See accompanying notes to the unaudited interim condensed consolidated financial statements.
See accompanying notes to the unaudited interim condensed consolidated financial statements.
See accompanying notes to the unaudited interim condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
November 30, 2018
Note 1: Nature of Operations
ShiftPixy, Inc. (the “Company”) was incorporated in the State of Wyoming on June 3, 2015. The Company is a specialized staffing and human capital management service provider that provides solutions for large contingent part-time workforce demands, primarily in the restaurant, hospitality and maintenance service trades. The Company’s initial focus is on the restaurant industry in Southern California.
Shift Human Capital Management Inc. (“SHCM”), a wholly-owned subsidiary of ShiftPixy, Inc., is incorporated in the State of Wyoming. SHCM functions substantially as a professional employer organization (“PEO”) and provides comprehensive human resources solutions under its co-employment model. SHCM assumes certain of the responsibilities of being an employer and helps its clients mitigate employer-related risks and manage many of the complex and burdensome administrative and compliance responsibilities associated with employment. SHCM also functions as an-administrative-services only (“ASO”) provider, in response to client needs for only administrative and processing services, performing functions in the nature of a payroll processor, human resources consultant, administrator of worker’s compensation coverages and claims, under circumstances wherein the client remains as the sole employer of the subject employees. These services are also available to businesses in all industries, not limited to the restaurant and hospitality industries. The Company hopes that this mechanism may become a way to onboard new clients into the ShiftPixy Ecosystem when eligible clients to whom the Company is providing these services recognize the value of the services provided by the parent Company.
The Company is currently operating in one reportable segment.
Note 2: Summary of significant accounting policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim reports of companies filing as a smaller reporting company. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The results of operations for the three months ended November 30, 2018, are not necessarily indicative of the results that may be expected for the year ending August 31, 2019.
The condensed consolidated balance sheet as of August 31, 2018, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial information.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended August 31, 2018, filed with the SEC on November 29, 2018.
Principles of Consolidation
The Company and its wholly-owned subsidiary have been consolidated in the accompanying unaudited condensed consolidated financial statements. All intercompany balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include:
|
·
|
Liability for legal contingencies;
|
|
|
|
|
·
|
Useful lives of property and equipment;
|
|
|
|
|
·
|
Assumptions made in valuing equity instruments;
|
|
|
|
|
·
|
Deferred income taxes and related valuation allowance; and
|
|
|
|
|
·
|
Projected development of workers’ compensation claims.
|
Computer Software Development
Software development costs relate primarily to software coding, systems interfaces and testing of our proprietary professional 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. Capitalized software development costs are amortized using the straight-line method over the estimated useful life of the software.
Revenue Recognition
The Company’s revenues are primarily attributable to fees for providing staffing solutions and PEO/HCM (“Professional Employer Organization” / “Human Capital Management”) services. The Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the services have been rendered to the customer; (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
We account for our PEO revenues in accordance with ASC 605-45,
Revenue Recognition, Principal Agent Considerations
. Our PEO 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.
The gross billings are invoiced concurrently with each periodic payroll of the Company’s worksite employees. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup are recognized ratably over the payroll period as worksite employees perform their service at the client worksite.
Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on our condensed consolidated balance sheets.
Consistent with our revenue recognition policy, our direct costs do not include the payroll cost of our worksite employees. Our cost of revenue associated with our revenue generating activities are primarily comprised of all other costs related to our worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.
Concentration of Credit Risk
The Company considers all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash with a commercial bank and from time to time exceed the federally insured limits. The deposits are made with a reputable financial institution, and the Company had not experienced losses from these deposits.
No one individual client represents more than 10% of revenues for the three months ended November 30, 2018, and 2017, respectively. However, four clients represent 75% of total accounts receivable at November 30, 2018, compared to four clients representing approximately 86% of our total accounts receivable at August 31, 2018.
Impairment and Disposal of Long-Lived Assets
The Company periodically evaluate its long-lived assets for impairment in accordance with ASC 360-10,
Property, Plant, and Equipment
. 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 November 30, 2018, and 2017.
Workers’ compensation
Everest Program
Up to July 2018, a portion of the Company’s workers’ compensation risk was covered by a retrospective rated policy, which calculates the final policy premium based on the Company’s loss experience during the term of the policy and the stipulated formula set forth in the policy. The Company funds the policy premium based on standard premium rates on a monthly basis and based on the gross payroll applicable to workers covered by the policy. During the policy term and thereafter, periodic adjustments may involve either a return of previously paid premiums or a payment of additional premiums by the Company or a combination of both. If the Company’s losses under that policy exceed the expected losses under that policy, then the Company could receive a demand for additional premium payments. During the year ended August 31, 2017, the Company funded an initial deposit of $2.3 million, which was included in Deposits – worker’ compensation (“deposits”) on the condensed consolidated balance sheet. During the year ended August 31, 2018, the Company funded two-month worth of policy premiums against this initial deposit for approximately $0.8 million. As of November 30, 2018, the Company had Deposit-workers’ compensation of $1.5 million for this retrospective rated policy.
The Company utilizes a third-party to estimate its loss development rate, which is based primarily upon the nature of worksite employees’ job responsibilities, the location of worksite employees, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. As of November 30, 2018, the Company classified $0.2 million in short term accrued workers’ compensation and $0.4 million in long term accrued workers’ compensation in our condensed consolidated balance sheets.
Sunz Program
Starting in July 2018, the Company’s workers’ compensation program for our 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 (“deposit”), 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 November 30, 2018, the Company had $0.4 million in deposit – workers’ compensation”, classified as a short-term asset and $2.8 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 November 30, 2018, we had short term accrued workers’ compensation costs of $0.4 million and long term accrued workers’ compensation costs of $1.2 million.
Because the Company bears the financial responsibility for claims up to the level noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which takes into account the ongoing development of claims and therefore requires a significant level of judgment. In estimating ultimate loss rates, the Company utilizes historical loss experience, exposure data, and actuarial judgment, together with a range of inputs which are primarily based upon the worksite employee’s job responsibilities, their location, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. The estimated incurred claims are based upon: (i) the level of claims processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan.
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.
Advertising Costs
The Company expenses all advertising as incurred. The Company incurred advertising costs totaling $379,049 and $112,163 for the three months ended November 30, 2018, and 2017, respectively.
Earnings (Loss) Per Share
The Company utilizes Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common share equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common share equivalents include the dilutive effect of in-the-money share equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any common share equivalents if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation
Securities 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
November 30, 2018
|
|
|
For the Three Months Ended November 30, 2017
|
|
|
|
|
|
|
|
|
Options
|
|
|
1,490,829
|
|
|
|
750,000
|
|
Senior Secured Convertible Notes (Note 4)
|
|
|
3,390,228
|
|
|
|
-
|
|
Warrants
|
|
|
3,511,296
|
|
|
|
2,570,413
|
|
Total potentially dilutive shares
|
|
|
8,392,353
|
|
|
|
3,320,413
|
|
Stock-Based Compensation
At November 30, 2018, 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 (“Black-Scholes”) pricing model. For all employee stock options, the Company recognizes expense over the requisite service period on an accelerated basis over the employee’s requisite service period (generally the vesting period of the equity grant).
The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. The expected volatility is based on the historical volatility of the Company since our Initial Public Offering. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
The Company elected to account for forfeitures as they occur, as such, compensation cost previously recognized for an award that is forfeited because of the failure to satisfy a service condition is revised in the period of forfeiture.
Reclassifications
Certain reclassifications have been made to prior year’s data to confirm to the current year’s presentation. Such reclassifications had no impact on the Company’s financial condition, operating results, cash flows or stockholder’s equity.
Recent Accounting Standards
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. For all entities, amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the potential impact this guidance will have on the condensed consolidated financial statements, if any.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. For entities that early adopted Topic 842, the amendments are effective upon issuance of ASU 2018-10, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. ASU 2018-10 will be effective for use for fiscal years beginning after December 15, 2019. The Company is currently evaluating the potential impact this guidance will have on the consolidated financial statements, if any.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The standard provides enhancements to the quality and consistency of how revenue is reported by companies, while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP. The new standard also will require enhanced revenue disclosures, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. This accounting standard becomes effective for the Company for reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted for annual reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of this standard is to clarify the implementation of guidance on principal versus agent considerations related to ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarity related to ASU 2014-09 regarding identifying performance obligations and licensing implementation. The standard has the same effective date as ASU 2014-09 described above.
In May 2016, the FASB issued ASU 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope improvements and practical expedients related to ASU 2014-09. The purpose of this standard is to clarify certain narrow aspects of ASU 2014-09, such as assessing the collectability criterion, presentation of sales taxes, and other similar taxes collected from customers, noncash considerations, contract modifications at transition, completed contracts are transition, and technical correction. The standard has the same effective date as ASU 2014-09 described above.
In December 2016, the FASB issued ASU 2016-20: Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this standard affect narrow aspects of guidance issued in ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above.
The Company is currently developing an adoption plan of how it currently recognizes revenue compared to the accounting treatment required under the new guidance. This plan includes a review of client contracts and revenue transactions to determine the impact of the accounting treatment under the new guidance, evaluation of the adoption method and completing a rollout plan for the new guidance. Additionally, the Company is in the process of assessing the impact of the new standard on its disclosures and internal controls.
In February 2016, the FASB issued new accounting guidance on leases ASU 2016-02, Leases. The new standard requires that a lessee recognize assets and liabilities on the balance sheet for leases with terms longer than 12 months. The recognition, measurement and presentation of lease expenses and cash flows by a lessee will depend on its classification as a finance or operating lease. The guidance also includes new disclosure requirements providing information on the amounts recorded in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact that this standard will have on its consolidated financial statement.
In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard will be effective for the Company in the first quarter of fiscal year 2020, although early adoption is permitted (but no sooner than the adoption of Topic 606). The Company does not expect that the adoption of this ASU will have a significant impact on its consolidated financial statements.
Note 3: Going Concern
As of November 30, 2018, the Company had cash of $0.2 million and a working capital deficiency of $12.9 million. During the quarter year ended November 30, 2018, the Company used approximately $1.6 million of cash in its operation. The Company has incurred recurring losses resulted in an accumulated deficit of $28 million as of November 30, 2018. These conditions raise substantial doubt as to our 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.
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).
Exclusive of the development costs, the Company is currently using $1.2 million each quarter from its operations or approximately $0.4 million per month. 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 operating cash burn. Since November 30, 2018, the Company has added, through executed service agreements, approximately 25 clients, servicing approximately 3,300 worksite employees with approximately $85.9 million in additional gross billings per year.
The remaining key features (scheduling and intermediation) of the Company’s mobile application will be fully released in the first calendar quarter of 2019. The onboarding feature has already been released, but the scheduling and intermediation features have been postponed pending additional financing which is expected to come during the first calendar of 2019. The Company also developed an additional driver management layer to its mobile platform and plans to begin using this “delivery feature” of its mobile platform during the first calendar quarter of 2019.
The deployment of these features, expected in the first calendar quarter of 2019, would further accelerate the growth as the Company’s clients would be able to remediate their turnover and associated costs and self-deliver a brand intended experience and retain profit currently given away to third party delivery platforms. The Company’s plans and expectations for the next 12 months include raising capital to help fund expansion of its operations, including the final development of its mobile application users features. 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.
The Company’s management believes 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 its assets, or consider other means of financing. The Company can give no assurance that it will be successful in implementing its business plan and obtaining financing on terms advantageous to the Company or that any such additional financing would be available to the Company. These condensed consolidated financial statements do not include any adjustments from this uncertainty.
Note 4: Senior Secured Convertible Note Payable
On June 4, 2018, the Company issued convertible notes in the principal amount of $10 million for a purchase price of $9 million to institutional investors, bearing interest at a rate of 8%, with maturity date of September 4, 2019, for cash proceeds of $8.4 million for mobile application development and support, IT and HR platform development and support and working capital. The Company incurred approximately $0.6 million of debt issuance costs that are incremental costs directly related to the issuance of the senior secured convertible notes payable.
Concurrently with the sale of the notes, the Company also granted warrants to purchase 1,004,016 shares of common stock to its institutional investors and also granted warrants to purchase 216,867 shares of common stock to its investment banker as placement fees, at an exercise price of $2.49, subject to down round price protection adjustment, as defined in the agreements.
The terms of convertible notes are summarized as follows:
|
·
|
Term: September 4, 2019;
|
|
|
|
|
·
|
Coupon: 8%;
|
|
|
|
|
·
|
Convertible at the option of the holder at any time;
|
|
|
|
|
·
|
Conversion price is initially set at $2.49 but subject to down round price protection. After the maturity, the conversion price will be set subsequently at the lesser of the then conversion price and 85% of the volume weighted average price for the trading date immediately prior to the application conversion date; and
|
|
|
|
|
·
|
Monthly amortization of principal either in cash at a 10% premium or in stock, subject to equity conditions, at a 15% discount to the lowest volume weighted average price, at the option of the Company.
|
The Company had the following principal balances under its convertible notes outstanding as of November 30, 2018 and August 31, 2018:
|
|
November
30,
|
|
|
August
31,
|
|
|
|
2018
|
|
|
2018
|
|
8% Senior Secured Convertible notes, Principal (in default)
|
|
$
|
10,000,000
|
|
|
$
|
10,000,000
|
|
Less debt discount costs
|
|
|
(462,871
|
)
|
|
|
(617,162
|
)
|
Less debt issuance costs
|
|
|
(1,669,692
|
)
|
|
|
(2,226,323
|
)
|
Less Principal converted to common stock
|
|
|
(1,558,333
|
)
|
|
|
-
|
|
Total outstanding convertible notes, net
|
|
|
6,309,104
|
|
|
|
7,156,515
|
|
Less current portion of convertible notes payable
|
|
|
(6,309,104
|
)
|
|
|
(7,156,515
|
)
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company recognized amortization expense related to the debt discount and debt issuance costs of $710,922 and $0 for the three months ended November 30, 2018 and 2017, respectively, which is included in interest expense in the statements of operations.
For the fiscal quarter ended November 30, 2018, and 2017, the interest expense on convertible notes was $0, respectively. The Company applied the interest paid in cash and interest paid in equity against the make whole provision, which represents guaranteed twelve months of coupon payments since the Company was in default from its registration rights agreements. As of November 30, 2018, and August 31, 2018, the balance in the make whole accrual amounts to $446,555 and $608,889, respectively, and such amount was accrued as of November 30, 2018 and August 31, 2018.
During the three months ended November 30, 2018, the Company converted $1,558,332 of principal and $86,778 accrued interest into shares of commons to our institutional investors and issued 664,923 shares of common stock.
Event of default
The Company executed registration rights agreements with each of its institutional investors. These registration rights agreements require, among other things, that the initial registration statement should be (a) filed within 30 days of June 4, 2018, and (b) declared effective within 90 days of June 4, 2018. Our registration statement was filed on October 1, 2018 and it was declared effective by the SEC on October 29, 2018; thus, both the filing and effectiveness deadlines were missed.
The Company recorded in its condensed consolidated financial statements the mandatory default amount as stipulated in the convertible note agreements. As of November 30, 2018 and August 31, 2018, the Company recorded approximately $3.5 million, which is reported under current liabilities in its condensed consolidated statement of operations.
On December 20, 2018, the Company entered into settlement agreements with its institutional investors, which resolves all disputes relating to technical defaults by the Company in failing to meet deadlines for filing a registration statement and for having a registration statement effective by the SEC. As a result of such settlement, the Company increased the principal amount of the convertible notes by $888,888 in full settlement of the previously accrued $3.5 million default amount thereby decreasing the total liabilities reported on the Company’s November 30, 2018, and August 31, 2018, balance sheet by $2.6 million, respectively.
Note 5: Stockholders’ Equity
Preferred Stock
In September of 2016, the Company issued options to purchase preferred stock at $0.0001 per share. This issuance was approved by our shareholders. The number of options is equal to the lesser of (a) the number of shares of common stock held by such shareholder on September 28, 2016, which accounts for approximately 25.6 million shares, or (b) the number of shares of common stock held by such shareholder on date of the shareholder’s exercise of the aforesaid option. The preferred stock that is the subject of such contingent option provides a right to elect a majority of the directors on the Board of Directors of the Corporation and does not include any rights to dividends, conversion to shares of common stock, or preference upon liquidation of the Corporation. The contingent option is exercisable only upon the acquisition of a 20% or greater voting interest in the Corporation by a party other than the founding shareholders, or prior to any proposed merger, consolidation (in which the Corporation’s common stock is changed or exchanged) or sale of at least 50% of the Corporation’s assets or earning power (other than a reincorporation). The right to exercise the option terminates on December 31, 2023.
Common Stock and Warrants
During the three months ended November 30, 2018, the Company issued 142,500 and 125,000 shares of common stock following the exercise of warrants with an exercise price of $2 and $3, respectively, and received gross proceeds of $660,000.
During the three months ended November 30, 2017, the Company issued 25,000 shares of common stock following the exercise of warrants with an exercise price of $2 and received gross proceeds of $50,000.
As described more fully above in note 4, the Company issued 664,923 shares of common stock in satisfaction of principal and accrued interest following conversion of convertible notes into shares of common stock.
On September 28, 2017, the Company granted each 26,316 common shares, through the ShiftPixy, Inc., Plan to two of its independent directors, Whitney White and Sean Higgins at a fair value of $2.85 per share, of which 50% will vest on the date marking the six-month anniversary and the remaining 50% of the shares vesting on the first anniversary (September 28, 2018) of service under the executed agreement. For the three months ended November 30, 2018, the Company recognized $75,000 of compensation expense in its shareholders’ equity.
On November 30, 2018, the Company granted 12,296 common shares, through the ShiftPixy, Inc., Plan to Ken Weaver, Chairman of its Audit Committee, at a fair value of $3.05 per share. For the three months ended November 30, 2018, the Company recognized $37,500 of compensation expense in its shareholders’ equity.
During the three months ended November 30, 2017, the Company recognized 12,432 shares of common stock for services that vested during the three months ended November 30, 2017, at a fair value of $47,240.
The following tables summarize our warrants outstanding as of November 30, 2018:
|
|
Number
of
shares
|
|
|
Weighted
average
remaining
life
(years)
|
|
|
Weighted
average
exercise
price
|
|
Warrants outstanding, August 31, 2018,
|
|
|
3,778,796
|
|
|
|
2.13
|
|
|
$
|
2.84
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Exercised)
|
|
|
(267,500
|
)
|
|
|
0.45
|
|
|
$
|
2.47
|
|
(Cancelled)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Expired)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding, November 30, 2018,
|
|
|
3,511,296
|
|
|
|
2.00
|
|
|
$
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable, November 30, 2018,
|
|
|
3,511,296
|
|
|
|
2.00
|
|
|
$
|
2.87
|
|
The following table summarizes information about warrants outstanding as of November 30, 2018:
Exercise price
|
|
|
Warrants Outstanding
|
|
|
Weighted average life of outstanding warrants in years
|
|
$
|
2.00
|
|
|
|
776,300
|
|
|
|
0.3
|
|
$
|
2.49
|
|
|
|
1,220,883
|
|
|
|
5.0
|
|
$
|
3.00
|
|
|
|
878,800
|
|
|
|
0.3
|
|
$
|
4.00
|
|
|
|
535,313
|
|
|
|
0.3
|
|
$
|
6.90
|
|
|
|
100,000
|
|
|
|
3.6
|
|
|
|
|
|
|
3,511,296
|
|
|
|
2.0
|
|
Note 6: Stock based Compensation
The Company granted options to purchase an aggregate total of 235,000 and 35,000 shares of common stock during the three months ended November 30, 2018, and 2017, respectively. The Company recognized approximately $77,000 and $70,000 of compensation expense in the three months ended November 30, 2018, and 2017, respectively. The weighted average remaining contract life of the options is 9.14 and 9.61 years, respectively.
The total intrinsic value of options as of November 30, 2018, and 2017, is $135,424 and $0, respectively.
Stock option activity during the three months ended November 30, 2018, is summarized as follows:
|
|
Options Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Options outstanding at August 31, 2018
|
|
|
1,348,745
|
|
|
$
|
3.45
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
235,000
|
|
|
|
3.79
|
|
Forfeited
|
|
|
(92,916
|
)
|
|
$
|
3.06
|
|
Expired
|
|
|
-
|
|
|
|
|
|
Options outstanding at November 30, 2018
|
|
|
1,490,829
|
|
|
$
|
3.53
|
|
Note 7: Related Parties
J. Stephen Holmes, our Sales Manager is an advisor to and significant shareholder of the Company. The Company incurred $180,000 and $170,000 in professional fees for management consulting services in the three months ended November 30, 2018, and 2017, respectively.
On September 28, 2018, Sean Higgins, one of the Company’s independent directors, was awarded 13,158 shares for services at an assumed fair value of $2.85. For the quarter ended November 30, 2018, the Company recognized $37,500 of compensation expense in its shareholders’ equity for the potion that fully vested at quarter end. The Company also recorded $21,000 and $0 as compensation for his role as independent director for the quarter ended November 30, 2018, and 2017, respectively.
On September 28, 2018, Whitney White, one of the Company’s independent directors, was awarded 13,158 shares for services at an assumed fair value of $2.85. For the quarter ended November 30, 2018, the Company recognized $37,500 of compensation expense in its shareholders’ equity for the portion that fully vested at quarter end. The Company also recorded $22,500 and $0 as compensation for his role as independent director for the quarter ended November 30, 2018, and 2017, respectively.
On November 30, 2018, the Board of Directors awarded 12,296 shares of common stock at an assumed fair value of $3.05 to Kenneth W. Weaver. For the quarter ended November 30, 2018, the Company recognized $37,500 of compensation expense in its shareholders’ equity. For the quarter ended November 30, 2018, and 2017, the Company recorded $22,500 and $0, respectively, as compensation for his role as independent director.
Note 8: Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will be resolved only when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.
During the ordinary course of business, the Company is subject to various claims and litigation. Management believes that the outcome of such claims or litigation will not have a material adverse effect on the Company’s financial position, results of operations or cash flow.
Lyons Capital, LLC, Litigation
On June 21, 2018, ShiftPixy was served with a summons and complaint in connection with a claim by Lyons Capital, LLC, arising out of a contract wherein ShiftPixy, Inc., agreed to pay Lyons Capital, LLC, a total of 210,000 shares of the company’s common stock in exchange for introductions to brokers, research coverage, funds, investment banking firms, and market makers as well as board representation and business opportunities and for promotion of the company at Lyons Capital, LLC’s annual conference. This lawsuit 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.
Maribel Ramirez Litigation
On May 1, 2018, claimant, Maribel Ramirez, filed a class action lawsuit, naming our subsidiary, Shift Human Capital Management Inc., and its client as defendants, claiming that she was forced to work hours for which she was not paid and denied lunch breaks, and rest periods, etc., to which she was entitled, and also claiming in separate government complaints that she was discriminated against and wrongfully terminated. 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 obligated contractually to indemnify the Company for misreported hours and portions of the claim would be covered under the Company’s employment practices liability insurance.
Note 9: Subsequent Events
The Company granted 60,000 incentive stock options to employees with a weighted average grant-date exercise price of $2.62, which vest over a service period of 48 months. The stock options were valued using the Black-Scholes option-pricing model.
The Company issued 1,285,245 shares of common stock as repayment of $1,780,606 in principal and $139,300 in accrued interest of convertible notes.
On December 7, 2018, the Board of Directors adopted a resolution providing for the award on December 11, 2018, to two of its independent directors Sean Higgins and Whitney White, of 32,895 shares for services each, as part of their compensation under their Director Agreements for the 1 year period ending as of September 29, 2019; 50% of the shares will vest on March 28, 2019, following the completion of six months of service, the remaining 50% of the shares will vest on September 27, 2019 following the completion of another year of service under their Director agreements through that date.
On December 20, 2018, the Company entered into settlement agreements with its institutional investors relating to technical defaults by the Company in failing to meet deadlines set forth in agreements between the Company and the investors for filing a registration statement and for having the registration statement declared effective by the SEC. Under the settlement agreements, the Company increased the principal amount of the notes payable to the investors by $888,888 in full settlement of the previously accrued $3.5 million default amount thereby decreasing the total liabilities reported on the Company’s November 30, 2018, and August 31, 2018, balance sheet by $2.6 million, respectively.
Management has evaluated subsequent events pursuant to the issuance of the interim unaudited consolidated financial statements and has determined that other than listed above, no other subsequent events exist through the date of this filing.