SHIFTPIXY, INC. 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 endedAugust 31, 2021 ("Fiscal 2021"), filed with theSEC onDecember 3, 2021 andFebruary 28, 2022 , respectively. 31
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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 theSEC , 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 theSEC onDecember 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. 32 -------------------------------------------------------------------------------- Table of Contents 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 endedFebruary 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 endedFebruary 28, 2022 , which were driven primarily by substantial investments in our technology platform, our SPAC sponsorships and ourShiftPixy 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 andNew 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 ourShiftPixy 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 33 -------------------------------------------------------------------------------- Table of Contents 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 throughFebruary 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
•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 inmid-March 2020 , when theState of California first implemented "lockdown" measures. Substantially all of our billed WSEs as ofFebruary 29, 2020 worked for clients located inSouthern 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 theMarch 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 endedMay 31, 2020 , our WSE billings per client location decreased as many of our clients were forced to cease operations or reduce staffing. OnJuly 13, 2020 , the Governor of theState of California re-implemented certain COVID-19 related lockdown restrictions in most of the counties in the state, including those located inSouthern 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 34 -------------------------------------------------------------------------------- Table of Contents patterns of business openings and closings throughout our clients' markets, which also experienced significant lockdowns beginning in lateNovember 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 inCalifornia and elsewhere from March throughJune 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. OnMay 4, 2020 , theState 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
Financing Activities
OnMay 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 onJune 15, 2026 . OnJanuary 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 suchJanuary 2022 Common Warrant being issued on the basis of twoJanuary 2022 Common Warrant shares for each share of the Existing Warrant that was exercised for cash. TheJanuary 2022 Common Warrant is exercisable commencing onJuly 28, 2022 , terminates onJuly 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 theJanuary 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 theJanuary 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.
InSeptember 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 eachSeptember 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 theSeptember 2021 Common Warrants to purchase up to 7,523,511 shares of Common Stock, with 35 -------------------------------------------------------------------------------- Table of Contents eachSeptember 2021 Prefunded Warrant exercisable for one share of Common Stock at a price per share of$0.0001 . Each share of Common Stock and accompanyingSeptember 2021 Common Warrant were sold together at a combined offering price of$1.595 and eachSeptember 2021 Prefunded Warrant and accompanyingSeptember 2021 Common Warrant were sold together at a combined offering price of$1.5949 . TheSeptember 2021 Prefunded Warrants are immediately exercisable, at a nominal exercise price of$0.0001 , and may be exercised at any time until all of theSeptember 2021 Prefunded Warrants are exercised in full. TheSeptember 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 theSeptember 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 theSeptember 2021 Prefunded Warrants sold in the offering (the "September Placement Agent Warrants"). The September Placement Agent Warrants are exercisable for a period commencing onMarch 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
OnApril 29, 2021 , we announced our sponsorship of four SPAC IPOs. The IHC IPO closed onOctober 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. OnMarch 18, 2022 , we announced the withdrawal of registration statements on Form S-1 previously filed with theSecurities 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 theShiftPixy 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 endedFebruary 28, 2022 .
OnJuly 29, 2020 , we announced the launch ofShiftPixy 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 ourMiami 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 throughoutthe United States and in selected international locations. We also intend to provide similar services via mobile kitchen concepts, all of which will be heavily 36 -------------------------------------------------------------------------------- Table of Contents 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 ofShiftPixy Labs , (as described in more detail in Item 1 of our Annual Report on Form 10-K for Fiscal 2021, filed with theSEC onDecember 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 withShiftPixy's technology stack, which includes order delivery and dispatch, we believe that the ghost kitchen solutions that emerge fromShiftPixy 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 forShiftPixy 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 thatShiftPixy 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 inMiami 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 throughShiftPixy 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.
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 onJanuary 1, 2021 , we began to migrate our clients to our new direct cost program, which we believe significantly limits our claims exposure. EffectiveMarch 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 37 -------------------------------------------------------------------------------- Table of Contents 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
OnJanuary 3, 2020 , we entered into an asset purchase agreement withShiftable HR Acquisition, LLC , a wholly-owned subsidiary ofVensure , pursuant to which we assigned client contracts representing approximately 88% of our quarterly revenue as ofNovember 30, 2019 , including 100% of our existing PEO business effective as ofDecember 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 ofFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 28, 2022 by$88,000 or 24%, compared to the same period in Fiscal 2021. For our six month period endedFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 28, 2022 , compared to the same period in Fiscal 2021, included the following significant items: 38
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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
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
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)
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)
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. 39
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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
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 endedFebruary 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 endedFebruary 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 endedFebruary 28, 2021 and an increase of$5.0 million or 13.1% to $$42.6 million from$37.6 million , for the six months endedFebruary 28, 2021 , along with Recurring WSE counts for the three and six months endedFebruary 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 endedFebruary 28, 2022 and$25.5 million and$16.1 million , representing 61.3% and 38.7% of our gross billings for the six months endedFebruary 28, 2022 .
Billings per WSE increased to
For the three months endedFebruary 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 40 -------------------------------------------------------------------------------- Table of Contents 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 endedFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 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 inFebruary 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 endedFebruary 28, 2022 decreased by$423,000 or 116.5%, and decreased by approximately$241,000 , or 27.5%, for the six months endedFebruary 28, 2022 , compared to the same periods in Fiscal 2021. The decrease for the three months endedFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 28, 2022 is primarily due to increased costs associated with our growth initiatives. For the three months endedFebruary 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 endedFebruary 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 inMiami, Florida ; (ii) ourShiftPixy Labs facility inMiami, Florida ; and (iii) our new office facility inSunrise, Florida , which will house the majority of 41
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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 endedFebruary 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 endedFebruary 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
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 endedFebruary 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. 42
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Net loss for the three and six months endedFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 28, 2022 , we recorded a loss primarily based upon our reassessment of our workers' compensation claims reserve associated with the clients that we transferred toVensure in connection with the Vensure Asset Sale. For the three and six months endedFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 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 endedFebruary 28, 2022 orFebruary 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. 43
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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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