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 Forms 10-K/A for the fiscal year endedAugust 31, 2022 ("Fiscal 2022"), filed with theSEC onDecember 13, 2022 ,December 14, 2022 ,February 3, 2023 andFebruary 9, 2023 , 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 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 Forms 10-K/A for Fiscal 2022, filed with theSEC onDecember 13, 2022 ,December 14, 2022 ,February 3, 2023 andFebruary 9, 2023 , respectively, which are expressly incorporated herein by reference, and elsewhere in this Quarterly Report. Moreover, the Company operates 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- 32 --------------------------------------------------------------------------------
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 the Company 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 that the Company currently believe are immaterial to our business. In addition, the Company 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 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. The Company has 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 the Company 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. The Company has 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. The Company provides 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, the Company 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. Our losses 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 through the six months endedFebruary 28, 2023 , the Company's 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. The Company believes 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 33 -------------------------------------------------------------------------------- during the quarter endingFebruary 28, 2023 , accounting for approximately 43.6% of our gross billings.Washington andNew Mexico represented our other significant markets during the three months endedFebruary 28, 2023 , representing approximately 23.97% 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. The Company's business focus during the fiscal year endingAugust 31, 2022 , and continuing into the quarter endingFebruary 28, 2023 , 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 believe 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 offerings, which we believe represents a substantial value proposition to our clients as a valuable source of agile human capital business intelligence. The Company's revenues 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 attributable to prior programs, carried as liabilities. We provided a self-funded workers' compensation policy up to$500K 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.
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--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations of theSEC .
Critical Accounting Estimates and Policies
A critical accounting policy and related estimates are both important to the portrayal of a company's financial condition and results of operations and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Refer to the Company's Annual Report for complete listing of the critical accounting estimates. Below summarizes a few significant accounting policies for your reference. Our unaudited condensed consolidated financial statements are presented in accordance withU.S. GAAP, and all applicableU.S. GAAP accounting standards effective as ofFebruary 28, 2023 have been taken into consideration in preparing the unaudited consolidated financial statements. The preparation of unaudited consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect our consolidated financial statements:
•Assumption as a going concern; management assumes that the Company will continue as a going concern , which contemplates continuity of operations, realization of assets and liquidation of all liabilities in the normal course of business;
•Liability for legal contingencies;
•Useful lives of property and equipment;
•Deferred income taxes and related valuation allowance;
•Projected development of workers' compensation claims.
Growth Initiatives
Through November, 20, 2022, the Company 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 future revenue growth for the human capital management services we provide to our clients. Further, we have emphasized sales growth in the staffing division of our business, which has historically tended to present less risk and greater margin than the HCM division of our business. Our R&D work under our SPAC project has opened additional market opportunities into which we intend to leverage our technology.
Transformative Sales Growth Strategy
ShiftPixy's agile business development plan for organic growth has always been 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. Our new market opportunities open doors for us with Fortune 1000 companies to 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. 35 -------------------------------------------------------------------------------- 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 anticipated to spur demand forShiftPixy's contingent and flexible skilled labor pool. Additional tailwinds supporting our growth strategy include positive demographic trends as the labor market prioritizes 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.
OnJuly 29, 2020 , we announced the launch ofShiftPixy Labs , which includes the development of ghost kitchens in conjunction with our wholly owned subsidiary,ShiftPixy Labs, 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 quick service restaurants or "QSR". 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 ordered 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 36 -------------------------------------------------------------------------------- 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 three and six months endedFebruary 28, 2023 andFebruary 28, 2022 , primarily all the recorded in the discounted operations as disclosed in the accompany unaudited condensed statements of operations. The 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 8, 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 , the Company entered into an asset purchase agreement withShiftable HR Acquisition, LLC , a wholly owned subsidiary ofVensure , pursuant which was the assigned client contracts was significant to its quarterly revenue as ofNovember 30, 2019 , including 100% of the Company's existing PEO business. In connection with this transaction, the Company had a Note Receivable to be paid over four years. the Company's 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 ofFebruary 28, 2023 ,Vensure and the Company were engaged in litigation regarding the amount owed to the Company pursuant to the Note Receivable, as described in Note 8, Contingencies,
Results of Operations
The following table summarizes the condensed consolidated results of our
operations for the three and six months ended
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For the Three Months Ended For the Six Months Ended
February 28, February 28, February 28, February 28,
2023 2022 2023 2022
Revenues (See Note 2) $ 4,579,000 $ 10,437,000 $ 9,844,000 $ 19,378,000
Cost of revenues 4,095,000 10,498,000 8,941,000 18,743,000
Gross profit (loss) 484,000 (61,000) 903,000 635,000
Operating expenses:
Salaries, wages, and payroll taxes 2,598,000 3,653,000 4,857,000 7,543,000
Commissions 7,000 28,000 17,000 56,000
Professional fees 870,000 1,677,000 2,065,000 3,414,000
Software development 119,000 1,073,000 179,000 2,234,000
Depreciation and amortization 150,000 130,000 299,000 253,000
General and administrative 1,765,000 2,354,000 3,516,000 4,693,000
Total operating expenses 5,509,000 8,915,000 10,933,000 18,193,000
Operating loss (5,025,000) (8,976,000) (10,030,000) (17,558,000)
Other (expense) income: Interest expense (239,000) (1,000) (457,000) (2,000) Other income 642,000 13,000 642,000 16,000 Expensed SPAC offering costs - (515,000) - (515,000) Total other expense 403,000 (503,000) 185,000 (501,000) Net loss attributed to ShiftPixy, Inc. (4,622,000) (9,479,000) (9,845,000) (18,059,000) Loss from discontinued operations, net of tax (607,000) (18,000) (807,000) (151,000) Non-controlling interest (540,000) - (540,000) - Net loss$ (5,769,000) $ (9,497,000) $ (11,192,000) $ (18,210,000) Preferred stock preferential dividend and deemed dividend from changes in fair value from warrant modification - (7,731,000) (127,145,000) (7,731,000) Net loss attributable to common shareholders$ (5,769,000) $ (17,228,000)
Net loss attributable to common shareholders Continuing operations - basic and diluted$ (0.53) $ (55.13) $ (14.29) $ (76.77) Discontinued operations - basic and diluted (0.06) (0.06) (0.08) (0.45) Net loss per common share - basic and diluted$ (0.59) $ (55.19)
Weighted average common shares
outstanding - basic and diluted 9,703,645 312,155 9,625,660 335,934
We report our revenues as gross billings, net of related direct labor costs for
the Company's EAS/HCM clients and revenues without reduction of labor costs for
staffing services clients.
38
--------------------------------------------------------------------------------The following table presents certain information related to the gross profit (loss) components in thousands, (unaudited):
For the Three Months Ended For the Six Months Ended
February 28, February 28, February 28, February 28,
2023 2022 2023 2022
Gross Billings for HCM $ 11,993 $ 12,594 $ 23,604 $ 25,510
Gross Wages for HCM (10,435) (11,006) (20,635) (22,242)
Total Net Revenue for HCM 1,558 1,588 2,969 3,333
Revenue for Staffing 3,021 8,849 6,664 16,120
Total Net Revenues (in
thousands) 4,579 $ 10,437 $ 9,844 $ 19,378
Increase (Decrease), Quarter
over Quarter (in thousands) (5,858) 8,000 (9,534) 14,500
Percentage Increase (Decrease),
Quarter over Quarter (56.1) % 333.3 % (49.2) % 295.9 %
Cost of Revenues (in thousands) 4,095 $ 10,498 9,248 $ 18,743
Increase (Decrease), Quarter
over Quarter (in millions) (6,403) 8,100 (9,495) 14,700
Percentage Increase (Decrease),
Quarter over Quarter $ - 385.7 % (50.7) % 367.5 %
Gross Profit (in thousands) $ 484 $ (61) $ 903 $ 635
Increase (Decrease), Quarter
over Quarter (in millions) 545 (100) 268 (300)
Percentage Increase (Decrease),
Quarter over Quarter (893.4) % (25.0) % 42.2 % (33.3) %
Gross Profit Percentage of
Revenues 10.6 % (0.6) % 9.2 % 3.3 %
Three months ended
Net revenues for the HCM services exclude 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 Revenues decreased approximately$5.9 million from$10.4 million to$4.6 million and decreased$4.6 million from$14.4 million to$9.8 million for the endedFebruary 28, 2023 . The decrease was in part due to Management's attention to the company's SPAC transactions work in the prior year. The Company's legacy QSR sales work was also affected by COVID market contraction for QSR operators. These unique market conditions led to the decline of future net revenues as the average number of WSEs decreased by approximately 700 employees for the three months endingFebruary 28, 2023 as compared toFebruary 28, 2022 . Cost of Revenues includes the Company's 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, 2023 , decreased by$6.4 million to$4.1 million from$10.5 million for the three months endedFebruary 28, 2022 . The decrease is correlated with the decrease in our net revenues, respectively. Gross Profit (loss) for the three months endedFebruary 28, 2023 was 10.6% as compared to a gross profit (loss) of (.06) %. The increase in gross profit was due to higher costs for the three months endedFebruary 28, 2022 . There were higher costs for the three months endedFebruary 28, 2022 . 39 --------------------------------------------------------------------------------
The following table presents certain information on related to our operating expenses (unaudited):
For the Three months Ended For the Six Months Ended
February 28, February 28, February 28, February 28,
2023 2022 2023 2022
Operating expenses:
Salaries, wages, and payroll taxes $ 2,598,000 $ 3,653,000 $ 4,857,000 $ 7,543,000
Commissions 7,000 28,000 17,000 56,000
Professional fees 870,000 1,677,000 2,065,000 3,414,000
Software development 119,000 1,073,000 179,000 2,234,000
Depreciation and amortization 150,000 130,000 299,000 253,000
General and administrative 1,765,000 2,354,000 3,516,000 4,693,000
Total operating expenses $ 5,509,000 $ 8,915,000 $ 10,933,000 $ 18,193,000 Operating expenses decreased for the three months ended
Salaries, wages and payroll taxes decreased for the three months ended
Professional fees consist of legal fees, accounting and public company costs, board fees, and consulting fees. Professional fees for the three months endedFebruary 28, 2023 , decreased by$0.8 million , compared to three months endedFebruary 28, 2022 . The decrease is primarily due to legal fees related to the Company's litigation. Software development consists of costs associated with research and development outsourced to third parties. Software development costs decreased by$1 million for the three months endedFebruary 28, 2023 , respectively, compared to the three monthsFebruary 28, 2022 . The decrease is based on the Company's substantial completion of its software development cost in the prior year. General and administrative expenses consist of office rent and related overhead, software licenses, insurance, penalties, stock- based compensation, travel and entertainment, and other general business expenses. General and administrative expenses for the three months endedFebruary 28, 2023 , decreased by$0.8 million , compared to the three months endedFebruary 28, 2022 . The decrease was a primarily attributed to directors and insurance premiums of$1 million due premium reduction for less coverage from the failed SPAC transaction, decrease in non-cash cash stock compensation expense of$0.1 million and was offset by an increase of$0.4 million in penalties related to an increase in the Company's outstanding payroll tax liabilities and an increase in legal settlements of$0.2 million . Other income primarily consist of net liability of IHC at the time of the deconsolidation onFebruary 7, 2023 . For the three months endedFebruary 28, 2023 , other income was$0.6M as compared to$0.01 million for the three months endedFebruary 28, 2022 . Interest expense primarily consist of the Company's obligation to the Internal Revenue Service ("IRS") and States based upon its unpaid payroll liabilities. Interest expense for the three months endedFebruary 28, 2023 was$0.2 million as compared toFebruary 28, 2022 was$1,000 . The increase in interest expense represents was from an increase in unpaid payroll liabilities and an increase in interest rates assessed by theIRS and various states. 40 --------------------------------------------------------------------------------
Six months ended
Net Revenues decreased$4.6 million from$14.4 million to$9.8 million for the six months endedFebruary 28, 2023 . The decrease was in part due to Management's attention to the company's SPAC transactions work in the prior year. The Company's legacy QSR sales work was also affected by COVID market contraction for QSR operators. These unique market conditions led to the decline of future net revenues as the average number of WSEs decreased by approximately 700 employees for the three months endingFebruary 28, 2023 as compared toFebruary 28, 2022 . Cost of Revenues includes the Company's costs associated with employer taxes, workers' compensation insurance premiums, and the gross wages paid for our staffing clients. Cost of revenues for the six months endedFebruary 28, 2023 , decreased by$9.8 million to$8.9 million from$18.7 million for the six months endedFebruary 28, 2022 . The decrease is correlated with the decrease in our net revenues, respectively. Gross Profit for the six months endedFebruary 28, 2023 was 9.2% as compared to a gross profit of 3.3 % for the six monthsFebruary 28, 2022 due to higher costs for the six months endedFebruary 28, 2022 . Salaries, wages and payroll taxes decreased for the six months endedFebruary 28, 2023 , by approximately$1.1 million , as compared toFebruary 28, 2022 . The decrease is primarily attributable to the significant reduction in employee head count through all departments. Professional fees consist of legal fees, accounting and public company costs, board fees, and consulting fees. Professional fees for the six months endedFebruary 28, 2023 , decreased by$0.8 million , compared toFebruary 28, 2022 . The decrease is primarily related to the Company's current active litigation. Software development consists of costs associated with research and development outsourced to third parties. Software development costs decreased by$1.0 million , for the six months endedFebruary 28, 2023 , respectively, compared to the six monthsFebruary 28, 2022 . The decrease is based on the Company's substantial completion of the Company's software development cost in the prior year. General and administrative expenses consist of office rent and related overhead, software licenses, insurance, penalties, stock- based compensation, travel and entertainment, and other general business expenses. General and administrative expenses for the six months endedFebruary 28, 2023 , decreased by$0.8 million , compared toFebruary 28, 2022 . The decrease was a result of reduced premiums for directors and insurance for less coverage from the failed SPAC transaction, a decrease in non-cash cash stock compensation decreased of$0.3 million and was offset by an increase of$0.4 million in penalties due to an increase in the Company's outstanding payroll tax liabilities and an increase in legal settlements of$0.2 million . Other income primarily consist of primarily consist of net liability of IHC at the time of the deconsolidation onFebruary 7, 2023 . For the six months endedFebruary 28, 2023 , other income was$0.6 million as compared to$0.01 million for the six months endedFebruary 28, 2022 . Interest expense primarily consist of the Company's obligation to theIRS andStates based upon its unpaid payroll liabilities. Interest expense for the six months endedFebruary 28, 2023 was$ 0.5 million as compared toFebruary 28, 2022 was$2,000 . The increase in interest expense represents an increase in unpaid payroll liabilities as ofFebruary 28, 2023 and an increase in interest rates assessed by theIRS and various states.
Cash Flows
The following table summarizes our sources and uses of cash for the periods presented:
41
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For the Six Months Ended
February 28, 2023 February 28, 2022
Net cash used in operations of
$ (10,333,000) Net cash provided by discontinued operating activities - - Net cash provided by non-controlling interest - - Net cash used in operating activities (5,323,000) (10,333,000) Net cash provided by (used in) investing activities 117,275,000 (117,193,000) Net cash (used in) provided by financing activities (111,752,000) 129,676,000 Net increase in cash 200,000 2,150,000 Cash - beginning of period 618,000 1,199,000 Cash - end of period $ 818,000$ 3,349,000 Net cash used in operations ofShiftPixy, Inc for the six months endedFebruary 28, 2023 was$5.3 million , primarily consisting of a net loss from continuing operations of$10.4 million , a decrease in accounts payable and accrued expenses of$0.8 million , decrease in accounts receivable of$0.5 million , a decrease in workers compensation of$0.4 million offset by an increase in payroll related liabilities of$4.9 million , an increase of$0.4 million in prepaid and other liabilities, an increase in non-cash stock-based compensation expense of$0.6 million and an increase in depreciation and amortization expense of$0.3 million . Net cash used in operations ofShiftPixy, Inc for the six months endedFebruary 28, 2022 was$10.3 million primarily consisting of the net loss of$18.1 million , a decrease in workers compensation of$0.5 million , a decrease in prepaid and other current assets of$0.6 million , offset by an increase in payroll related liabilities of$3.3 million , an increase in accounts payable and accrued expenses of$3.1 million , an increase in non-cash stock-based compensation expense of$0.8 million and an increase in depreciation and amortization expense of$0.2 million .
Investing Activities
Net cash provided by investing activities for the six months endedFebruary 28, 2023 was$117.2 million from the redemption of IHC Trust Account of$117.6 million and from the purchase of fixed asset of$0.3 million .. Net cash used investing activities for the six months endedFebruary 28, 2022 was$117.2 million which was from an investment of$116.7 million from the proceeds of the initial public offering into the IHC Trust Account and for the purchase fixed assets of$0.5 million . Financing Activities Net cash used in financing activities for the six months endedFebruary 28, 2023 , was$111.8 million which was from the net proceeds of$4.4 million related to a private placement,$1.4 million from the net proceeds of an ATM offering and$117.6 million payment to IHC shareholders. Net cash provided by financing activities for the six months endedFebruary 28, 2022 was$129.7 million , primarily from the net proceeds of$116.7 million for an initial public offering of IHC,$11.0 million from the net proceeds from two private placements,$5.4 million net proceeds from common stock issued on exercised warrants and payment of$3.5 million of SPAC related offering cost.
Liquidity and Capital Resources
As ofFebruary 28, 2023 , the Company had cash of$0.8 million and a working capital deficit of$35.3 million . During the six months endedFebruary 28, 2023 , the Company used approximately$5.3 million of cash from its continuing operations and incurred recurring losses, resulting in an accumulated deficit of$203.9 million . As ofFebruary 28, 2023 , the Company is delinquent with respect to remitting payroll tax payments to theIRS . The Company has been in communication with theIRS regarding amounts owing in relation to Employee Retention Credits due. In addition, some clients have filed suits against the Company, demanding that the Company take action to file for additional Employee Retention Credits for certain tax periods. Until the matter is concluded and the taxes are paid, theIRS could, subject to its standard processes and the Company's rights to respond, implement collection actions, including such actions as levying against Company bank accounts, to recover the amounts that it calculates to be due and owing. Historically, the Company's principal source of financing has come through the sale of the Company's common stock, including in certain instances, warrants and issuance of convertible notes. OnSeptember 20, 2022 , the Company entered into a securities purchase agreement (the "Purchase Agreement") with a large 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 42 -------------------------------------------------------------------------------- seven years commencing upon issuance at an exercise price of$12.00 , subject to adjustment. The offering closed onSeptember 23, 2022 . The net proceeds to the Company from the offering were$4.4 million . OnJanuary 31, 2023 , entered into an ATM Issuance Sales Agreement for an offering for up to$8.1 million in shares of its common stock, see Note 5 to the accompany financials. For the three months endedFebruary 28, 2023 , the Company received$1.9 million in gross proceeds ($1.4 million , net of costs) from the sale of 305,340 shares of the Company's common stock. As ofFebruary 28, 2023 , approximately$6.3 million remains available for the sale of shares of the Company's common stock under the ATM. 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 2, Liquidity and Capital Resources to the accompanying financial statements. 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. The Company's plans and expectations for the next twelve months include raising additional capital to help fund expansion of our operations and strengthening of the Company's sales force strategy by focusing on staffing services as the Company's key driver to improve the Company's margin and the continued support and functionality improvement of the Company's information technology ("IT") and HRIS platform. This expanded go-to-market strategy will focus on building a national account portfolio managed by a newly formed regional team of senior sales executives singularly focused on sustained quarterly revenue growth and gross profit margin expansion. We expect to continue to invest in the Company's HRIS platform,ShiftPixy Labs , and other growth initiatives, all of which have required and will continue to require significant cash expenditures. The Company also expects itsShiftPixy Labs growth initiative to generate cash flow once launched, by functioning as an incubator of food service and restaurant concepts through collaboration and partnerships with local innovative chefs. If successful, the Company believes that this initiative will produce businesses that provide recurring revenue through direct sales, as well as through utilization of the ShiftPixy Ecosystem, HRIS platform, and other human capital services that the Company provides. To the extent that this business model is successful and can be replicated in other locations, the Company believes that it has the potential to contribute significant revenue toShiftPixy in the future. The Company may also take equity stakes in various branded restaurants that it develops and operates with its partners throughShiftPixy Labs . Such ownership interests will be held to the extent that it is consistent with the Company's continued existence as an operating company, and to the extent that the Company believes such ownership interests have the potential to create value for its shareholders. The Company expects to raise capital from additional sales of its securities during this fiscal year either through its ATM, registered public offerings or private placements, the proceeds of which the Company intends to use to fund its operations and growth initiatives. There can be no assurance that we will meet the requirements to be able to sell securities on terms that the Company is seeking. Management believes that its current cash position, along with its anticipated revenue growth and proceeds from future sales of its securities, when combined with prudent expense management, will alleviate substantial doubt about its ability to continue as a going concern and to fund its operations for at least one year from the date these financials are available (especially when considering the absence of any funded debt outstanding on its balance sheet). If these sources do not provide the capital necessary to fund the Company's operations during the next twelve months, it may need to curtail certain aspects of its operations or expansion activities, consider the sale of additional assets, or consider other means of financing. The Company can give no assurance that it will be successful in implementing its business plan and obtaining financing on advantageous terms, or that any such additional financing will be available. If the Company is not successful in obtaining the necessary financing, we do not currently have the cash resources to meet our operating commitments for the next twelve months. These unaudited condensed consolidated financial statements do not include any adjustments for this uncertainty. As noted in the accompany condensed financial statements, Note 4:Special Purpose Acquisition Company ("SPAC") Sponsorship, onFebruary 7, 2023 , three creditors of IHC filed an involuntary petition for liquidation under Chapter 7 against IHC in theUS Bankruptcy Court for the Southern District of Florida . The matter is proceeding, and the Company and its subsidiary,ShiftPixy Investments, Inc. , are anticipated to be listed as two of the largest creditors of IHC. However, there can be no assurance that either the Company orShiftPixy Investments, Inc. will recover any of the amounts owed to them by IHC from the bankruptcy estate.ShiftPixy, Inc. is the largest creditor of IHC, having periodically advanced a total of approximately$2 million in cash to IHC to enable it to fund its ongoing prospective target engagement, evaluation and negotiation activities. Following the dissolution of IHC, in January of 2023, the dissolved IHC issued approximately$0.6 million toShiftPixy, Inc. , in partial satisfaction of amounts advanced byShiftPixy, Inc. to IHC, including the return toShiftPixy, Inc. of a recently received refund of approximately$0.5 million in premiums applicable to the cancellation of directors and officer insurance policies attributable to four of the SPACs sponsored byShiftPixy Investments, Inc. Although the public shareholders of IHC received in excess of$117.6 million in redemption of their capital contributions to IHC, the bankruptcy trustee could elect to pursue the 43 --------------------------------------------------------------------------------
amount received by the Company from IHC, if it can demonstrate that the payment was preferential and made outside of the ordinary course of business of IHC.
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, 2023 , 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$14.1million and$7.1 million (total of$21.2 million ), representing 66.4% and 33.6% of our gross revenues, respectively. Gross billings represent billings to our business clients and include WSE gross wages, employer payroll taxes, and workers' compensation premiums as well as administrative fees for our value-added services and other charges for workforce management support. Gross billings for our HCM services are a non-GAAP measurement that we believe to represent a key revenue-based operating metric, along with number of WSEs and number of clients. Active WSEs are defined as employees on our HRIS platform that have provided services for at least one of our clients for any reported period. Our primary profitability metrics are gross profit, and our primary driver of gross profit is administrative fees.
Reconciliation of GAAP to Non-GAAP Measure
Gross Billings to Net Revenues
The following table presents a reconciliation of our Gross Billings (unaudited) to Revenues:
For the Three Months Ended February For the Six Months Ended February
28, 28,
($ in thousands) 2023 2022 2023 2022
Gross Billings $ 15,014 $ 21,443 $ 30,479 $ 41,620
Less: Adjustment to Gross Billings (10,435) (11,006) $ (20,635) $ (22,242)
Revenues $ 4,579 $ 10,439 $ 9,844 $ 19,378
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The following table provides the key revenue and our primary gross profit driver used by management (unaudited).
For the Three Months Ended February
28, For the Six Months Ended February 28,
2023 2022 2023 2022
Administrative Fees (in thousands) $ 343 $ 476 $ 632 $ 944
Increase (Decrease), Quarter over Quarter
(in millions) $ (133) $ (156) $ (312) $ 250
Percentage Increase (Decrease), Quarter
over Quarter (27.9) % (24.7) % (33.0) % 36.0 %
Administrative Fee % of Gross Billings 2.4 % 2.2 % 2.1 % 2.2 %
Average WSEs (unaudited) 2,100 2,900 2,100 2,900
Average Gross Billings per Average WSE $ 6,801 $ 7,400 $ 14,500 $ 14,200 Average Active WSEs totaled approximately 2,100, decreased for the three months
ended
Material Commitments
We do not have any contractual obligations for ongoing capital expenditures at this time. The Company purchased fixed assets and software necessary to conduct its operations on an as needed basis.
Contingencies
For a discussion of contingencies, see Note 8, 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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