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, 2022 ("Fiscal 2022"), filed with theSEC onDecember 13, 2022 andDecember 14, 2022 , respectively.
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 31 -------------------------------------------------------------------------------- Table of Contents 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 this report and in our Annual Report on Form 10-K and 10-K/A for Fiscal 2022, filed with theSEC onDecember 13, 2021 and onDecember 14, 2022 , respectively, 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. 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. Our business, operating results, liquidity and financial condition could be materially affected in an adverse manner as a result of these risks. 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 32 -------------------------------------------------------------------------------- Table of Contents 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. TheShiftPixy logo and other trademarks or service marks ofShiftPixy, Inc. appearing in this Quarterly Report on Form 10-Q are the property ofShiftPixy, Inc. This Form 10-Q also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this Form 10-Q appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names. Overview Our current business, and the primary source of our revenues to date, has been providing human resources, employment compliance, employment related insurance, payroll, and operational employment services solutions for our business clients using a comprehensive HRIS platform under a human capital fee-based business model. We have developed a comprehensive human resources information system or 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 worksite employees (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 months endedNovember 30, 2022 andNovember 30, 2021 , we processed approximately$11.7 million and$14.1 million of payroll billings, respectively, our primary operating metric, and incurred approximately$5.4 million and$8.7 million in operating losses for the three months endedNovember 30, 2022 andNovember 31, 2021 , respectively. Our loses 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 the fiscal year endingAugust 31, 2022 , and continuing into the first quarter of 2023 endingNovember 30, 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 three months endingNovember 30, 2022 , accounting for approximately 48.78% of our gross billings.Washington andNew Mexico represented our other significant markets during the first quarter of 2023 endingNovember 30, 2022 , representing approximately 22.43% of our total gross billings. (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 the fiscal year endingAugust 31, 2022 , and continuing into the three months endingNovember 30, 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. Now we feel that our HRIS platform is at completion stage and our IT development cost has started to stabilize with a significant cost reduction year over year, we are focused in the maintenance and minor functionality improvements to keep our technology at a top level of excellence in functionality. To that end, we identified and began to execute on various growth strategies, and expect that our execution of these strategies, if successful, will yield significant customer growth driven by widespread adoption of our technology 33 -------------------------------------------------------------------------------- Table of Contents 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 first quarter of 2023 endingNovember 30, 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 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 liabilities is for our 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 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.
However, many of our clients have, with the benefit of Payroll Protection Plan
loans ("PPP Loans") under the CARES Act and with adjustments to business
offerings to accommodate the impact of the virus and the related government
response thereto, learned to respond to and in some cases grow despite the
pandemic. Thus far, the impact of the variants of the disease have been largely
inconsequential. However, if the disease or its variants further impose on the
health of residents of states wherein we have a significant presence, the
effects thereof, including the government response thereto, could have a
material impact on our revenues.
Significant Developments in the Three Months Ended
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Financing Activities
OnSeptember 20, 2022 , the Company entered into a securities purchase agreement (the "Purchase Agreement") with a large institutional investor (the "Purchaser") pursuant to which the Company sold to the Purchaser an aggregate of 416,667 shares (the "Shares") of its common stock together with warrants (the "Warrants") to purchase up to 833,334 shares of common stock (collectively, the "Offering"). Each share of common stock and two accompanying Warrants were sold together at a combined offering price of$12.00 . The Warrants are exercisable for a period of seven years commencing upon issuance at an exercise price of$12.00 , subject to adjustment. The Offering closed onSeptember 23, 2022 . The gross proceeds to the Company from the Offering were approximately$5 million . In connection with the Purchase Agreement, the Company and the Purchaser entered into amendment No. 1 to warrants (the "Warrant Amendment"). Pursuant to the Warrant Amendment, the exercise price of (i) 25,233 warrants issued onSeptember 3, 2021 , and (ii) 98,969 warrants issued onJanuary 28, 2022 , was reduced to$0.01 . A.G.P./Alliance Global Partners (the "Placement Agent") acted as the exclusive placement agent in connection with the Offering pursuant to the terms of a placement agent agreement, datedSeptember 20, 2022 , between the Company and the Placement Agent (the "Placement Agent Agreement"). Pursuant to the Placement Agent Agreement, the Company paid the Placement Agent a fee equal to 7.0% of the aggregate gross proceeds from the Offering. In addition to the cash fee, the Company issued to the Placement Agent warrants to purchase up to 20,833 shares of common stock (5% of the number of shares sold in the Offering (the "Placement Agent Warrants")). The Placement Agent Warrants will be exercisable for a period commencing six months from issuance, will expire four years from the effectiveness of a registration statement for the resale of the underlying shares, and have an initial exercise price of$13.20 per share.
Growth Initiatives
During the first quarter of Fiscal 2023, we concluded activities associated with our SPAC-related growth initiative, and we continued to execute on our other primary growth initiative, which 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.
Transformative Sales Growth Strategy
In second half of Fiscal 2022,ShiftPixy activated an agile business development plan for rapid organic growth starting in the first quarter of Fiscal 2023, focused on building scalable long-term revenue creation with a goal to become the market leader inU.S. contingent labor through increasingly diverse service offerings. By helping Fortune 1000 companies rethink human capital,ShiftPixy's novel technology and proprietary sourcing tools are designed to disrupt not only traditional thinking about staffing, but also provide a cure to toxic employee turnover and thus provide labor cost certainty. This new and compelling go-to-market strategy is prepared to leverage the recently expanded staffing platform on the ShiftPixy Human Resources Information System ("HRIS") that offers clients an industry-leading digital and mobile technology to handle the duties and demands of human capital management at significant scale. An enhanced value proposition will offer clients automation, acceleration, liberation, and some indemnification, which we believe will drive growth and deliver value to stakeholders while also increasing our market share. Successful execution of this sales growth plan will leaveShiftPixy strategically positioned for secular growth in the$123 billion temporary and contract employment staffing market in theU.S. The Company's transformative sales growth strategy will capitalize on several economic developments in attractive vertical markets including retail, skilled trades, logistics, manufacturing, healthcare, and hospitality. A sustained surge in e-commerce is driving the need for supply chain expansions that require additional warehouses and the labor necessary to expedite delivery and returns. Likewise, a re-focus on domestic manufacturing capacity expansion for critical technology and an acute labor supply gap is leading to a surge in demand forShiftPixy's contingent and flexible skilled labor pool. Additional tailwinds supporting our growth strategy include positive demographic trends as the labor market reprioritizes flexibility, control, and access to job opportunities anywhere and anytime.ShiftPixy's business development plan offers immediate solutions to critical workflow challenges for human capital acquisition, talent management, labor force retention, worker supply chain disruptions, and runaway hiring costs.ShiftPixy's continuous improvement of its client and candidate experience elevates engagement and satisfaction for neglected contingent and temporary workers. The completion of the Company's current sales growth strategy is expected to create one of the largest employers in theU.S. in 2023 and build the fastest growing flexible labor force to meet the demands of a fast-changing human capital market while ushering significant enterprise value creation and recurring revenue growth for our shareholders. 35
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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 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 , 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 though other business assistance provided by our management team. During Fiscal 2021, we established an industrial facility inMiami that we expect to be fully completed and operational during Fiscal 2023. During Fiscal 2022 we equipped this facility with ten standardized kitchen stations in both single and double kitchen configurations built within standard cargo container shells and order a food truck for mobile operation. 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
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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 first quarter of Fiscal 2023, included in our cost of sales was
approximately $200,000 of expense for claims estimate increases relating to loss
reserves activity 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 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. During our third quarter of Fiscal 2022, we recorded an asset impairment to adjust the net realizable value of the long-term note receivable to zero. As ofNovember 30, 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. •Served approximately 68 clients and an average of 2,000 WSEs for the period endingNovember 30, 2022 vs. 72 clients and an average of 3,000 WSEs for the same period endingNovember 30, 2021 . •We processed approximately$11.7 million of gross payroll billings from continuing operations for the three months endedNovember 30, 2022 , representing a decrease of 24.1% when compared to the three months endedNovember 30, 2021 , due to the loss of a few clients during such period Our continuing operations mix remained consistent for the three months endedNovember 30, 2022 , when compared to the three months endedNovember 30, 2021 , primarily consisting of QSR or quick service restaurant , WSEs. (For further information, please refer to the "Non-GAAP Financial Measures" section below.) •Our revenues decreased 3.7 million for the three months endedNovember 30, 2022 , compared to the same period in Fiscal 2021, primarily due to the loss of a few clients during the second half of Fiscal 2022, for which the full impact is reflected during the first quarterly reporting of Fiscal 2023.
•Our gross margin was 8% for the three months ended
•Our operating loss for the three months endedNovember 30, 2022 decreased approximately$3.4 million compared to the same period in Fiscal 2022. The decrease is due to cost reductions of$1.6 million in payroll expenses and the reduction or approximately$1.1 million in software development costs net by the increase of approximately$-0.2 million in interest and penalties on outstanding payroll liabilities due. Our financial performance for the three months endedNovember 30, 2022 , compared to the three months endedNovember 30, 2021 , included the significant items set forth herein below. Results of Operations
The following table summarizes the condensed consolidated results of our
operations for the three months ended
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For the Three Months Ended
November 30, November 30,
2022 2021
Revenues (See Note 2) $ 5,266,000 $ 8,940,000
Cost of revenue 4,845,000 8,245,000
Gross profit (loss) 421,000 695,000
Operating expenses:
Salaries, wages, and payroll taxes 2,259,000 3,890,000
Stock-based compensation - general and administrative
Commissions 10,000 27,000
Professional fees 1,195,000 1,737,000
Software development 60,000 1,161,000
Depreciation and amortization 149,000 123,000
General and administrative 1,971,000 2,340,000
Total operating expenses 5,644,000 9,278,000
Operating Loss (5,223,000) (8,583,000)
Other (expense) income: Interest expense - (1,000) Other income - - Expensed SPAC offering costs - - Total other expense - 4,000 Loss from continuing operations (5,223,000) (8,579,000) Total (loss) income from discontinued operations, net of tax (200,000) (134,000) Net loss$ (5,423,000) $ (8,713,000) Preferred stock preferential dividend (127,145,000) - Net loss attributable to common shareholders $
(132,568,000)
Net loss attributable to common shareholders Continuing operations$ (13.88) $ (24.00) Discontinued operations (0.02) - Net loss per common share - Basic and diluted $
(13.90)
Weighted average common shares outstanding - Basic and diluted
9,533,982 359,452
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.
The following table presents certain information related to our gross profit components (unaudited):
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For the Three Months Ended
November 30, November 30,
2022 2021
Gross Billings for HCM $ 11.7 $ 14.1
Gross Wages for HCM $ (10.3) $ (12.3)
Total Net Revenue for HCM $ 1.4 1.8
Revenue for Staffing 3.8 7.1
Total Net Revenues (in millions) $ 5.3 $ 8.9
Increase (Decrease), Quarter over Quarter (in millions) (3.6) 6.4
Percentage Increase (Decrease), Quarter over Quarter (40.4) % 257.2 %
Cost of Revenues (in millions) $ 4.8 $ 8.2
Increase (Decrease), Quarter over Quarter (in millions) (3.4) 6.30
Percentage Increase (Decrease), Quarter over Quarter (41.5) % 314.3 %
Gross Profit (in millions) $ 0.4 $ 0.7
Increase (Decrease), Quarter over Quarter (in millions) (0.3) 0.2
Percentage Increase (Decrease), Quarter over Quarter (42.9) % 35.5 %
Gross Profit Percentage of Revenues 7.5 % 7.8 %
Three 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. See also non-GAAP Financial Measures below. Net Revenue decreased approximately$3.7 million from$8.9 million for the three months endedNovember 30, 2022 to$5.3 million for the three months endedNovember 30, 2022 . The decrease is based on the loss of a few clients during the third quarterly reporting of Fiscal 2022, for which the full impact of the loss of this revenue is being reflected in the first quarterly reporting of Fiscal 2023. Average WSEs decreased by approximately$1,000 for the thee months endingNovember 30, 2022 .
Net revenue per WSE remained consistent for the three month period ended
For the three months endedNovember 30, 2022 , our revenue associated with administrative fees decreased by$0.2 million ,, our tax revenues by$0.5 million , workers' compensation revenue by$0.1 million , for our administrative fees by$0.3 million and our tax revenue by$0.7 million , compared to the same period in Fiscal 2022. The decrease is consistent with our billed wages decrease for the three months endedNovember 30, 2022 , compared the same period in Fiscal 2022. 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 endedNovember 30, 2022 , decreased by$3.4 million to$4.8 millions from$8.2 million for the same period in Fiscal 2022. The decrease is correlated with the decrease in our net revenues, respectively. The contributors to the decrease in cost of revenue for the three months endedNovember 30, 2022 , are; a decrease of$3.4 million in gross wages related primarily to$2.8 million decrease in gross wages and$0.5 million decrease in taxes, respectively. 39
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Gross Profit for the three months ended
The decrease for the three months endedNovember 30, 2022 was primarily driven by the decrease in net revenues, consistent with our$5.1 million decrease in gross billings compared to the same period in Fiscal 2022. Operating expenses for the three months endedNovember 30, 2022 , decreased by$3.6 million to$5.6 million from$9.3 million , compared to the same period in Fiscal 2022. The decrease in operating expenses for the three months endedNovember 30, 2022 is primarily due to a decrease of approximately$1.6 million in payroll related expenses due to the reduction in employees,$0.5 million in professional fees, due the ceased operations of our sponsored SPACs and,$1.1 million in software development cost, based on the elimination of external IT consultants as our application was substantially completed during the third quarterly reporting of Fiscal 2022, net by the increased costs of$0.2 million in interest and penalties on payroll liabilities due. The following table presents certain information related to our operating expenses (unaudited): For the Three months Ended November 30, November 30, 2022 2021 Operating expenses: Salaries, wages, and payroll taxes$ 2,259,000 $ 3,890,000 Commissions 10,000 27,000 Professional fees 1,195,000 1,737,000 Software development 60,000 1,161,000 Depreciation and amortization 149,000 123,000 General and administrative 1,971,000 2,340,000 Total operating expenses$ 5,644,000 $ 9,278,000 Operating expenses decreased for the three months endedNovember 30, 2022 by$3.6 million , compared with the same period of Fiscal 2022. The components of operating expenses changed as follows: Salaries, wages and payroll taxes decreased for the three months endedNovember 30, 2022 , by approximately$1.6 million , in comparison to the same period in Fiscal 2022. The decrease is primarily attributable to the significant reduction in employees in the executive, operations, and software development ranks of our business. Our corporate employee count decreased from 85 employees as ofNovember 30, 2021 , to 65 employees as ofNovember 30, 2022 . Professional fees consists of legal fees, accounting and public company costs, board fees, and consulting fees. Professional fees for the three months endedNovember 30, 2022 , decreased by$0.5 million , compared to the same period in Fiscal 2022. The decrease is primarily attributable to our termination of our sponsorship of IHC's IBC-related activities, net by our legal fees related to our current active litigation. Software development consists of costs associated with research and development outsourced to third parties. Software development costs decreased by$1.1 million ,, for the three months endedNovember 30, 2022 , respectively, compared to the same period in Fiscal 2022. The decrease is based on our substantial completion of our application during our third quarterly reporting of Fiscal 2022 and the strategic decision to hold our IT development outsourcing, focusing on the use of internal resources for the maintenance and non significant application improvements. General and administrative expenses consist of office rent and related overhead, software licenses, insurance, penalties, business taxes, stock based compensation, travel and entertainment, and other general business expenses. General and administrative expenses for the three months endedNovember 30, 2022 , decrease by$0.4 million , compared with the same period of Fiscal 2022. The decrease was a result of reduced directors and insurance premiums due to less coverage from failed SPAC. Non-cash cash stock compensation expense decrease by$0.2 million and an increase of$0.2 million in general and administrative expenses primarily due to interest and penalties related to the outstanding payroll taxes liabilities.
Net loss for the three months ended
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the interest and dividends received from the Trust account and the gain from the renegotiation our D&O insurance for our sponsored SPAC.
Loss from continuing operations for the three months ended
Loss from discontinued operations. For the three months endedNovember 30, 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 months endedNovember 30, 2022 , the loss from discontinued operations increased$0.1 million , compared with the same period in Fiscal 2022. The negligible increase for the three months endedNovember 30, 2022 , is due to the reassessment of claims liability for the period.
Liquidity and Capital Resources
As ofNovember 30, 2022 , the Company had cash of$0.9 million and a working capital deficit of$32.0 million . During this same period, the Company used approximately$3.7 million of cash from its continuing operations and incurred recurring losses, resulting in an accumulated deficit of$198.1 million as ofNovember 30, 2022 . OnSeptember 20, 2022 , the Company entered into a securities purchase agreement (the "Purchase Agreement") with a large institutional investor (the "Purchaser") pursuant to which the Company sold to the Purchaser an aggregate of 416,667 shares (the "Shares") of its common stock together with warrants (the "Warrants") to purchase up to 833,334 shares of common stock (collectively, the "Offering"). Each share of common stock and two accompanying Warrants were sold together at a combined offering price of$12.00 . The Warrants are exercisable for a period of seven years commencing upon issuance at an exercise price of$12.00 , subject to adjustment. The Offering closed onSeptember 23, 2022 . The net gross proceeds to the Company from the Offering was$4,738,000 . The recurring losses, negative working capital and cash used in the Company's operations are indicators of substantial doubt as to the Company's ability to continue as a going concern for at least one year from issuance of these financial statements. 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" 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 endedNovember 30, 2022 , our gross billings from HCM and staffing services totaled approximately$11.7 million and$3.8 million (total of$15.5 million ), representing 75% and 25% of our gross revenue, respectively. For the three months endedNovember 30, 2021 , our gross billings from HCM and staffing services totaled approximately$14.1 million and$7.1 million (total of$21.2 million ), representing 66.4% and 33.6% of our gross revenue, respectively. Gross billings represent billings to our business clients and include WSE gross wages, employer payroll taxes, and workers' compensation premiums as well as administrative fees for our value-added services and other charges for workforce management support. Gross billings for our HCM services are a non-GAAP measurement that we believe to represent a key revenue-based operating metric, along with number of WSEs and number of clients. Active WSEs are defined as employees on our HRIS platform that have provided services for at least one of our clients for any reported period. Our primary profitability metrics are gross profit, and our primary driver of gross profit is administrative fees. 41
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Reconciliation of GAAP to Non-GAAP Measure
Gross Billings to Net Revenues
The following table presents a reconciliation of our Gross Billings (unaudited)
to Revenues:
For the Three Months Ended November
30,
($ in millions) 2022 2021
Gross Billings $ 11.7 $ 14.1
Less: Adjustment to Gross Billings $ 10.3 $ 12.3
Revenues $ 1.4 $ 1.8 The following table provides the key revenue and our primary gross profit driver used by management (unaudited).
For the
Three Months Ended
2022 2021
Administrative Fees (in millions) $ 0.3 $ 0.5
Increase (Decrease), Quarter over Quarter (in millions) $ (0.2) $ 0.1
Percentage Increase (Decrease), Quarter over Quarter (38.2) % 34.9 %
Administrative Fee % of Gross Billings 1.8 % 2.2 %
Average WSEs (unaudited) 2,000 3,000
Average Gross Billings per Average WSE $ 8,049 $ 7,066 Average Active WSEs totaled approximately 2,000, decreased for the three months
ended
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 " 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 " of this Quarterly Report.
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