See accompanying notes to the unaudited interim
condensed consolidated financial statements.
See accompanying notes to the unaudited interim
condensed consolidated financial statements.
See accompanying notes to the unaudited interim
condensed consolidated financial statements.
See accompanying notes to the unaudited interim
condensed consolidated financial statements.
See accompanying notes to the unaudited interim
condensed consolidated financial statements.
See accompanying notes to the unaudited interim
condensed consolidated financial statements.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Nature of Operations
ShiftPixy, Inc., (“we,” “us,”
“our,” the “Company” or “ShiftPixy”), was incorporated on June 3, 2015, in the State of Wyoming.
We are currently operating as a human capital outsourcing services provider that offers solutions for large contingent part-time workforce
demands, primarily in the restaurant and hospitality service trades. Our historic focus has been on the quick service restaurant industry
in Southern California, but we have begun to expand into other geographic areas and industries employing temporary or part-time labor
sources as well as additional services ancillary to those labor sources.
The Company offers a variety of human capital
services to its clients, including staffing, employment administrative services (“EAS”), payroll processing, human resources
consulting, and workers’ compensation coverage and administration related services, as permitted by applicable law. We offer these
services through various wholly-owned subsidiaries, including the following: (i) ShiftPixy Staffing, Inc., which provides traditional
staffing services; (ii) ReThink Administrative Services, Inc., which operates as an administrative services organization, or
“ASO”, often in conjunction with ShiftPixy Staffing; and (iii) Rethink Human Capital Management, Inc., which offers
a combination of services provided by ShiftPixy Staffing and ReThink Administrative Services, including EAS. We have built a human resources
information systems (“HRIS”) platform to assist in customer acquisition that simplifies the onboarding of new clients into
our closed proprietary operating and processing information system (the “ShiftPixy Ecosystem”). This platform is expected
to facilitate additional value-added services in future reporting periods. In January 2020, we sold the assets of Shift Human Capital
Management, Inc. (“SHCM”), a wholly-owned subsidiary of the Company, pursuant to which we assigned the majority of our
billable clients, at that time, to a third party for cash as described below in Note 3.
The Company also announced, in late 2020, its
“ShiftPixy Labs” initiative, which includes the creation of incubator “ghost kitchens” to be operated in conjunction
with its wholly-owned subsidiary, ShiftPixy Ghost Kitchens, Inc. Through this initiative, the Company intends to provide resources
and guidance to entrepreneurs seeking to bring their food delivery concepts to market, in return for the opportunity to combine with the
ShiftPixy HRIS platform to create a co-branded, or “ghost” branded, food preparation and delivery solution. The initial phase
of this initiative will be implemented in a dedicated showcase kitchen facility located in close proximity to our Miami headquarters,
which is currently under renovation and which we expect to be operational in the fourth quarter of our fiscal year ending August 31,
2021 (“Fiscal 2021”). We intend to partner with various culinary training organizations and experts in testing these concepts,
and to showcase these efforts through the distribution of video programming on social media produced and distributed by our wholly owned
subsidiary, ShiftPixy Productions, Inc. If successful, we intend to replicate this initiative in similarly constructed facilities
throughout the United States and in selected international locations. We also intend to provide similar services via mobile kitchen concepts,
all of which will be heavily reliant on our HRIS platform and which we believe will capitalize on trends observed during the COVID-19
pandemic toward providing customers with a higher quality prepared food delivery product that is more responsive to their needs.
On March 25, 2020, the Company filed Amended and Restated Articles
of Incorporation (the “Restated Articles of Incorporation”) with the Wyoming Secretary of State, which were approved by the
Company’s board of directors (the “Board of Directors”) and its shareholders representing a majority of its outstanding
shares of capital stock. The Restated Articles of Incorporation, among other things, set conversion rights for the Company’s Class A
Preferred Stock, par value $0.0001 per share, to convert into shares of common stock on a one-for-one basis. On March 31, 2021, shareholders
representing a majority of the Company’s outstanding shares of capital stock approved a further amendment to the Restated Articles
of Incorporation (the “Amended Restated Articles of Incorporation”), which makes the federal district courts of the United
States the exclusive forum for the resolution of any complaint asserting a cause of action against the Company arising under the Securities
Act of 1933, as amended. On May 13, 2021, the Company filed the Amended Restated Articles of Incorporation with the Wyoming Secretary
of State.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim
reports of companies filing as a small reporting company. Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. The results of operations for the three and nine months ended May 31, 2021 are
not necessarily indicative of the results that may be expected for the full year ending Fiscal 2021.
For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31,
2020 (“Fiscal 2020”), filed with the SEC on November 30, 2020, as well as the amendment to Item 13 of our Annual Report
on Form 10-K/A for Fiscal 2020 filed with the SEC on January 12, 2021.
Principles of Consolidation
The Company and its wholly-owned subsidiaries
have been consolidated in the accompanying financial statements. All intercompany balances have been eliminated in consolidation.
On April 29, 2021, we announced our sponsorship, through our wholly-owned
subsidiary, ShiftPixy Investments, Inc., of four special purpose acquisition companies, or “SPACs”. Three of the SPACs
are each seeking to raise $250 million in capital investment, through an initial public offering, or “IPO”, to acquire companies
in the light industrial, healthcare, and technology segments of the staffing industry, while the fourth SPAC is seeking to raise $500
million through an IPO to acquire one or more insurance entities. We anticipate that, through our wholly-owned subsidiary, we will own
approximately 20% of the issued and outstanding stock in each entity upon their IPOs being consummated, and that each will operate as
a separately managed, publicly traded entity following the completion of their respective initial business combinations, or “De-SPAC”.
We anticipate entering into service agreements with each of the staffing entities that will allow them to participate in our HRIS platform.
We also expect to facilitate the procurement of workers’ compensation, personal liability, and other similar insurance products
for these staffing entities through our anticipated relationship with the insurance SPAC after it completes the De-SPAC process. For the
period ended May 31, 2021, the sponsorship operations for these entities are consolidated in the accompanying financial statements as
they were being conducted under a wholly-owned subsidiary.
Use of Estimates
The preparation of financial statements in conformity
with GAAP requires the Company to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Significant estimates include:
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·
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Liability for legal contingencies;
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·
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Useful lives of property and equipment;
|
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·
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Deferred income taxes and related valuation allowance;
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·
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Valuation of long-lived assets including fair value and net realizable value of long term notes receivable;
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·
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Projected development of workers’ compensation claims; and
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·
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Valuation expense related to preferred stock options.
|
Revenue and Direct Cost Recognition
The Company provides an array of human resources
and business solutions designed to help improve business performance.
The Company’s revenues are primarily attributable
to fees for providing staffing solutions and EAS/human capital management services. The Company recognizes revenue when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the services have been rendered to the customer; (iii) the
sales price is fixed or determinable; and (iv) collectability is reasonably assured. The Company enters into contracts with its clients
for EAS based on a stated rate and price in the contract. Contracts generally have a term of 12 months but are cancellable at any time
by either party with 60 days’ written notice. Contract performance obligations are satisfied as services are rendered, and the time
period between invoicing and when the performance obligations are satisfied is not significant. The Company does not have significant
financing components or significant payment terms for its customers and consequently has no material credit losses. Payments for the Company’s
services are typically made in advance of, or at the time that the services are provided.
The Company accounts for its EAS revenues in accordance
with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-45, Revenue
Recognition, Principal Agent Considerations. EAS solutions revenue is primarily derived from the Company’s gross billings, which
are based on (i) the payroll cost of the Company’s worksite employees (“WSEs”) and (ii) a mark-up computed
as a percentage of payroll costs for payroll taxes and workers’ compensation premiums.
Gross billings are invoiced to each client concurrently
with each periodic payroll of the Company’s WSEs, which coincides with the services provided and which is typically a fixed percentage
of the payroll processed. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup,
are recognized ratably over the payroll period as WSEs perform their services at the client worksite. Revenues that have been recognized
but not invoiced are included in unbilled accounts receivable on the Company’s consolidated balance sheets, and were not material
as of May 31, 2021 and August 31, 2020, respectively.
Consistent with the Company’s revenue recognition
policy, direct costs do not include the payroll cost of its WSEs. The cost of revenue associated with the Company’s revenue generating
activities is primarily comprised of all other costs related to its WSEs, such as the employer portion of payroll-related taxes, employee
benefit plan premiums and workers’ compensation insurance costs.
The Company has evaluated its revenue recognition
policies in conjunction with its future expected business as it migrates to a staffing business model. For Fiscal 2020 and Fiscal 2021,
there were no material revenues to date that should have been evaluated under a staffing business model. Such a staffing business model
would have included the payroll costs in revenues with a corresponding increase to cost of revenues for payroll costs associated with
staffing services.
Segment Reporting
The Company currently principally operates as
one reportable segment under ASC 280, Segment Reporting. The chief operating decision maker regularly reviews the financial information
of the Company at a consolidated level in deciding how to allocate resources and in assessing performance. During Fiscal 2020, the Company
began to enter into new business lines and geographic areas that, to date, are not material. The Company expects to operate in multiple
segments in the future as its business evolves and will evaluate these changes prospectively. The impact from the SPACs for the
three and nine months ended May 31, 2021, in our operations has not been material.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with an original maturity of three months or less when purchased as cash equivalents. The Company had no such investments as of May 31,
2021 or August 31, 2020.
Concentration of Credit Risk
The Company maintains cash with a commercial bank,
which is insured by the Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company has deposits in this
financial institution in excess of the amount insured by the FDIC. The Company has not experienced any losses related to these balances
and believes its credit risk to be minimal. As of May 31, 2021, there was $9,138,000 of cash in excess of the amounts insured by
the FDIC.
For the three and nine months ended May 31, 2021, one and zero
individual clients represented more than 10% of revenues, respectively. No individual clients represented more than 10% of revenues for
the three months and nine months ended May 31, 2020. However, two clients represented 92% of total accounts receivable at May 31,
2021.
Fixed Assets
Fixed assets are recorded at cost, less accumulated
depreciation and amortization. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance,
and repairs are charged to expense as incurred. When fixed assets are retired or otherwise disposed of, the cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Leasehold
improvements are amortized over the shorter of the useful life or the initial lease term.
Fixed assets are recorded at cost and are depreciated
over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of property and equipment
for purposes of computing depreciation are as follows:
Equipment:
|
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5 years
|
Furnitures & Fixtures:
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5 - 7 years
|
The amortization of these assets is included in
depreciation expense on the condensed consolidated statements of operations.
Computer Software Development
Software development costs relate primarily to
software coding, systems interfaces and testing of the Company’s proprietary employer information systems and are accounted for
in accordance with ASC 350-40, Internal Use Software.
Internal software development costs are capitalized
from the time the internal use software is considered probable of completion until the software is ready for use. Business analysis, system
evaluation and software maintenance costs are expensed as incurred. The capitalized computer software development costs are reported under
the section fixed assets, net in the consolidated balance sheets.
The Company determined that there were no material
capitalized internal software development costs for the three and nine months ended May 31, 2021 or May 31, 2020. All capitalized
software recorded was purchased from third party vendors. Capitalized software development costs are amortized using the straight-line
method over the estimated useful life of the software, generally three to five years from when the asset is placed in service.
Impairment and Disposal of Long-Lived Assets
The Company periodically evaluates its long-lived
assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment. ASC 360-10 requires that an impairment loss
be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be recoverable. If events
or circumstances were to indicate that any of our long-lived assets might be impaired, the Company would assess recoverability based on
the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, the Company may record an impairment
loss to the extent that the carrying value of the asset exceeds the fair value of the asset. Fair value is generally determined using
an estimate of discounted future net cash flows from operating activities or upon disposal of the asset. There were no indicators noted
of impairments during the periods ended May 31, 2021 or May 31, 2020.
Workers’ Compensation
Everest Program
Until July 2018, a portion of the Company’s
workers’ compensation risk was covered by a retrospective rated policy, which calculates the final policy premium based on the Company’s
loss experience during the term of the policy and the stipulated formula set forth in the policy. The Company funds the policy premium
based on standard premium rates on a monthly basis and based on the gross payroll applicable to workers covered by the policy. During
the policy term and thereafter, periodic adjustments may involve either a return of previously paid premiums or a payment of additional
premiums by the Company or a combination of both. If the Company’s losses exceed the expected losses under that policy, then the
Company could receive a demand for additional premium payments. The Company is currently engaged in litigation regarding such a demand
for additional premium payments, which we believe to be without merit, as discussed at Note 9, Contingencies, Everest Litigation,
below.
Sunz Program
From July 2018 through
February 28, 2021, the Company’s workers’ compensation program for its WSEs was provided primarily through an
arrangement with United Wisconsin Insurance Company and administered by Sunz Insurance Solutions, LLC (“Sunz”). Under
this program, the Company has financial responsibility for the first $0.5 million of claims per occurrence. The Company provides and
maintains a loss fund that is earmarked to pay claims and claims related expenses. The workers’ compensation insurance carrier
establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims
(“claim loss funds”). The level of claim loss funds is primarily based upon anticipated WSE payroll levels and expected
workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims
expected to be paid within one year are recorded as Deposit - workers’ compensation, a short-term asset, while the remainder
of claim funds are included in Deposit- workers’ compensation, a long-term asset in its consolidated balance sheets. The
Company is currently engaged in litigation regarding demands by Sunz for additional claims loss funds, which we believe to be
without merit, as discussed at Note 9, Contingencies, Sunz Litigation, below.
Current Program
Effective March 1, 2021, the Company
migrated its clients to a guaranteed cost program. Under this program, the Company’s financial responsibility is limited to
the cost of the workers’ compensation premium. The Company funds the workers’ compensation premium based on standard
premium rates on a monthly basis and based on the gross payroll applicable to workers covered by the policy. Any final adjustments
to the premiums are based on the final audited exposure multiplied by the applicable rates, classifications, experience
modifications and any other associated rating criteria.
Under the Everest and Sunz programs, the Company
utilized a third party to estimate its loss development rate, which was based primarily upon the nature of WSEs’ job responsibilities,
the location of WSEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends.
Each reporting period, changes in the assumptions resulting from changes in actual claims experience and other trends are incorporated
into its workers’ compensation claims cost estimates.
As of May 31, 2021, the Company had $0.3
million in Deposit – workers’ compensation classified as a short-term asset and $0.5 million classified as a long-term asset.
The Company’s estimate of incurred claim
costs expected to be paid within one year is included in short-term liabilities, while its estimate of incurred claim costs expected to
be paid beyond one year is included in long-term liabilities on its consolidated balance sheets. As of May 31, 2021, the Company
had short term accrued workers’ compensation costs of $0.7 million and long term accrued workers’ compensation costs of $1.3
million.
The Company retained workers’ compensation
asset reserves and workers’ compensation related liabilities for former WSEs of clients transferred to Shiftable HR Acquisition,
LLC, a wholly-owned subsidiary of Vensure Employer Services, Inc. (“Vensure”), in connection with the Vensure Asset Sale
described in Note 3, below. As of May 31, 2021, the retained workers’ compensation assets and liabilities are presented
as a discontinued operation net asset or liability. As of May 31, 2021, the Company had $0.6 million in short term assets and $1.7
million of short term liabilities, and had $1.1 million of long term assets and $3.1 million of long term liabilities.
Because the Company bears the financial responsibility
for claims up to the level noted above, such claims, which are the primary component of its workers’ compensation costs, are recorded
in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid
over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes
estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. In estimating
ultimate loss rates, the Company utilizes historical loss experience, exposure data, and actuarial judgment, together with a range of
inputs that are primarily based upon the WSE’s job responsibilities, their location, the historical frequency and severity of workers’
compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial assumptions resulting
from changes in actual claims experience and other trends are incorporated into the Company’s workers’ compensation claims
cost estimates. The estimated incurred claims are based upon: (i) the level of claims processed during each quarter; (ii) estimated
completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan.
The Company has had very limited and immaterial
COVID-19 related claims between March 2020 through the date of this Quarterly Report, although there is a possibility of additional
workers’ compensation claims being made by furloughed WSEs as a result of the employment downturn caused by the pandemic. On May 4,
2020, the State of California indicated that workers who become ill with COVID-19 would have a potential claim against workers’
compensation insurance for their illnesses. There is a possibility that additional workers’ compensation claims could be made by
employees required to work by their employers during the COVID-19 pandemic, which could have a material impact on our workers’ compensation
liability estimates. While the Company has not seen significant additional expenses as a result of any such potential claims to date,
which would include claims for reporting periods after May 31, 2021, we continue to monitor closely all workers’ compensation
claims made as the COVID-19 pandemic continues.
Fair Value of Financial Instruments
ASC 825, Financial Instruments,
requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on
the balance sheet, for which it is practical to estimate fair value. ASC 825 defines fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction between willing parties. At May 31, 2021 and
August 31, 2020, the carrying value of certain financial instruments (cash, accounts receivable and payable) approximated fair
value due to the short-term nature of the instruments. Notes Receivable was valued at estimated fair value as described below as of
August 31, 2020 and through December 31, 2020 (end of the earnout period provided for under the terms of the Note
Receivable), and at estimated net realizable value as of May 31, 2021.
The Company measures fair value under a framework
that utilizes a hierarchy prioritizing the inputs to relevant valuation techniques. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs
(Level 3 measurements). The three levels of inputs used in measuring fair value are:
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·
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Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
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·
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Level 2: Inputs to the valuation methodology include:
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o
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Quoted prices for similar assets or liabilities in active markets;
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o
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Quoted prices for identical or similar assets or liabilities in inactive markets;
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o
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Inputs other than quoted prices that are observable for the asset or liability;
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o
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Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
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o
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If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
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·
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Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The Company did not have any Level 1 or Level
2 assets or liabilities at May 31, 2021 or August 31, 2020. The valuation of the Note Receivable (as defined below) from the
Vensure Asset Sale, as defined below, is a Level 3 fair value measurement as of August 31, 2020 and through December 31, 2020
(end of the earnout period as defined under the terms of the Note Receivable).
The Note Receivable, as described in Note 3, below, was estimated using
a discounted cash flow technique based on expected contingent payments identified in the Vensure Asset Sale contract and with significant
inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The Company valued
the Note Receivable on the January 1, 2020 transaction date using a 10% discount rate, and on August 31, 2020 and through December 31,
2020 using a 15% discount rate, which contemplates the risk and probability assessments of the expected future cash flows. The significant
inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related
to the Vensure Asset Sale, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in
accordance with the terms of the Vensure Asset Sale agreement. The Company believes there are risks associated with the value of the Note
Receivable due to business impacts of the COVID-19 pandemic. The expected cash payments from the Note Receivable are based on estimated
gross wages billed for the clients transferred to Vensure pursuant to the Vensure Asset Sale as of the measurement date. Those transferred
clients may have had their businesses impacted due to the pandemic which, in turn, would have resulted in lower gross wage billings. While
the Company believes the current valuation of the Note Receivable was fairly recorded as of December 31, 2020, a material change in the
business transferred may result in a reduction of the estimate of the contingent payments expected to be received and therefore the value
of this asset. The Company used the following assumptions to value the Note Receivable as of August 31, 2020:
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·
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Actual monthly wages billed to the extent available to the Company
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The development and determination of the unobservable
inputs for Level 3 fair value measurements and the fair value calculations are the responsibility of the Company’s chief financial
officer and are approved by the chief executive officer.
Research and Development
During the three months ended May 31, 2021
and May 31, 2020, the Company incurred research and development costs of approximately $1 million and $ 1.5 million, respectively.
During the nine months ended May 31, 2021 and May 31, 2020, the Company incurred research and development costs of approximately
$2.7 million and $3.4 million, respectively. All costs were related to internally developed or externally contracted software and related
technology for the Company’s HRIS platform and related mobile application. No software costs were capitalized for the three months
and nine months ended May 31, 2021 and May 31, 2020, respectively.
Advertising Costs
The Company expenses all advertising as incurred.
The Company incurred advertising costs totaling $410,000 and $1,331,000 for the three months and nine months ended May 31, 2021,
respectively, and advertising costs of $206,000 and $389,000 for the three and nine months ended May 31, 2020, respectively.
Earnings (Loss) Per Share
The Company utilizes ASC 260, Earnings per
Share. Basic earnings (loss) per share is computed by dividing earnings (loss) attributable to common stockholders by the weighted-average
number of common shares outstanding during the reporting period. Common stock outstanding for purposes of earnings (loss) per share calculations
include unexercised Preferred Options and unexercised prefunded warrants, as described in Note 5, below. Diluted earnings (loss)
per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common
stock equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common stock equivalents
include the dilutive effect of in-the-money stock equivalents, which are calculated based on the average share price for each period using
the treasury stock method, excluding any common stock equivalents if their effect would be anti-dilutive. In periods in which a net loss
has been incurred, all potentially dilutive common stock shares are considered anti-dilutive and thus are excluded from the calculation.
Securities that are excluded from the calculation of weighted average dilutive common stock, because their inclusion would have been antidilutive,
are:
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For the
Three and
Nine
Months
Ended
May 31,
2021
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For the
Three and
Nine
Months
Ended
May 31,
2020
|
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Options
|
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1,826,548
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43,406
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Warrants (Note 5)
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9,592,086
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1,896,209
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Total potentially dilutive shares
|
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11,418,634
|
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1,939,615
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For the table above, “Options” represent
all options granted under the Company’s 2017 Stock Option/Stock Issuance Plan, as described in Note 6, below.
Stock-Based Compensation
At May 31, 2021, the Company had one stock-based
compensation plan under which the Company may issue awards, as described in Note 6, below. The Company accounts for this plan under the
recognition and measurement principles of ASC 718, Compensation- Stock Compensation, which requires all stock-based payments to
employees, including grants of employee stock options, to be recognized in the condensed consolidated statements of operations at their
fair values.
The grant date fair value is determined using
the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, the Company recognizes expense on
an accelerated basis over the employee’s requisite service period (generally the vesting period of the equity grant).
The Company’s option pricing model requires
the input of highly subjective assumptions, including the expected stock price volatility and expected term. The expected volatility is
based on the historical volatility of the Company’s common stock since our initial public offering. Any changes in these highly
subjective assumptions significantly impact stock-based compensation expense.
The Company elects to account for forfeitures
as they occur. As such, compensation cost previously recognized for an unvested award that is forfeited because of the failure to satisfy
a service condition is revised in the period of forfeiture.
The methods and assumptions used in the determination of the fair value
of stock-based awards are consistent with those described in the Company's Annual Report on Form 10-K for Fiscal 2020. See the Company's
Annual Report on Form 10-K for Fiscal 2020 for a detailed description of the Company's stock-based compensation awards, including information
related to vesting terms, service and performance conditions, payout percentages, and process for estimating the fair value of stock options
granted.
Revisions and Reclassifications of Financial
Statements for the Three and Nine months ended May 31, 2020
Revision of Financial Statements
During the preparation of the consolidated financial
statements for Fiscal 2020, the Company determined that it had improperly amortized capitalized software that had not been placed into
service. The Company assessed the materiality of the misstatements in accordance with Staff Accounting Bulletin No. 99, Materiality,
and No. 108, Quantifying Misstatements, and concluded that this error was not qualitatively material to the Company’s
consolidated balance sheet, statement of operations, statement of cash flows, statement of stockholders’ equity (deficit) or net
loss for the periods then ended.
Reclassification of Discontinued Operations
During the preparation of the consolidated financial
statements for Fiscal 2020, the Company determined that it had included in continuing operations certain customer revenues, cost of revenues,
and commission expense related to customers transferred to Vensure as part of the Vensure Asset Sale. For consistency of presentation,
those customer activities were reclassified to discontinued operations for the three and nine months ended May 31, 2020. Such reclassifications
had no material impact on the Company’s financial condition, operating results, cash flows or stockholder’s equity. Reclassifications
to discontinued operations and the impact on earnings (loss) per share have been represented in the table below.
The effect of the revisions and reclassifications
on the line items within the Company’s condensed consolidated statement of operations for the three and nine months ended May 31,
2020, was as follows:
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For the three months ended May 31, 2020
(unaudited)
|
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As
Previously
Reported
|
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Revision
Adjustments
|
|
|
As
Restated
|
|
|
Discontinued
Operations
Reclassification
|
|
|
As Restated
and
Reclassified
|
|
Revenues
|
|
$
|
2,014,000
|
|
|
$
|
-
|
|
|
$
|
2,014,000
|
|
|
$
|
-
|
|
|
$
|
2,014,000
|
|
Cost of revenue
|
|
|
1,873,000
|
|
|
$
|
-
|
|
|
|
1,873,000
|
|
|
|
-
|
|
|
|
1,873,000
|
|
Gross profit
|
|
$
|
141,000
|
|
|
$
|
-
|
|
|
$
|
141,000
|
|
|
$
|
-
|
|
|
$
|
141,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
545,000
|
|
|
|
(162,000
|
)
|
|
|
383,000
|
|
|
|
-
|
|
|
|
383,000
|
|
All other operating expenses
|
|
$
|
4,149,000
|
|
|
$
|
-
|
|
|
$
|
4,149,000
|
|
|
$
|
-
|
|
|
$
|
4,149,000
|
|
Operating loss
|
|
$
|
(4,553,000
|
)
|
|
$
|
162,000
|
|
|
$
|
(4,391,000
|
)
|
|
$
|
-
|
|
|
$
|
(4,391,000
|
)
|
Net loss from continuing operations
|
|
$
|
(71,688,000
|
)
|
|
$
|
162,000
|
|
|
$
|
(71,526,000
|
)
|
|
$
|
-
|
|
|
$
|
(71,526,000
|
)
|
Total income from discontinued operations
|
|
$
|
(1,490,000
|
)
|
|
$
|
-
|
|
|
$
|
(1,490,000
|
)
|
|
$
|
-
|
|
|
$
|
(1,490,000
|
)
|
Net loss
|
|
$
|
(73,178,000
|
)
|
|
$
|
162,000
|
|
|
$
|
(73,016,000
|
)
|
|
$
|
-
|
|
|
$
|
(73,016,000
|
)
|
Net loss per common share - continuing operations, Basic and diluted
|
|
$
|
(2.73
|
)
|
|
$
|
0.01
|
|
|
$
|
(2.72
|
)
|
|
$
|
-
|
|
|
$
|
(2.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) per common share
|
|
$
|
(0.06
|
)
|
|
$
|
-
|
|
|
$
|
(0.06
|
)
|
|
$
|
-
|
|
|
$
|
(0.06
|
)
|
Net income (loss) per common share, Basic and diluted
|
|
$
|
(2.79
|
)
|
|
$
|
0.01
|
|
|
$
|
(2.78
|
)
|
|
$
|
-
|
|
|
$
|
(2.78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common stock shares, Basic and diluted
|
|
|
26,249,518
|
|
|
|
|
|
|
|
26,249,518
|
|
|
|
|
|
|
|
26,249,518
|
|
|
|
For the nine months ended May 31, 2020
(unaudited)
|
|
|
|
As
Previously
Reported
|
|
|
Revision
Adjustments
|
|
|
As
Restated
|
|
|
Discontinued
Operations
Reclassification
|
|
|
As Restated
and
Reclassified
|
|
Revenues
|
|
$
|
6,775,000
|
|
|
$
|
-
|
|
|
$
|
6,775,000
|
|
|
$
|
(494,000
|
)
|
|
$
|
6,281,000
|
|
Cost of revenue
|
|
|
6,051,000
|
|
|
|
-
|
|
|
|
6,051,000
|
|
|
|
(227,000
|
)
|
|
|
5,824,000
|
|
Gross profit
|
|
$
|
724,000
|
|
|
$
|
-
|
|
|
$
|
724,000
|
|
|
$
|
(267,000
|
)
|
|
$
|
457,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,025,000
|
|
|
|
(486,000
|
)
|
|
|
539,000
|
|
|
|
-
|
|
|
|
539,000
|
|
All other operating expenses
|
|
$
|
12,561,000
|
|
|
$
|
-
|
|
|
$
|
12,561,000
|
|
|
$
|
112,000
|
|
|
$
|
12,673,000
|
|
Operating loss
|
|
$
|
(12,862,000
|
)
|
|
$
|
486,000
|
|
|
$
|
(12,376,000
|
)
|
|
$
|
(379,000
|
)
|
|
$
|
(12,755,000
|
)
|
Net loss from continuing operations
|
|
$
|
(80,678,000
|
)
|
|
$
|
486,000
|
|
|
$
|
(80,192,000
|
)
|
|
$
|
(379,000
|
)
|
|
$
|
(80,571,000
|
)
|
Total income from discontinued operations
|
|
$
|
14,389,000
|
|
|
$
|
-
|
|
|
$
|
14,389,000
|
|
|
$
|
379,000
|
|
|
$
|
14,768,000
|
|
Net loss
|
|
$
|
(66,289,000
|
)
|
|
$
|
486,000
|
|
|
$
|
(65,803,000
|
)
|
|
$
|
-
|
|
|
$
|
(65,803,000
|
)
|
Net loss per common share - continuing operations, Basic and diluted
|
|
$
|
(5.49
|
)
|
|
$
|
0.04
|
|
|
$
|
(5.45
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(5.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) per common share
|
|
$
|
0.98
|
|
|
$
|
-
|
|
|
$
|
0.98
|
|
|
$
|
0.03
|
|
|
$
|
1.01
|
|
Net income (loss) per common share, Basic and diluted
|
|
$
|
(4.51
|
)
|
|
$
|
0.04
|
|
|
$
|
(4.47
|
)
|
|
$
|
-
|
|
|
$
|
(4.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common stock shares, Basic and diluted
|
|
|
14,708,554
|
|
|
|
|
|
|
|
14,708,554
|
|
|
|
|
|
|
|
14,708,554
|
|
Recent Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services.” The standard provides enhancements to the quality and consistency of how revenue is reported by companies, while
also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or GAAP.
The new standard also requires enhanced revenue disclosures, provides guidance for transactions that were not previously addressed comprehensively,
and improves guidance for multiple-element arrangements. This accounting standard was initially scheduled to become effective for the
Company for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods
beginning after December 15, 2019 but has since been delayed. Early adoption was permitted for annual reporting periods (including
interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect
transition method. The Company is still evaluating the effect of the new standard.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of this standard is to clarify
the implementation of guidance on principal versus agent considerations related to ASU 2014-09. The standard has the same effective date
as ASU 2014-09 described above.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarity related
to ASU 2014-09 regarding identification of performance obligations and licensing implementation. The standard has the same effective date
as ASU 2014-09 described above.
In May 2016, the FASB issued ASU 2016-12:
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope
improvements and practical expedients related to ASU 2014-09. The purpose of this standard is to clarify certain narrow aspects of ASU
2014-09, such as assessing the collectability criterion, presentation of sales taxes, and other similar taxes collected from customers,
noncash consideration, contract modifications at transition, completed contracts at transition, and technical correction. The standard
has the same effective date as ASU 2014-09 described above.
In December 2016, the FASB issued ASU 2016-20:
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this standard affect
narrow aspects of guidance issued in ASU 2014-09.
In June 2020, the FASB issued ASU 2020-05:
Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842). For entities that, as of June 2020, had not issued
financial statements under Topic 606, the effective date was extended by one year to annual periods beginning after December 15,
2019 and interim periods within annual periods beginning after December 15, 2020. Entities that have not issued financial statements
under Topic 842 are required to adopt this standard for financial statements issued for fiscal years beginning after December 15,
2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application is permitted.
The Company is evaluating the effect of adopting
this new accounting guidance and is currently finalizing its analysis of the financial impact of adoption. The Company expects to adopt
the guidance using the modified retrospective method.
In February 2016, the FASB issued ASU 2016-02,
Leases. The new standard requires that a lessee recognize assets and liabilities on the balance sheet for leases with terms longer
than 12 months. The recognition, measurement and presentation of lease expenses and cash flows by a lessee will depend on its classification
of the lease as a finance or operating lease. The guidance also includes new disclosure requirements providing information on the amounts
recorded in the financial statements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases.
For entities that early adopted Topic 842, the amendments are effective upon issuance of ASU 2018-10, and the transition requirements
are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will
be the same as the effective date and transition requirements in Topic 842. In June 2020, the FASB voted to defer the effective date
for private companies for one year. The updated effective date will be for fiscal years beginning after December 15, 2021, and interim
periods within fiscal years beginning after December 15, 2022. The Company is evaluating the effect of adopting this new accounting
guidance and is currently finalizing its analysis of the financial impact of the adoption. The Company expects to adopt the guidance using
the modified retrospective method.
In August 2020, the FASB issued ASU 2020-06,
Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s
Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies
the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number
of embedded conversion features that could be recognized separately from the primary contract. The update also requires the application
of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. The new guidance is effective
for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted,
but no earlier than fiscal years beginning after December 15, 2020. This update can be adopted on either a fully retrospective or
a modified retrospective basis. The Company is evaluating the effects of the adoption.
In May 2021, the FASB issued ASU 2021-04 Earnings
Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718),
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications
or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). The amendments
in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those
fiscal years. The Company is evaluating the effects of the adoption.
Note 3: Discontinued Operations
On January 3, 2020, the Company executed
an asset purchase agreement assigning client contracts comprising approximately 88% of its quarterly revenue through the date of the transaction,
including 100% of its existing professional employer organization (“PEO”) business effective as of December 31, 2019,
and the transfer of $1.5 million of working capital assets, including cash balances and certain operating assets associated with the assigned
client contracts included in the agreement, to a wholly owned subsidiary of Vensure (the “Vensure Asset Sale”). Gross proceeds
from the Vensure Asset Sale were $19.2 million, of which $9.7 million was received at closing and $9.5 million was to be paid out in equal
monthly payments over the next four years (the “Note Receivable”), subject to adjustments for working capital and customer
retention, (as measured by a gross wage guarantee included in the governing agreement), over the twelve month period following the Vensure
Asset Sale. During the three months and nine months ended May 31, 2021, the Company identified an additional $41,000 of net cash
paid on behalf of the Company and adjusted the Note Receivable accordingly.
On March 12, 2021, the Company received correspondence
from Vensure proposing approximately $10.7 million of working capital adjustments under the terms of the Vensure Asset Sale agreement
which, if accepted, would have had the impact of eliminating any sums owed to the Company under the Note Receivable. As indicated in the
reconciliation table below, the Company has recorded $2.6 million of working capital adjustments, subject to final review and acceptance,
and has provided for an additional reserve of $2.9 million for potential claims. By letter dated April 6, 2021, the Company disputed
Vensure’s proposed adjustments, and maintains that the amount Vensure owes the Company pursuant to the Note Receivable is as much
as $9.5 million. Any disputes regarding working capital adjustments under the Vensure Asset Sale agreement are subject to a resolution
process that includes a 30-day negotiation period followed by binding arbitration, which the parties have mutually agreed to extend as
of the date of this filing.
The following is a reconciliation of the gross proceeds to the net
proceeds from the Vensure Asset Sale as presented in the balance sheet for the period ended May 31, 2021.
Gross proceeds
|
|
$
|
19,166,000
|
|
Cash received at closing – asset sale
|
|
|
(9,500,000
|
)
|
Cash received at closing – working capital
|
|
|
(166,000
|
)
|
Gross note receivable
|
|
$
|
9,500,000
|
|
|
|
|
|
|
Less: Transaction reconciliation – estimated working capital adjustments
|
|
|
(2,604,000
|
)
|
Adjusted Note Receivable
|
|
|
6,896,000
|
|
Reserve for estimated potential claims
|
|
|
(2,892,000
|
)
|
Long-term note receivable, estimated net realizable value
|
|
$
|
4,004,000
|
|
The Vensure Asset Sale met the criteria of discontinued
operations set forth in ASC 205. As such, the Company has reclassified its discontinued operations for all periods presented and has excluded
the results of its discontinued operations from continuing operations for all periods presented.
Until December 31, 2020, the Company estimated
the fair value of the adjustments to the Note Receivable using Level 3 inputs. For the period ended May 31, 2021, the Company estimated
the net realizable value of the Note Receivable, which approximates the fair value as of December 31, 2020.
The Vensure Asset Sale calls for adjustments to the Note Receivable
either for: (i) working capital adjustments or (ii) in the event that the gross wages of the business transferred is less than
the required amount, as detailed below:
Working
capital adjustments: Through May 31, 2021, the Company has identified $2,604,000 of likely working capital
adjustments, including $88,000 related to lower net assets transferred at closing, and $2,516,000 of cash remitted to the
Company’s bank accounts, net of cash remitted to Vensure’s bank accounts. Under the terms of the Vensure Asset Sale, a
reconciliation of the working capital was to have been completed by April 15, 2020. Due to operational difficulties and
quarantined staff caused by the outbreak of COVID-19, Vensure requested a postponement of the working capital reconciliation that
was due in Fiscal 2020. Although Vensure provided the Company with its working capital reconciliation on March 12, 2021, it
failed to provide adequate documentation to support its calculations. Accordingly, the working capital adjustment recorded as of
May 31, 2021, represents the Company’s estimate of the reconciliation by using Vensure’s claims and the limited
supporting information Vensure provided as a starting point, and then making adjustments for amounts in dispute based upon our
internal records and best estimates. There is no assurance that the working capital change identified as of May 31, 2021
represents the final working capital adjustment.
Gross billings adjustment: Under
the terms of the Vensure Asset Sale, the proceeds of the transaction are reduced if the actual gross wages of customers transferred for
calendar 2020 are less than 90% of those customers’ 2019 gross wages. For the year ended August 31, 2020 and the quarter ended
November 30, 2020, the Company recorded a reserve for its estimate of a gross billings adjustment. Vensure did not identify any such
adjustments in their March 2021 correspondence. Based on the information available, the Company reclassified the previously recorded
gross wages claim to a general potential claims reserve during the quarter ended February 28, 2021. No additional adjustment was
made during the three months ended on May 31, 2021.
The $2.9 million reserve for estimated potential
claims is based on an evaluation of the disputed claims made by Vensure that are in excess of the $2.6 million of likely working capital
claims previously identified.
The entire Note Receivable is
recorded as a long term note receivable as of May 31, 2021. Any adjustments to the gross $9.5 million note receivable are to be applied
against payments in the order they are due to be paid. Under the terms of the Vensure Asset Sale, any dispute regarding the amount due
under the Note Receivable is subject to a reconciliation process that provides for negotiation, followed by binding arbitration of any
disputes that cannot be resolved. As of the date of this filing, the parties agree that some amount is due to the Company under the Note
Receivable, although the precise amount remains subject to ongoing negotiations. As such, although we are hopeful for a prompt resolution,
we cannot state with certainty whether we anticipate any collections prior to May 31, 2022, and therefore have classified the Note
Receivable as long-term.
Vensure
Note Receivable Net Realizable Value
For the
period ended May 31, 2021, the Company estimated the net realizable value based on the available information through the date of
this report.
In March 2021, Vensure provided
the Company with approximately $10.7 million of proposed working capital adjustments and no adjustments for the actual 2020 wages
billed, which would have had the effect of eliminating any sums due to the Company under the Note Receivable. The Company used these
proposed adjustments as a starting point and considered each potential adjustment based on items deemed to be more or less likely
and the level of the dispute for any disputed items. The Company disputes a significant portion of the working capital adjustments,
and Vensure has since conceded that the Company is owed sums under the Note Receivable, although the precise amount remains in
dispute. In conducting its analysis, the Company identified approximately $2.6 million of adjustments deemed to be likely and
retained a $2.9 million additional reserve for a total reserve of $5.5 million. The $2.9 million additional reserve was developed
using a weighted probability approach of the known claims and demands and combined with an estimate of legal and collection costs.
The total reserve of $5.5 million is equivalent to approximately 50% of the difference between the value of the Note Receivable
after giving full effect to Vensure’s March 2021 proposed adjustments and the gross carrying value of the $9.5 million Note
Receivable.
In April 2021,
the Company provided Vensure with its objections to Vensure’s March 2021 proposed adjustments. Based upon ongoing negotiations between
the parties, Vensure has conceded that sums remain due to the Company under the Note Receivable, though the precise amount owed remains
in dispute, as noted above. Based on our analysis we made no material changes to the carrying value of the Note Receivable between December 31,
2020, the last internal measurement date, and the current reporting date of May 31, 2021.
The carrying amounts of the classes of assets
and liabilities from the Vensure Asset Sale included in discontinued operations were as follows:
|
|
May 31,
2021
|
|
|
August 31,
2020
|
|
Cash
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts receivable and unbilled account receivable
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
-
|
|
Deposits – workers’ compensation
|
|
|
623,000
|
|
|
|
1,030,000
|
|
Total current assets
|
|
|
623,000
|
|
|
|
1,030,000
|
|
Fixed assets, net
|
|
|
-
|
|
|
|
-
|
|
Deposits – workers’ compensation
|
|
|
1,126,000
|
|
|
|
2,582,000
|
|
Total assets
|
|
$
|
1,749,000
|
|
|
$
|
3,612,000
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Payroll related liabilities
|
|
|
-
|
|
|
|
-
|
|
Accrued workers’ compensation cost
|
|
|
1,687,000
|
|
|
|
1,746,000
|
|
Total current liabilities
|
|
|
1,687,000
|
|
|
|
1,746,000
|
|
Accrued workers’ compensation cost
|
|
|
3,050,000
|
|
|
|
4,377,000
|
|
Total liabilities
|
|
|
4,737,000
|
|
|
|
6,123,000
|
|
|
|
|
|
|
|
|
|
|
Net liability
|
|
$
|
(2,988,000
|
)
|
|
$
|
(2,511,000
|
)
|
Reported results for the discontinued operations by period were as
follows:
|
|
For the Three Months
Ended
|
|
|
For the Nine Months
Ended
|
|
|
|
May 31,
2021
|
|
|
May 31,
2020
|
|
|
May 31,
2021
|
|
|
May 31,
2020
|
|
Revenues (gross billings of $0 and $0 million less worksite employee payroll cost of $0 million and $0 million, respectively for the three months ended; gross billings of $0 million and $120.6 million less worksite employee payroll cost of $0 million and $103.0 million, respectively for the nine months ended)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,632,000
|
|
Cost of revenue
|
|
|
(23,000
|
)
|
|
|
1,490,000
|
|
|
|
1,512,000
|
|
|
|
17,252,000
|
|
Gross profit (loss)
|
|
|
23,000
|
|
|
|
(1,490,000
|
)
|
|
|
(1,512,000
|
)
|
|
|
380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
553,000
|
|
Commissions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
741,000
|
|
Total operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,294,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
23,000
|
|
|
$
|
(1,490,000
|
)
|
|
$
|
(1,512,000
|
)
|
|
$
|
(914,000
|
)
|
The loss from discontinued operations for the
three and nine months ended May 31, 2021, represents the change in the estimated workers’ compensation accruals required
for the residual workers’ compensation liabilities retained after the Vensure Asset Sale.
Note 4: Going Concern
As of May 31, 2021, the Company had cash
of $9 million and a working capital deficit of $1.9 million. During the nine months ended May 31, 2021, the Company used approximately
$14 million of cash from its continuing operations. The Company has incurred recurring losses, which has resulted in an accumulated deficit
of $140.6 million as of May 31, 2021. The recurring losses and cash used in operations raise substantial doubt as to our ability
to continue as a going concern within one year from the issuance date of these financial statements.
Historically, the Company’s principal source
of financing has come through the sale of its common stock and issuance of convertible notes. On May 26, 2020, the Company successfully
completed an underwritten public offering, raising a total of $12 million ($10.3 million net of costs), and closed an additional $1.35
million ($1.24 million net of costs) between June 1, 2020 and July 7, 2020 pursuant to the underwriter’s overallotment.
In October 2020, the Company closed a $12 million equity offering ($10.7 million net of costs), and in May 2021 the Company closed
an additional $12 million private equity offering with a large institutional investor ($11.9 million net of costs). The Company’s
plans and expectations for the next 12 months include raising additional capital to help fund expansion of its operations, including the
continued development and support of its IT and HRIS platform, as well as its activities in connection with its sponsorship of the SPACs
described above.
During Fiscal 2021, the Company has continued
to invest in its HRIS platform, ShiftPixy Labs, and other growth initiatives, including its SPAC sponsorship activities, all of which
have required significant cash expenditures. The Company expects to deploy significant additional capital resources to continue with these
growth initiatives, which include making ShiftPixy Labs and our ghost kitchens fully operational.
The Company has been and expects to continue to
be impacted by the COVID-19 pandemic, from which it has experienced both positive and negative impacts. Its current business focus is
providing human capital and payroll services for the restaurant and hospitality industries, which have seen a reduction in payroll and
consequently a reduction in payroll processing fees on a per WSE and per location basis. However, the Company believes that it provides
the means for current and potential clients to adapt to many of the obstacles posed by COVID-19 by offering additional services such as
delivery, which have facilitated an increase by the Company in its client and client location counts, resulting in recovery of billings
lost during the first months of the pandemic. Beginning in June 2020, the Company’s billings per WSE and per location improved
as lockdowns in its primary Southern California market were lifted. Although the State of California re-implemented lockdowns in November 2020,
the Company believes that many of its clients have modified their businesses after the initial lockdowns to adapt somewhat to these adverse
circumstances. Further, the recent acceleration in the roll-out of COVID-19 vaccines throughout California and the entire country has
resulted in an easing of business operating restrictions. Nevertheless, if lockdowns resume, the Company’s clients delay hiring
or rehiring employees, or if our clients shut down operations, our ability to generate operational cash flows may be significantly impaired.
In August 2020, the Company signed an agreement
with the Washington Hospitality Association Member Services Corporation (“Washington Hospitality”), a consortium representing
approximately 200,000 potential WSEs in the food industry located in the State of Washington. This agreement expands the Company’s
geographic reach and is expected to drive revenue growth during the second half of calendar 2021.
The Company also signed a new client in July 2020
representing a significant revenue opportunity. This client provides outsourced nurses that are paid gross wages in an amount approximately
three times what the Company’s typical restaurant and hospitality WSEs receive, with the Company receiving the same administrative
fee rates per wage dollar paid. We believe that this client will generate new business for the Company, as the need for nurses increases
to administer COVID-19 testing and vaccination services. We began to see an increase in these billed nurses in the quarter ended May 31,
2021.
The Company’s management believes that
the Company’s current cash position will not be sufficient to fund our operations for at least a year from the date these financials
are issued without additional capital funding. While the Company has successfully raised capital from debt and equity investors in the
past, if these sources do not provide the capital necessary to fund the Company’s operations during the twelve months following
the issuance of this Quarterly Report, the Company may need to curtail certain aspects of its operations or expansion activities, consider
the sale of additional assets, or consider other means of financing. The Company can give no assurance that it will be successful in
implementing its business plan and obtaining financing on terms advantageous to the Company, or that any such additional financing will
be available. These condensed consolidated financial statements do not include any adjustments for this uncertainty.
Note 5: Stockholders’ Equity
Preferred Stock
As previously disclosed, in September 2016,
the founding shareholders of the Company were granted options to acquire ShiftPixy preferred stock (the “Preferred Options”).
The number of Preferred Options granted was based upon the number of shares held at that time. These Preferred Options are nontransferable
and forfeited upon the sale of the related founding shares of common stock. Upon the occurrence of certain specified events, such
founding shareholders may exercise each Preferred Option to purchase one share of preferred stock of the Company at an exercise price
of $0.0001 per share. The preferred stock underlying the Preferred Options does not include any rights to dividends or preference upon
liquidation of the Company and is convertible into shares of common stock on a one-for-one basis pursuant to the Amended Restated Articles
of Incorporation. The Preferred Options became exercisable to purchase shares of preferred stock in January 2020 and in March 2020
became exchangeable into an equal number of shares of common stock.
On June 4, 2020, Scott W. Absher, the
Company’s Chief Executive Officer, exercised 12,500,000 Preferred Options to purchase an equal number of shares of preferred
stock. Immediately thereafter, Mr. Absher converted all 12,500,000 shares of preferred stock into 12,500,000 shares of common
stock. These shares of common stock are subject to a two-year lockup from the date of the conversion. Between June 4, 2020 and
August 31, 2020, an additional 294,490 Preferred Options were exercised and exchanged for a like number of shares of common
stock. During the three months ended May 31, 2021, no preferred options were exercised or exchanged for a like number of
shares of common stock. During the nine months ended May 31, 2021, an additional 12,500 Preferred Options were exercised and
exchanged for a like number shares of common stock. As of the date of this Quarterly Report, 11,827,570 Preferred Options remain
outstanding and exercisable. The right to exercise the options terminates on December 31, 2023. As stated above, the amount of
the Preferred Options, and the number of shares of preferred stock issuable upon exercise of such options, is based upon the number
of shares of common stock held by such founding shareholders at the time such options were issued. Accordingly, in order to confirm
the original intent of the granting options to purchase up to 50,000,000 shares of preferred stock to two of our founding
shareholders, Mr. Absher and J. Stephen Holmes, at some point in the future the Company intends to adopt a second grant of
options, exercisable upon the occurrence of certain specified events, granting an additional 12,500,000 options to each of
Messrs. Absher and Holmes, whereby each option permits the holder to acquire one share of preferred stock of the Company for
$0.0001 per share. Each share of preferred stock will be convertible into common stock on a one-for-one basis.
October 2020 Public Offering
On October 8, 2020, the Company entered into
an underwriting agreement (the “October Underwriting Agreement”) with A.G.P./Alliance Global Partners (“AGP”)
in connection with a public offering (the “October 2020 Offering”) of an aggregate of (i) 4,000,000 shares of our
common stock and (ii) warrants to purchase 2,300,000 shares of common stock (the “October 2020 Common Warrants”),
which included the partial exercise of AGP’s over-allotment option to purchase 300,000 additional October 2020 Common Warrants.
Each share of common stock was sold together with
an October 2020 Common Warrant as a fixed combination, with each share of common stock sold being accompanied by an October 2020
Common Warrant to purchase 0.5 shares of common stock. Each share of common stock and accompanying October 2020 Common Warrant was
sold at a price to the public of $3.00. The October 2020 Common Warrants were immediately exercisable, will expire on October 13,
2025, and have an exercise price of $3.30 per share, subject to anti-dilution and other adjustments for certain stock splits, stock dividends,
or recapitalizations.
The October 2020 Offering closed on
October 14, 2020, for gross proceeds of approximately $12.0 million, prior to deducting $1.3 million of costs consisting of
underwriting discounts and commissions and offering expenses payable by the Company, which includes a partial exercise of the
underwriter’s over-allotment option to purchase additional October 2020 Common Warrants. Pursuant to the
October Underwriting Agreement, the Company, upon closing of the October 2020 Offering, issued to AGP warrants to purchase
up to 200,000 shares of common stock (the “October Underwriter Warrants”), which is equivalent to 5.0% of the
aggregate number of shares of common stock sold in the October 2020 Offering. The October Underwriter Warrants are
exercisable at any time and from time to time, in whole or in part, commencing six months after the closing date and ending five
years from the closing date, at a price per share equal to $3.30, which is equivalent to 110% of the public offering price per
share.
May 2021 Private Placement
On May 13, 2021, the Company entered into a Securities Purchase
Agreement with a large institutional investor (the “Purchaser”) pursuant to which the Company agreed to sell to the Purchaser
an aggregate of (i) 2,320,000 shares (the “Shares”) of the Company’s common stock, par value $0.0001 per share
(the “Common Stock”), together with warrants (the “May 2021 Common Warrants”) to purchase up to 2,320,000 shares
of Common Stock, with each May 2021 Common Warrant exercisable for one share of Common Stock at a price per share of $2.425, and (ii) 2,628,453
prefunded warrants (the “May 2021 Prefunded Warrants”), together with the May 2021 Common Warrants to purchase up to 2,628,453
shares of Common Stock, with each May 2021 Prefunded Warrant exercisable for one share of Common Stock at a price per share of $0.0001.
Each share of Common Stock and accompanying May 2021 Common Warrant were sold together at a combined offering price of $2.425, and each
May 2021 Prefunded Warrant and accompanying May 2021 Common Warrant were sold together at a combined offering price of $2.4249.
The May 2021 Prefunded Warrants are immediately
exercisable, at a nominal exercise price of $0.0001, and may be exercised at any time until all of the May 2021 Prefunded Warrants are
exercised in full. The May 2021 Common Warrants have an exercise price of $2.425 per share, are immediately exercisable, and will expire
five years from June 15, 2021, which is the date that the registration statement covering the resale of the shares underlying the Common
Warrants was declared effective. The private placement closed on May 17, 2021, for gross proceeds of approximately $12.0 million,
prior to deducting $0.94 million of costs consisting of Placement Agent commissions and offering expenses payable by the Company. In addition
to the 7.0% of the aggregate gross proceeds cash fee, the Company issued to the Placement Agent 247,423 warrants to purchase an aggregate
of up to five percent (5%) of the aggregate number of Shares and shares of Common Stock issuable upon exercise of the May 2021 Prefunded
Warrants sold in the offering (the “Placement Agent Warrants”). The Placement Agent Warrants are exercisable for a period
commencing six months after issuance and expire four years from the effective date of a registration statement for the resale of the underlying
shares, and shall have an initial exercise price of $2.6675 per share.
Common Stock and Warrants
During the nine months ended May 31, 2021,
the Company issued 4,000,000 shares of common stock pursuant to the October 2020 Offering at $3.00 per share, 2,320,000 shares of
Common Stock, 2,628,453 May 2021 Prefunded Warrants and Common Warrants to purchase up to 4,948,453 shares of Common Stock pursuant to
the May 2021 Private Placement. Each share of Common Stock and accompanying May 2021 Common Warrant were sold together at a combined offering
price of $2.425, and each May 2021 Prefunded Warrant and accompanying May 2021 Common Warrant were sold together at a combined offering
price of $2.4249.
The following table summarizes the changes in the Company’s common
stock and Prefunded warrants from August 31, 2020 to May 31, 2021:
|
|
|
Number
of
shares
|
|
|
Weighted
average
remaining
life
(years)
|
|
|
Weighted
average
exercise
price
|
|
Warrants outstanding, August 31, 2020
|
|
|
|
1,896,209
|
|
|
|
4.7
|
|
|
$
|
7.91
|
|
Issued
|
|
|
|
10,324,329
|
|
|
|
4.8
|
|
|
|
2.03
|
|
(Cancelled)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Exercised)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding, May 31, 2021
|
|
|
|
12,220,538
|
|
|
|
4.7
|
|
|
|
3.02
|
|
Warrants exercisable, May 31, 2021
|
|
|
|
11,973,116
|
|
|
|
4.7
|
|
|
$
|
3.02
|
|
The following table summarizes the Company’s
warrants outstanding as of May 31, 2021:
|
|
Warrants
Outstanding
|
|
|
Weighted average
Life of
Outstanding
Warrants
in years
|
|
|
Exercise
price
|
|
May 2021 Common Warrants
|
|
|
4,948,453
|
|
|
|
5.0
|
|
|
$
|
2.43
|
|
May 2021 Prefunded Warrants (1)
|
|
|
2,628,453
|
|
|
|
5.0
|
|
|
$
|
0.00
|
|
May 2021 Underwriter Warrants (2)
|
|
|
247,423
|
|
|
|
5.5
|
|
|
$
|
2.67
|
|
October 2020 Common Warrants
|
|
|
2,300,000
|
|
|
|
4.4
|
|
|
|
3.30
|
|
October 2020 Underwriter Warrants
|
|
|
200,000
|
|
|
|
4.4
|
|
|
|
3.30
|
|
May 2020 Common Warrants
|
|
|
1,277,580
|
|
|
|
4.0
|
|
|
|
5.40
|
|
May 2020 Underwriter Warrants
|
|
|
111,108
|
|
|
|
4.0
|
|
|
|
5.40
|
|
March 2020 Exchange Warrants
|
|
|
423,669
|
|
|
|
4.3
|
|
|
|
10.17
|
|
Amended March 2019 Warrants
|
|
|
66,288
|
|
|
|
2.8
|
|
|
|
40.00
|
|
March 2019 Services Warrants
|
|
|
3,366
|
|
|
|
2.8
|
|
|
|
70.00
|
|
June 2018 Warrants
|
|
|
6,276
|
|
|
|
2.5
|
|
|
|
40.00
|
|
June 2018 Services Warrants
|
|
|
5,422
|
|
|
|
2.5
|
|
|
|
99.60
|
|
2017 PIPE Warrants
|
|
|
2,500
|
|
|
|
1.1
|
|
|
|
276.00
|
|
|
|
|
12,220,538
|
|
|
|
4.7
|
|
|
$
|
3.02
|
|
|
(1)
|
The May 2021 Prefunded Warrants were sold as part of a Prefunded Warrant Unit as described above. The exercise price is $0.0001 per
share. As of July 15, 2021, all of the Prefunded Warrants have been exercised.
|
|
(2)
|
The May 2021 Underwriter Warrants are not exercisable until November 17, 2021.
|
Note 6: Stock Based Compensation
In March 2017, the Company adopted its 2017
Stock Option/Stock Issuance Plan (the “Plan”). The Plan provides incentives to eligible employees, officers, directors and
consultants in the form of incentive stock options (“ISOs”), non-qualified stock options (“NQs”), (each of which
is exercisable into shares of common stock) (collectively, “Options”) or shares of common stock (“Share Grants”).
On July 1, 2020, our Board of Directors unanimously
approved an increase in the number of shares of common stock issuable under the Plan from 250,000 to 3,000,000 and granted options that
were contingent upon shareholder approval. On March 31, 2021, the Company’s shareholders approved the increase in the number
of shares of common stock issuable under the Plan as well as the various contingent grant awards under the Plan since July 1, 2020.
Effective with the shareholders’ approval, all previously unexercisable option grant awards became exercisable and the option awards
granted since July 1, 2020 were no longer subject to any contingency not set forth in the Plan.
On June 4, 2021, the Company registered an aggregate of 3,000,000 shares,
par value $.0001 per share, reserved for issuance under the Plan.
For all options granted prior to July 1,
2020, each option is immediately exercisable and has a term of service vesting provision over a period of time as follows: 25% vest after
a 12-month service period following the award, with the balance vesting in equal monthly installments over the succeeding 36 months. The
options granted on or after July 1, 2020, typically vest over four years, with 25% of the grant vesting one year from the grant date,
and the remainder in equal quarterly installments over the succeeding 12 quarters. All options granted to date have a stated ten-year
term.
Stock grants are issued at fair value, considered
to be the market price on the grant date. The fair value of option awards is estimated on the grant date using the Black-Scholes stock
option pricing model.
Following our adoption of ASU 2016-09, we elected
to account for forfeitures under the Plan as they occur. Any compensation cost previously recognized for an unvested award that is forfeited
because of a failure to satisfy a service condition is reversed in the period of the forfeiture.
The Company recognized approximately $444,000
and $1,363,000 of compensation expense for the three and nine months ended May 31, 2021, respectively. The Company recognized
approximately $75,000 and $745,000 of compensation expense for the three and nine months ended May 31, 2020, respectively.
The Company compensates its Board members through
grants of common stock for services performed. These services have been accrued within the accounts payable and other accrued liabilities
on the Condensed Consolidated Balance Sheet. The Company has incurred $56,000 and $113,000 for the three and nine months ended May 31,
2021, respectively. The Company incurred $75,000 and $150,000 for the three and nine months ended May 31, 2020, respectively.
At May 31, 2021, the total unrecognized deferred
stock-based compensation expected to be recognized over the remaining weighted average vesting periods of 3.1 years for outstanding grants
was $4.8 million.
The following table summarizes option activity
during the nine months ended May 31, 2021:
|
|
|
Options
Outstanding and Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
Balance
Outstanding, August 31, 2020
|
|
|
|
1,398,740
|
|
|
|
9.5
|
|
|
$
|
8.18
|
|
Granted
|
|
|
|
715,000
|
|
|
|
10.0
|
|
|
|
3.07
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
|
(287,192
|
)
|
|
|
9.5
|
|
|
|
4.32
|
|
Balance
Outstanding at May 31, 2021
|
|
|
|
1,826,548
|
|
|
|
9.1
|
|
|
$
|
6.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Exercisable at May 31, 2021
|
|
|
|
1,826,548
|
|
|
|
|
|
|
|
|
|
Options outstanding as of May 31, 2021 had
aggregate intrinsic value of $45,000.
Option vesting activity during the nine months
ended May 31, 2021 was as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Options Vested
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
Balance, August 31, 2020
|
|
|
28,410
|
|
|
|
7.2
|
|
|
$
|
115.10
|
|
Vested
|
|
|
5,631
|
|
|
|
7.4
|
|
|
|
93.61
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(656
|
)
|
|
|
7.2
|
|
|
|
50.33
|
|
Balance at May 31, 2021
|
|
|
33,385
|
|
|
|
7.0
|
|
|
$
|
112.74
|
|
The following table summarizes information about
stock options outstanding and vested at May 31, 2021:
|
|
Options Outstanding
|
|
|
Options Vested
|
Exercise Prices
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
(In Years)
|
|
|
|
|
|
|
|
|
(In Years)
|
|
|
|
|
|
$2.23-10.00
|
|
|
|
1,785,730
|
|
|
|
9.3
|
|
|
$
|
4.59
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
$10.01-$40.00
|
|
|
|
3,500
|
|
|
|
8.0
|
|
|
|
21.69
|
|
|
|
1,882
|
|
|
|
8.0
|
|
|
|
21.66
|
|
$40.01–$80.00
|
|
|
|
13,396
|
|
|
|
7.8
|
|
|
|
51.21
|
|
|
|
9,529
|
|
|
|
7.8
|
|
|
|
51.22
|
|
$80.01–$120.00
|
|
|
|
10,303
|
|
|
|
7.0
|
|
|
|
102.90
|
|
|
|
8,542
|
|
|
|
7.0
|
|
|
|
102.79
|
|
$120.01–$160.00
|
|
|
|
12,495
|
|
|
|
6.3
|
|
|
|
155.24
|
|
|
|
12,307
|
|
|
|
6.2
|
|
|
|
155.73
|
|
$160.01-$391.60
|
|
|
|
1,126
|
|
|
|
6.1
|
|
|
|
391.60
|
|
|
|
1,125
|
|
|
|
6.1
|
|
|
|
391.60
|
|
|
|
|
|
1,826,548
|
|
|
|
9.1
|
|
|
$
|
6.62
|
|
|
|
33,385
|
|
|
|
7.0
|
|
|
$
|
112.74
|
|
On March 31, 2021, with the shareholders
approval for the increase in the option pool, the contingent options granted by our Board of Directors between July 1, 2020 and May 31,
2021 became exercisable. The options remain subject to service vesting period requirements retroactive to the grant date, as described
above.
Note 7: Related Parties
J. Stephen Holmes, our non-employee sales manager,
is an advisor to and significant shareholder of the Company. The Company incurred $180,000 and $570,000 in professional fees for
services provided by Mr. Holmes in the three and nine months ended May 31, 2021 and $180,000 and $570,000 for the three and
nine months ended May 31, 2020, respectively.
During the three and nine month periods ended
May 31, 2021, we made one-time payments to certain of our employees totaling approximately $53,000 and $653,000, respectively, in
connection with their agreement to relocate from California to our new principal executive offices in Miami, Florida. Included among these
were payments to the following related parties, in the amounts indicated: (i) Mr. Absher, $160,000; (ii) Amanda Murphy,
our Director of Operations and a member of our Board, $80,000; (iii) David May, a member of our business development team, and the
son-in-law of Mr. Absher, $80,000; (iv) Phil Eastvold, the Executive Producer of ShiftPixy Productions, Inc., and the son-in-law
of Mr. Absher, $88,000; (v) Hannah Absher, an employee of the Company and the daughter of Scott Absher, $18,000; and (vi) Jared
Holmes, an employee of the Company and son of Stephen Holmes, $18,000.
Note 8: Commitments
Operating Leases & License Agreements
Effective April 15, 2016, the Company entered
into a non-cancelable five-year operating lease for its Irvine, California facility. On July 25, 2017, the Company entered into a
non-cancelable operating lease for expansion space at its Irvine offices with a termination date that coincides with the termination date
of the prior lease and extended the terms of the original lease until 2022. The leases for certain facilities contain escalation clauses
relating to increases in real property taxes as well as certain maintenance costs.
Effective August 13, 2020, the Company entered
into a non-cancelable seven-year operating lease for its Miami, Florida office facility commencing October 2020 through September 2027.
The lease contains escalation clauses relating to increases in real property taxes as well as certain maintenance costs.
Effective October 1, 2020, the Company entered
into a non-cancelable 64-month lease for 23,500 square feet of primarily industrial space located in Miami, Florida, to house ghost kitchens,
production facilities, and certain marketing and technical functions, including those associated with ShiftPixy Labs. The lease contains
escalation clauses relating to increases in real property taxes as well as certain maintenance costs.
Future minimum lease and licensing payments under
non-cancelable operating leases at May 31, 2021, are as follows:
Years ended August 31,
|
|
|
|
|
2021
|
|
|
$
|
289,000
|
|
2022
|
|
|
|
1,198,000
|
|
2023
|
|
|
|
1,014,000
|
|
2024
|
|
|
|
1,075,000
|
|
2025
|
|
|
|
1,108,000
|
|
Thereafter
|
|
|
|
1,652,000
|
|
Total minimum payments
|
|
|
$
|
6,336,000
|
|
ShiftPixy Labs Ghost Kitchens
On March 17, 2021, the Company entered into a
master service agreement for the construction of six ghost kitchens to be placed in its ShiftPixy Labs facility in Miami for a total cost
of $962,000. As of May 31, 2021, the Company has made payments totaling $577,000 of service was provided and capitalized
as construction in progress and included in Fixed Assets on the Condense Consolidated Balance Sheet and has an additional cost
to complete of $385,000 under this contract, which is expected to be completed by the end of the current fiscal year.
Non-contributory 401(k) Plan
The Company has a non-contributory 401(k) Plan
(the “401(k) Plan”). The 401(k) Plan covers all non-union employees who are at least 21 years of age and have completed
3 months of service. There were no employer contributions to the 401(k) Plan for the three or nine months ended May 31, 2021
and May 31, 2020.
Stock Repurchase Plan
On July 9, 2019, the Board of Directors authorized
the repurchase of up to 10 million shares of the Company’s outstanding common stock as market conditions warrant over a period of
18 months. The Company has not implemented the stock repurchase plan to date and has not repurchased any stock under this authorization,
which has now expired.
Special Purpose Acquisition Company (“SPAC”) Sponsorship
On April 29, 2021, ShiftPixy Investments, Inc.
(the “Sponsor”), a wholly owned subsidiary of the Company, announced the filing of registration statements relating to initial
public offerings (“IPOs”) of the following four SPACs: (i) Industrial Human Capital Inc., which proposes to raise $250 million
to acquire one or more light industrial staffing companies; (ii) Vital Human Capital, Inc., which proposes to raise $250 million
to acquire one or more healthcare staffing companies; (iii) TechStackery, Inc., which proposes to raise $250 million to acquire one or
more technology staffing companies; and (iv) Firemark Global Capital, Inc., (formerly known as Insurity Capital, Inc.), which proposes
to raise $500 million to acquire one or more commercial insurance company “shells” licensed to conduct business throughout
the United States. It is anticipated that the Board of Directors of each of these entities will be comprised of the same individuals
(none of whom will be directors of the Company aside from our Chairman and Chief Executive Officer, Scott W. Absher) and that Mr. Absher,
Domonic J. Carney (our Chief Financial Officer), and Robert S. Gans (our General Counsel) will serve as the Chief Executive Officer, Chief
Financial Officer, and General Counsel of each entity, respectively. Details of the Sponsor’s financial commitment to each SPAC
is set forth below. The Company has advanced approximately $.5 million in connection with its sponsorship of the SPACs as of the three
and nine months ended May 31, 2021.
Industrial Human Capital, Inc (“IHC”)
The Sponsor
has agreed to purchase an aggregate of 4,279,000 warrants (the “IHC Placement Warrants”) (or 4,654,000 IHC Placement Warrants
if the over-allotment option is exercised in full) at a price of $1.00 per warrant, for an aggregate purchase price of $4,279,000 ($4,654,000
if the over-allotment option is exercised in full). Each IHC Placement Warrant will be identical to warrants sold in the IPO, subject to certain exceptions. The IHC Placement Warrants will be
sold in a private placement that will close simultaneously with the closing of the IPO.
The Sponsor currently owns 5,187,500 shares of IHC common stock, prior
to the exercise of any of the IHC Placement Warrants.
Vital Human Capital, Inc. (“VHC”)
The Sponsor has agreed to purchase an aggregate
of 4,279,000 warrants (the “VHC Placement Warrants”) (or 4,654,000 VHC Placement Warrants if the over-allotment option is
exercised in full) at a price of $1.00 per warrant, for an aggregate purchase price of $4,279,000 ($4,654,000 if the over-allotment option
is exercised in full). Each VHC Placement Warrant will be identical to warrants sold in the IPO, subject to certain exceptions. The VHC
Placement Warrants will be sold in a private placement that will close simultaneously with the closing of the IPO.
The Sponsor currently owns 5,187,500 shares of VHC common stock, prior
to the exercise of any of the VHC Placement Warrants.
TechStackery, Inc. (“TSI”)
The Sponsor has agreed to purchase an aggregate
of 4,279,000 warrants (the “TSI Placement Warrants”) (or 4,654,000 TSI Placement Warrants if the over-allotment option is
exercised in full) at a price of $1.00 per warrant, for an aggregate purchase price of $4,279,000 ($4,654,000 if the over-allotment option
is exercised in full). Each TSI Placement Warrant will be identical to the warrants sold in the IPO, subject to certain exceptions. The
TSI Placement Warrants will be sold in a private placement that will close simultaneously with the closing of the IPO.
The Sponsor currently owns 5,187,500 shares of TSI common stock, prior
to the exercise of any of the TSI Placement Warrants.
Firemark Global Capital, Inc. (“FGC”)
The Sponsor has agreed to purchase an aggregate
of 7,447,000 warrants (the “FGC Placement Warrants”) (or 8,197,000 FGC Placement Warrants if the over-allotment option is
exercised in full) at a price of $1.00 per warrant, for an aggregate purchase price of $7,447,000 ($8,197,000 if the over-allotment option
is exercised in full). Each FGC Placement Warrant will be identical to the warrants sold in the IPO, subject to certain exceptions. The
FGC Placement Warrants will be sold in a private placement that will close simultaneously with the closing of the IPO.
The Sponsor currently owns 10,375,000 shares of FGC common stock, prior
to the exercise of any of the FGC Placement Warrants.
The Sponsor has agreed to loan up to $500,000 to each of the sponsored
SPACs to be used for a portion of their IPO expenses. The source of repayment of these loans will be from the IPO proceeds and the sale
of the Placement Warrants described above, as permitted and described in the respective registration statements for each SPAC.
Note 9: Contingencies
Certain conditions may exist as of the date the
financial statements are issued, which may result in a loss to the Company, but which will be resolved only when one or more future events
occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent
liabilities, and such assessment inherently involves an exercise of judgment.
During the ordinary course of business, the Company
is subject to various claims and litigation. Management believes that the outcome of such claims or litigation will not have a material
adverse effect on the Company’s financial position, results of operations or cash flow.
Kadima Litigation
The Company is in a dispute with its former software
developer, Kadima Ventures (“Kadima”), over incomplete but paid for software development work. In May 2016, the Company
entered into a contract with Kadima for the development and deployment of user features that were proposed by Kadima for an original build
cost of $2.2 million to complete. This proposal was later revised upward to approximately $7.2 million to add certain features to the
original proposal. As of the date of this Quarterly Report, the Company has paid approximately $11 million to Kadima, but has never been
provided access to the majority of the promised software. Kadima refused to continue development work, denied access to developed software,
and refuses to surrender to the Company any software that it has developed unless the Company pays an additional $12.0 million above the
$11.0 million already paid. In April 2019, Kadima filed a complaint against the Company in the Superior Court of the State of Arizona,
Maricopa County, alleging claims for breach of contract, promissory estoppel and unjust enrichment, and seeking damages in excess of $11.0
million. The Company vigorously disputes and denies each of Kadima’s claims, including that it owes any sums to Kadima, and further
believes that it is entitled, at a minimum, to a refund of a substantial portion of the sums that it has already paid, along with the
release of the software modules currently being withheld. In June 2020 the Company engaged in a mediation with Kadima in an attempt
to resolve the matter, which was unsuccessful. On July 14, 2020 the Company filed an answer to Kadima’s complaint, which denied
Kadima’s claims and asserted counter-claims for breach of contract and fraud. Discovery is underway, and a trial date has not been
set.
Splond Litigation
On April 8, 2019, claimant, Corey Splond,
filed a class action lawsuit, on behalf of himself and other similarly situated individuals, in the Eighth Judicial District Court for
the State of Nevada, Clark County, naming the Company and its client as defendants, and alleging violations of certain wage and hour laws.
This lawsuit is in the initial stages, and the Company denies any liability. Even if the plaintiff ultimately prevails, the potential
damages recoverable will depend substantially upon whether the Court determines in the future that this lawsuit may appropriately be maintained
as a class action. Further, in the event that the Court ultimately enters a judgment in favor of plaintiff, the Company believes
that it would be contractually entitled to be indemnified by its client against at least a portion of any damage award.
Radaro Litigation
On July 9, 2020, we were served with a complaint
filed by one of our former software vendors, Radaro Inc., in the United States District Court for the Central District of California,
alleging damages arising from claims sounding in breach of contract and fraud. By Order filed October 21, 2020, the Court dismissed
plaintiff’s claims for fraud and for punitive damages, with leave to replead. On January 4, 2021, plaintiff filed its Second
Amended Complaint, in which it abandoned its claims for fraud and punitive damages. The Company denies plaintiff’s remaining claims
and is defending the lawsuit vigorously. Discovery is underway, and the Court has set a trial date of March 1, 2022.
Diamond Litigation
On September 8, 2020, a former financial
advisor to the Company filed a Complaint in the United States District Court for the Southern District of New York naming the Company
and one of its officers as defendants. The Complaint asserts multiple causes of action, all of which stem from plaintiff’s claim
that he is entitled to compensation from the Company, in the form of warrants to purchase ShiftPixy common stock, based upon a prior agreement
to provide financial advisory services to the Company in connection with a prior transaction. By Order entered July 13, 2021, the Court dismissed the Complaint in
its entirety, with prejudice, and without granting leave to amend.
Everest Litigation
On December 18, 2020, we were served with
a Complaint filed in the United States District Court for the Central District of California by our former workers’ compensation
insurance carrier, Everest National Insurance Company. The Complaint asserts claims for breach of contract, alleging that the Company
owes certain premium payments to plaintiff under a retrospective rated policy, and seeks damages of approximately $600,000. On February 5,
2021, we filed an Answer to Plaintiff’s Complaint denying its claims for relief, and also filed a cross-claim against the third
party claims administrator, Gallagher Bassett Services, Inc., for claims sounding in breach of contract and negligence based upon
its administration of claims arising under the policy. By order dated April 7, 2021, the Court dismissed the Company’s complaint
against Gallagher Bassett without prejudice to re-filing in another forum. On May 17, 2021, we refiled our complaint against Gallagher
Basset in the Circuit Court of Cook County, Illinois. Discovery is underway in both cases, and the California Court has set a trial date
in the Everest case of February 22, 2022.
Benchmark Litigation
On March 8, 2021, we were served with a Complaint
filed in the United States District Court for the Southern District of New York by Benchmark Investments, Inc. d/b/a Kingswood Capital
Markets, asserting a single claim for breach of contract arising from a non-binding engagement letter pursuant to which plaintiff offered
to provide certain investment banking services to an affiliate of the Company. The Complaint seeks damages in an unspecified amount. On
April 8, 2021, we filed an Answer to Plaintiff’s Complaint denying its claims for relief, and asserting various affirmative
defenses. On April 23, 2021, the Company entered into a settlement with the plaintiff resolving the litigation on terms that do not
provide for any payment by the Company.
Sunz Litigation
On March 19, 2021, we were served with a
Complaint filed in the Circuit Court for the 11th Judicial Circuit, Manatee County, Florida, by our former workers’ compensation
insurance carrier, Sunz Insurance Solutions, LLC. The Complaint asserts claims for breach of contract, alleging that the Company owes
payments for loss reserve funds totaling approximately $10 million. The Company denies plaintiff’s allegations and intends to defend
the lawsuit vigorously. On May 12, 2021, the Company filed a motion to dismiss the complaint. The case is in discovery and no trial
date has been set.
Note 10: Subsequent Events
Leases
Effective June 7, 2021, the Company entered
into a sublease agreement with Verifone, Inc. to sublease premises consisting of approximately 8,000 square feet of office space located
in Miami, Florida, that the Company anticipates using for its sales and operations workforce. The lease has a term of three years expiring
on May 31, 2024. The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the sublease.
Effective June 21, 2021, the Company entered into
a 77 month lease agreement, which is anticipated to commence on January 1, 2022, for premises consisting of approximately 13,418 square
feet of office space located in Sunrise, Florida, that the Company anticipates using primarily to house its operations personnel and other
elements of its workforce. The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the lease.
Registration Statement
On June 4, 2021, the Company filed a registration statement on Form
S-8 with the SEC covering an aggregate of 3,000,000 shares of its common stocks, par value $.0001 per share, that may be issued from time
to time pursuant to the terms of the ShiftPixy, Inc. 2017 Stock Option / Stock Issuance Plan (the “Plan”).
May 2021 Prefunded Warrant Exercises
As indicated in Note 5 above, the Purchaser in the
Company’s May 2021 Private Placement received a total of 2,628,453 May 2021 Prefunded Warrants. Between June 30, 2021 and
July 8, 2021, the Purchaser exercised all of its May 2021 Prefunded Warrants.