SHIFTPIXY, INC.

(PIXY)
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SHIFTPIXY, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

04/14/2022 | 04:59pm EDT
The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and the related
notes, and other financial information included in this Quarterly Report, as
well as the information contained in our Annual Report on Form 10-K and 10-K/A
for the fiscal year ended August 31, 2021 ("Fiscal 2021"), filed with the SEC on
December 3, 2021 and February 28, 2022, respectively.
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND INFORMATION


This Quarterly Report, the other reports, statements, and information that we
have previously filed or that we may subsequently file with the SEC, and public
announcements that we have previously made or may subsequently make, contain
"forward-looking statements" within the meaning of the federal securities laws,
including the Private Securities Litigation Reform Act of 1995, which statements
involve substantial risks and uncertainties. Unless the context is otherwise,
the forward-looking statements included or incorporated by reference in this
Quarterly Report and those reports, statements, information and announcements
address activities, events or developments that we expect or anticipate will or
may occur in the future. Forward-looking statements generally relate to future
events or our future financial or operating performance. In some cases, you can
identify forward-looking statements because they contain words such as "may,"
"might," "will," "should," "expects," "plans," "anticipates," "could,"
"intends," "target," "projects," "contemplates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these words or other
similar terms or expressions that concern our expectations, strategy, plans or
intentions. Forward-looking statements contained in this Quarterly Report
include, but are not limited to, statements about:

• our future financial performance, including our revenue, costs of revenue and

                 operating expenses;


   •   our ability to achieve and grow profitability;

• the sufficiency of our cash, cash equivalents and investments to meet our

                 liquidity needs;


   •   our predictions about industry and market trends;


   •   our ability to expand successfully internationally;

• our ability to manage effectively our growth and future expenses, including

                 our growth and expenses associated with
                 our sponsorship of various special purpose acquisition companies;


   •   our estimated total addressable market;


• our ability to maintain, protect and enhance our intellectual property;

• our ability to comply with modified or new laws and regulations applying to

                 our business;


• the attraction and retention of qualified employees and key personnel;

• the effect that the novel coronavirus disease ("COVID-19") or other public

                 health issues could have on our business, financial 

condition and the economy

                 in general;


• our ability to be successful in defending litigation brought against us; and

• our ability to continue to meet the listing requirements of Nasdaq.

We caution you that the forward-looking statements highlighted above do not encompass all of the forward-looking statements made in this Quarterly Report.


We have based the forward-looking statements contained in this Quarterly Report
primarily on our current expectations and projections about future events and
trends that we believe may affect our business, financial condition, results of
operations and prospects. The outcome of the events described in these
forward-looking statements is subject to risks, uncertainties and other factors
described in the section entitled "Risk Factors" in our Annual Report on Form
10-K for Fiscal 2021 filed with the SEC on December 3, 2021, which is expressly
incorporated herein by reference, and elsewhere in this Quarterly Report.
Moreover, we operate in a very competitive and challenging environment. New
risks and uncertainties emerge from time to time, and it is not possible for us
to predict all risks and uncertainties that could have an impact on the
forward-looking statements contained in this Quarterly Report. We cannot assure
you that the results, events and circumstances reflected in the forward-looking
statements will be achieved or occur, and actual results, events or
circumstances could differ materially from those described in the
forward-looking statements.

The forward-looking statements made in this Quarterly Report relate only to
events as of the date on which the statements are made. We undertake no
obligation to update any forward-looking statements made herein to reflect
events or circumstances after the date of this Quarterly Report or to reflect
new information or the occurrence of unanticipated events, except as required by
law. We may not actually achieve the plans, intentions or expectations disclosed
in our forward-looking statements and you should not place undue reliance on our
forward-looking statements. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers, dispositions, joint
ventures, other strategic transactions or investments we may make or enter into.

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The risks and uncertainties we currently face are not the only ones we face. New
factors emerge from time to time, and it is not possible for us to predict which
will arise. There may be additional risks not presently known to us or that we
currently believe are immaterial to our business. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. If any such risks occur, our
business, operating results, liquidity and financial condition could be
materially affected in an adverse manner.

The industry and market data contained in this Quarterly Report are based either
on our management's own estimates or, where indicated, independent industry
publications, reports by governmental agencies or market research firms or other
published independent sources and, in each case, are believed by our management
to be reasonable estimates. However, industry and market data are subject to
change and cannot always be verified with complete certainty due to limits on
the availability and reliability of raw data, the voluntary nature of the data
gathering process and other limitations and uncertainties inherent in any
statistical survey of market shares. We have not independently verified market
and industry data from third-party sources. In addition, consumption patterns
and customer preferences can and do change. As a result, you should be aware
that market share, ranking and other similar data set forth herein, and
estimates and beliefs based on such data, may not be verifiable or reliable.

Overview


Our current business, and the primary source of our revenues to date, has been
under a human capital fee-based SAAS business model. We have developed a
comprehensive HRIS platform designed to provide real-time, agile business
intelligence information for our clients as well as an employment marketplace
designed to match client opportunities with a large workforce under a digital
umbrella. Our market focus is to use this traditional approach, coupled with
developed technology, to address underserved markets containing predominately
lower wage employees with high turnover, beginning with light industrial,
services, and food and hospitality markets. We provide human resources,
employment compliance, insurance-related, payroll, and operational employment
services solutions for our clients and shift work or gig opportunities for WSEs
(or shifters). As consideration for providing these services, we receive
administrative or processing fees, typically as a percentage of a client's gross
payroll, process and file payroll taxes and payroll tax returns, provide
workers' compensation insurance, and provide employee benefits. We have built a
substantial business on a recurring revenue model since our inception in 2015.
For the three and six months ended February 28, 2022 , we processed
approximately $21.4 million and $42.6 million of payroll billings, respectively,
our primary operating metric, and incurred approximately $9.5 million and $18.2
million in operating losses for the three and six months ended February 28,
2022, which were driven primarily by substantial investments in our technology
platform, our SPAC sponsorships and our ShiftPixy Labs growth initiative, as
well as by necessary upgrades to our back-office operations to facilitate
servicing a large WSE base under a traditional staffing model.

For most of Fiscal 2021 and continuing into the second quarter of Fiscal 2022,
our primary focus was on clients in the restaurant and hospitality industries,
(market segments typically characterized by high employee turnover and low pay
rates), and healthcare industries typically employing specialized personnel that
command higher pay rates. We believe that these industries are better served by
our HRIS platform and related mobile application, which provide payroll and
human resources tracking for our clients and which we believe result in lower
operating costs, improved customer experience and revenue growth acceleration.
California continued to be our largest market during the second quarter of
Fiscal 2022, accounting for approximately 53% of our gross billings. Washington
and New Mexico represented our other significant markets during the second
quarter of Fiscal 2022, representing approximately 21% of our total revenues.
(Our other locations did not contribute revenue to a material degree.) All of
our clients enter into client services agreements ("CSAs") with us or one of our
wholly owned subsidiaries.

Our business focus during Fiscal 2021 and continuing into the second quarter of
Fiscal 2022 was to complete our HRIS platform and to expand that platform to
position the Company for rapid billings growth as well as to expand our product
offerings to increase our monetization of our payroll billings. To that end, we
identified and began to execute on various growth strategies, including our
sponsorship of our IHC SPAC and our ShiftPixy Labs initiative. We expect that
our execution of these strategies, if successful, will yield significant
customer growth driven by widespread adoption of our technology offerings, which
we believe represents a substantial value proposition to our clients as a
valuable source of agile human capital business intelligence.

Our revenues for the second quarter of Fiscal 2022 consisted of: i) staffing
solutions revenues equal to gross billings for staffing solutions clients; and
ii) EAS solutions revenues which consist of administrative fees calculated as a
percentage of gross payroll processed, payroll taxes due on WSEs billed to the
client and remitted to the taxation authority, and workers' compensation
premiums billed to the client for which we facilitate coverage for our clients.
Our costs of revenues for EAS solutions revenues consist of the accrued and paid
payroll taxes and our costs to provide the workers' compensation coverage
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and administration related services, including premiums and loss reserves. For
staffing solutions revenues our cost of revenues also included the gross payroll
paid to staffing solutions employees. A significant portion of our assets and
liabilities is for our workers' compensation reserves, carried as cash balances,
and our estimates of projected workers' compensation claims, carried as
liabilities. We provided a self-funded workers' compensation policy up to
$500,000 and purchased reinsurance for claims in excess of that limit through
February 28, 2021, after which we changed to a direct cost premium only workers'
compensation program.

We believe that our customer value proposition is to provide a combination of overall net cost savings to our clients, for which they are willing to pay increased administrative fees, as follows:


•Payroll tax compliance and management services;
•Governmental HR compliance services, such as compliance with the Affordable
Care Act ("ACA");
•Reduced client workers' compensation premiums or enhanced coverage; and
•Access to an employee pool of potential applicants to reduce turnover costs.

We have invested heavily in a robust, cloud-based HRIS platform (the ShiftPixy "Ecosystem") in order to:


•reduce WSE management costs;
•automate new WSE and client onboarding; and
•provide value-added services for our business clients resulting in additional
revenue streams to the Company.

Our cloud-based HRIS platform captures, holds, and processes HR and payroll
information for clients and WSEs through an easy-to-use customized front-end
interface coupled with a secure, remotely hosted database. The HRIS platform can
be accessed by either a desktop computer or an easy to use smartphone
application designed with legally binding HR workflows in mind. Once fully
implemented, we expect to reduce the time, expense, and error rate for
on-boarding WSEs into our ecosystem. This allows our HRIS platform to serve as a
"gig" marketplace for WSEs and clients and for client businesses to better
manage their human capital needs.

We see our technology platform as a key competitive advantage and differentiator
to our market competitors and one that will allow us to expand our human capital
business beyond our current focus of low-wage employees and healthcare workers.
We believe that providing this baseline business, coupled with a technology
solution to address additional concerns such as employee scheduling and
turnover, will provide a unique, cost effective solution to the HR compliance,
staffing, and scheduling problems that these businesses face. We are completing
additional features that we expect to generate additional revenue streams,
enhance and expand our product offering, increase our client customer and WSE
counts, and increase our revenues and profit per existing WSE.

COVID-19 Pandemic Impact


The COVID-19 pandemic continues to provide both business setbacks and business
opportunities. Our growth trajectory has been muted by the economic impacts of
the COVID-19 pandemic on our core business clients, primarily restaurants and
nurse staffing organizations supplying health services not related to COVID-19.

The COVID-19 pandemic has significantly impacted and delayed our expected
growth, which we saw initially through a decrease in our billed customers and
WSEs beginning in mid-March 2020, when the State of California first implemented
"lockdown" measures. Substantially all of our billed WSEs as of February 29,
2020 worked for clients located in Southern California, and were primarily in
the QSR industry. Many of these clients were required to furlough or lay off
employees or, in some cases, completely shutter their operations. For our
clients serviced prior to the March 2020 pandemic lockdown, we experienced an
approximate 30% reduction in business levels within six weeks after the first
lockdown commenced. Early in the pandemic, the combination of our sales efforts
and the tools that our services provide to businesses impacted by the COVID-19
pandemic resulted in additional business opportunities for new client location
additions, as did the fact that many of our clients received Payroll Protection
Plan loans ("PPP Loans") under the CARES Act, which supported their businesses
and payroll payments during in-store lockdowns. Nevertheless, during the quarter
ended May 31, 2020, our WSE billings per client location decreased as many of
our clients were forced to cease operations or reduce staffing. On July 13,
2020, the Governor of the State of California re-implemented certain COVID-19
related lockdown restrictions in most of the counties in the state, including
those located in Southern California where most of our clients were located. The
mercurial nature of the pandemic led to recurring lockdowns through the issuance
of additional orders by state and county health authorities that yielded uneven
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patterns of business openings and closings throughout our clients' markets,
which also experienced significant lockdowns beginning in late November 2020 and
through the year-end holiday season as a spike in COVID-19 cases was observed.

The negative impact of these lockdowns on our business and operations continued
through our third quarter of Fiscal 2021 in a see-saw pattern, with some
improvement observed after the removal of many restrictions in California and
elsewhere from March through June 2021, only to be followed by the
reimplementation of restrictions in the face of the pandemic resurgence fueled
by the spread of the Delta variant of the virus. While the availability of PPP
Loans to our clients mitigated the negative impact on our business during the
initial stages of the pandemic, we believe that the failure of the government to
renew this program exacerbated the deleterious impact of subsequent restrictions
and lockdowns on our financial results for Fiscal 2021. We have observed some
degree of business recovery as these lockdowns have relaxed and vaccination
efforts have accelerated, and we believe that, to the extent that COVID-19
infection rates continue to decrease, and vaccination rates increase,
governmental authorities will continue to remove restrictions, which will fuel
our clients' business recoveries. Nevertheless, we believe that the recent
resurgence of the virus, in the form of the Omicron variant, had a material
negative impact on our business and results of operations, and that the
emergence of additional variants of the virus could have a similarly material
negative impact on us in the future.

We have also experienced increases in our workers' compensation reserve
requirements, and we expect additional workers' compensation claims to be made
by furloughed employees. We also expect additional workers' compensation claims
to be made by WSEs required to work by their employers during the COVID-19
pandemic. On May 4, 2020, the State of California indicated that workers who
became ill with COVID-19 would have a potential claim against workers'
compensation insurance for their illnesses. These additional claims, to the
extent they materialize, could have a material impact on our workers'
compensation liability estimates.

Significant Developments in the Three Months Ended February 28, 2022.

Financing Activities

January 2022 Warrant Exercise Agreement


On May 17, 2021, we issued warrants to purchase up to an aggregate of 4,948,453
shares of our common stock, par value $0.0001 per share, with an exercise price
of $2.425 (the "Existing Warrants") The Existing Warrants were immediately
exercisable and expire on June 15, 2026.
On January 26, 2022, we entered into a Warrant Exercise Agreement ("the Exercise
Agreement") with the holder of the Existing Warrants (the "Exercising Holder").
Pursuant to the Exercise Agreement, the Exercise Holder and the Company agreed
that, subject to any applicable beneficial ownership limitations, the Exercising
Holder would cash exercise up to 4,948,453 of its Existing Warrants (the
"Investor Warrants") into shares of our common stock underlying such Existing
Warrants (the "Exercised Shares"). To induce the Exercising Holder to exercise
the Investor Warrants, the Exercise Agreement (i) amended the Investor Warrants
to reduce their exercise price per share to $1.20 and (ii) provided for the
issuance of a new warrant to purchase up to an aggregate of approximately
9,896,906 shares of our common stock (the "January 2022 Common Warrant"), with
such January 2022 Common Warrant being issued on the basis of two January 2022
Common Warrant shares for each share of the Existing Warrant that was exercised
for cash. The January 2022 Common Warrant is exercisable commencing on July 28,
2022, terminates on July 28, 2027, and has an exercise price per share of $1.55.
The Exercise Agreement generated aggregate proceeds to the Company of
approximately $5.9 million, prior to the deduction of $461,000 of costs
consisting of placement agent commissions and offering expenses payable by the
Company. As a result of the warrant modification, which reduced the exercise
price of the Existing Warrants, as well as the issuance of the January 2022
Common Warrants, the Company recorded approximately (i) $639,000 for the
increased fair value of the modified warrants; and (ii) $12,590,000 as the fair
value of the January 2022 Common Warrants on the date of issuance. We recorded
approximately $5,477,000 as issuance costs that offset the $5.5 million of
additional paid-in capital the Company received for the cash exercise of the
Existing Warrants at the reduced exercise price, while the remaining $7,731,000
was recorded as a deemed dividend on the Condensed Consolidated Statements of
Operations, resulting in a reduction of income available to common shareholders
in our basic earnings per share calculation.

September 2021 Private Placement


In September 2021, the Company entered into a $12 million private placement
transaction, inclusive of $0.9 million of placement agent fees and costs, with a
large institutional investor pursuant to which the Company sold to the investor
an aggregate of (i) 2,850,000 shares of Common Stock, together with warrants
(the "September 2021 Common Warrants") to purchase up to 2,850,000 shares of
Common Stock, with each September 2021 Common Warrant exercisable for one share
of Common Stock at a price per share of $1.595, and (ii) 4,673,511 prefunded
warrants (the "September 2021 Prefunded Warrants"), together with the September
2021 Common Warrants to purchase up to 7,523,511 shares of Common Stock, with
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each September 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
September 2021 Common Warrant were sold together at a combined offering price of
$1.595 and each September 2021 Prefunded Warrant and accompanying September 2021
Common Warrant were sold together at a combined offering price of $1.5949.

The September 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
September 2021 Prefunded Warrants are exercised in full. The September 2021
Common Warrants have an exercise price of $1.595 per share, are immediately
exercisable, and will expire five years from the date that the registration
statement covering the resale of the shares underlying the September 2021 Common
Warrants is declared effective (which has not yet occurred). The private
placement generated gross proceeds of approximately $12.0 million, prior to
deducting $0.9 million of costs consisting of placement agent commissions and
offering expenses payable by the Company. In addition to the seven percent (7%)
of the aggregate gross proceeds cash fee, the Company issued warrants to the
placement agent to purchase an aggregate of 376,176 shares of our common stock
issuable upon exercise of the September 2021 Prefunded Warrants sold in the
offering (the "September Placement Agent Warrants"). The September Placement
Agent Warrants are exercisable for a period commencing on March 3, 2022 (six
months after issuance) and expire four years from the effective date (which has
not yet occurred) of a registration statement for the resale of the underlying
shares, and have an initial exercise price per share of $1.7545.

Growth Initiatives


During the second quarter of Fiscal 2022, we continued to execute on our two
primary growth initiatives. Each growth initiative is designed to leverage our
technology solution, knowledge, and expertise to provide for significant revenue
growth for the human capital management services we provide to our clients.

Sponsorship of SPACs


On April 29, 2021, we announced our sponsorship of four SPAC IPOs. The IHC IPO
closed on October 22, 2021, raising gross proceeds for IHC of $115 million,
which IHC currently intends to use to acquire companies primarily in the light
industrial segment of the staffing industry. Immediately following the IHC IPO,
IHC began to evaluate acquisition candidates. IHC's goal is to complete its IBC
within one year of consummation of the IHC IPO.

On March 18, 2022, we announced the withdrawal of registration statements on
Form S-1 previously filed with the Securities and Exchange Commission relating
to three SPACs for which our wholly owned subsidiary, ShiftPixy Investments,
Inc., had previously been identified as the Sponsor: Vital, TechStackery, and
Firemark. After considering our options and the current market environment, we
concluded that we can best achieve our SPAC sponsorship goals, including
expansion of our own footprint, by doing everything possible to ensure IHC's
ultimate success without distraction. We do not believe that our decision to
withdraw our sponsorship from the other SPACs will have a material negative
impact on our goal of building large national staffing clients to operate on the
ShiftPixy technology platform, which remains unchanged and which we continues to
work toward achieving.

We expect our sponsored SPAC, IHC, to operate as a separately managed,
publicly-traded entity following the successful completion of its IBC or
"De-SPAC". Our goal is to enter into one or more CSAs with IHC that will allow
it to participate in our HRIS platform. We believe that this initiative has the
potential to generate significant revenues and earnings for us, while also
supporting a favorable business model for IHC.

To date, we have incurred direct costs of $1 million to form the SPAC entities,
primarily for legal and professional services related fees, which are included
as operating expenses for the three and six months ended February 28, 2022.

ShiftPixy Labs


On July 29, 2020, we announced the launch of ShiftPixy Labs, which includes the
development of ghost kitchens in conjunction with our wholly-owned subsidiary,
ShiftPixy Ghost Kitchens, Inc. Through this initiative, we intend to bring
various food delivery concepts to market that will combine with our HRIS
platform to create an easily replicated, comprehensive food preparation and
delivery solution. The initial phase of this initiative is being implemented in
our dedicated kitchen facility located in close proximity to our Miami
headquarters, which we are already showcasing 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
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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.

The idea of ShiftPixy Labs, (as described in more detail in Item 1 of our Annual
Report on Form 10-K for Fiscal 2021, filed with the SEC on December 3, 2021),
originated from discussions with our restaurant clients, combined with our
observations of industry trends that appear to have accelerated during the
pandemic. Beginning in Calendar 2020, we recognized a significant uptick in the
use of mobile applications to order take-out food either for individual pickup
or third-party delivery, which grew even more dramatically as the pandemic took
hold. Not surprisingly, the establishment of fulfillment kitchens for third
party delivery also spread rapidly during this time period, initially among
national fast food franchise chains but then among smaller QSRs.

We believe that the restaurant industry is in the midst of a food fulfillment
paradigm shift that will ultimately result in the widespread use of "ghost
kitchens" in a shared environment. Similar to shared office work locations, a
shared kitchen can provide significant cost efficiencies and savings compared to
the cost of operating multiple retail restaurant locations. Coupled with
ShiftPixy's technology stack, which includes order delivery and dispatch, we
believe that the ghost kitchen solutions that emerge from ShiftPixy Labs will
provide a robust and effective delivery order fulfillment option for our
clients.

We have also observed the growing impact of social media platforms over the past
five years, a trend which has accelerated through the pandemic. As this trend
has gained steam, many social media influencers have successfully capitalized on
their popularity by establishing new business concepts in a variety of
industries, including within the QSR space. Some of these QSRs are identified as
"virtual" restaurants with delivery-only service fulfilled by centralized ghost
kitchens. We intend to capitalize on this trend by creating an extensive social
media presence for ShiftPixy Labs.

Many restaurant entrepreneurs have also become successful during the pandemic by
moving outside through the use of mobile food trucks, which can be used as a
launching point for restaurants and ultimately expanded to traditional indoor
dining locations. We have researched this phenomenon and, coupled with our
experience in the restaurant industry, believe a significant business
opportunity exists to assist with the fulfillment of new restaurant ideas and
rapidly expand those ideas across a broad geographic footprint utilizing
centralized ghost kitchen fulfillment centers. Again, we believe that ShiftPixy
Labs will provide solutions that will facilitate the rapid growth of these new
businesses, through a combination of centralized ghost kitchens and an available
pool of human capital resources provided through our HRIS platform, as well as
through other business assistance provided by our management team.

During Fiscal 2021, we established an industrial facility in Miami that we
expect to be fully operational shortly. We have installed ten standardized
kitchen stations in both single and double kitchen configurations built within
standard cargo container shells in this facility. We expect this facility, upon
completion, to function as a state of the art ghost kitchen space that will be
used to incubate restaurant ideas through collaboration and partnerships with
local innovative chefs, resulting in sound businesses that provide recurring
revenue to us in a variety of ways, both through direct sales and utilization of
the ShiftPixy Ecosystem, our HRIS platform, and other human capital services
that we provide. To the extent that this business model is successful and can be
replicated in other locations, it has the potential to contribute significant
revenue to us in the future.

We may also take equity stakes in various branded restaurants that we develop
and operate with our partners through ShiftPixy Labs. Such ownership interests
will be held to the extent that it is consistent with our continued existence as
an operating company, and to the extent that we believe such ownership interests
have the potential to create significant value for our shareholders.

Workers' Compensation Insurance


During Fiscal 2021, the Company made a strategic decision to change its approach
to securing workers' compensation coverage for our clients. This was primarily
due to rapidly increasing loss development factors stemming in part from the
COVID-19 pandemic. The combination of increased claims from WSEs, the inability
of WSEs to obtain employment quickly and return to work after injury claims, and
increasing loss development factor rates from our insurance and reinsurance
carriers resulted in significantly larger potential loss exposures, claims
payments, and additional expense accruals. Starting on January 1, 2021, we began
to migrate our clients to our new direct cost program, which we believe
significantly limits our claims exposure. Effective March 1, 2021, all of our
clients had migrated to the direct cost program.

For the second quarter of Fiscal 2022, included in our cost of sales was
approximately $18,000 of expense for claims estimate increases relating to loss
reserves activity for calendar 2021 for the legacy Sunz and Everest programs.
These claims estimates are the subject of ongoing litigation with our former
workers' compensation insurance providers, Sunz and Everest, as
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described in Note 11, Contingencies, above. We are currently re-evaluating our
workers' compensation liability estimates under our legacy Sunz and Everest
programs.

Vensure Asset Sale Note Receivable Reconciliation


On January 3, 2020, we entered into an asset purchase agreement with Shiftable
HR Acquisition, LLC, a wholly-owned subsidiary of Vensure, pursuant to which we
assigned client contracts representing approximately 88% of our quarterly
revenue as of November 30, 2019, including 100% of our existing PEO business
effective as of December 31, 2019, and we transferred $1.6 million of working
capital assets, including cash balances and certain operating assets associated
with the assigned client contracts included in the agreement. Gross proceeds
from the Asset Sale were $19.2 million, of which $9.7 million was received at
closing and $9.5 million was embodied in the Note Receivable described above, to
be paid out in equal monthly payments for the next four years after certain
transaction conditions were met. As of February 28, 2022, Vensure and the
Company were engaged in litigation regarding the amount owed to the Company
pursuant to the Note Receivable, as described in Note 11, Contingencies, above.

Quarterly Performance Highlights: Second Quarter Fiscal 2022 v. Second Quarter Fiscal 2021

•Served approximately 72 clients and an average of 3,000 WSEs.


•Processed over $21.3 and $42 million in gross billings from continuing
operations for the three and six months ended February 28, 2022, respectively,
representing an increase of 19.6% and 13.1% from the same period, respectively,
in Fiscal 2021 due to the easing of COVID-19 restrictions, which had a
significant impact on our QSR customer base. Our continuing operations mix
remained consistent for the three and six months ended February 28, 2022, with
the same period in Fiscal 2021, primarily consisting of QSR WSEs. (For further
information, please refer to the section entitled "Non-GAAP Financial Measures",
below.) Our revenues for the three and six months ended February 28, 2022 were
394.3% and 293.7%, respectively, higher than the same period in Fiscal 2021, due
primarily to the our migration to a staffing revenue recognition model during
the latter part of Fiscal 2021. Gross margin for the three and six months ended
February 28, 2022 improved over the same period in Fiscal 2021, due primarily to
higher billings driving greater margins from additional administrative fees and
taxes.

•Gross margin slightly decreased for the three month period ended February 28,
2022 by $88,000 or 24%, compared to the same period in Fiscal 2021. For our six
month period ended February 28, 2022, our gross margin increased by $95,000 or
10.7% compared to the same period in Fiscal 2021.

•Our operating loss for the three and six months ended February 28, 2022
increased by $2.7 and $4.4 million, respectively, compared to the same period in
Fiscal 2021. The increase mainly reflects increased costs associated with our
growth initiatives, (including payroll-related costs for the three and six
months ended February 28, 2022 of $3.6 million and $7.5 million, professional
costs of $1.7 million and $3.4 million, software development costs of $1.2
million and $2.2, and costs classified in our statement of operations as general
and administrative expenses of $1.9 million and $3.7 million, respectively).

Our financial performance for the three and six months ended February 28, 2022,
compared to the same period in Fiscal 2021, included the following significant
items:


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Results of Operations

The following table summarizes the unaudited condensed consolidated results of our operations for the three and six months ended February 28, 2022, and February 28, 2021.

                                                  For the Three Months                          For the Six Months
                                                         Ended                                         Ended
                                           February 28,          February 28,           February 28,           February 28,
                                               2022                  2021                   2022                   2021
Revenues (See Note 2)                    $  10,437,000          $  

2,419,000 $ 19,378,000 $ 4,922,000 Cost of revenue

                             10,498,000             2,056,000             18,743,000              4,046,000
Gross profit  (loss)                           (61,000)              363,000                635,000                876,000

Operating expenses:
Salaries, wages, and payroll taxes           3,653,000             2,592,000              7,543,000              4,785,000
Stock-based compensation - general and
administrative                                 339,000               423,000                747,000                919,000
Commissions                                     28,000                49,000                 56,000                 87,000
Professional fees                            1,677,000             1,006,000              3,414,000              1,713,000
Software development                         1,073,000               786,000              2,234,000              1,663,000
Depreciation and amortization                  130,000                86,000                253,000                148,000
General and administrative                   2,014,000             1,380,000              3,946,000              3,139,000
Total operating expenses                     8,915,000             6,322,000             18,193,000             12,454,000

Operating Loss                              (8,976,000)           (5,959,000)           (17,558,000)           (11,578,000)

Other (expense) income:
Interest expense                                (1,000)               (3,000)                (2,000)                (6,000)
Other income                                    13,000                     -                 16,000                      -
Expensed SPAC offering costs                  (515,000)                    -               (515,000)                     -
Total other expense                           (503,000)               (3,000)              (501,000)                (6,000)
Loss from continuing operations             (9,479,000)           (5,962,000)           (18,059,000)           (11,584,000)

Total (loss) income from discontinued
operations, net of tax                         (18,000)             (221,000)              (151,000)            (1,535,000)

Net loss attributable to Shiftpixy Inc.
shareholders                             $  (9,497,000)         $ 

(6,183,000) $ (18,210,000) $ (13,119,000)


Deemed dividend for triggering of
warrant down round feature                  (7,790,000)                    -             (7,790,000)                     -
Net loss attributable to common
shareholders                             $ (17,287,000)         $ 

(6,183,000) $ (26,000,000) $ (13,119,000)


Net loss  per share, Basic and diluted
Continuing operations                    $       (0.30)         $      (0.18)         $       (0.54)                 ($ 0.36)
Discontinued operations                              -                 (0.01)                     -                  (0.05)
Net  loss per common share - Basic and
diluted                                  $       (0.30)         $      (0.19)         $       (0.54)                 ($ 0.41)

Weighted average common shares
outstanding - Basic and diluted             31,215,495            32,746,660             33,593,393             31,772,050



We report our revenues as gross billings, net of related direct labor costs for
our EAS/HCM clients and revenues without reduction of labor costs for staffing
services clients.


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                                                    For the Three Months                         For the Six Months
                                                            Ended                                       Ended
                                            February 28,             February 28,         February 28,         February 28,
                                                2022                     2021                 2022                 2021
Gross Billings for HCM                     $     12.6               $      17.9                 25.5                 37.6
Gross Wages for HCM                        $    (11.0)              $      15.5          $     (22.2)         $      32.7
Total Net Revenue for HCM                  $      1.6                          2.4       $       3.3                     4.9
Revenue for Staffing                              8.8                         -                 16.1                    -
Total Net Revenues (in millions)           $     10.4               $       2.4                 19.4                  4.9
Increase (Decrease), Quarter over Quarter
(in millions)                                     8.0                       0.4                 14.5                  0.7
Percentage Increase (Decrease), Quarter
over Quarter                                    333.3   %                  20.0  %             295.9  %              16.7  %

Cost of Revenues (in millions)             $     10.5               $       2.1          $      18.7          $       4.0
Increase (Decrease), Quarter over Quarter
(in millions)                                     8.4                      0.20                14.70                  0.1
Percentage Increase (Decrease), Quarter
over Quarter                                    400.0   %                  10.5  %             367.5  %               2.6  %

Gross Profit (in millions)                 $     (0.1)              $       0.4          $       0.6          $       0.9
Increase (Decrease), Quarter over Quarter
(in millions)                                    (0.5)                      0.3                 (0.3)                 0.6
Percentage Increase (Decrease), Quarter
over Quarter                                   (125.0)  %                 132.1  %             (33.3) %             200.0  %
Gross Profit Percentage of Revenues              (1.0)  %                  16.7  %               3.1  %                18  %



Three and six months ended February 28, 2022


Net revenue for our HCM services excludes the payroll cost component of gross
billings. With respect to staffing services, employer payroll taxes, employee
benefit programs, and workers' compensation insurance, we believe that we are
the primary obligor, and we have latitude in establishing price, selecting
suppliers, and determining the service specifications. As such, the billings for
those components are included as revenue. Revenues are recognized ratably over
the payroll period as WSEs perform their services at the client worksite. In
Fiscal 2021, we began to migrate our business clients to a staffing revenue
recognition model during the later half of Fiscal 2021. As such, the net
revenues for the three and six months ended February 28, 2021 are primarily HCM
services while the net revenues for the Fiscal 2022 reporting period are under
the staffing revenue recognition model. See also non-GAAP Financial Measures
below.

Net Revenue increased approximately 333.3% and 295.9%, to $10.4 million and
$19.4 million for the three and six months ended February 28, 2022, from $2.4
million and $4.9 million for the same period of Fiscal 2021, respectively. The
increase for the three and six month periods is due to: i) the impact of the
transition of some of our existing clients to a staffing revenue recognition
model, which commenced during the latter part of Fiscal 2021 and ii) an increase
in gross billings of $3.5 million or 19.6% to $21.3 million, from $17.9 million
for the three months ended February 28, 2021 and an increase of $5.0 million or
13.1% to $$42.6 million from $37.6 million, for the six months ended February
28, 2021, along with Recurring WSE counts for the three and six months ended
February 28, 2022, averaged approximately 3,000, consistent with a recovery to
our pre-pandemic WSE levels.

Our gross billings from HCM and Staffing services totaled approximately $12.6
million and $8.8 million, representing 58.9% and 41.1% of our gross billings for
the three months ended February 28, 2022 and $25.5 million and $16.1 million,
representing 61.3% and 38.7% of our gross billings for the six months ended
February 28, 2022.

Billings per WSE increased to $3,567 and $6,623 for the three and six month period ended February 28, 2022, due primarily to business recoveries achieved by our QSR clients as the pandemic subsided, combined with an increase in the placement of nursing WSEs who earn higher wages and generate higher billings.


For the three months ended February 28, 2022, our revenue associated with
administrative fees increased by $132,000, or 38.4%, our tax revenues increased
by $327,000 or 20.2%, consistent with our billed wages increase of 19.6%, and
our revenue associated with workers' compensation premiums decreased by $13,000,
or 3.0%, due to the migration of our WSEs to a
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guaranteed cost program during Fiscal 2021 and a change in our client mix that
resulted in lower billed workers' compensation rates per wage dollar, compared
to the same comparative period in Fiscal 2021,. For the six months ended
February 28, 2022, our revenue associated with administrative fees increased by
$250,000 or 36.1%, our tax revenue increased by $528,000 or 16% and out workers
compensation revenue decreased by $49,000 or 5.4%, compared to the same
comparative period in Fiscal 2021

Cost of Revenues includes our costs associated with employer taxes, workers'
compensation insurance premiums, and the gross wages paid for our staffing
clients. Cost of revenues for the three months ended February 28, 2022,
increased by $8.4 million or 410.6% to $10.5 million from $2.1 million for the
same period in Fiscal 2021. Cost of revenues for the six months ended February
28, 2022, increased by $14.7 million, or 363.2%, to $18.7 million from $4
million, respectively, for the same period in Fiscal 2021. The change in cost of
revenues for the three and six months ended February 28, 2022 was due primarily
to the conversion of certain existing clients to a staffing revenue recognition
model during the latter part of Fiscal 2021. As discussed above, the staffing
model includes the gross wages in the cost of sales as the Company is considered
the employer. Other contributors to the increase in cost of sales are the slight
increase in workers' compensation cost by approximately $300,000 for the three
and six months ended in February 28, 2022, respectively, due to higher premiums
from our participation in the direct guaranteed cost program, offset by the
decrease in our claims accruals from our prior workers' compensation programs,
and the increase by $211,000 and $310,000, or 13.6% and 10.2%, respectively, in
taxes which is correlated to our increase in staffing services.

Gross Profit for the three months ended February 28, 2022 decreased by $423,000
or 116.5%, and decreased by approximately $241,000, or 27.5%, for the six months
ended February 28, 2022, compared to the same periods in Fiscal 2021. The
decrease for the three months ended February 28, 2022 was primarily driven by an
increase in workers' compensation cost due to higher premiums from our
participation in the direct guaranteed cost program, offset by an increase in
our administrative fees and taxes billed, which is consistent with our 19.61%
increase in gross billings compared to the same period in Fiscal 2021. The
increase in gross profit for the six months ended February 28, 2022 was mainly
driven by a $250,000 increase in our administrative fees and $218,000 increase
in taxes billed, consistent with our 13.6% increase in gross billings, offset by
an increase in workers' compensation cost of $342,000 and a decrease of $359,000
in gross wages, compared to the same period in Fiscal 2021.

Operating expenses for the three and six months ended February 28, 2022,
increased by $2.6 million or 41% to $8.9 million from $6.3 million, and by $5.7
million or 46.1% to $18.2 million from $12.5 million, respectively, compared to
the same period in Fiscal 2021. The increase in operating expenses for the three
and six months ended February 28, 2022 is primarily due to increased costs
associated with our growth initiatives. For the three months ended February 28,
2022 the $2.6 million increase is due to payroll-related cost increases of $1.0
million, professional fees increase of $0.7 million and software development
costs of $0.3 million and general and administrative expenses increase of $0.6
million. The $5.7 million increase for the six months ended February 28, 2022
was due to $2.7 million of payroll related cost increases, professional fees
increase of $1.7 million, software development costs of $0.6 million, and
general and administrative cost increases of $0.8 million.

Payroll-related costs increased due primarily to hiring additional executive,
operations, and software development personnel to support our growth initiatives
and accrued executive bonuses. Professional fees increased due to litigation
arising in the normal course of business and legal fees we paid on behalf of our
sponsored SPACs. Software development costs were driven primarily by our
continuing investment in our HRIS platform, while general and administrative
expenses grew primarily due to rent cost increases from our entry into leases
covering the following: (i) our principal executive offices in Miami, Florida;
(ii) our ShiftPixy Labs facility in Miami, Florida; and (iii) our new office
facility in Sunrise, Florida, which will house the majority of
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our operations personnel and other elements of our workforce. Other contributors
to the increase in general and administrative expenses include non-recurring
costs to relocate certain employees, and marketing expenses related to our
growth initiatives.

The following table presents certain information related to our operating
expenses (unaudited):

                                                                                                                 For the Six Months
                                                       For the Three months Ended                                      Ended
                                                   February 28,            February 28,             February 28,                   February 28,
                                                       2022                    2021                     2022                           2021
Operating expenses:
Salaries, wages, and payroll taxes             $    3,653,000             $  2,592,000                7,543,000                      4,785,000
Stock-based compensation - general and admin          339,000                  423,000                  747,000                        919,000
Commissions                                            28,000                   49,000                   56,000                         87,000
Professional fees                                   1,677,000                1,006,000                3,414,000                      1,713,000
Software development                                1,073,000                  786,000                2,234,000                      1,663,000
Depreciation and amortization                         130,000                   86,000                  253,000                        148,000
General and administrative                          2,014,000                1,380,000                3,946,000                      3,139,000
Total operating expenses                       $    8,915,000             $  6,322,000               18,193,000                     12,454,000


Operating expenses increased for the three and six months ended February 28,
2022 by $2.6 million, or 41% and by $5.7 million or 46.1%, compared with the
same period of Fiscal 2021. The components of operating expenses changed as
follows:

Salaries, wages and payroll taxes increased for the three and six months ended
February 28, 2022, by approximately $1 million, or 41%, and by $2.8 million or
57.6%, respectively, in comparison to the same period in Fiscal 2021. These
costs consisted of gross salaries, benefits, and payroll taxes associated with
our executive management team and corporate employees. Approximately $0.8
million of the increase was for accrued management bonuses and $0.2 million and
$2 million was primarily attributable to hiring additional employees in the
executive, operations, and software development ranks of our business to support
our various growth initiatives, including our SPAC sponsorships and ShiftPixy
Labs. Our corporate employee count increased from 56 employees as of February
28, 2021, to 83 employees as of February 28, 2022.

Share-Based compensation decreased by $0.1 million, or 19.9% and by $.2 million
or 18.7%, for the three and six months ended February 28, 2022, compared to the
same period in Fiscal 2021.

Commissions consist of commissions payments made to third party brokers and inside sales personnel, and remained consistent year over year, with a slight decrease based on the reduction of our sales force.


Professional fees consists of legal fees, accounting and public company costs,
board fees, and consulting fees. Professional fees for the three and six months
ended February 28, 2022, increased by 63.2% or $636,000 and by 97.3% or $1.7
million, respectively. The increase is primarily attributable to an increase in
legal fees related to our current active litigation and IHC's IBC-related
activities.

Software development consists of costs associated with research and development
outsourced to third parties. Software development costs increased by 36.5%, or
$287,000, and 34.3% or $571,000, for the three and six months ended February 28,
2022, respectively, compared to the same period in Fiscal 2021. The increased
costs are due primarily to additional contracted developers to support our
mobile application improvements.

Depreciation and amortization for the three and six months ended February 28, 2022, increased by $44,000, or 51% and $105,000 or 70.9%, respectively, as compared to the same period in Fiscal 2021, due to depreciation of the additional asset purchased during the period to support our growth initiatives.


General and administrative expenses consist of office rent and related overhead,
software licenses, insurance, penalties, business taxes, travel and
entertainment, and other general business expenses. General and administrative
expenses for the three and six months ended February 28, 2022, increased by
45.9% or $634,000, and by 25.7% or $807,000, respectively, compared with the
same period of Fiscal 2021. The increase was due primarily to approximately $1
million of general and administrative expenses incurred in connection with IHC,
our sponsored SPAC, during the period. No such expenses were incurred during the
same period of Fiscal 2021.
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Net loss for the three and six months ended February 28, 2022, increased by $2.9
million, or 48.2%, from $6.2 million to $9.2 million, and 36.3%, from $13.1
million to $17.9 million, compared to the same period in Fiscal 2021. The
increase is mainly due to increased costs associated with our growth
initiatives, (including payroll-related costs for the three and six months ended
February 28, 2022 of $3.6 million and $7.5 million, professional costs of $1.7
million and $3.4 million, software development costs of $1.2 million and $2.2
million, and costs classified in our statement of operations as general and
administrative expenses of $2 million and $3.9 million, respectively). The
increase in these cost is mainly related to the additional cost incurred in
support to the Company's growth initiatives discussed above.

Other income (expense) for the three and six months ended February 28, 2022
increased by of $501,000 and $495,000, respectively, compared to the same period
in Fiscal 2021. The increase is related to the expensing of deferred offering
costs paid in cash and associated with the three SPACs for which our
wholly-owned subsidiary has withdrawn its sponsorship, and which are not
proceeding with their initial public offerings.

Loss from continuing operations for the three and six months ended February 28,
2022, increased by $3.2 million or 48.2% and by $6.1 million or 53%,
respectively, due primarily to expenses associated with the Company's growth
initiatives, as described above.

Gain/loss from discontinued operations. For the three and six months ended
February 28, 2022, we recorded a loss primarily based upon our reassessment of
our workers' compensation claims reserve associated with the clients that we
transferred to Vensure in connection with the Vensure Asset Sale. For the three
and six months ended February 28, 2022, the loss from discontinued operations
decreased $203,000, or 91.9%, and $1.4 million, or 90.2%, respectively, compared
with the same period in Fiscal 2021. The decrease was driven primarily by the
phase out of the claims liability reserved, which trended downward during the
period.

Liquidity and Capital Resources

For a discussion of our liquidity and capital resources, see Note 6, Going Concern, to the Notes to the Condensed Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)" of this Quarterly Report.


Non-GAAP Financial Measures

In addition to financial measures presented in accordance with GAAP, we monitor
other non-GAAP measures that we use to manage our business, make planning
decisions and allocate resources. These key financial measures provide an
additional view of our operational performance over the long term and provide
useful information that we use to maintain and grow our business. The
presentation of these non-GAAP financial measures is used to enhance the
understanding of certain aspects of our financial performance. They are not
meant to be considered in isolation, superior to, or as a substitute for the
directly comparable financial measures presented in accordance with GAAP.

Our revenue recognition policy differs for our EAS/HCM and staffing clients and
is dependent on the respective CSA applicable to each client. During Fiscal
2021, some of our EAS clients migrated to a staffing CSA. Our policy is to
report revenues as gross billings, net of related direct labor costs, for our
EAS/HCM clients, and revenues without reduction for labor costs for staffing
clients. For the three months ended February 28, 2022, our gross billings from
HCM and staffing services totaled approximately $12.6 million and $8.9 million
(total of $21.5 million), representing 58.7% and 41.3% of our gross revenue,
respectively. For the six months ended February 28, 2022, our gross billings
from HCM and staffing services totaled approximately $25.6 million and $17.1
million (total of $42.7 million), representing 59.9% and 40.1% of our gross
revenue, respectively. For the three and six months ended February 28, 2022, our
gross billings were approximately $21.4 million and $42.6 million from our HCM
services, respectively, and our gross billings generated from staffing were
immaterial. (We had no revenues generated from technology services during the
three or six months ended February 28, 2022 or February 28, 2021.

Gross billings represent billings to our business clients and include WSE gross
wages, employer payroll taxes, and workers' compensation premiums as well as
administrative fees for our value-added services and other charges for workforce
management support. Gross billings for our HCM services are a non-GAAP
measurement that we believe to represent a key revenue-based operating metric,
along with number of WSEs and number of clients. Active WSEs are defined as
employees on our HRIS platform that have provided services for at least one of
our clients for any reported period. Our primary profitability metrics are gross
profit, and our primary driver of gross profit is administrative fees.
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Reconciliation of GAAP to Non-GAAP Measure

Gross Billings to Net Revenues


The following table presents a reconciliation of our Gross Billings (unaudited)
to Revenues:

                                          For the Three Months Ended February 28,        For the Six Months Ended February 28,
                                                 2022                   2021                   2022                   2021
Gross Billings in millions                $          21.4                 17.9          $          42.6                 37.6
Less: Adjustment to Gross Billings        $          10.9                 15.5          $          23.2                 32.7
Revenues, in millions                     $          10.5                  2.4          $          19.4                  4.9


The following table provides the key revenue and our primary gross profit driver used by management.

                                             For the Three Months Ended February        For the Six Months Ended February
                                                             28,                                       28,
                                                   2022                 2021                 2022                 2021

Administrative Fees (in millions)            $      0.48            $    0.34          $      0.94            $    0.69
Increase (Decrease), Quarter over Quarter
(in millions)                                       0.13                  0.1                  0.2                  0.1
Percentage Increase (Decrease), Quarter over
Quarter                                             38.4    %            34.9  %              36.0    %            15.9  %
Administrative Fee % of Gross Billings               2.2    %             1.9  %               2.2    %             1.8  %

Average WSEs by Quarter (unaudited)                3,000                3,000                3,000                3,000
Average Gross Billings per Average WSE       $     7,124            $   5,956          $    14,190            $  12,545



Our billed WSEs as of the end of:

                            February 28,       August 31,       February 28,
                                2022              2021              2021
Active WSEs (unaudited)        3,000             2,800             3,000


Average Active WSEs totaled approximately 3,000, which is consistent with
continuous growth and recovery to our pre-pandemic levels. The increase in
administrative fees was consistent with our billings growth over the same time
period. The increase in average gross billings per WSE was due primarily to
growth in the higher wages commanded by our healthcare WSEs, as well as an
increase in billings to our restaurant clients as their operations recovered
from the worst effects of the COVID-19 pandemic.

Material Commitments


We do not have any contractual obligations for ongoing capital expenditures at
this time. We do, however, purchase equipment and software necessary to conduct
our operations on an as needed basis.

Contingencies


For a discussion of contingencies, see Note 11, Contingencies, to the Notes to
the Condensed Consolidated Financial Statements in "Part I, Item 1. Condensed
Consolidated Financial Statements (Unaudited)" of this Quarterly Report.

New and Recently Adopted Accounting Standards


For a listing of our new and recently adopted accounting standards, see Note 2,
Summary of Significant Accounting Policies, to the Notes to the Condensed
Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated
Financial Statements (Unaudited)" of this Quarterly Report.
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