Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Form 10-Q.
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Our Management's Discussion & Analysis of Financial Condition and Results of Operations (MD&A) includes references to our performance measures presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and other non-GAAP financial measures that we use to manage our business, make planning decisions and allocate resources. Refer to the Non-GAAP Financial Measures within our MD&A for definitions and reconciliations from GAAP measures.
Overview
The Company is primarily a staffing enterprise, providing employment services solutions for businesses and workers in an environment in which shift or other part-time/temporary positions, commonly called “gigs,” are performed. In what is now being called the Gig Economy, businesses such as those in our current target market in the restaurant and hospitality industries contract with independent workers for less than full-time engagements primarily in the form of shift work. The trend toward a Gig Economy has begun, and we are endeavoring to participate through an employment related service offering. A study by Intuit predicted that by 2020, 40 percent of American workers would be less than full time independent contractors. Intuit, Inc. October 2010. “Intuit 2020 Report: Twenty Trends That Will Shape the Next Decade”.
A significant problem for employers in the Gig Economy involves compliance with employment related regulations imposed by federal, state and local governments, including requirements associated with workers’ compensation insurance, and other traditional employment compliance issues, including the employer mandate provisions of the Patient Protection and Affordable Care Act (“ACA”). The compliance challenges are often complicated by the actions of many employers in reducing workers’ hours as a means to avoid characterizing employees as “full-time.” Congress is considering amendments to or replacement of the ACA. As of the date of this filing, 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. Employers still face regulatory issues and overhead costs, including those associated with the employer mandate provisions of the ACA for which we believe our services are a cost-effective solution.
For Gig/Shift Workers, whom we also call “shifters,” the significant problem is difficulty in finding other jobs/gigs to replace hours lost when their employers reduce their hours and make them less than full-time employees or otherwise to fill workweek employment voids.
We believe ShiftPixy has the ideal solution for both of these groups and each of their problems via a service offering that entails two principal elements (that we refer to collectively as our “Ecosystem”) as follows:
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ShiftPixy Employer Solution
: Under a co-employment agreement, ShiftPixy assumes certain of the responsibilities of being an employer and helps our clients mitigate employer-related risks and manage many of the complex and burdensome administrative and compliance responsibilities associated with employment. Once the ShiftPixy Mobile application will be fully implemented, ShiftPixy will absorb the co-employer’s shifters as ShiftPixy Employees and makes those employees available to the former employer to work the same jobs, as employees of ShiftPixy, shouldering a substantial portion of the employment-related compliance responsibilities. In addition, when the shift intermediation features of the ShiftPixy mobile app are implemented, which can occur as soon as a sufficient number of users and clients in an area begin to use the scheduling features of the application, such businesses will be able to access via that technology additional qualified workers, who are already part of the ShiftPixy Ecosystem, to fill workforce voids on short notice, having assurance that such employees have work experience, will be paid, will be covered by applicable workers’ compensation coverage, will have applicable employment related taxes calculated and processed.
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ShiftPixy Shifter Solution
: Shifters placed with one of ShiftPixy’s clients can now access other shift work with other ShiftPixy clients, and they will be able to do so quickly and easily ultimately through the new ShiftPixy mobile application. Workers are now engaging with the application at the point of onboarding with ShiftPixy. We anticipate that employees will be able to use the app to secure additional shifts within our Ecosystem. When released to the general public, anticipated to be in the calendar year 2018, provided adequate funding is available to complete our development activities, the ShiftPixy mobile application will enable not only ShiftPixy shift employees but also ultimately shift employees outside the ShiftPixy Ecosystem, many of them Millennials who connect to the outside world solely through mobile devices, to access available shift jobs at all of ShiftPixy’s participating clients. In addition to the benefits of working not as independent contractors but as employees, enjoying the protections of workers’ compensation coverage and employment laws, as well as the calculation and remittance of applicable employment taxes, among other benefits, shifters are also enabled to participate in ShiftPixy’s benefit plan offerings, including minimum essential health insurance coverage plans and a 401(k) plan.
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ShiftPixy’s headquarters is currently situated in Irvine, California, from which it can reach the Southern California market. ShiftPixy recently opened offices in New York City, Austin, Texas, and the Orlando area from which its local sales/service representatives will secure and service clients in those areas, and it plans to open additional physical offices in the following locales: Chicago, Las Vegas and Atlanta.
These markets collectively account for or allow us to cover approximately 53% of our target market in the restaurant/hospitality sectors. (U.S. Department of Labor. Bureau of Labor Statistics. May 2015. Occupational Employment and Wages.)
ShiftPixy and its subsidiary collectively serve, as of February 28, 2018, an aggregate of approximately 160 clients with an aggregate of approximately 6,798 employees, including 5,113 employees of ShiftPixy and ShiftableHR that we provide to our clients and 1,685 employees of our clients for whom we provide only payroll administration services. None of these clients represents more than 10% of our revenues for the three months period ending February 28, 2018.
ShiftPixy’s anticipated business and revenue growth will result from the following factors:
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Large Potential Market.
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The burdens placed on employers with over 50 full-time employees under the ACA.
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Marketing Advantages from Strategic Insurance Provider Relationships.
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New ShiftPixy Mobile App that is designed to provide Additional Benefits to ShiftPixy’s client businesses and shift workers.
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Ultimate Development of a ShiftPixy Ecosystem.
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Mitigation of Employment Law Compliance Risks.
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The Problem
: Employment law compliance requirements present a multi-obstacle ridden employment related compliance landscape for our target market of businesses that rely significantly on part-time and temporary workers. Challenges facing such businesses include the need to secure applicable workers’ compensation insurance coverage, to effect employment related tax withholdings and filings, and to navigate laws related to hiring and release of employees, including discrimination (race, color, national origin, sex, age, religion, disability, pregnancy and sexual orientation), sexual harassment, sick pay and time off, hours of work, minimum wage and overtime, gender pay differentials, immigration, safety, child labor, military leave, garnishment and other wage imposition processing, family and medical leave, COBRA, and unemployment claims. ACA compliance currently adds another significant burden to businesses with more than 50 full-time workers, as they try to manage the additional burdens associated with mandated health insurance benefits.
A business can secure assistance in mitigating and even eliminating these challenges by retaining ShiftPixy.
The ShiftPixy Solution
: ShiftPixy is developing an Ecosystem comprised of a closed proprietary operating and processing system that helps restaurant or hospitality businesses (and in the future, businesses in additional industries wherein we plan to market our services) as well as shift workers by matching available shifts with available shift workers. The ShiftPixy Ecosystem provides the following benefits:
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Compliance
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Cost Containment
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Cost Savings
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Shift Human Capital Management Inc.
: We formed Shift Human Capital Management Inc., a wholly-owned subsidiary, in December 2015. We formed this subsidiary in response to the need to have workers’ compensation policies written in the names of the clients (as may be required by some states) and otherwise in response to client needs for only administrative and processing services rather than the full-service, staffing program offered by ShiftPixy. As of February 28, 2018, ShiftableHR had 110 clients with 4,239 worksite employees, including 1,685 employees for whom we provide only payroll administration services.
Significant Developments in 2018
New Sales Offices
ShiftPixy recently opened offices in New York City, Austin, Texas, and the Orlando area from which its local sales/service representatives will secure and service clients in those areas, and it plans to open additional physical offices in the following locales: Chicago, Las Vegas and Atlanta.
Software Development
The heart of ShiftPixy’s employment service solutions is a technology platform, including a mobile app, through which ShiftPixy employees (and in the future, shift workers not currently in our Ecosystem) will be enabled to find available shift work at ShiftPixy client locations, solving a problem of finding available shift work for both the shifters looking for additional shift work and business clients looking to fill open shifts.
The mobile app is one of the software components of what we call the mobile platform, and together with the ShiftPixy “Command Hub” and the client portal, is being developed, tested and released in stages. We have released and are using the onboarding feature of our software, which 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. Our new employees no longer have to fill out the burdensome pile of required new employee paperwork. By leveraging artificial intelligence capabilities, new hires are guided by a conversation with a “Pixy” chatbot that asks the necessary questions and generates the required employment documents in a highly personal and engaging way.
Following completion of the questions, applicable onboarding paperwork is prepopulated with the data and prepared for the employee’s signature to be affixed digitally via the app as well. We use the app to gather even I-9 required documentation.
Our next phase of development, planned to be completed in the beginning of our second calendar quarter of 2018, is the implementation of the scheduling component of our software, which is being designed to enable each client worksite to schedule workers and to identify shift gaps that need to be filled. We again plan to leverage artificial intelligence to maintain schedules and fulfillment, using an active methodology to engage and move people to action. We plan to engage certain of our clients to begin using this functionality before the end of the second calendar quarter of 2018.
The next succeeding phase of development, also planned to be completed in the second calendar quarter of 2018, includes the implementation of our shift intermediation functionality, which is designed to enable our shift workers to receive information regarding and to accept available shift work opportunities. We currently plan to have the onboarding, scheduling and shift intermediation functionalities operable and integrated across our platform during the second calendar quarter of 2018; however, the intermediation functionality becomes useful only to the extent that we have meaningful numbers of available workers and client shift opportunities in the same geographic region, which we expect to begin to occur at the end of the second calendar quarter of 2018. Our goal is to have the mobile platform serve not only to enable our shift workers to secure additional shift work and our job provider clients to fill open shifts but also to attract new clients who see the value associated with being able to fill open shifts with a ready-to-hire workforce. This software is an important component of our overall ecosystem, and we are excited about our continued development.
We also plan to begin using the “delivery features” of our mobile platform during the second calendar quarter of 2018. Our technology and approach to human capital management allows the company a unique window into the daily demands of “Quick Service Restaurants” (“QSR”) operators and the ability to extend our technology and engagement to enable this unique self-delivery proposition. ShiftPixy’s new driver management layer for operators in the ShiftPixy ecosystem will now allow clients to use their own team members to deliver a brand intended customer experience. ShiftPixy has taken the compliance, management and insurance issues related to the support of a delivery option and created a turnkey self-delivery opportunity. This would allow our clients to enjoy the income growth from delivery and preserve their customer experience and their brand. The first phase of this component of our platform will be driver onboarding, which we plan to use by the second calendar quarter of 2018. Following completion of this phase, we plan to add features that enhance the capability of our mobile application to track and manage the delivery process. The enhanced features will “micro metering” of essential commercial insurance coverages required by our operator clients-namely workers’ compensation and auto coverages on a delivery-by-delivery basis.
Another key element of our software development involves using ShiftPixy’s blockchain ledger to process and record our critical P2P (“Peer-to-Peer”) connections. While not necessarily a new development, we note that we use blockchain technology in an effort to keep our data secure. Any data considered to be a human capital validation point or part of the hiring and onboarding process is being utilized and recorded in ShiftPixy’s blockchain ledger. The employee I-9 verification process, for example—one of the most stringent, rigorous, and penalty-laden compliance procedures is positively impacted by blockchain utilization of biometric authentication and automatic verification of I-9 data, removing human error in the process of screening for fraudulent information. Verification of that data on the blockchain allows both employers and auditing agencies to confidently validate additional criteria such as employment dates, and a candidate’s background (i.e. education, references, certifications, etc.), and share the verification status directly on multiple distributed sources within the blockchain, further underscoring the trust and accuracy of a candidate’s information and corporate compliance.
Future implementation of blockchain technology within ShiftPixy’s technological ecosystem is anticipated to include the extended applications for payroll and real-time payments, and utilizing smart contracts for employment contracts, which facilitate the performance of credible, trackable, and irreversible transactions without third parties. For purposes of clarification, we note that ShiftPixy has never, does not now and will never use its blockchain technology in any form of cryptocurrency or cryptocurrency related application
Performance Highlights
Q2 FYE 2018 vs. Q2 FYE 2017
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Served approximately 160 clients and co-employed average 6,546 worksite employees, a 67.2% increase in average worksite employees compared to the same period in 2017, and
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Processed approximately $48.6 million in gross billings, an increase of 58.1% over the same period in 2017.
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Our financial performance for the second quarter ended February 28, 2018, compared to the same quarterly period ended February 28, 2017, included:
Revenues
increased 45.8% to $7.9 million due to increased number of worksite employee the Company is currently servicing.
Cost of Revenue
increased 62.8% to $7.0 million due to increased number of worksite employees, incremental workers compensation from engaging with two clients in the janitorial space and an increase in our state unemployment tax rate.
Operating expenses
increased 74.1% to $3.6 million due to an increase in the number of corporate employees, commissions payments related to our increased billings and additional general and administrative expenses resulting from being a public company.
Net Loss
increased to -$2.7 million or -$0.09 per diluted share, from -$1.0 million or -$0.04 per diluted share.
YTD 2018 – YTD 2017
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Served approximately 160 clients and co-employed an average of 6,008 worksite employees, a 35.5% increase in average worksite employees compared to the same YTD period in 2017, and
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Processed approximately $88.8 million in gross billings, an increase of 35% over the same YTD period in 2017, and
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Decreased cash and cash equivalents by approximately $5 million or 84.7% to $0.9 million from the end of our last fiscal year.
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Our Financial performance for the first six months of 2018, compared to the same period in 2017, included:
Revenues
increased by 29.8% to $14.4 million, attributable primarily to the increased number of our worksite employees.
Cost of Revenue
increased by $4.2 million to $12.3 million
due to increased number of worksite employees, incremental workers compensation from engaging with two clients in the janitorial space and an increase in our state unemployment tax rate
Operating Expense
increased 124.9% to $8.2 million. Such increase is a directly attributed to the expenditures incurred for the development of our mobile platform and expenditures directly related from being a public company.
Net Loss
increased to $6.1 million or -$0.21 per diluted share from $0.6 million or -$0.02 per diluted share.
Results of Operations
The following table summarizes the condensed consolidated results of our operations for the three months ended February 28, 2018, and February 28, 2017 (Unaudited).
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For the Three
Months Ended
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February
28,
2018
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February 28,
2017
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(Restated)
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Revenues (gross billings of $48.6 million and $30.8 million less worksite employee payroll cost of $40.8 million and $25.3 million, respectively)
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$
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7,886,459
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$
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5,408,743
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Cost of revenue
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7,007,315
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4,302,972
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Gross profit
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879,144
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1,105,771
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Operating expenses
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3,598,027
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2,066,123
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Net Loss
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$
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(2,718,883
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)
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$
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(960,352
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)
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Net Loss available to common shareholders per common share:
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Basic and Diluted
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$
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(0.09
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)
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$
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(0.04
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)
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Weighted Average Number of Common Shares Used in Per Share Computations:
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Basic and Diluted
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28,800,630
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26,227,935
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Revenues
for the three months ended February 28, 2018, increased by $2.5 million or 45.8% to $7.9 million, compared to $5.4 million for the three months ended February 28, 2017. 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 28, 2018, were earned from billings to clients to whom we provide staff or workforce management support (PEO and ASO). Gross billings for the three months ended February 28, 2018, increased by $17.9 million or 58.1% to $48.7 million, compared to $30.8 million for the three months ended February 28, 2017.
Gross billings’ increase was primarily due to the increase in the average worksite employees by 2,630 to 6,546 employees, compared to an average of 3,916 employees for the three months ended February 28, 2017. This was offset by an increase during the three months ended February 28, 2018 in the number of clients, which are not covered under ShiftableHR workers’ compensation insurance program, compared to the three months ended February 28, 2017. This translated in a significant reduction in workers compensation amount billed as a percentage of our worksite employees’ payroll cost.
Cost of Revenues
mainly includes the costs of employer-side taxes and workers’ compensation insurance coverage. Our cost of revenues for the three months ended February 28, 2018, increased by $2.8 million or 62.8% to $7.1 million, compared to $4.3 million for the three months ended February 28, 2017.
Approximately $2.5 million is attributed to the additional worksite employees the Company is servicing, which increased by 2,630 from an average 3,916 employees in the three months ended February 28, 2017, to an average of 6,546 employees in the three months ended February 28, 2018.
Approximately $0.3 million of the increase is attributed to the increase in our state unemployment (SUTA) tax rate for calendar year 2018.
Gross Profit
for the three months ended February 28, 2018, decreased by $0.2 million or 20.5% to $0.9 million, compared to $1.1 million in the three months ended February 28, 2017. The gross profit, as a percentage of revenues, decreased from 20.4% for the three months ended February 28, 2017, to 11.1% for the three months ended February 28, 2018, which is a direct consequence of the increase in our state unemployment tax rate. While the gross amount of fees that we charge to many of our clients remain static over the course of the year, because those fees include, as a billable component, unemployment tax, the related expense of which declines as wage limits are attained, our gross profit begins to increase over the course of the year as the wage limits applicable to employees providing services to such clients are attained such that the expense related to these employees, which we record on our financial statements, is reduced.
We also anticipate gross profit to increase in the near future from the current level, as a result of positive initiatives that have been implemented in the workers’ compensation program and economies of scale.
Total Operating Expenses
for the three months ended February 28, 2018, have increased by $1.5 million or 74.1% to $3.6 million compared to $2.1 million for the three months ended February 28, 2017.
The increase of $1.5 million in operating expenses is primarily attributed to the development costs for the Company’s new technology platform from $0 in the three months ended February 28, 2017, to $0.5 million in the three months ended February 28, 2018.
Our payroll costs for the three months ended February 28, 2018, increased by $0.4 million to $1.3 million compared to $0.9 million for the three months ended February 28, 2017. Approximately $0.2 million of the increase is attributed to the increase in our corporate payroll employees from an average of 35 for the three months ended February 28, 2017, to 41 employees for the three months ended February 28, 2018. Approximately $0.2 million of the increase is attributed to the stock-based compensation expense resulting from our 2017 Stock Options/ Stock Issuance Plan, personal time off expense incurred in the three months ended February 28, 2018, compared to $0 in the three months ended February 28, 2017 and approximately $50k bonus payout in the three months ended February 28, 2018.
Selling, General & Administrative expenses for the three months ended February 28, 2018, increased by $0.3 million to $1.2 million, compared to $0.9 million for the three months ended February 28, 2017. The increase of $0.3 million is primarily attributed to the $0.1 million increase in commissions, which is a direct consequence of the increase in gross billings and secondarily to a $0.1 million increase in investor relations expenses resulting from being a public company and $0.2 million related to penalties for late remittance of payroll taxes.
Professional fees for the three months ended February 28, 2018, increased by $226k or 79.8% to $0.5 million, compared to $0.3 million for the three months ended February 28, 2017. This increase results from additional audit fees to our year-end audit, consulting fees, other fees incurred following our IPO and fees paid to our Directors. We anticipate professional fees and other general & administrative expenses to remain consistent for the remainder of the fiscal year as most of the expenses are fixed in nature.
Net loss/Income.
As a result of the explanations described above, the net loss for the three months ended February 28, 2018, was $2.7 million, compared to a net loss of $1.0 million for the three months ended February 28, 2017.
The following table summarizes the condensed consolidated results of our operations for the six months ended February 28, 2018, and February 28, 2017 (Unaudited).
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For the Six
Months Ended
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February
28,
2018
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February 28,
2017
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(Restated)
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Revenues (gross billings of $88.8 million and $65.8 million less worksite employee payroll cost of $74.4 million and $54.7 million, respectively)
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$
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14,398,378
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$
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11,090,419
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Cost of revenue
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12,273,718
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8,033,525
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Gross profit
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2,124,660
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3,056,894
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Operating expenses
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8,184,760
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3,639,147
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Net Loss
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$
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(6,060,100
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)
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$
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(582,253
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)
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Net Loss available to common shareholders per common share:
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Basic and Diluted
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$
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(0.21
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)
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$
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(0.02
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)
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Weighted Average Number of Common Shares Used in Per Share Computations:
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Basic and Diluted
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28,792,333
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26,220,789
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Revenues
for the six months ending February 28, 2018, were earned from billings to clients to whom we provide staff and workforce management support (PEO and ASO). Our revenues, which represent gross billings net of worksite employee payroll cost, increased by 29.8% to $14.4 million in the six months ended February 28, 2018, compared to $11.1 million in the six months ended February 28, 2017. Gross billings are a non-GAAP measurement and are the metric in which we currently earn our revenue.
Gross Billings for the six months ended February 28, 2018, increased by $23.0 million or 35% to $88.8 million, compared to $65.8 million for the six months ended February 28, 2017. Gross billings’ increase was primarily due to the increase in the worksite employees by 1,575 to an average of 6,008 employees for the six months ended February 28, 2018, compared to an average of 4,433 employees for the six months ended February 28, 2017.
Cost of Revenues.
Our cost of revenues mainly includes the costs of employer-side taxes and workers’ compensation insurance coverage. Our cost of revenues for the six months ended February 28, 2018, increased by $4.3 million or 52.8% to $12.3 million, compared to $8.0 million in the six months ended February 28, 2017.
Approximately $2.9 million of the increase is attributable to the additional worksite employees the Company is servicing, which increased from an average of 4,433 employees in the six months ended February 28, 2017, to 6,008 employees in the six months ended February 28, 2018.
Approximately $0.3 million of the increase is attributable to the increase in our state unemployment (SUTA) tax rate for calendar year 2018.
Approximately $0.3 million of the increase is attributable to workers’ compensation premium, which, as previously disclosed, was over expensed in the fiscal year ended August 30, 2016. This resulted in an understatement of our gross profit for the fiscal year ended August 30, 2016. Such difference was not deemed quantitatively and qualitatively material to the August 2017 fiscal year end financial statements.
Approximately $0.8 million of the increase is attributed to the increase in workers’ compensation expense, resulting from engaging with two clients in the janitorial business, serving approximately 200 worksite employees, for which the cost of workers’ compensation insurance is triple the average cost of coverage for employees in the industries in which we otherwise operate. The Company incurred $0.9 million of workers’ compensation insurance expense for these two clients in the six months ended February 28, 2018, compared to $0.1 in the six months ended February 28, 2017.
Gross Profit
for the six months ended February 28, 2018, decreased by $0.9 million or 30.5% to $2.1 million, compared to $3.0 million in the six months ended February 28, 2017. The gross profit, as a percentage of revenues, decreased from 27.6% in the six months ended February 28, 2017, to 14.8% in the six months ended February 28, 2018, which is a consequence of the workers’ compensation issue related to fiscal year ended August 30, 2016, as explained in the cost of revenues section above, the additional $0.8 million in workers’ compensation insurance expense attributable to the two clients highlighted above and the increase in the Company’s state unemployment tax rate.
We anticipate gross profit to increase in the near future from the current level, as a result of positive initiatives that have been implemented in the workers’ compensation program, economies of scale and additional profit that will be realized when state unemployment tax limits are attained.
Total Operating Expenses
for the six months ended February 28, 2018, have increased by $4.6 million or 124.9% to $8.2 million, compared to $3.7 million for the six months ended February 28, 2017.
The increase in operating expenses is primarily attributed to the development costs incurred for the new technology platform, which increased from $0 in the six months ended February 28, 2017, to $2.4 million in the six months ended February 28, 2018. This software is an important component of our overall Ecosystem and is fundamental to our strategy to establish the first ecosystem that links businesses to a large number of part-time workers and the ever-growing number of shift workers in the new Gig Economy.
Our payroll costs for the six months ended February 28, 2018 increased by $0.8 million to $2.6 million compared to $1.8 million for the six months ended February 28, 2017. Approximately $0.3 million of the increase is attributed to the increase in our corporate payroll employees from an average of 35 for the six months ended February 28, 2017 to 41 employees for the six months ended February 28, 2018. Approximately $0.1 million of the increase is attributed to the stock-based compensation expense resulting from our 2017 Stock Options/ Stock Issuance Plan. Approximately $0.2 million of the increase is attributable to the personal time off expense incurred in the six months ended February 28, 2018, compared to $0 in the six months ended February 28, 2017. Approximately $0.2 million of the increase is attributable to the higher wage mix of employees the Company has compared to the same comparable period in 2017.
Selling, General & Administrative expenses for the six months ended February 28, 2018, increased by $0.9 million to $2.2 million, compared to $1.3 million for the six months ended February 28, 2017. The increase of $0.9 million is primarily attributed to the $0.3 million increase in commissions, which is a direct consequence of the increase in gross billings, a $0.3 million increase in investor relations expenses resulting from being a listed company and finally approximately $0.2 million resulting from various penalties.
Professional fees for the six months ended February 28, 2018, increased by $549k or 121.2% to $1.0 million, compared to $453k for the six months ended February 28, 2017. This increase results from additional audit fees to our year-end audit, consulting fees, other fees incurred following our IPO and fees paid to our directors. We anticipate professional fees and other general & administrative expenses to remain consistent for the remainder of the fiscal year as most of the expenses are fixed in nature.
Net loss/Income.
As a result of the explanations described above, the net loss for the six months ended February 28, 2018, was $6.1 million, compared to a net loss of $0.6 million for the six months ended February 28, 2017.
Going Concern
As of February 28, 2018, the Company had cash and cash equivalents of $0.9 million and a working capital deficiency of $1.5 million. During the six months ended February 28, 2018, the Company used approximately $4.2 million of cash in its operations, of which $3.2 million was attributed to the mobile application development costs and $0.3 million was attributed to the workers’ compensation deposit. The Company has incurred recurring losses resulting in an accumulated deficit of $15.5 million as of February 28, 2018. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern within one year from the 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.
Historically, the Company’s principal source of financing has come through the sale of its common stock. The Company successfully completed an Initial Public Offering (IPO) on June 29, 2017, raising a gross amount of $12 million ($10.9 million net of costs).
Exclusive of the development costs, the Company is currently using $0.3 million each quarter from its operations or less than $0.1 million per month. As a consequence of changing certain providers and achieving some economies of scale, the Company has already realized a significant reduction to its workers’ compensation expense, which has factored into its reduced cash burn. In addition, the Company continues to experience significant growth in the number of worksite employees. Subsequent to February 28, 2018, the Company has added through executed service agreements, approximately 6 clients, servicing 1,300 worksite employees with approximately $93 million in additional gross billings per year, representing an increase of approximately $1.7 million in gross profit. Our gross billings for the month of March grew 21% sequentially over the month of February.
The key features of the Company’s mobile application have been fully developed, one of the key feature has been released and two other key features are now ready to be released at no additional costs, except for the post implementation expenditures. The deployment of these features, expected in the second calendar quarter of 2018, would further accelerate growth as the Company’s clients would be able to remediate their turnover issues.
The Company’s plans and expectations for the next 12 months include raising capital to help fund expansion of its operations, including product development. 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
We believe 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 a year from the date these financials are available. If these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months from the date of this report, the Company may need to curtail certain aspects of its operations or expansion activities, consider the sale of its assets, or consider other means of financing. The Company can give no assurance that it will be successful in implementing its business plan and obtaining financing on terms advantageous to the Company or that any such additional financing would be available to the Company. These consolidated condensed financial statements do not include any adjustments from this uncertainty.
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.
Reconciliation of GAAP to Non-GAAP Measure
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Three Months Ended
February 28,
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|
|
Six Months Ended
February 28,
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|
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2018
|
|
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2017
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|
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2018
|
|
|
2017
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|
Gross Billings
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|
$
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48,636,443
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|
|
$
|
30,758,439
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|
|
$
|
88,813,216
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|
|
$
|
65,795,641
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Less: Adjustment to gross billings
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|
|
40,749,984
|
|
|
|
25,329,696
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|
|
|
74,414,838
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|
|
|
54,705,222
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Revenues
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|
$
|
7,886,459
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|
|
$
|
5,408,743
|
|
|
$
|
14,398,378
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|
|
$
|
11,090,419
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Credit Facilities
We have been offered but have not accepted any credit facilities or other access to bank credit.
Capital Expenditures
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 a 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.
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. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates 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 the Company’s 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.