
|
)
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(1,167,000
|
)
|
|
|
(3,019,000
|
)
|
Issuance of related party note receivable
|
|
|
(325,000
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(1,492,000
|
)
|
|
|
(3,019,000
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of convertible notes
|
|
|
3,750,000
|
|
|
|
9,000,000
|
|
Issuance costs
related to convertible notes
|
|
|
(485,000
|
)
|
|
|
(765,000
|
)
|
Repayment of convertible
notes
|
|
|
(436,000
|
)
|
|
|
-
|
|
Proceeds from
exercise of warrants
|
|
|
660,000
|
|
|
|
75,000
|
|
Net cash provided by financing activities
|
|
|
3,489,000
|
|
|
|
8,310,000
|
|
Net decrease in cash and cash equivalents
|
|
|
(89,000
|
)
|
|
|
(4,247,000
|
)
|
Cash - beginning of year
|
|
|
1,650,000
|
|
|
|
5,897,000
|
|
Cash - end of year
|
|
$
|
1,561,000
|
|
|
$
|
1,650,000
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
Interest
|
|
$
|
226,000
|
|
|
$
|
133,000
|
|
Income taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Conversion of debt and accrued interest
into common stock
|
|
$
|
8,904,000
|
|
|
$
|
–
|
|
Additional principal to settle registration
rights penalties
|
|
$
|
889,000
|
|
|
$
|
–
|
|
Discharge of related party note receivable
for common shares
|
|
$
|
325,000
|
|
|
$
|
–
|
|
Allocated fair value of beneficial conversion
feature
|
|
$
|
1,479,000
|
|
|
$
|
–
|
|
Allocated fair value of warrants included
with convertible notes
|
|
$
|
2,271,000
|
|
|
$
|
–
|
|
Debt discount due to the intrinsic value
of beneficial conversion feature
|
|
$
|
–
|
|
|
$
|
924,000
|
|
Debt discount due to warrants included
with convertible notes
|
|
$
|
–
|
|
|
$
|
859,000
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
ShiftPixy. Inc.
Notes to Consolidated
Financial Statements
Note 1: Nature of Operations
ShiftPixy, Inc. (the “Company”)
was incorporated on June 3, 2015. The Company is a specialized staffing service provider that provides solutions for large contingent
part-time workforce demands, primarily in the restaurant, hospitality and maintenance service trades. The Company’s focus
is on the restaurant industry in Southern California.
Both ShiftPixy, Inc and its
wholly-owned subsidiary, Shift Human Capital Management Inc. (“SHCM”), function as an employment administrative services
(“EAS”) provider including services such as administrative and processing services, performing functions in the nature
of a payroll processor, human resources consultant, administrator of workers’ compensation coverages and claims and provides
workers compensation coverage written in the names of the clients (as may be required by some states). The Company has built a
human resources information systems platform to assist in customer acquisition and hopes that this mechanism may become a way
to onboard new clients into the ShiftPixy Ecosystem when eligible clients recognize the value of the services provided by the
parent Company.
Note 2: Summary of significant accounting
policies
Basis of Presentation
The consolidated financial statements
of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
The Company and its wholly-owned
subsidiary have been consolidated in the accompanying consolidated financial statements. All intercompany balances have been eliminated
in consolidation.
Use of Estimates
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect 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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|
·
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Liability
for legal contingencies;
|
|
|
|
|
|
|
·
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Useful
lives of software, property and equipment;
|
|
|
|
|
|
|
·
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Assumptions
made in valuing equity instruments;
|
|
|
|
|
|
|
·
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Assumptions
made in valuing embedded derivatives and freestanding equity-linked instrument classified as liabilities;
|
|
|
|
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·
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Deferred
income taxes and related valuation allowance; 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 accounts for
its EAS revenues in accordance with 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 and (ii) a mark-up computed as a percentage of payroll costs
for payroll taxes and workers compensation premiums.
The Company’s revenues
are primarily attributable to fees for providing staffing solutions and EAS/HCM (“Employment Administration Services”/
“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 services
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 30 days’ notice. Contract performance obligations are satisfied as services are rendered and the term
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.
Gross billings are invoiced
to each client concurrently with each periodic payroll of the Company’s worksite employees 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 worksite employees
perform their service 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 $1,137,000 and $310,000 for the years ended August 31,
2019 and August 31, 2018, respectively.
Consistent with the Company’s
revenue recognition policy, direct costs do not include the payroll cost of its worksite employees. The cost of revenue associated
with the Company’s revenue generating activities is primarily comprised of all other costs related to its worksite employees,
such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance
costs.
The Company has evaluated
its revenue recognition policies in conjunction with its future expected business which may be migrating to a staffing business
model. For fiscal years 2018 and 2019, 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.
The Company reviewed the costs associated
with acquiring its customers under ASC 340-10 Other Assets and Deferred Costs and determined that no such costs should
be capitalized. Costs relating to its customers are typically commissions paid as a percentage of some of the Company’s
revenue components and are expensed as they are incurred because the terms of its contracts generally are cancellable by either
party with a 30-day notice. These costs are recorded in commissions in the Consolidated Statement of Operations.
Segment Reporting
The Company 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 performances. 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 August 31, 2019 or 2018.
Concentration of Credit Risk
The Company maintains cash
with a commercial bank, which is insured by the Federal 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 August 31, 2019, there were $2,354,000 of cash in
excess of the amounts insured by the FDIC.
The Company had no individual
client that represented more than 10% of its annual revenues for either fiscal years 2019 or 2018. Four clients represent 92%
of total accounts receivable at August 31, 2019, compared to four clients representing approximately 86% of its total accounts
receivable at August 31, 2018.
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 being 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.
Computer Software Development
Software development costs
relate primarily to software coding, systems interfaces and testing of the Company’s proprietary employer information systems
and are accounted for in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal Use Software.
Internal software development costs
are capitalized from the time the internal use software is considered probable of completion until the software is ready for use.
Business analysis, system evaluation and software maintenance costs are expensed as incurred. The capitalized computer software
development costs are reported under the section fixed assets, net in the consolidated balance sheets.
The Company determined that
there were no material internal software development costs for the years ended August 31, 2018 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 five years.
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 its 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.
Workers’ compensation
Everest Program
Up to July 2018, a portion of the Company’s
workers’ compensation risk was covered by a retrospective rated policy, which calculates the final policy premium based
on the Company’s loss experience during the term of the policy and the stipulated formula set forth in the policy. The Company
funds the policy premium based on standard premium rates on a monthly basis and based on the gross payroll applicable to workers
covered by the policy. During the policy term and thereafter, periodic adjustments may involve either a return of previously paid
premiums or a payment of additional premiums by the Company or a combination of both. If the Company’s losses under that
policy exceed the expected losses under that policy, then the Company could receive a demand for additional premium payments.
The Company utilizes a third-party
to estimate its loss development rate, which is based primarily upon the nature of worksite employees’ job responsibilities,
the location of worksite employees, the historical frequency and severity of workers’ compensation claims, and an estimate
of future cost trends. Each reporting period, changes in the assumptions resulting from changes in actual claims experience and
other trends are incorporated into its workers’ compensation claims cost estimates. As of August 31, 2019, the Company classified
$0.1 million in short term accrued workers’ compensation and $0.1 million in long-term accrued workers’ compensation
in the Company’s consolidated balance sheets.
Sunz Program
Starting in July 2018, the
Company’s workers’ compensation program for its worksite employees has been provided through an arrangement with United
Wisconsin Insurance Company (“UWIC”) and administered by Sunz. Under this program, the Company has financial responsibility
for the first $0.5 million of claims per occurrence. The Company provides and maintains a loss fund that will be used to pay claims
and claim related expenses. The workers’ compensation insurance carrier established monthly funding requirements comprised
of premium costs and funds to be set aside for payment of future claims (“claim loss funds”). The level of claim loss
funds is primarily based upon anticipated worksite employee payroll levels and expected worker’s compensation loss rates,
as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year
are recorded as Deposit - workers’ compensation, a short-term asset, while the remainder of claim funds are included in
deposits- workers’ compensation, a long-term asset in its consolidated balance sheets.
As of August 31, 2019, the Company
had $0.2 million in deposit – workers’ compensation classified as a short-term asset and $0.8 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 August 31,
2019, the Company had short term accrued workers’ compensation costs of $0.1 million and long-term accrued workers’
compensation costs of $0.5 million.
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 takes into account the ongoing development of claims and therefore
requires a significant level of judgment. In estimating ultimate loss rates, the Company utilizes historical loss experience,
exposure data, and actuarial judgment, together with a range of inputs which are primarily based upon the worksite employee’s
job responsibilities, their location, the historical frequency and severity of workers’ compensation claims, and an estimate
of future cost trends. For each reporting period, changes in the actuarial assumptions resulting from changes in actual claims
experience and other trends are incorporated into its workers’ compensation claims cost estimates. The estimated incurred
claims are based upon: (i) the level of claims processed during each quarter; (ii) estimated completion rates based upon recent
claim development patterns under the plan; and (iii) the number of participants in the plan.
Debt issuance Costs and Debt discount
Debt issuance costs and debt
discounts are being amortized over the lives of the related financings on a basis that approximates the effective interest method.
Costs and discounts are presented as a reduction of the related debt in the accompanying consolidated balance sheets. Portions
attributable to notes converted into equity are accelerated to interest expense upon conversion.
Beneficial Conversion Features
The intrinsic value of a beneficial
conversion feature (“BCF”) inherent to a convertible note payable, which is not bifurcated and accounted for separately
from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible
note payable. This discount is amortized over the period from the date of issuance to the stated maturity using the straight-line
method which approximates the effective interest method. If the note payable is retired prior to the end of the contractual term,
the unamortized discount is expensed in the period of retirement to interest expense. In general, the BCF is measured by comparing
the effective conversion price, after considering the relative fair value of detachable instruments included in the financing
transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.
Derivative financial instruments
When a Company issues debt that contains
a conversion feature, it first evaluates whether the conversion feature meets the requirement to be treated as a derivative: a)
the settlement amount is determined by one or more underlying, typically the price of the Company’s stock, b) the settlement
amount is determined by one or more notional amounts or payments provisions or both, generally the number of shares upon conversion;
c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provision, which in the case
of convertible debt generally means the stock received upon conversion can be readily sold for cash. There are certain scope exceptions
from derivative treatment, but these typically exclude conversion features that provide for a variable number of shares. When
ShiftPixy, Inc., issues warrants to purchase its common stock, the Company evaluates whether they meet the requirements to be
treated as derivative. Generally, warrants would be treated as a derivative if the provisions of the warrants agreements create
uncertainty as to a) the number of shares to be issued upon exercise, or b) whether shares may be issued upon exercise. If the
conversion feature within convertible debt or warrants meet the requirements to be treated as a derivative, ShiftPixy estimates
the fair value of the derivative liability using the lattice-based option valuation model upon the date of issuance. If the fair
value of the derivative liability is higher than the face value of the convertible debt, the excess is immediately recognized
as interest expense. Otherwise, the fair value of the derivative is recorded as a liability with an offsetting amount recorded
as a debt discount, which offsets the carrying amount of the debt. The derivative liability is revalued at the end of each reporting
period and any change in fair value is recorded as a change in fair value in the consolidated statement of operations. The debt
discount is amortized through interest expense over the life of the debt. Derivative instrument liabilities and the host debt
agreements are classified on the consolidated balance sheets as current or non-current based on whether settlement of the derivative
instrument could be required within twelve months of the consolidated balance sheet date.
The accounting treatment of derivative
financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of
the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded
as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the
classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during
the period, the contract is reclassified as of the date of the event that caused the reclassification.
Fair Value of Financial Instruments
FASB ASC 825, “Financial Instruments,”
requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized
on the balance sheet, for which it is practical to estimate fair value. FASB 825 defines fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current transaction between willing parties. At August 31, 2019
and August 31, 2018, the carrying value of certain financial instruments (cash, accounts receivable and payable, and other financial
instruments) approximates fair value due to the short-term nature of the instruments. Convertible notes approximate fair value
based on comparison of terms from similar instruments in the marketplace.
The Company measures fair value under
a framework that utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level
1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of inputs which prioritize
the inputs used in measuring fair value are:
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·
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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.
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·
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Level
2: Inputs to the valuation methodology include:
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|
o
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Quoted
prices for similar assets or liabilities in active markets;
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|
|
|
o
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Quoted
prices for identical or similar assets or liabilities in inactive markets
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|
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|
|
|
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.
|
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|
|
|
|
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 and liabilities at August 31, 2019. The derivative liabilities associated with its March 2019 Convertible
Notes (see Note 9), consisted of conversion feature derivatives and warrants at August 31, 2019, are Level 3 fair value measurements.
The table below sets forth a summary
of the changes in the fair value of the Company’s derivative liabilities classified as Level 3 for the year ended August
31, 2019:
|
|
Conversion
Features
|
|
|
Warrant
Liability
|
|
|
Total
|
|
Balance at August 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Initial recognition
|
|
|
2,421,000
|
|
|
|
3,917,000
|
|
|
|
6,338,000
|
|
Reclassification to equity
|
|
|
(13,000
|
)
|
|
|
|
|
|
|
(13,000
|
)
|
Change in fair
value
|
|
|
444,000
|
|
|
|
(3,013,000
|
)
|
|
|
(2,569,000
|
)
|
Balance at August 31, 2019
|
|
$
|
2,852,000
|
|
|
$
|
904,000
|
|
|
$
|
3,756,000
|
|
At August 31, 2019, the Company
estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on weighted probabilities
of assumptions used in the Lattice-based option valuation model. The key valuation assumptions used consists, in part, of the
price of the Company’s common stock, a risk free interest rate based on the average yield (1.76%) of a Treasury note and
expected volatility of the Company’s common stock (100%) all as of the measurement dates, and the various estimated reset
exercise prices weighted by probability.
At August 31, 2019, the Company estimated
the fair value of the warrant liabilities based on the Lattice-based option valuation model. The key valuation assumptions used
consists, in part, of the price of the Company’s common stock, a risk-free interest rate based on the average yield of a
Treasury note (1.39%) and expected volatility of the Company’s common stock (119%) all as of the measurement dates.
When the Company changes
its valuation inputs for measuring financial assets and liabilities at fair value, either due to changes in current market conditions
or other factors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new inputs
used. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the periods ended
August 31, 2019 and August 31, 2018, there were no transfers of financial assets or financial liabilities between the hierarchy
levels.
Advertising Costs
The Company expenses advertising costs
when incurred. Advertising costs incurred amounted to approximately $1.2 million and $0.5 million for the years ended August 31,
2019, and 2018, respectively.
Research and Development
During the years ended August
31, 2019 and 2018 the Company incurred research and development costs of approximately $2.3 million and $4.0 million, respectively.
All costs were related to internally developed and contracted software and related technology for the Company’s HRIS system
and related mobile application. In addition, $0.9 million and $2.8 million of software costs were capitalized for the years ended
August 31, 2019 and 2018, respectively.
Income Taxes
The Company accounts for income taxes
pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740,
“Income Taxes.” Under FASB ASC 740 deferred income taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The provision for income taxes represents the
tax expense for the period, if any, and the change during the period in deferred tax assets and liabilities. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
FASB ASC 740 also provides criteria
for the recognition, measurement, presentation and disclosure of uncertain tax positions. Under FASB ASC 740, the impact of an
uncertain tax position on the income tax return may only be recognized at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant taxing authority.
Share-Based Compensation
At August 31, 2019 and 2018, the Company
has one stock-based compensation plan under which the Company may issue both share and stock option awards. The Company accounts
for this plan under the recognition and measurement principles of ASC 718, Compensation- Stock Compensation, which requires all
share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements
of operations on their fair values. Share grants are valued at the closing market price on the date of issuance which approximates
fair value.
For option grants, the grant
date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. Option grants are typically
issued with vesting depending on a term of service. For all employee stock options granted, the Company recognizes expense over
the requisite service period 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 its Initial Public Offering. Any changes
in these highly subjective assumptions significantly impact stock-based compensation expense.
Following the adoption of Accounting
Standards Update ASU 2016-09, the Company elected to account for forfeitures 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.
Earnings (Loss) Per Share
The Company utilizes FASB ASC 260,
“Earnings per Share.” Basic loss per share is computed by dividing loss attributable to common stockholders by the
weighted-average number of common shares outstanding during the reporting period. Diluted loss per share is computed similar to
basic loss per share except that the denominator is increased to include additional common share equivalents available upon exercise
of stock options and warrants using the treasury stock method. Dilutive common share equivalents include the dilutive effect of
in-the-money share equivalents, which are calculated based on the average share price for each period using the treasury stock
method, excluding any common share equivalents if their effect would be anti-dilutive.
The table below shows earnings per
common share and diluted earnings per common share and reconciles the numerator and denominator of both earnings per common share
calculations.
|
|
For the year ended
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
Losses per common share:
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
$(24,724,000
|
)
|
|
$(18,049,000
|
)
|
Income from
continuing operations
|
|
5,997,000
|
|
|
1,226,000
|
|
Net loss allocated
to common shareholders
|
|
|
$(18,727,000
|
)
|
|
$
|
(16,823,000
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
|
817,720
|
|
|
|
720,253
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations per common share
|
|
$
|
(30.24
|
)
|
|
$
|
(25.06
|
)
|
Income from continuing
operations per common share
|
|
|
7.34
|
|
|
|
1.70
|
|
Basic and Fully
Diluted net loss per common share
|
|
$
|
(22.90
|
)
|
|
$
|
(23.36
|
)
|
Securities that are excluded from the
calculation of weighted average dilutive common shares, because their inclusion would have been antidilutive are:
|
|
For the year
ended
August 31,
2019
|
|
|
For the year
ended
August 31,
2018
|
|
Options
|
|
|
50,749
|
|
|
|
33,594
|
|
Senior Secured Convertible Notes (Note
9)
|
|
|
491,868
|
|
|
|
100,402
|
|
Warrants
|
|
|
107,410
|
|
|
|
94,470
|
|
Total potentially dilutive shares
|
|
|
650,027
|
|
|
|
228,466
|
|
Treasury Stock
Treasury stock represents
shares of common stock provided to the company in satisfaction of the related party advance, described in Note 12: Related Parties.
Shares provided are recorded at cost as treasury stock. The Company intends to retire all treasury stock outstanding as of August
31, 2019 in fiscal 2020. Any treasury stock retired is recorded to additional paid-in capital, limited to the amount previously
credited to additional paid-in capital, if any. Any excess is charged to accumulated deficit.
Revision of Financial Statements
During 2019, the Company
determined that it had improperly calculated the volatility of the Company’s common stock, which had been used to
calculate the relative fair value of the warrants issued in connection with the June 2018 convertible notes. This resulted in
an overstatement of the net carrying amount of the convertible note by the understatement of the corresponding debt discount
with the offset to additional paid-in capital as of February 28, 2019. 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 on the Company’s consolidated
balance sheet, statements of operations, statements of cash flows, statement of stockholders’ deficit and net loss for
the periods then ended.
The effect of this revision on the
line items within the Company’s consolidated financial statements as of August 31, 2018, was as follows:
|
|
August 31,
2018
|
|
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Convertible note, net
|
|
$
|
7,156,000
|
|
|
|
(985,000
|
)
|
|
$
|
6,171,000
|
|
Additional Paid-In Capital
|
|
|
17,234,000
|
|
|
|
1,231,000
|
|
|
|
18,465,000
|
|
Accumulated deficit
|
|
|
(25,977,000
|
)
|
|
|
(246,000
|
)
|
|
|
(26,223,000
|
)
|
Net Loss
|
|
$
|
(16,577,000
|
)
|
|
|
(246,000
|
)
|
|
$
|
(16,823,000
|
)
|
Net loss per share – Basic and
diluted
|
|
$
|
(23.02
|
)
|
|
|
-
|
|
|
$
|
(23.36
|
)
|
Reclassifications
Certain reclassifications have been
made to prior year’s data to confirm to the current year’s presentation. Such reclassifications had no impact on the
Company’s financial condition, operating results, cash flows or stockholder’s equity.
Significant 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 U.S. GAAP. The new standard also will require enhanced revenue disclosures,
provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element
arrangements. This accounting standard becomes effective for the Company for reporting periods beginning after December 15, 2018,
and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted for
annual reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either
the retrospective or cumulative effect transition method.
In March 2016, the FASB issued ASU
No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of this standard
is to clarify the implementation of guidance on principal versus agent considerations related to ASU 2014-09. The standard has
the same effective date as ASU 2014-09 described above.
In April 2016, the FASB issued ASU
No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides
clarity related to ASU 2014-09 regarding identifying performance obligations and licensing implementation. The standard has the
same effective date as ASU 2014-09 described above.
In May 2016, the FASB issued ASU 2016-12:
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope
improvements and practical expedients related to ASU 2014-09. The purpose of this standard is to clarify certain narrow aspects
of ASU 2014-09, such as assessing the collectability criterion, presentation of sales taxes, and other similar taxes collected
from customers, noncash considerations, contract modifications at transition, completed contracts are transition, and technical
correction. The standard has the same effective date as ASU 2014-09 described above.
In December 2016, the FASB issued ASU
2016-20: Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this standard
affect narrow aspects of guidance issued in ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above.
Topic 606 is effective for the company beginning with the fiscal year ending August 31, 2020. The Company has evaluated Topic
606 and we plan to utilize the modified retrospective transition method upon the adoption of ASC 606. The Company is still in
the process of finalizing its evaluation for the adoption of ASC 606, however, no material difference is expected.
In February 2016, the FASB issued new
accounting guidance on leases ASU 2016-02, Leases. The new standard requires that a lessee recognize assets and liabilities on
the balance sheet for leases with terms longer than 12 months. The recognition, measurement and presentation of lease expenses
and cash flows by a lessee will depend on its classification as a finance or operating lease. The guidance also includes new disclosure
requirements providing information on the amounts recorded in the financial statements.
In March 2019, the FASB issued ASU
2019-01, which added guidance to ASC 842 that is similar to the guidance in ASC 840-10-55-44 and states that, for lessors that
are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long
as there isn’t a significant amount of time between acquisition of the asset and lease commencement. The amendments also
clarify that lessors in the scope of ASC 942 must classify principal payments received from sales-type and direct financing leases
in investing activities in the statement of cash flows. In addition, the amendments clarify that entities are not subject to the
transition disclosure requirements in ASC 250-10-50-3 related to the effect of an accounting change on certain interim period
financial information.
In November 2019, the FASB issued ASU
2019-10, which provides a one-year deferral of the effective dates of the new lease standard. The ASU is effective for fiscal
years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company
is currently evaluating the impact that this standard will have on its consolidated financial statement.
In June 2018, the FASB issued ASU 2018-07,
which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies
to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s
own operations by issuing share-based payment awards. The standard will be effective for the Company in the first quarter of fiscal
year 2020, although early adoption is permitted (but no sooner than the adoption of Topic 606). The Company does not expect that
the adoption of this ASU will have a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU
2018-13, Fair Value Measurement (Topic 820). The ASU eliminates such disclosures as the amount of and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy. The ASU adds new disclosure requirements for Level 3 measurements. This ASU is
effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption
permitted for any eliminated or modified disclosures. The Company is evaluating the effect of adopting this new accounting guidance
to determine the impact it may have on the Company’s financial statements.
In November 2016, the FASB issued Accounting
Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted cash (ASU 2016-18), which requires companies to include
amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period
and end-of-period total amounts shown in the statement of cash flow. This guidance is effective for fiscal year beginning after
December 15, 2018 and early adoption is permitted. The Company does not expect the adoption of ASU 2016-18 to have a material
impact on the Company’s 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 (the “Asset Sale”). The following discloses
the amounts disclosed as discontinued operations in the recast financial statements
In accordance with the provisions of
ASC 205-20, Presentation of Financial Statements, we have separately reported the assets and liabilities of the discontinued
operations in the consolidated balance sheets. The assets and liabilities have been reflected as discontinued operations in the
consolidated balance sheets as of August 31, 2019 and 2018 and consist of the following:
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
Cash
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts receivable and unbilled account receivable
|
|
|
8,261,000
|
|
|
|
5,721,000
|
|
Prepaid expenses and other current assets
|
|
|
171,000
|
|
|
|
118,000
|
|
Deposits – workers’ compensation
|
|
|
1,722,000
|
|
|
|
1,588,000
|
|
Total current
assets
|
|
|
10,154,000
|
|
|
|
7,427,000
|
|
Fixed assets, net
|
|
|
40,000
|
|
|
|
42,000
|
|
Deposits – workers’ compensation
|
|
|
5,527,000
|
|
|
|
2,091,000
|
|
Total assets
|
|
$
|
15,721,000
|
|
|
$
|
9,560,000
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
$
|
457,000
|
|
|
$
|
18,000
|
|
Payroll related liabilities
|
|
|
13,853,000
|
|
|
|
8,501,000
|
|
Accrued workers’ compensation
cost
|
|
|
1,722,000
|
|
|
|
290,000
|
|
Total current
liabilities
|
|
|
16,032,000
|
|
|
|
8,808,000
|
|
Accrued workers’ compensation
cost
|
|
|
3,853,000
|
|
|
|
856,000
|
|
Total liabilities
|
|
|
19,885,000
|
|
|
|
9,664,000
|
|
|
|
|
|
|
|
|
|
|
Net assets/(liability)
|
|
$
|
(4,164,000
|
)
|
|
$
|
(104,000
|
)
|
In accordance with the provisions of ASC 205-20, we have
separately reported the results of operations from in the results of continuing operations in the consolidated statements of operations.
The results of operations from discontinued operations for the years ended August 31, 2019 and 2018, have been reflected as discontinued
operations for the years ended December 31, 2019 and 2018, and consist of the following:
|
|
For the
Year Ended
|
|
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
Revenues (gross billings of $313.3 million and $210.3 million less
worksite employee payroll cost of $265.3 million and $177.2 million, respectively for the year ended)
|
|
$
|
48,013,000
|
|
|
$
|
33,139,000
|
|
Cost of revenue
|
|
|
36,452,000
|
|
|
|
27,970,000
|
|
Gross profit (loss)
|
|
|
11,561,000
|
|
|
|
5,169,000
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
|
3,032,000
|
|
|
|
2,442,000
|
|
Commissions
|
|
|
2,532,000
|
|
|
|
1,501,000
|
|
Total operating expenses
|
|
|
5,564,000
|
|
|
|
3,943,000
|
|
Operating income from discontinued operations
|
|
|
5,997,000
|
|
|
|
1,226,000
|
|
Provision for income tax expense from
discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Net income from discontinued operations
|
|
$
|
5,997,000
|
|
|
$
|
1,226,000
|
|
The Company utilized fully reserved
net operating loss carryforwards of approximately $7,223,000 to offset income from discontinuing operations as follows:
|
|
For
the Year Ended
|
|
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
Provision of income tax expense:
|
|
|
|
|
|
|
Federal tax expense
|
|
$
|
1,260,000
|
|
|
$
|
265,000
|
|
State tax expense
|
|
|
540,000
|
|
|
|
92,000
|
|
Total tax expense
|
|
|
1,800,000
|
|
|
|
357,000
|
|
Tax benefit for utilization of tax loss carryforwards
|
|
|
(1,800,000
|
)
|
|
|
(357,000
|
)
|
Provision for income tax expense
from discontinued operations
|
|
$
|
--
|
|
|
$
|
--
|
|
Note 4: Going Concern
As of August 31, 2019, the Company
had cash of $1.6 million and a working capital deficiency of $15.9 million. During the year ended August 31, 2019, the
Company used approximately $2.1 million of cash in its operations, of which $9.5 million was used in continuing operations
and $7.4 million was provided by discontinued operations. Cash used in continuing operations consisted of a net loss of $24.7
million, reduced by net non-cash charges of $10.6 million and working capital changes of $4.6 million. Cash provided by
discontinued operations consisted of income of $6.0 million and $1.4 million in working capital changes. For the most recent
quarter ending August 31, 2019, cash flows used in operations were $0.5 million. The Company has incurred recurring losses
resulted in an accumulated deficit of $45 million as of August 31, 2019. These conditions raise substantial doubt as to the
Company’s ability to continue as going concern within one year from issuance date of the financial statements.
The ability of the Company to
continue as a going concern is dependent upon generating profitable operations in the future and obtaining additional funds
by way of public or private offering to meet the Company’s obligations and repay its liabilities when they become due.
The Company has a recurring revenue business model that generated $12.4 million of gross profit for the year of which $3.6
million is attributable to the fourth fiscal quarter. Approximately 12% or of the recurring business gross profit represents
continuing operations. On an annualized basis, a projected twelve-month gross profit based solely on the fourth quarter would
be $14.4 million in total or approximately $1.7 million from continuing operations.. For the year ended August 31, 2019, the
Company had $17.0 million of continuing operating expenses, of which $1.4 million was non-cash depreciation and share based
compensation. Of the remaining $15.6 million, $4.9 million was for software development and marketing related spending for
the HRIS and mobile application systems, including licensing and related salaries and consulting fees, with an additional
$1.4 million for legal services, settlements and 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 and settling its outstanding debt as it comes due. The Company engaged an investment banking
firm to assist the Company in (i) preparing information materials, (ii) advising the Company concerning the structure, price and
conditions and (iii) organizing the marketing efforts with potential investors in connection with a financing transaction. With
the added development and marketing investment into the mobile application, the Company anticipates the need to raise additional
capital coupled with using its actual cash position and continue leveraging its payables until it reaches breakeven at about 25,000
worksite employees.
Historically, the Company’s principal
source of financing has come through the sale of its common stock and issuance of convertible notes. The Company successfully
completed an Initial Public Offering (IPO) on NASDAQ on June 29, 2017, raising a total of $12 million ($10.9 million net of costs).
In June 2018, the Company completed a private placement of 8% senior secured convertible notes to institutional investors raising
$9 million of gross proceeds ($8.4 million net of costs). In March 2019, the Company completed a private placement of senior secured
notes to institutional investors raising $3.75 million ($3.3 million net of costs).
The Company believes that
its current cash position, along with its revenue growth and the financing from potential institutional investors will be sufficient
to fund its operations for at least a year from the date these financials are available. If these sources do not provide the capital
necessary to fund the Company’s operations during the next twelve months from the date of this report, the Company may need
to curtail certain aspects of its operations or expansion activities, consider the sale of its assets, or consider other means
of financing. The Company can give no assurance that it will be successful in implementing its business plan and obtaining financing
on terms advantageous to the Company or that any such additional financing would be available to the Company. As such, these conditions
raise substantial doubt as to its ability to continue as a going concern within one year from the issuance date of the financial
statements. These consolidated financial statements do not include any adjustments from this uncertainty.
Note 5: Accounts Receivable
Accounts receivables, which
represent outstanding gross billings to clients, are reported net of allowance for doubtful accounts. The Company establishes
an allowance for doubtful accounts based on management’s assessment of the collectability of specific accounts and by making
a general provision, based on its past experiences, for other potentially uncollectible amounts. The provision for doubtful accounts
during the fiscal years ending August 31, 2019 and 2018 was not material.
The Company makes an accrual
at the end of each accounting period for the obligations associated with the earned but unpaid wages of its worksite employees
and for the accrued gross billings associated with such wages. These accruals are included in unbilled accounts receivable. The
Company generally requires clients to pay invoices for service fees no later than 1 day prior to the applicable payroll date.
As such the Company generally does not require collateral.
Note 6: Fixed Assets
Fixed assets consisted of the following
at August 31, 2019 and 2018:
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
Equipment
|
|
$
|
282,000
|
|
|
$
|
154,000
|
|
Furniture & fixtures
|
|
|
412,000
|
|
|
|
329,000
|
|
Software
|
|
|
3,737,000
|
|
|
|
2,797,000
|
|
Leasehold improvements
|
|
|
41,000
|
|
|
|
41,000
|
|
|
|
|
4,472,000
|
|
|
|
3,321,000
|
|
Accumulated depreciation & amortization
|
|
|
(1,152,000
|
)
|
|
|
(331,000
|
)
|
Fixed assets, net
|
|
$
|
3,320,000
|
|
|
$
|
2,990,000
|
|
Depreciation and amortization expense
for the years ended August 31, 2019 and 2018, was $839,000 and $274,000, respectively.
Software consists primarily
of customized software purchased from third party providers and which is incorporated into the Company’s HRIS platform and
related mobile application.
Information related to capitalized
software costs is as follows:
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
Software
costs capitalized
|
|
$
|
3,737,000
|
|
|
$
|
2,797,000
|
|
Software
costs amortized
|
|
|
(904,000
|
)
|
|
|
(190,000
|
)
|
Software
costs, Net
|
|
$
|
2,833,000
|
|
|
$
|
2,607,000
|
|
The Company has evaluated certain development
costs of its software solution in accordance with ASC Topic 350-40, Internal Use Software, which outlines the stages of computer
software development and specifies when capitalization of costs is required. Projects that are determined to be in the development
stage are capitalized and amortized over their useful lives of five years. Projects that are determined to be within the preliminary
stage are expensed as incurred. For the years ended August 31, 2019 and 2018 no internally developed software was capitalized.
A substantial portion of the capitalized software is attributable to a third party with whom the Company is in litigation. The
Company evaluated the asset value as of August 31, 2019 and determined that no asset impairment is required for this customized
third party software.
Amortization expense included in the
depreciation and amortization expense disclosed above for the years ended August 31, 2019 and 2018, was $714,000 and $190,000,
respectively. The weighted average remaining life of amortizable software assets was 3.56 years as August 31, 2019. Amortization
expense for capitalized software is expected to approximate the following for each of the next five fiscal years and thereafter:
|
|
Amount
|
|
2020
|
|
$
|
814,000
|
|
2021
|
|
|
814,000
|
|
2022
|
|
|
744,000
|
|
2023
|
|
|
458,000
|
|
2024
|
|
$
|
3,000
|
|
Note 7: Workers Compensation
The Company has two workers
compensation programs in effect during the years ended August 31, 2019 and 2018. The Everest program covered corporate and worksite
employees from July 1, 2017 until June 30, 2018 and the SUNZ program covered corporate and worksite employees since July 1, 2018.
The following table summarizes the workers’ compensation deposit for the years ended August 31, 2019 and 2018:
|
|
Everest
Program
|
|
|
SUNZ
Program
|
|
|
Total
|
|
Workers’ Comp Deposit at August
31, 2017
|
|
$
|
2,335,000
|
|
|
$
|
-
|
|
|
$
|
2,335,000
|
|
Premiums paid
|
|
|
(819,000
|
)
|
|
|
-
|
|
|
|
(819,000
|
)
|
Paid in deposits
|
|
|
-
|
|
|
|
2,386,000
|
|
|
|
2,386,000
|
|
Claim losses
|
|
|
-
|
|
|
|
(28,000
|
)
|
|
|
(28,000
|
)
|
Workers’ Comp Deposit at August
31, 2018
|
|
$
|
1,516,000
|
|
|
|
2,358,000
|
|
|
$
|
3,874,000
|
|
Premiums paid
|
|
|
(144,000
|
)
|
|
|
-
|
|
|
|
(144,000
|
)
|
Paid in deposits
|
|
|
-
|
|
|
|
7,730,000
|
|
|
|
7,730,000
|
|
Claim losses
|
|
|
(149,000
|
)
|
|
|
(1,850,000
|
)
|
|
|
(1,999,000
|
)
|
Deposit refund
|
|
|
(1,223,000
|
)
|
|
|
-
|
|
|
|
(1,223,000
|
)
|
Workers’ Comp Deposit at August
31, 2019
|
|
$
|
-
|
|
|
|
8,238,000
|
|
|
$
|
8,238,000
|
|
Less Current Amount
|
|
|
-
|
|
|
|
(1,957,000
|
)
|
|
|
(1,957,000
|
)
|
Long Term Balance at August 31, 2019
|
|
$
|
-
|
|
|
|
6,281,000
|
|
|
$
|
6,281,000
|
|
The following reconciles the
workers comp deposits for continuing and discontinued operations as of August 31, 2018 and 2019:
|
|
Everest
Program
|
|
|
SUNZ
Program
|
|
|
Total
|
|
Workers’ comp deposit at August 31, 2018
|
|
$
|
1,516,000
|
|
|
$
|
2,358,000
|
|
|
$
|
3,874,000
|
|
Workers’ comp deposit from discontinued
operations (See Note 3)
|
|
|
(1,441,000
|
)
|
|
|
(2,240,000
|
)
|
|
|
(3,681,000
|
)
|
Workers’ comp deposit from continuing
operations
|
|
|
75,000
|
|
|
|
118,000
|
|
|
|
193,000
|
|
Less Current Amount
|
|
|
(32,000
|
)
|
|
|
(51,000
|
)
|
|
|
(83,000
|
)
|
Long Term Balance at August 31, 2018
|
|
$
|
43,000
|
|
|
$
|
67,000
|
|
|
$
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Everest
Program
|
|
|
SUNZ
Program
|
|
|
Total
|
|
Workers’ comp deposit at August 31, 2019
|
|
$
|
-
|
|
|
$
|
8,238,000
|
|
|
$
|
8,238,000
|
|
Workers’ comp deposit from discontinued
operations (See Note 3)
|
|
|
-
|
|
|
|
(7,249,000
|
)
|
|
|
(7,249,000
|
)
|
Workers’ comp deposit from continuing
operations
|
|
|
-
|
|
|
|
989,000
|
|
|
|
989,000
|
|
Less Current Amount
|
|
|
-
|
|
|
|
(235,000
|
)
|
|
|
(235,000
|
)
|
Long Term Balance at August 31, 2019
|
|
$
|
-
|
|
|
$
|
754,000
|
|
|
$
|
754,000
|
|
The following table summarizes the
accrued workers’ compensation liability for the years ended August 31, 2019 and 2018:
|
|
Everest
Program
|
|
|
SUNZ
Program
|
|
|
Total
|
|
Workers’ Comp Liability at August
31, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Claim loss development
|
|
|
572,000
|
|
|
|
662,000
|
|
|
|
1,234,000
|
|
Paid in losses
|
|
|
-
|
|
|
|
(28,000
|
)
|
|
|
(28,000
|
)
|
Workers’ Comp Liability at August
31, 2018
|
|
|
572,000
|
|
|
|
634,000
|
|
|
|
1,206,000
|
|
Claim loss development
|
|
|
-
|
|
|
|
7,129,000
|
|
|
|
7,129,000
|
|
Paid in losses
|
|
|
(149,000
|
)
|
|
|
(1,850,000
|
)
|
|
|
(1,999,000
|
)
|
Workers’ Comp Liability at August
31, 2019
|
|
|
423,000
|
|
|
|
5,913,000
|
|
|
|
6,336,000
|
|
Less Current Amount
|
|
|
(159,000
|
)
|
|
|
(1,798,000
|
)
|
|
|
(1,957,000
|
)
|
Long Term Balance at August 31, 2019
|
|
$
|
264,000
|
|
|
|
4,115,000
|
|
|
$
|
4,379,000
|
|
The following reconciles the workers
comp liabilities for continuing and discontinued operations as of August 31, 2018 and 2019:
|
|
Everest
Program
|
|
|
SUNZ
Program
|
|
|
Total
|
|
Workers’ comp liability at August 31, 2018
|
|
$
|
572,000
|
|
|
|
$634,000
|
|
|
$
|
1,206,000
|
|
Workers’ comp liability from discontinued
operations (See Note 3)
|
|
|
(544,000
|
)
|
|
|
(602,000
|
)
|
|
|
(1,145,000
|
)
|
Workers’ comp liability from continuing
operations
|
|
|
28,000
|
|
|
|
32,000
|
|
|
|
60,000
|
|
Less Current Amount
|
|
|
(7,000
|
)
|
|
|
(8,000
|
)
|
|
|
(15,000
|
)
|
Long Term Balance at August 31, 2018
|
|
$
|
21,000
|
|
|
|
24,000
|
|
|
$
|
45,000
|
|
|
|
Everest
Program
|
|
|
SUNZ
Program
|
|
|
Total
|
|
Workers’ comp liability at August 31, 2019
|
|
$
|
423,000
|
|
|
|
$5,913,000
|
|
|
$
|
6,336,000
|
|
Workers’ comp liability from discontinued
operations (See Note 3)
|
|
|
(372,000
|
)
|
|
|
(5,204,000
|
)
|
|
|
(5,576,000
|
)
|
Workers’ comp liability from continuing
operations
|
|
|
51,000
|
|
|
|
709,000
|
|
|
|
760,000
|
|
Less Current Amount
|
|
|
(16,000
|
)
|
|
|
(219,000
|
)
|
|
|
(235,000
|
)
|
Long Term Balance at August 31, 2019
|
|
$
|
35,000
|
|
|
|
490,000
|
|
|
$
|
525,000
|
|
Note 8: Accrued Payroll
and Related Liabilities
Accrued payroll liabilities consisted
of the following at August 31, 2019 and 2018:
|
|
August 31,
2019
|
|
|
August 31,
2018
|
|
Accrued Payroll
|
|
$
|
899,000
|
|
|
$
|
459,000
|
|
Accrued Payroll Taxes
|
|
|
1,297,000
|
|
|
|
230,000
|
|
Corporate employee accrued paid time
off
|
|
|
363,000
|
|
|
|
287,000
|
|
Accrued Payroll and related liabilities
|
|
$
|
2,559,000
|
|
|
$
|
976,000
|
|
Accrued payroll and accrued
payroll taxes represent payroll liabilities associated with its client worksite employees as well as corporate employees of the
Company.
Note 9: Senior Secured
Convertible Notes Payable (in default)
The Company has issued three
series of senior secured convertible notes payable. In general, each series is convertible into common shares of the Company.
Senior Secured Convertible Notes Payable consist of the following:
|
|
August
31,
|
|
|
August
31,
|
|
|
|
2019
|
|
|
2018
|
|
Senior
Secured Convertible notes, Principal
|
|
$
|
6,808,000
|
|
|
$
|
10,000,000
|
|
Less
debt discount and deferred financing costs
|
|
|
(3,457,000
|
)
|
|
|
(3,829,000
|
)
|
Total
outstanding convertible notes, net
|
|
$
|
3,351,000
|
|
|
$
|
6,171,000
|
|
Less
current portion of convertible notes payable
|
|
|
3,351,000
|
)
|
|
|
(6,171,000
|
)
|
Long-term
convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table rolls
forward the Convertible Notes Payable balances from August 31, 2018 to August 31, 2019:
|
|
Gross
Principal
|
|
|
Deferred
Financing
Costs
|
|
|
Note
Discount
|
|
|
Net
|
|
Balance at August 31, 2018
|
|
$
|
10,000,000
|
|
|
$
|
(617,000
|
)
|
|
$
|
(3,212,000
|
)
|
|
$
|
6,171,000
|
|
Issuance of Notes Payable
|
|
|
5,639,000
|
|
|
|
(485,000
|
)
|
|
|
(4,750,000
|
)
|
|
|
404,000
|
|
Conversion of Principal into Equity
|
|
|
(8,395,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,395,000
|
)
|
Amortization of Interest Expense
|
|
|
-
|
|
|
|
758,000
|
|
|
|
4,849,000
|
|
|
|
5,607,000
|
|
Repayment of Principal in cash
|
|
|
(436,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(436,000
|
)
|
Balance at August 31, 2019
|
|
$
|
6,808,000
|
|
|
$
|
(344,000
|
)
|
|
$
|
(3,113,000
|
)
|
|
$
|
3,351,000
|
|
Less Current Amount
|
|
|
(6,808,000
|
)
|
|
|
344,000
|
|
|
|
3,113,000
|
|
|
|
(3,351,000
|
)
|
Long Term Balance at August 31, 2019
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table outlines the gross
principal balance rollforward for each series from August 31, 2018 to August 31, 2019. Each series is described in further detail
below.
|
|
June 2018
Notes
|
|
|
December
2018
Notes
|
|
|
March 2019
Notes
|
|
|
Total
|
|
Gross Balance at August 31, 2018
|
|
$
|
10,000,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,000,000
|
|
Issuance of Notes Payable
|
|
|
-
|
|
|
|
889,000
|
|
|
|
4,750,000
|
|
|
|
5,639,000
|
|
Repayment of Principal in cash
|
|
|
(436,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(436,000
|
)
|
Conversion of Principal into Equity
|
|
|
(8,098,000
|
)
|
|
|
(22,000
|
)
|
|
|
(275,000
|
)
|
|
|
(8,395,000
|
)
|
Gross Balance at August 31, 2019
|
|
$
|
1,466,000
|
|
|
$
|
867,000
|
|
|
$
|
4,475,000
|
|
|
$
|
6,808,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Discount and Debt Issuance Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
|
|
|
(27,000
|
)
|
|
|
-
|
|
|
|
(317,000
|
)
|
|
|
(344,000
|
)
|
Deferred Financing Costs
|
|
|
(5,000
|
)
|
|
|
-
|
|
|
|
(3,108,000
|
)
|
|
|
(3,113,000
|
)
|
Carrying Balance at August 31, 2019
|
|
$
|
1,434,000
|
|
|
$
|
867,000
|
|
|
$
|
1,050,000
|
|
|
$
|
3,351,000
|
|
Less Current Amount
|
|
|
(1,434,000
|
)
|
|
|
(867,000
|
)
|
|
|
(1,050,000
|
)
|
|
|
(3,351,000
|
)
|
Long Term Balance at August 31, 2019
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
During the years ended August 31, 2019
and 2018 the Company amortized $5,607,000 and $951,000, respectively, to interest expense from the combined amortization of deferred
financing costs and note discounts recorded at issuance for the June 2018 and March 2019 Notes.
During the year ended August
31, 2019, investors converted $8,395,000 of principal and $509,000 of interest expense into approximately 172,500 shares of common
stock of the company. The Company has been converting the convertible notes in its shares of common stock at a fifteen percent
(15%) discount to the lowest volume weighted average price (“VWAP”) whereas the terms of the agreement state that
such discount to the original conversion price of $99.60 should have been initiated on or after the maturity date of the convertible
notes or September 4, 2019. The accounting standards require the recognition through earnings of an inducement charge equal to
the fair value of the consideration delivered in excess of the consideration issuable under the original conversion terms. Included
in the 172.500 shares issued for the 2019 conversions were approximately 67,500 shares valued at $3.9 million on the date of issuance
at fair value and issued related to consideration delivered in excess of the consideration issuable under the original conversion
terms. This resulted in a non-cash charge of $3.9 million for the year ended August 31, 2019 recorded as loss on debt extinguishment
in the statement of operations. There were no conversions of convertible notes during fiscal 2018.
On June 3, 2019, one of its
institutional investors filed claim in the United States District Court, Southern District of New York seeking preliminary injunctive
relief against the Company to immediately deliver one million shares of the Company’s common stock and to honor all future
conversion requests duly submitted in accordance with the terms of the notes.
On June 7, 2019, and June
10, 2019, the Company received notices from two of its institutional investors that the Company was in default due to missed principal
and interest payments under the terms of the Notes. On June 27, 2019, the Company reported that is has informed its convertible
note holders that it will cease honoring conversion requests of the 2018 and 2019 Notes forcing a voluntary default of these instruments.
The Company is pursuing a renegotiation and amendment of these instruments in an effort to avoid litigation. The Company is requesting
to amend the terms of the notes to remove the conversion features and revise the cash amortization, among other items.
See also Note 14 for litigation
related to the Convertible Notes Payable.
From June 10, 2019 until
year end, the Company has accrued interest at the default interest rate for all note series representing approximately $0.3 million
of additional interest payable. The Company has accrued an additional $1.8 million to accrued default liabilities as of August
31, 2019 and charged to a loss on note default on the statement of operations for the year ending August 31, 2019, representing
potential liability associated with the default of the notes payable for default premium, potential liquidating damages, and other
costs associated with the notes in default.
June 2018 Senior Convertible
Notes (in default)
On June 4, 2018, the Company
issued $10 million of senior convertible notes (“June 2018 Notes”) to institutional investors with an original issue
discount of $1 million for a purchase price of $9 million. The notes bear interest at a rate of 8%, with one year’s interest
guaranteed, and have a maturity date of September 4, 2019. The Notes remain outstanding as of November 22, 2019. The company received
cash proceeds of $8.4 million representing the $9 million purchase price, reduced by approximately $0.6 million of financing costs
directly related to the issuance of the June 2018 Notes.
Concurrent with the sale
of the June 2018 Notes, the Company granted warrants to purchase 25,100 shares of common stock to its institutional investors
and warrants to purchase 5,422 shares of common stock to its investment banker as placement fees, at an exercise price of $99.60,
subject to down round price protection adjustment, as defined in the agreements. The warrants were valued at the date of issuance
using the lattice-based option pricing model at $86.80 per warrant. Both the June 2018 Notes and the related warrants were issued
with registration rights, whereby the Company was obligated to register the shares underlying the June 2018 Notes or was subject
to registration rights penalties. During the year ended August 31, 2018, the Company accrued a loss of $3,500,000 for penalties
associated with the registration rights penalties. With the issuance of the December 2018 Notes described below, the Company reduced
the loss accrual to $889,000 and recorded a gain of $2,611,000 to the statement of operations during the year ended August 31,
2019. Combined with the $1.8 million loss described above for the 2019 default loss estimate resulted in a net gain of $811,000
for the year ended August 31, 2019.
The terms of June 2018 notes are summarized
as follows:
·
|
Term:
September 4, 2019;
|
·
|
Coupon:
8%; Default interest rate: 18%;
|
·
|
Convertible
at the option of the holder at any time;
|
·
|
Conversion price is
initially set at $99.60 but subject to down round price protection. After maturity, the conversion
price will be set subsequently at the lesser of the then conversion price and 85% of the volume
weighted average price for the trading date immediately prior to the application conversion
date; and
|
·
|
Monthly
amortization of principal either in cash at a 10% premium or in stock, subject to equity conditions, at a 15% discount to
the lowest volume weighted average price, at the option of the Company.
|
Debt issuance costs
The Company paid approximately $0.8
million of incremental issuance costs directly attributable to the issuance of the senior secured convertible notes. These costs
were recorded as a discount to the convertible notes and they are amortized straight line over the term to interest expense, which
approximates the effective interest method.
Debt Discount
During the year ended August
31, 2018, the Company recorded an aggregate debt discount of $4.1 million for the June 2018 Notes. The debt discount includes
an initial $1 million resulting from the original issuance discount on the convertible notes and an initial $2.2 million resulting
from the fair value of the warrants and $0.9 million resulting from the beneficial conversion feature on the non-detachable conversion
option. The Company evaluated the warrants and determined that the warrants did not qualify for derivative accounting as the warrants
contained a set exercise price with an adjustment only based upon customary items including stock dividends and splits, subsequent
rights offering and pro rata distributions and subject to down round price protection. The Company reviewed the guidance under
ASC 470 Debt and allocated the proceeds from the sale of a debt instrument with stock purchase warrants based on the relative
fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. As a result, the Company
allocated $2.2 million to the warrants and was recorded as a debt discount with an offset to additional paid in capital in the
accompanying financial statements.
The Company valued the issued
warrants using the Lattice pricing model at $52.80 per warrant with the following assumptions: dividend yield of zero, years to
maturity of 5 years, risk free rates of 2.78 percent, and annualized volatility of 122%. The debt discount is amortized straight-line
over the stated life of the obligation, which approximates the effective interest method. Any conversions results in a pro-rata
acceleration of unamortized debt discount and debt issuance costs to interest expense on the date of conversion.
Event of default – August
2018
At the June 2018 issuance, the Company
executed registration rights agreements with each of its institutional investors. These registration rights agreements require,
among other things, that the initial registration statement should be (a) filed within 30 days of June 4, 2018, and (b) declared
effective within 90 days of June 4, 2018. The Company’s registration statement was filed on October 1, 2018 and it was declared
effective by the SEC on October 29, 2018; thus, both the filing and effectiveness deadlines were missed.
The Company recorded in its consolidated
financial statements the mandatory default amount as stipulated in the convertible note agreements. As of August 31, 2018, the
Company recorded approximately $3.5 million, which is reported under current liabilities in its consolidated statement of operations,
and a further $0.6 million of accrued interest.
On December 20, 2018, the Company entered
into settlement agreements with its institutional investors, which resolved all disputes relating to technical defaults by the
Company in failing to meet deadlines for filing a registration statement and for having a registration statement effective by
the SEC. As a result of such settlement, the Company increased the principal amount of the convertible notes by issuing $889,000
of December 2018 Notes in full settlement of the previously accrued $3.5 million default. The Company accrued an additional $1.8
million in liquidating damages and recognized an $811,000 gain on recovery of these accrued penalties.
December 2018 Notes (in default)
On December 20, 2018, the
Company entered into settlement agreements with its institutional investors, which resolved all disputes relating to technical
defaults by the Company in failing to meet deadlines for filing a registration statement and for having a registration statement
effective by the SEC. As a result of such settlement, the Company issued additional notes (“December 2018 Notes” in
the amount of $889,000 on substantially the same terms as the June 2018 Notes except that the stated interest rate was 0% and
the term of the December 2018 Notes was December 31, 2019. There was no recorded discount or deferred financing costs for the
December 2018 Notes issued.
March 2019 Bridge Financing (in
default)
On March 12, 2019, the Company
issued convertible notes in the principal amount of $4,750,000 with an original issue discount of $1 million for a purchase price
of $3,750,000 to certain of its existing institutional investors (“March 2019 Notes”) and mature on September 12,
2020. The Company received net cash proceeds of $3.3 million to be used for mobile application development and working capital.
The Company incurred approximately $0.5 million of debt issuance costs that are incremental costs directly related to the issuance
of the bridge financing senior convertible notes payable.
The terms of the March 2019 convertible
notes are summarized as follows:
|
·
|
Term:
September 12, 2020;
|
|
·
|
Coupon:
0%;
|
|
·
|
Default
interest rate: 18%;
|
|
·
|
Original
issue discount: $1,000,000;
|
|
·
|
Convertible
at the option of the holder at any time;
|
|
·
|
Initial
conversion price is set at $66.80 but subject to down round price protection;
|
|
·
|
Alternate
conversion price at the greater of the floor price of $12.40 and the lower of the conversion
price in effect and alternate conversion percentage of the lowest VWAP of the common
share during the 10 consecutive trading day prior to the applicable conversion date;
|
|
·
|
Alternate
conversion percentage is 75% if the alternate conversion is an alternate conversion event of default as a result of bankruptcy
or 80% for all alternate event of default conversion or 85% is such alternate conversion is an alternate optional conversion;
|
|
·
|
Redemption
at the option of the Company at 15% premium at any time after 45 days from March 12, 2019.
|
In connection with the note,
the Company issued 74,390 warrants (“March 2019 Warrants”), exercisable at $70.00, with a five-year term. The Company
evaluated the warrants issued and determined that they were derivative liabilities. The Company estimated the fair value of the
warrants using the Lattice pricing model. The key valuation assumptions used consist, in part, of the price of the Company’s
common stock of $63.60, a risk-free interest rate of 2.49% and expected volatility of the Company’s common stock of 122%,
resulting in a fair value of $3,917,000.
The Company estimated the aggregate
fair value of the conversion feature derivative embedded in the debenture (“March 2019 Conversion Feature”) at issuance
at $2,421,000 based on weighted probabilities of assumptions using the Lattice pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock of $63.60, a risk-free interest rate of 2.49% and expected
volatility of the Company’s common stock of 122%, and the various estimated reset exercise prices weighted by probability.
This resulted in the calculated fair
value of the debt discount resulted from bifurcating the warrants and the conversion feature being greater than the face amount
of the debt and the original issue discount, and the excess amount of $2.6 million was immediately expensed as financing costs.
March 2019 Derivative Liabilities:
Both the March 2019 Warrants and the
March 2019 Conversion Feature are accounted for as derivative liabilities. As such, each derivative is marked to market at each
reporting date. Prior to March 2019, the Company had no derivative liabilities. The following table provides the activity for
the Company’s derivative liabilities for the year ended August 31, 2019.
|
|
March
2019
Conversion
Feature
|
|
|
March
2019
Warrant
Liability
|
|
|
Total
|
|
Balance at August 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Initial recognition
|
|
|
2,421,000
|
|
|
|
3,917,000
|
|
|
|
6,338,000
|
|
Reclassification to equity
|
|
|
(13,000
|
)
|
|
|
|
|
|
|
(13,000
|
)
|
Change in fair value
|
|
|
444,000
|
|
|
|
(3,013,000
|
)
|
|
|
(2,569,000
|
)
|
Balance at August 31, 2019
|
|
$
|
2,852,000
|
|
|
$
|
904,000
|
|
|
$
|
3,756,000
|
|
The Company used the following assumptions
to estimate fair value of the derivatives as of August 31, 2019, using the default rate of 75% of market price as a conversion
price:
|
|
March 2019
Conversion
Feature
|
|
|
March 2019
Warrant
Liability
|
|
Risk free rate
|
|
|
1.76
|
%
|
|
|
1.39
|
%
|
Market price per share
|
|
$
|
19.04
|
|
|
$
|
19.04
|
|
Life of instrument in years
|
|
|
1.04
|
|
|
|
4.47
|
|
Volatility
|
|
|
100
|
%
|
|
|
119
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Note 10: Stockholders’ Equity
Preferred Stock
In September 2016, the Company
issued options to purchase preferred stock at $0.0001 per share. This issuance was approved by its shareholders. The number of
options is equal to the lesser of (a) the number of shares of common stock held by such shareholder on September 28, 2016, which
accounts for approximately 25.6 million shares, or (b) the number of shares of common stock held by such shareholder on date of
the shareholder’s exercise of the aforesaid option. The preferred stock that is the subject of such contingent option provides
a right to elect a majority of the directors on the Board of Directors of the Corporation and does not include any rights to dividends,
conversion to shares of common stock, or preference upon liquidation of the Corporation. The contingent option is exercisable
only upon the acquisition of a 20% or greater voting interest in the Corporation by a party other than the founding shareholders,
or prior to any proposed merger, consolidation (in which the Corporation’s common stock is changed or exchanged), or sale
of at least 50% of the Corporation’s assets or earning power (other than a reincorporation). The right to exercise the option
terminates on December 31, 2023.
Common Shares
During the year ended August 31, 2019,
the Company issued 6,688 shares of common stock following
the exercise of warrants and received gross proceeds of $660,000. During the year ended August 31, 2018, the Company issued 938
shares of common stock following the exercise of warrants with an exercise price of $80.00 and received gross proceeds of $75,000.
As described more fully in Note 9,
during the year ended August 31, 2019, the Company issued 174,081
shares of common stock in satisfaction of principal and accrued interest following conversion of convertible notes into shares
of common stock.
Issuances of common shares
to directors for services
The Company awards shares
of common stock to its independent directors under its 2017 Stock Option / Stock Issuance Plan (the “Plan”) as compensation
for their services as directors. These awards are typically valued at market value on the date of the award. For the year ended
August 31, 2019 the Company issued 4,985 shares valued at $263,000 to its directors.
Treasury Stock
In June 2019, the Company
advanced $325,000 in cash to Steven Holmes, a significant shareholder and service provider to the Company. In July 2019, Mr. Holmes
repaid the advance by returning 13,954 shares of Mr. Holmes common share holdings, valued at $23.28 per share in full settlement
of the advance and which was the market value on the date of settlement. The shares were retired in fiscal 2019 in accordance
with company policy. See also Note 12.
Common Stock Warrants
During the year ended August
31, 2018, the Company issued warrants to purchase 30,523
shares of common stock to investors in connection with the senior secured convertible notes, with exercise price of $99.60 per
warrant with expiration date of 5 years and subject to down round price protection and reset the warrant price to $70.00 in 2019
concurrent with the March 2019 Note financing warrant issuance. The Company valued the warrants at issuance using the Lattice
option-pricing model with the following assumptions: dividend yield of zero, years to maturity of 5 years, risk free rates of
2.78 percent, and annualized volatility of 120%. The Company valued the revised warrants on March 12, 2019 using the Lattice option-pricing
model with the following assumptions: dividend yield of zero, years to maturity of 4.2 years, risk free rates of 2.41 percent,
and annualized volatility of 122%.
During the year ended August 31, 2019,
the Company issued warrants to purchase 74,390 shares
of common stock in connection with the March 2019 Notes, with exercise price of $70.00 per warrant with expiration date of 5 years.
The Company valued the issued warrants using the Black-Scholes option-pricing model at $52.80 per warrant with the following assumptions:
dividend yield of zero, years to maturity of 5 years, risk free rates of 2.49%, and annualized volatility of 122%. The fair value
of the warrants issued were incorporated into the financing loss and March 2019 Notes discount described in Note 9 above.
The following tables summarize
the Company’s warrants outstanding as of August 31, 2019 and 2018:
|
|
Number of
shares
|
|
|
Weighted
average
remaining
life (years)
|
|
|
Weighted
average
exercise price
|
|
Warrants outstanding, August 31, 2017
|
|
|
64,887
|
|
|
|
1.5
|
|
|
$
|
119.60
|
|
Issued
|
|
|
30,526
|
|
|
|
5.3
|
|
|
$
|
99.60
|
|
(Exercised)
|
|
|
(938
|
)
|
|
|
1.2
|
|
|
|
80.00
|
|
(Cancelled)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Expired)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding, August 31, 2018
|
|
|
94,475
|
|
|
|
2.13
|
|
|
$
|
113.60
|
|
Issued
|
|
|
74,390
|
|
|
|
5.0
|
|
|
$
|
70
|
|
(Exercised)
|
|
|
(6,688
|
)
|
|
|
0.45
|
|
|
|
98.80
|
|
(Cancelled)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Expired)
|
|
|
(54,761
|
)
|
|
|
-
|
|
|
|
114.80
|
|
Warrants outstanding, August 31, 2019
|
|
|
107,416
|
|
|
|
4.42
|
|
|
$
|
74.80
|
|
The following table summarizes information
about warrants outstanding as of August 31, 2019:
|
|
Exercise
price
|
|
|
Warrants
Outstanding
|
|
|
Weighted
average
life of
outstanding
warrants in
years
|
|
March 2019 Notes Warrants
|
|
$
|
70.00
|
|
|
|
74,390
|
|
|
|
4.6
|
|
June 2018 Notes Warrants
|
|
$
|
70.00
|
|
|
|
30,526
|
|
|
|
3.8
|
|
2017 PIPE Warrants
|
|
$
|
276.00
|
|
|
|
2,500
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
107,416
|
|
|
|
4.4
|
|
Note 11: Share based compensation
In March 2017, the Company
adopted the 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 (“Options”) or shares of common stock (“share grants”).
The Company has reserved a total of 250,000 shares of common stock for issuance under the Plan as of August 31, 2019.
Of these shares, as of August 31, 2019, approximately 82,500
options and 7,500 shares have been designated by the Board of Directors for issuance and approximately 32,500 of the options have
been forfeited and returned to the option pool under the Plan due to employment terminations. As of August 31, 2019, approximately
195,000 shares remain issuable of which 167,500 are eligible to be issued as ISOs and 195,000 are eligible to be issued as either
share grants or NQ stock options.
During 2018 and 2019 both common share
grants and stock options were issued to employees and non-officer directors of the Company. Shares issued for services for 2019
and 2018 consist solely of grants to non-officer directors.
For all options granted thus far to
August 31, 2019, 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, and the balance vest in equal monthly installments over the next
36 months of service. All options granted to date have a ten year term.
Share 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 and the following assumptions:
|
|
2019
|
|
|
2018
|
|
Expected life
|
|
4.0
years
|
|
|
4.0
years
|
|
Estimated
volatility
|
|
|
119
|
%
|
|
|
121
|
%
|
Risk-free
interest rate
|
|
|
1.70%-2.90
|
%
|
|
|
2.01%-2.83
|
%
|
Dividends
|
|
|
-
|
|
|
|
-
|
|
Estimates of fair value are not intended
to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events
are not indicative of the reasonableness of the original estimates of fair value made by us.
Following the adoption of Accounting
Standards Update ASU 2016-09, the Company elected to account for forfeitures 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.
Share based compensation expense consisted
of the following for the years ended August 31, 2019 and 2018:
|
|
Year ended
August 31,
2019
|
|
|
Year ended
August 31,
2018
|
|
Shares
issued for services
|
|
$
|
263,000
|
|
|
$
|
163,000
|
|
Employee
stock options
|
|
|
369,000
|
|
|
|
200,000
|
|
Balance
at August 31, 2019
|
|
$
|
632,000
|
|
|
$
|
363,000
|
|
At August 31, 2019, the total unrecognized
deferred share-based compensation expected to be recognized over the remaining weighted average vesting periods of 1.7 years for
outstanding grants was $1.6 million.
A summary of option activity was as
follows:
|
|
Options Outstanding
and Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
Balance, August 31, 2017
|
|
|
19,750
|
|
|
|
9.58
|
|
|
$
|
184.80
|
|
Granted
|
|
|
23,719
|
|
|
|
10.0
|
|
|
$
|
105.60
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Forfeited
|
|
|
(9,750
|
)
|
|
|
8.49
|
|
|
$
|
154.80
|
|
Balance, August 31, 2018
|
|
|
33,719
|
|
|
|
9.77
|
|
|
$
|
138.00
|
|
Granted
|
|
|
36,073
|
|
|
|
10.0
|
|
|
$
|
63.60
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Forfeited
|
|
|
(19,042
|
)
|
|
|
8.06
|
|
|
$
|
111.20
|
|
Balance at August 31, 2019
|
|
|
50,750
|
|
|
|
8.95
|
|
|
$
|
95.20
|
|
Options outstanding as of August 31,
2019 and 2018 had aggregate intrinsic value of $575,000 and $1,000 respectively.
Option vesting activity was as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Options Vested
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
Balance, August 31, 2017
|
|
|
--
|
|
|
|
--
|
|
|
$
|
-
|
|
Vested
|
|
|
5,364
|
|
|
|
8.83
|
|
|
$
|
184.80
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Forfeited
|
|
|
(850
|
)
|
|
|
8.54
|
|
|
$
|
177.20
|
|
Balance, August 31, 2018
|
|
|
4,514
|
|
|
|
8.57
|
|
|
$
|
182.40
|
|
Vested
|
|
|
7,410
|
|
|
|
–
|
|
|
$
|
137.20
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Forfeited
|
|
|
(1,633
|
)
|
|
|
8.10
|
|
|
$
|
164.40
|
|
Balance at August 31, 2019
|
|
|
10,291
|
|
|
|
8.04
|
|
|
$
|
152.80
|
|
The following table summarizes information
about stock options outstanding and vested at August 31, 2019:
|
|
Options Outstanding
and Exercisable
|
|
|
|
|
|
Options Vested
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Exercise Prices
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
$18.80-40.00
|
|
|
8,125
|
|
|
|
9.77
|
|
|
$
|
22.40
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
$40.01–$80.00
|
|
|
15,761
|
|
|
|
9.59
|
|
|
$
|
51.60
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
$80.01–$120.00
|
|
|
12,864
|
|
|
|
8.67
|
|
|
$
|
104.00
|
|
|
|
4,202
|
|
|
|
8.63
|
|
|
$
|
105.20
|
|
$120.01–$160.00
|
|
|
12,625
|
|
|
|
8.04
|
|
|
$
|
155.20
|
|
|
|
5,373
|
|
|
|
7.60
|
|
|
$
|
158.40
|
|
$160.01-$391.60
|
|
|
1,375
|
|
|
|
7.88
|
|
|
$
|
391.60
|
|
|
|
716
|
|
|
|
7.88
|
|
|
$
|
391.60
|
|
|
|
|
50,750
|
|
|
|
8.95
|
|
|
$
|
95.20
|
|
|
|
10,291
|
|
|
|
8.04
|
|
|
$
|
152.80
|
|
Note 12: Related Parties
Scott Absher, Chief Executive Officer,
Director, and a significant shareholder of the Company became a Company employee on April 1, 2016. During the year ended August
31, 2019 and 2018, the Company recorded $750,000 and $750,000, respectively as compensation for his role as CEO in accordance
with his employment agreement. On March 15, 2017, Scott Absher was granted 1,250 options to purchase common stock as part of the
2017 Plan, exercisable on March 15, 2017, with an expiration date of March 14, 2027, at an exercise price of $160.00.
J. Stephan Holmes is an advisor
to and a significant shareholder of the Company. The Company incurred $720,000 and $700,000 in such professional fees to J. Stephen
Holmes for management consulting services for the year ended August 31, 2019 and 2018, respectively and recorded in professional
fees on the statement of operations. On March 15, 2017, Stephan Holmes was granted 1,250 options to purchase common stock as part
of the 2017 Plan, exercisable on March 15, 2017, with expiration date of March 14, 2027, at an exercise price of $160.00.
In June 2019 the Company
advanced Mr. Holmes $325,000 in cash and recorded the advance as a short term note receivable. In July 2019, Mr. Holmes provided
13,954 shares of common stock of the Company valued at $23.20 per share in satisfaction of the cash advance.
On May 15, 2017, Mark Absher, Director,
In-House Counsel, and brother of Scott Absher, was granted 1,250 options to purchase common stock as part of the 2017 Plan, exercisable
on March 15, 2017 with expiration date of March 14, 2027, at an exercise price of $160.00. On May 10, 2018, Mark Absher was also
granted an additional 1,250 options to purchase common stock at an exercise price of $100.00 and exercisable in May 2018 with
expiration date in May 2028. During the year ended August 31, 2019 and 2018, the Company recorded $275,000 and $300,000, respectively
as compensation for his role as Registered In-House Counsel in accordance with his employment agreement. Mark Absher resigned
in February 2019 and all options granted were cancelled during the fiscal year ending August 31, 2019.
For the year ended August
31, 2019 the following issuances were made to the Company’s directors:
|
|
Date Issued
|
|
Shares
|
|
|
Issue Price
per Share
|
|
|
Value
|
|
Ken Weaver
|
|
August 2019
|
|
|
1,995
|
|
|
$
|
18.80
|
(A)
|
|
$
|
37,500
|
|
Ken Weaver
|
|
May 2019
|
|
|
1,202
|
|
|
$
|
31.20
|
(B)
|
|
|
37,500
|
|
Ken Weaver
|
|
November 2018
|
|
|
308
|
|
|
$
|
122.00
|
(C)
|
|
|
37,500
|
|
Sean Higgins
|
|
September 2018
|
|
|
329
|
|
|
$
|
114.00
|
(D)
|
|
|
37,500
|
|
Sean Higgins
|
|
April 2019
|
|
|
412
|
|
|
$
|
91.20
|
(E)
|
|
|
37,500
|
|
Whitney White
|
|
September 2018
|
|
|
329
|
|
|
$
|
114.00
|
(D)
|
|
|
37,500
|
|
Whitney White
|
|
April 2019
|
|
|
412
|
|
|
$
|
91.20
|
(E)
|
|
|
37,500
|
|
|
|
|
|
|
4,987
|
|
|
|
|
|
$
|
262,500
|
|
(A)
|
Represents share
grant for services performed between June 1, 2019 and November 30, 2019 and awarded in August 2019.
|
|
|
(B)
|
Represents share
grant for services performed between December 1, 2019 and May 31, 2019 and awarded in May 2019.
|
|
|
(C)
|
Represents share
grant for services performed between June 1, 2018 and November 30, 2018 and awarded by the Board of Directors in August 2018.
|
|
|
(D)
|
On September 28, 2017
the Company awarded two directors 658 shares of common stock of which 50% vested on the date
marking their six-month service anniversary and 50% for the remaining service through November
28, 2018.
|
|
|
(E)
|
Represents share
grant for services performed between September 29, 2018 and March 28, 2019 and awarded in March 2019
|
Note 13: Income Taxes
Current income taxes are based upon
the year’s income taxable for federal and state tax reporting purposes. Deferred income taxes (benefits) are provided for
certain income and expenses, which are recognized in different periods for tax and financial reporting purposes.
Deferred tax assets and liabilities
are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are
expected to affect taxable income. The Company’s deferred income taxes arise from the temporary differences between financial
statement and income tax recognition of net operating losses. These loss carryovers would be limited under the Internal Revenue
Code should a significant change in ownership occur within a three-year period.
As of August 31, 2019, and
2018, the Company had cumulative net operating loss carryforwards of approximately $30,686,000 and $26,673,000 respectively, which
begin to expire in 2029. The deferred tax assets primarily comprise net operating loss carryforwards and other net temporary deductible
differences such as stock-based compensation, deferred rent, depreciation and workers’ compensation accrual. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected
future taxable income and tax planning strategies in making this assessment. Based on management’s analysis, they concluded
that it was more likely than not that the deferred tax asset would not be realized. Therefore, the Company established a full
valuation allowance against the deferred tax assets. The change in the valuation allowance in 2019 and 2018 was approximately
$3,359,000 and $3,163,000, respectively.
Significant components of the net deferred
tax assets as reflected on the Consolidated Balance Sheets are as follows:
|
|
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
in thousands
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(122,000
|
)
|
|
$
|
(21,000
|
)
|
Software development costs
|
|
|
(845,000
|
)
|
|
|
(835,000
|
)
|
Total deferred tax liabilities
|
|
|
(967,000
|
)
|
|
|
(856,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
|
7,000,000
|
|
|
|
7,653,000
|
|
Business interest
|
|
|
2,539,000
|
|
|
|
-
|
|
Workers’ compensation accruals
|
|
|
1,763,000
|
|
|
|
360,000
|
|
Stock-based compensation
|
|
|
354,000
|
|
|
|
172,000
|
|
Deferred rent
|
|
|
15,000
|
|
|
|
16,000
|
|
Total deferred tax assets
|
|
|
11,671,000
|
|
|
|
8,201,000
|
|
Valuation allowance
|
|
|
(10,704,000
|
)
|
|
|
(7,345,000
|
)
|
Total net deferred tax assets
|
|
$
|
967,000
|
|
|
$
|
856,000
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Income tax expense consists of the
following
|
|
For the Year Ended
|
|
|
|
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,162,000
|
|
|
|
2,729,000
|
|
State
|
|
|
197,000
|
|
|
|
407,000
|
|
Total deferred
|
|
|
3,359,000
|
|
|
|
3,136,000
|
|
Change in valuation allowance
|
|
$
|
(3,359,000
|
)
|
|
$
|
(3,136,000
|
)
|
Total Income Tax Expense (Benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
The reconciliation of the statutory
federal rate to the Company’s effective income tax rate is as follows:
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2019
|
|
|
2018
|
|
Pre-tax book loss
|
|
$
|
2,673,000
|
|
|
$
|
3,880,000
|
|
Non-deductible penalties and other permanent differences
|
|
|
(430,000
|
)
|
|
|
(177,000
|
)
|
State taxes (8.84%)
|
|
|
1,116,000
|
|
|
|
1,374,000
|
|
Redetermination of prior year taxes
|
|
|
-
|
|
|
|
-
|
|
Enactment of the 2017 Tax Reform Act
|
|
|
-
|
|
|
|
(1,941,000
|
)
|
Change in valuation allowance
|
|
|
(3,359,000
|
)
|
|
|
(3,136,000
|
)
|
Net income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
In December 2017, the Tax Cuts and
Jobs Act was enacted, which reduces the U.S. statutory corporate tax rate from a maximum rate of 35% to 21% for the tax years
beginning after December 31, 2017. For a corporation whose fiscal year begins before December 31, 2017 and ends after December
31, 2017, the IRS has issued guidance, in notice 2018-38, regarding the calculation of a blended current year tax rate. The Company
followed this guidance in the calculation of the prior year tax benefit for the fiscal year ended August 31, 2018. The Calculation
resulted in a 25% effective tax rate for fiscal year 2018. The Tax Cuts and Jobs Act resulted in the re-measurement of the federal
portion of the Company’s deferred tax assets and valuation allowance as of August 31, 2018 from 35% to the new 21% tax rate.
As a result, the reduction of the corporate tax rate resulted in a write-down of the gross deferred tax assets of approximately
$1,277,000 and a corresponding write-down of the valuation allowance.
The Company’s continuing practice
is to recognize interest and/or penalties related to income tax matters in income tax expense. As of August 31, 2019, and 2018,
the Company had no accrued interest and penalties related to uncertain tax positions.
The Company’s net
operating losses (“NOL”) may be limited by the provisions of IRC Section 382, for which the Company has not performed
an analysis of the potential limitations. These limitations will be imposed when the Company attains taxable income against which
the NOL will be utilized. The company had a NOL of $3,843,000 during the period ending August 31, 2019. This NOL has an indefinite
life but are limited to 80%. As explained above, the Company has determined that it is more likely than not that the Company’s
deferred tax assets related to NOL Carryforwards will not be utilized.
The Company is subject to
taxation in the U.S. The tax years for 2016 and forward are subject to examination by tax authorities. The Company is not currently
under examination by any tax authority.
Management has evaluated tax positions
in accordance with FASB ASC 740, and has not identified any tax positions, other than those discussed above, that require disclosure.
Note 14: Commitments and Contingencies
Software License
The Company licenses software from
a third party for utilization in its mobile application and HRIS system. The license agreement is for three years and contains
an annual escalation beginning in May 2020. The license is month to month and is cancelable but is subject to a cancellation penalty
calculated as 30% of the remaining contracted license payments if cancelled by the Company. Future minimum license payments under
the license agreement at August 31, 2019, are as follows:
Years
ended August 31,
|
|
|
|
2020
|
|
$
|
922,000
|
|
2021
|
|
|
1,015,000
|
|
2022
|
|
|
817,000
|
|
Total
minimum payments
|
|
$
|
2,754,000
|
|
Operating Lease
Effective April 15, 2016,
the Company entered into a non-cancelable five-year operating lease for its Irvine 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 to extend until 2022. The leases for certain
facilities contain 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 August 31, 2019, are as follows:
Years
ended August 31,
|
|
|
|
2020
|
|
$
|
382,000
|
|
2021
|
|
|
382,000
|
|
2022
|
|
|
319,000
|
|
Total
minimum payments
|
|
$
|
1,083,000
|
|
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 employee who are at least 21 years of age and
have completed 3 months of service. There were no employer contributions to the Plan for the years ended August 31, 2019 and 2018.
Share Repurchase Plan
On July 9, 2019, the Company’s
Board of Directors authorized the repurchase of up to 250,000 shares of its outstanding common shares as market conditions warrant
over a period of 18 months. The Company has not implemented the share repurchase plan to date and has not repurchased any shares
under the plan.
Litigation
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.
Convertible Note related
litigation:
During 2019, three of the
Company’s note holders have filed complaints:
Alpha Capital v. ShiftPixy,
Inc.
On July 3, 2019 ShiftPixy
was served with a complaint filing by Alpha Capital Anstalt (ACA) in the United States District Court, Southern District of New
York alleging breach of contract in refusing to honor the conversion of certain convertible notes, specifically one for $310,000
submitted on June 20, 2019. ACA sought an injunction requiring the Company to issue 25,000 common shares, damages for the claimed
breaches, and attorney’s fees. In August 2019, the court denied the motion for a preliminary injunction but granted accelerated
discovery which was completed in September 2019. As of August 31, 2019, the Company had convertible notes outstanding with ACA
for approximately $1.7 million consisting of $0.3 million of the June 2018 series, $0.2 million of the December 2018 series and
$1.2 million of the March 2019 series.
Dominion Capital LLC v. ShiftPixy;
On July 18, 2019 ShiftPixy
was served with a complaint filing by Dominion Capital LLC in the United States District Court, Southern District of New York
alleging breach of contract in refusing to honor the conversion of certain convertible notes. Dominion sought injunctive relief,
injunction to prohibit buyback, breach of contract on the June 2018, December 2018, and March 2019 notes, and declaratory judgment.
In August 2019, the court denied the motion for a preliminary injunction but granted accelerated discovery which was completed
in September 2019. As of August 31, 2019, the Company had convertible notes outstanding with Dominion for approximately $1.5 million
consisting of $0.7 million of the June 2018 series, $0.2 million of the December 2018 series and $0.6 million of the March 2019
series.
Both ACA and Dominion have
filed for summary judgment on their cases. The court referred those motions to a magistrate judge for a report and recommendation,
and the magistrate judge filed his report on November 22, 2019, recommending that the court enter judgment for money damages in
both cases consistent with the amounts accrued for by the Company, denying permanent injunctive relief, and granting declaratory
relief with respect to the stock buyback program. The Company is awaiting a response from the court as of the date of this filing.
MEF I, LP v. ShiftPixy, Inc.;
On August 27, 2019 MEF filed a complaint
in the United States District Court, Southern District of New York based upon the Company’s refusal to convert June 2018
notes. MEF seeks monetary relief of $2.1 million and seeks to appoint themselves as receiver of the Company. As of August 31,
2019 the Company had convertible notes outstanding to MEF at approximately $0.7 million face value consisting of approximately
$0.5 million and $0.2 million for the June 2018 and December 2018 notes respectively. In November 2019 the Company filed a motion
in response to the receiver request. A hearing on the receiver matter was conducted on November 20, 2019 and the Company is awaiting
a response from the court on the hearing as of the date of this filing.
Lyons Capital, LLC Litigation
On June 21, 2018, ShiftPixy
was served with a summons and complaint in connection with a claim by Lyons Capital, LLC, arising out of a contract wherein ShiftPixy,
Inc., agreed to pay Lyons Capital, LLC, a total of 210,000 shares of the company’s common stock in exchange for introductions
to brokers, research coverage, funds, investment banking firms, and market makers as well as board representation and business
opportunities and for promotion of the company at Lyons Capital, LLC’s annual conference. This lawsuit was settled during
fiscal 2019 for an immaterial amount which was included in general and administrative expenses on the statement of operations.
Kadima Ventures
The Company is in dispute with its
software developer, Kadima Ventures, over incomplete but paid for software development work. In May 2016, the Company entered
into a contract with Kadima Ventures for the development and deployment of user features that were proposed by Kadima for an original
build cost of $8.5 million to complete. As of the date of this filing, the Company has spent approximately $11 million but has
not received the majority of certain software modules. In addition to the non-delivery of the paid for user features, Kadima Ventures
asserts that it is owed additional funds to turn over the work completed. The Company initiated litigation to force the delivery
of the software modules paid for through fiscal 2019 and exit the development engagement. In April 2019, Kadima filed a complaint
against ShiftPixy in the County of Maricopa, AZ alleging breach of contract, promissory estoppel and unjust enrichment and has
demands for an additional $10 million prior to releasing the remaining features. The parties agreed to a transfer of the matter
to an Arizona Commercial Court with the expectation that the matter would be sent to arbitration or mediation. In October 2019,
Kadima provided the software code to a third party for technical evaluation of the software in question. The Company expects to
enter into mediation once the technical evaluation is completed later in fiscal 2020. An answer to the Complaint is due January
31, 2020.
Splond Litigation
On April 8, 2019, claimant, Corey Splond,
filed a class action lawsuit, naming ShiftPixy, Inc. and its client as defendants, claiming that he was scheduled to work for
more than 8 hours during 24-hour periods without being paid overtime, to which he was entitled. In addition, claimant is
seeking waiting time penalties for the delay in payment. This lawsuit is in the initial stages; the financial impact to the Company,
if any, cannot be estimated. No liability has been recorded for this matter at this time. In the event of an unfavorable
outcome the Company’s client is contractually obligated to indemnify the Company for misreported hours and portions of the
claim would be covered under the Company’s employment practices liability insurance.
Note 15: Subsequent Events
On November 14, the Company filed a
preliminary proxy requesting a 1 for 40 reverse split of our common shares. We have received the majority shareholder approval
for the reverse split and the Company expects the reverse split to be effective on December 16, 2019.
On December 4, 2019 the Company received
a notice from the Nasdaq Capital Market stating that the Company will be delisted on December 13, 2019 unless the Company files
for a hearing by December 11, 2019. The Company requested a hearing on December 9, 2019 and has a hearing scheduled for January
23, 2020.
On December 5, 2019, the Company entered
into an exchange agreement with the holder of a majority of its March 2019 Convertible Notes. The exchange agreement and the related
revised March 2019 note agreement revised the conversion price to $40.00 per share, extended the term of the March 2019 notes
to March 1, 2022, provided for a revised quarterly amortization schedule beginning April 1, 2020, and removed certain anti-dilution
terms of the related March 2019 warrants. The holder also exchanged $222,000 of December 2018 Notes by extending the term to coincide
with the revised term of the March 2019 notes and for the revised amortization schedule. The Company agreed to issue an additional
$200,000 of consideration to the holder, payable in common stock, as consideration for this exchange and agreed to increase the
principal outstanding on the notes exchanged by 10% from $222,000 for the December 2018 notes to $244,000 and from $2,445,000
for the March 2019 notes to $2,890,000. On December 11, 2019, the Company issued 21,750 shares of common stock to the holder in
satisfaction of the additional $200,000 of consideration.
Management has evaluated subsequent
events pursuant to the issuance of the consolidated financial statements and has determined that no additional subsequent events
occurred through the date of this filing that would require disclosure.
Note 16: Reverse Stock Split
On December 17, 2019, the Company implemented a 1 for 40
reverse stock split for all common share and common share equivalents including, options, warrants, and convertible notes. All
common shares and common share equivalents are presented retroactively to reflect the reverse split.
1,898,850 Shares of Common Stock
323,310 Pre-Funded Warrants to Purchase
Shares of Common Stock
Warrants to Purchase 1,111,080 Shares
of Common Stock
Prospectus
Sole Book-Running
Manager
A.G.P.
May 20, 2020
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