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 Form 10-K.
Our Management's Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature risky, and are subject to uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Form 10-K. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other risks that might be detailed from time to time in our filings with theSEC . We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K. 46
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Although the forward-looking statements in this Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. You are urged to carefully review and consider the various disclosures made by us in this Form 10-K as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects. For a more detailed discussion of the inclusion of forward-looking statements in this Form 10-K, please refer to the discussion, above, entitled "Cautionary Statement Regarding Forward-Looking Statements and Information."
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 HRIS platform designed to provide real-time, agile business intelligence information for our clients as well as an employment marketplace designed to match client opportunities with a large workforce under a digital umbrella. Our market focus is to use this traditional approach, coupled with developed technology, to address underserved markets containing predominately lower wage employees with high turnover, beginning with light industrial, services, and food and hospitality markets. We provide human resources, employment compliance, insurance-related, payroll, and operational employment services solutions for our clients and shift work or gig opportunities for WSEs (or shifters). As consideration for providing these services, we receive administrative or processing fees, typically as a percentage of a client's gross payroll, process and file payroll taxes and payroll tax returns, provide workers' compensation insurance, and provide employee benefits. We have built a substantial business on a recurring revenue model since our inception in 2015. For Fiscal 2022, we processed approximately$81.8 million of payroll billings, our primary operating metric. Despite the impact of the COVID-19 pandemic and the worldwide economic crisis, by the end of Fiscal 2022 our billings had recovered to pre-pandemic levels, reaching over 3,000 WSEs on a recurring basis and annual billings; increased by$2.3 million or 2.9% above Fiscal 2021 gross payroll billings. For the current fiscal year we have incurred approximately$44 million in operating losses, which were driven primarily by substantial investments in our technology platform, our SPAC sponsorships and ourShiftPixy Labs growth initiative, as well as by necessary upgrades to our back-office operations to facilitate servicing a large WSE base under a traditional staffing model. Also, a significant factor this Fiscal 2022 was the impairments charges on our notes receivable fromVensure and the ROU asset impairment on two of our leases. For most of Fiscal 2022, our primary focus was on clients in the restaurant and hospitality industries, (market segments typically characterized by high employee turnover and low pay rates), and healthcare industries typically employing specialized personnel that command higher pay rates. We believe that these industries are better served by our HRIS platform and related mobile application, which provide payroll and human resources tracking for our clients and which we believe result in lower operating costs, improved customer experience and revenue growth acceleration.California continued to be our largest market during Fiscal 2022, accounting for approximately 52.10% of our gross billings during the year.Washington andNew Mexico represented our other significant markets during Fiscal 2022, representing approximately 13.30%% and 8.10%, of our total revenues, respectively. (Our other locations did not contribute revenue to a material degree.) All of our clients enter into CSAs with us or one of our wholly owned subsidiaries. Our business focus during Fiscal 2022 was to complete our HRIS platform and to expand that platform to position the Company for rapid billings growth as well as to expand our product offerings to increase our monetization of our payroll billings. Now we feel that our HRIS platform is at completion stage and our IT development cost has started to stabilize with a reduction of$1.23 million in cost 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 described above, 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.
Significant Developments in 2022
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 47
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capital,
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.
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 48 -------------------------------------------------------------------------------- Table of Contents 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.
Software Development
We believe that our HRIS platform and the related mobile functionality that we are developing will be key differentiators and drivers of our low-cost customer acquisition strategy. As such, we have invested heavily in our HRIS platform over the past five years. The heart ofShiftPixy's employment services solutions is a technology platform, including a smartphone application, through which our WSEs will be able to find available shifts at our clients' locations, solving a problem of finding available shifts for both the shifters looking for additional shifts when they want to work and businesses looking to fill open shifts. A key element of our software development involves using our blockchain ledger to process and record our critical Peer-to-Peer ("P2P") connections. While not necessarily a new development, we note that we intend to use blockchain technology to keep our data secure. Any data considered to be a human capital validation point or part of the hiring and onboarding process will be utilized and recorded in our blockchain ledger. For example, we expect the employeeI-9 verification process-one of the most stringent, rigorous, and penalty-laden compliance procedures - to be positively impacted by blockchain utilization of biometric authentication and automatic verification ofI-9 data, removing human error in the process of screening for fraudulent information. Verification of that data on the blockchain will allow both employers and auditing agencies to confidently validate additional criteria such as employment dates, and candidates' backgrounds (i.e. education, references, certifications, etc.), and share the verification status directly on multiple distributed sources within the blockchain, further underscoring the reliability and accuracy of candidates' information and corporate compliance. Future implementation of blockchain technology within the ShiftPixy Ecosystem is anticipated to include extended applications for payroll and real-time payments, and utilization of smart contracts for employment contracts, which will facilitate recording of credible, trackable, and irreversible transactions without third parties. For purposes of clarification, we note thatShiftPixy has never, does not now and will never use its blockchain technology in any form of cryptocurrency or crypto-currency related application. Our smartphone application is one of the software components of what we call the mobile platform, and together with theShiftPixy "Command Hub" and the client portal, is being developed, tested and released in stages. We have released and are currently using the multilingual onboarding feature of our software, which enables us to capture all application process related data regarding our assigned WSEs and to introduce WSEs to and integrate them into theShiftPixy Ecosystem. This multilingual feature will allow us to move faster into outside markets and will reduce the time and cost to bring new WSEs onto our HRIS platform. Our smartphone onboarding functionality streamlines the typical burdensome pile of new employee paperwork into a seamless user-friendly workflow that is fully compliant with governmental requirements. By leveraging artificial intelligence capabilities, new hires are guided by a conversation with a "Pixy" chatbot that asks the necessary questions and generates the required employment documents in a highly personal and engaging way. Following completion of the questions, applicable onboarding paperwork is prepopulated with the data and prepared for the employee's signature to be affixed digitally via the app as well. 49
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We believe that our technology and approach to human capital management provides our clients' management with a unique real-time business intelligence window into their human capital needs. In addition to standard management reporting, our technology provides real-time tools for management to quickly assess and plan their human capital staffing requirements. Prior toMarch 2019 , we primarily used turnkey contract software development firms to build the software code, mobile application, and license integrations required to build the functional solution, with our internal personnel maintaining principally an oversight role. Beginning inMarch 2019 , we hired and assembled an internal development team for cost-cutting and for better feature and implementation control. Our development team was fully in place byAugust 2019 and focused on delivering a version of our mobile application and software solution using a combination of third-party licensed software and internally developed software. We began building our internal software development team and transitioned away from our former software development vendor to expedite our technology deployment. We launched version 2.0 of our mobile application and enhanced user features, including onboarding, scheduling and driver management, during the fourth quarter of Calendar 2019. We continued our software development internally primarily by focusing on feature enhancements such as delivery, scheduling, and onboarding functionality improvement, as well as better integration and more seamless process flow improvements. We believe that this has resulted in an improved user experience, reduced internal staff time required for onboarding, and increased trials of our future revenue generation features such as delivery and scheduling. Our software development team has continued to focus on intermediation functionality and integration work designed to prepare our HRIS platform to scale and support our growth initiatives described above. From inception of the project in Fiscal 2017 throughAugust 31, 2022 , we spent approximately$34.2 million , consisting of outsourced research and development, IT related expenses, development contractors and employee costs, as well as marketing spending consisting of advertising, trade shows, and personnel costs. The following table shows the technology and marketing spending for each fiscal year endedAugust 31 : Development spending (in $ millions) 2022 2021 2020 2019 Contract development and licenses$ 1.0 $ 3.8 $ 2.3 $ 2.2 Internal personnel costs 3.0 3.0 1.9 1.1Total Development spending$ 4.1 $ 6.8 $ 4.2 $ 3.3 Marketing spending Advertising and Outside Marketing$ 2.5 $ 2.1 $ 0.6 $ 1.2 Internal personnel costs 0.7 0.5 0.4 0.4 Subtotal, Marketing costs$ 3.3 $
2.6
Cumulative Investment$ 34.2 $ 30.1 $ 20.7 $ Portion of investment capitalized as fixed assets $ - $ -$ 3.7 $ Portion of investment expensed$ 34.2 $
30.1
We capitalized no development spending into fixed assets for Fiscal 2022, since the development activities related to our software, as defined by GAAP, was completed during Fiscal 2020. For our Fiscal 2019 and our fiscal year endedAugust 31, 2018 ("Fiscal 2018"), we capitalized$0.9 million and$2.8 million , respectively, of contract development spending into fixed assets.
Offices Update
InAugust 2020 , we signed a lease to relocate our corporate headquarters toMiami, Florida , and largely completed the relocation for our administrative, marketing andEast Coast sales and customer support staffs toMiami by the end of Calendar 2020. We currently maintain offices inCalifornia primarily for use by our research and development team and ourWest Coast sales and customer support, and plan to continue to maintain these offices for the foreseeable future. 50
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EffectiveOctober 1, 2020 , we entered into a non-cancelable 64-month lease for 23,500 square feet of light industrial space located inMiami, Florida , to house kitchen facilities, video production facilities, and certain marketing and technical functions, including those associated withShiftPixy Labs . The lease contains escalation clauses relating to increases in real property taxes as well as certain maintenance costs. EffectiveJune 7, 2021 , we entered into a sublease agreement withVerifone, Inc. to sublease premises consisting of approximately 8,000 square feet of office space located inMiami, Florida , that we are currently using primarily for our operations workforce. The lease has a term of three years expiring onMay 31, 2024 . The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the sublease. EffectiveJune 21, 2021 , we entered into a 77 - month lease agreement, with an anticipated possession date ofMarch 1, 2022 , for premises consisting of approximately 13,418 square feet of office space located inSunrise, Florida . We anticipate using this space primarily to house our operations personnel and other elements of our corporate workforce. The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the lease. EffectiveMay 2, 2022 , the Company entered into a non-cancelable 60-month operating lease commencing onJuly 1, 2022 , for office space inIrvine, California , which the Company anticipates using primarily to house its IT, operations personnel, and other elements of its workforce. The base rent is paid monthly and escalates annually according to a schedule outlined in the lease. The monthly rent expense under this lease is approximately$24,000 . As an incentive, the landlord provided a rent abatement of 50% of the monthly rent for the first four months, with a right of recapture in the event of default. OnAugust 31, 2022 , the Company decided to formally abandon the leases for its offices in the Courvoisier Center, including a sublease on the second floor with Verifone. The determination was based on its inability to utilize the premises as they were under extensive construction by the landlord resulting in a significant negative impact on the Company's ability to conduct business and the health and well-being of the Company's employees and guests. The Company formally notified the landlord of its intention to vacate the premises and have not been legally released from our primary obligations under the lease. The Company received a formal suit complain from the landlord, and the matter is in litigation. The Company intends to vigorously defend the lawsuit and counterclaim for relocation costs.
Financing Activities
During Fiscal 2022, we closed a$12 million private placement offering inSeptember 2021 , and executed two Warrants Exercise Agreements ("The Agreements'). The Agreements generated aggregate proceeds of$5.9 million inJanuary 2022 and$1.3 million inJuly 19, 2022 . Furthermore, closed a$5 million private placement offering inSeptember 2022 , shortly after our fiscal year-end. As ofAugust 31, 2022 , andAugust 31, 2020 , we had no convertible debt outstanding that carry anti-dilutive provisions, except as otherwise noted below.
InSeptember 2021 , the Company entered into a$12 million private placement transaction, inclusive of$0.9 million of placement agent fees and costs, with a large institutional investor pursuant to which the Company sold to the investor an aggregate of (i) 28,500 shares of Common Stock, together with warrants (the "September 2021 Common Warrants") to purchase up to 28,500 shares of Common Stock, with eachSeptember 2021 Common Warrant exercisable for one share of Common Stock at a price per share of$159.50 , and (ii) 46,735 prefunded warrants (the "September 2021 Prefunded Warrants"), together with theSeptember 2021 Common Warrants to purchase up to 75,235 shares of Common Stock, with eachSeptember 2021 Prefunded Warrant exercisable for one share of Common Stock at a price per share of$0.010 . Each share of Common Stock and accompanyingSeptember 2021 Common Warrant were sold together at a combined offering price of$159.50 and eachSeptember 2021 Prefunded Warrant and accompanyingSeptember 2021 Common Warrant were sold together at a combined offering price of$159.49 . TheSeptember 2021 Prefunded Warrants are immediately exercisable, at a nominal exercise price of$0.010 , and may be exercised at any time until all of theSeptember 2021 Prefunded Warrants are exercised in full. TheSeptember 2021 Common Warrants have an exercise price of$159.50 per share, are immediately exercisable, and will expire five years from the date that the registration statement covering the resale of the shares underlying theSeptember 2021 Common Warrants is declared effective (which has not yet occurred). The private placement generated gross proceeds of approximately$12.0 million , prior to deducting$0.9 million of costs consisting of placement agent commissions and offering expenses payable by the Company. In addition to the seven percent (7%) of the aggregate gross proceeds cash fee, the Company issued to the placement agent warrants to purchase$3,762 shares of our common stock issuable upon exercise of theSeptember 2021 Prefunded Warrants sold in the offering (the "September Placement Agent Warrants"). The September Placement Agent Warrants are exercisable for a period commencing onMarch 3, 2022 (six months after issuance) and expire four years from the effective date (which 51
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occurred on
OnMay 17, 2021 , we issued warrants to purchase up to an aggregate of 49,485 shares of our common stock, par value$0.0001 with an exercise price of$242.50 (the "Existing Warrants"). The Existing Warrants were immediately exercisable and expire onJune 15, 2026 . OnJanuary 26, 2022 , we entered into a Warrant Exercise Agreement ("the Exercise Agreement") with the holder of the Existing Warrants (the "Exercising Holder"). Pursuant to the Exercise Agreement, the Exercise Holder and the Company agreed that, subject to any applicable beneficial ownership limitations, the Exercising Holder would cash exercise up to 49,485 of its Existing Warrants (the "Investor Warrants") into shares of our common stock (the "Exercised Shares"). To induce the Exercising Holder to exercise the Investor Warrants, the Exercise Agreement (i) amended the Investor Warrants to reduce their exercise price per share to$120.00 and (ii) provided for the issuance of a new warrant to purchase up to an aggregate of approximately 98,969 shares of our common stock (the "January 2022 Common Warrant"), with suchJanuary 2022 Common Warrant being issued on the basis of twoJanuary 2022 Common Warrant shares for each share of the Existing Warrant that was exercised for cash. TheJanuary 2022 Common Warrant is exercisable commencing onJuly 28, 2022 , terminates onJuly 28, 2027 , and has an exercise price per share of$155.00 . The Exercise Agreement generated aggregate proceeds to the Company of approximately$5.9 million , prior to the deduction of$461,000 of costs consisting of placement agent commissions and offering expenses payable by the Company. As a result of the warrant modification, which reduced the exercise price of the Existing Warrants, as well as the issuance of theJanuary 2022 Common Warrants, the Company recorded approximately (i)$639,000 for the increased fair value of the modified warrants; and (ii)$12,590,000 as the fair value of theJanuary 2022 Common Warrants on the date of issuance. We recorded approximately$5,477,000 as issuance costs that offset the$5.5 million of additional paid-in capital the Company received for the cash exercise of the Existing Warrants at the reduced exercise price, while the remaining$7,731,000 was recorded as a deemed dividend on the Consolidated Statements of Operations, resulting in a reduction of income available to common shareholders in our basic earnings per share calculation.
OnJuly 18, 2022 , the Company entered into a warrant exercise agreement (the "Exercise Agreement") with the holder of theSeptember 2021 Warrants andJanuary 2022 Warrants (the "Exercising Holder"). Pursuant to the Exercise Agreement, the Exercising Holder and the Company agreed that the Exercising Holder would exercise for cash 50,000 of itsSeptember 2021 Warrants (the "Investor Warrants"). In order to induce the Exercising Holder to exercise the Investor Warrants, the Exercise Agreement (i) amends theSeptember 2021 Warrants andJanuary 2022 Warrants to (a) reduce the exercise price per share of theSeptember 2021 Warrants andJanuary 2022 Warrants to$26.00 , (b) extends the expiration date of theSeptember 2021 Warrants toMay 3, 2029 , and (c) extends the expiration date of theJanuary 2022 Warrants toJuly 28, 2029 and (ii) provides for the issuance by the Company to the Exercising Holder of new warrants to purchase up to 348,408 shares of common stock (the "New Warrants") (equal to 200% of the sum of theSeptember 2021 Warrants andJanuary 2022 Warrants). The New Warrants are exercisable for a period of seven years commencing upon issuance and have an exercise price per share of$26.00 . OnJuly 25, 2022 , the Company entered into an amendment with the holder of the Company's warrants to purchase 348,408 shares of common stock, issuedJuly 19, 2022 . Pursuant to the amendment, the warrants were amended to be exercisable commencingJanuary 19, 2023 (six months from the date of issuance) and will terminateJanuary 19, 2030 . As a result of the warrant modification, which reduced the exercise price of the Existing Warrants, as well as the issuance of theJuly 2022 Common Warrants, the Company recorded approximately (i)$488,700 and$599,700 for the increased fair value of theSeptember 2021 andJanuary 2022 modified warrants, respectively; and (ii)$8,084,000 as the fair value of theJuly 2022 Common Warrants on the date of issuance. We recorded approximately$100,000 on paid cost and$1,200,000 as issuance costs that offset the$130,000 of additional paid-in capital the Company received for the cash exercise of the Existing Warrants at the reduced exercise price, while the remaining$7,972,500 was recorded as a deemed dividend on the Consolidated Statements of Operations, resulting in a reduction of income available to common shareholders in our basic earnings per share calculation.
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 52
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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 . Performance Highlights
All figures below represent the continuing operations of the Company after
segregating the operations of the assets sold to
Fiscal 2022 vs. Fiscal 2021
•Served approximately 70 clients and employed an average of 3,000 WSEs,
resulting in an increase in our administrative fees of approximately
•Processed over$81.8 million in gross billings from continuing operations, representing an increase of$2.31 million or 2.9% from Fiscal 2021. Our Fiscal 2022 continuing operations mix remained consistent with Fiscal 2021, primarily consisting of food and restaurant workers for QSRs. For further information, please refer to the section entitled "Non-GAAP Financial Measures", below.
Our financial performance for Fiscal 2022, compared to Fiscal 2021, included the following significant items:
Revenues increased approximately$12.6 million or 53.7%, from$23.42 million in Fiscal 2021 to$36.0 million in Fiscal 2022. The increase is due to the combination of$2.3 million or 2.9% increase in gross billings from$79.0 million in Fiscal 2021 to$81.8 million in Fiscal 2022, and the impact of transitioning a significant amount of our existing clients to a staffing revenue recognition model during Fiscal 2022. Recurring WSE counts as of the end of Fiscal 2022 averaged approximately 3,000, which is consistent with a recovery to our pre-pandemic WSE levels. Gross Billings per WSE remained consistent year over year with an average of$27,095 in Fiscal 2022 vs$26,345 in Fiscal 2021. Revenue associated with administrative fees increased by$0.2 million or 13.3%, and tax revenues by 0.4 million or 5.2% both of which are consistent with our billed wages increase of 2.9% during Fiscal 2022. Revenue associated with workers' compensation premiums decreased by$0.2 million , or 11.4%, due to the migration of our WSEs to a guaranteed cost program during Fiscal 2021 and a change in our client mix that resulted in lower billed workers' compensation rates per wage dollar. Impact of change in CSAs on prospective revenue recognition and cost of revenues During Fiscal 2021, as part of our annual review process, we modified certain terms and conditions of our standard CSA applicable to a portion of our existing client base, which resulted in us recognizing revenue generated by these clients pursuant to a staffing model on a prospective basis. The staffing revenue recognition model provides for all gross billings, including employee payroll paid, to be recorded as revenue, and for cost of revenues to be recorded to include the employee payroll paid. Accordingly, for Fiscal 2022 and 2021, all such revenue increases as a result of this change also yielded a corresponding increase in cost of revenues, and therefore had no impact on our gross margins. For further information, please refer to the section entitled "Non-GAAP Financial Measures", below. For Fiscal 2022, gross billings from staffing and HCM services totaled approximately$29.6 million and$52.2 million , representing 35.99% and 64.01% of our gross billings, respectively. For Fiscal 2021, gross billings from staffing and HCM services totaled approximately$15.2 million and$63.8 million , representing 19% and 81% of our gross billings, respectively. Gross Profit increased approximately$1.5 million , compared year over year to Fiscal 2021, mainly driven by the$1.2 million or 62.90% decrease in workers' compensation premium costs from our guaranteed cost program and a decrease in actuarial cost for our legacy workers' compensation insurance programs as they are in the phasing out stage, offset by a slight increase in gross profit associated with administrative fees and taxes. Operating expenses increased by$17.4 million or 62.7%, from$27.7 million in Fiscal 2021 to$45.0 million in Fiscal 2022. The increase in mainly driven by$2.5 million or 22.3% increase in payroll, the cost associated with the SPAC's initiative, which mainly had an increase effect of$3.6 million or 87.6% in the professional fees and$4.6 million or 56.1% in the operating 53
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expenses due to consolidation. Furthermore, a significant impact from non-recurring expenses in Fical 2022 includes the$4.0 million impairment of the notes receivable from theVensure sale and the$3.9 million ROU asset impairment for the two leases abandoned during the year.
Operating loss increased by
Other income (expense) increased by$0.2 million in Fiscal 2022 due to the$0.3 million increase in interest and dividends received from the Trust Account. net by the$0.5 million increase in expensed offering cost from the SPACs S-1 abandonment. Loss from discontinued operations represents the reassessment of the workers' compensation claims reserve associated with our former clients that we transferred toVensure as part of the Vensure Asset Sale. Loss from discontinued operations decreased by$1.9 million or 76.5% in Fiscal 2022.
Net Loss increased by
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Results of Operations
Fiscal 2022 Compared to Fiscal 2021
The following table summarizes our consolidated results of operations:
For the year ended August 31, August 31, 2022 2021 Revenues (See Note 2)$ 36,002,000 $ 23,420,000 Cost of revenue 34,227,000 23,098,000 Gross profit 1,775,000 322,000 Operating expenses: Salaries, wages, and payroll taxes 13,575,000 11,100,000 Commissions 89,000 176,000 Professional fees 7,673,000 4,089,000 Research and Software development 2,529,000 3,755,000 Depreciation and amortization 509,000 357,000 Impaired asset expense 4,004,000 - ROU asset impairment 3,851,000 - General and administrative 12,788,000 8,190,000 Total operating expenses 45,018,000 27,667,000 Operating Loss (43,243,000) (27,345,000) Other (expense) income: Interest expense (1,000) (5,000) Other income 316,000 25,000 Expensed SPAC offering costs (515,000) - Total other expense (200,000) 20,000 Loss from continuing operations before income taxes (43,443,000) (27,325,000) Income tax expense (38,000) 42,000 Loss from continuing operations (43,405,000) (27,367,000) Loss from discontinued operations, net of tax (590,000) (2,509,000) Net loss attributable to ShiftPixy, Inc shareholders $
(43,995,000)
Deemed dividend from change in fair value from warrants modification
(15,703,000) - Net loss attributable to common stockholders $
(59,698,000)
Net Loss per share, Basic and diluted Continuing operations$ (148.28) $ (81.23) Discontinued operations$ (1.47) $ (7.44) Net Loss per common share - Basic and diluted $
(149.76)
Weighted average common stock outstanding - Basic and diluted 402,591 337,225
We report our revenues as gross billings, net of related direct labor costs for our EAS clients and revenues without reduction of labor costs for staffing services clients.
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2022 2021 Net Revenues (in millions)$ 36.0 $ 23.4
Increase (Decrease), year over year (in millions)
53.7 % 171.0
%
Cost of Revenues (in millions)$ (34.2) $
(23.1)
Increase (Decrease), year over year (in millions)
48.2 % 200.6
%
Gross Profit (in millions)$ 1.8 $ 0.3 Increase (Decrease), year over year (in millions)$ 1.5 $ (0.6) Percentage Increase (Decrease), year over year 451.2 % (66.4) % Gross Profit Percentage of Revenues 4.9 % 1.4 % Fiscal 2022 Net revenue for our HCM services excludes the payroll cost component of gross billings. With respect to staffing services, employer payroll taxes, employee benefit programs, and workers' compensation insurance, we believe that we are the primary obligor, and we have latitude in establishing price, selecting suppliers, and determining the service specifications. As such, the billings for those components are included as revenue. Revenues are recognized ratably over the payroll period as WSEs perform their services at the client worksite. Net Revenue increased approximately 53.7% to$36.0 million , from$23.4 million in Fiscal 2021. The revenue increase was due to a 2.9% increase in gross billings to$81.3 million from$79.0 million , combined with the effect of the transition some of our existing clients to a staffing revenue recognition model during Fiscal 2021 and Fiscal 2022, as described above. Recurring WSE counts as of the end of Fiscal 2022 averaged approximately 3,000, which is consistent with recovery to our pre-pandemic WSE levels. Our gross billings from staffing and HCM services totaled approximately$29.6 million and$52.2 million , representing 35.99% and 64.01% of our gross billings, respectively. Revenue associated with administrative fees increased by$0.2 million or 13.3%, which is consistent with our billed wages increase of 2.9% as well as the$0.4 million or 5.2% increase in our revenues associated with taxes during Fiscal 2022. Revenue associated with workers' compensation decreased by$0.2 million , or 11.4%, due to the decrease in the premium costs from our guaranteed workers' compensation cost program during Fiscal 2022, which allowed us to pass the benefit down to our clients resulting in a lower billed workers' compensation rate per wage dollar. Cost of Revenues includes our costs associated with employer taxes, workers' compensation insurance premiums, and the gross wages paid by our staffing clients. Cost of revenues increased by$11.1 million , or 48.2%, to$34.2 million in Fiscal 2022 from$23.1 million in Fiscal 2021. The change in cost of revenues was due primarily to the conversion of certain existing clients to a staffing revenue recognition model during Fiscal 2021 and Fiscal 2022, as described above. Gross Profit increased approximately 451.2%, or$1.5 million in Fiscal 2022, compared to Fiscal 2021, primarily due to the migration of our clients to a guaranteed cost program workers' compensation program during Fiscal 2021 and further reductions in premiums in Fiscal 2022 and the$2.3 million or 2.9% increase in gross billings. 56
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The following table presents certain information related to our operating expenses: Year ended August 31, 2022 2021 % Change Salaries, wages and payroll taxes$ 13,575,000 $ 11,100,000 22.3 % Commissions 89,000 176,000 (49.4) % Professional fees 7,673,000 4,089,000 87.6 % Software development 2,529,000 3,755,000 (32.6) % Depreciation and amortization 509,000 357,000 42.6 % Asset impairment expense 4,004,000 - 100.0 % General and administrative 12,788,000 8,190,000 56.1 % Total operating expenses$ 41,167,000 $ 27,667,000 48.8 % Operating expenses increased$17.4 million or 62.7% to$45.0 million in Fiscal 2022 from$27.7 million in Fiscal 2021. The components of operating expenses changed as follows: Salaries, wages and payroll taxes increased by approximately$2.5 million , or 22.3% in Fiscal 2022 compared to Fiscal 2021, from$11.1 million in Fiscal 2021 to$13.6 million in Fiscal 2022. This increase resulted primarily from hiring additional employees in the executive, operations, and software development ranks of our business to support our various growth initiatives from Fiscal 2021, including our SPAC sponsorships andShiftPixy Labs . These costs consisted of gross salaries including salary increases provided to key management executives in Fiscal 2022, as disclosed in our 8K, benefits, and payroll taxes associated with our executive management team and corporate employees. Our corporate employee as ofAugust 31, 2022 , were approximately 61.
Commissions consist of commissions payments made to third party brokers and inside sales personnel and remained consistent year over year.
Professional fees consists of legal fees, accounting costs, board fees, and consulting fees. Professional fees increased by$3.6 million , or 87.6% in Fiscal 2022 compared to Fiscal 2021, from$4.1 million in Fiscal 2021 to$7.7 million in Fiscal 2022. The increase is primarily attributable to the professional fees incurred with the activities related to the completion of the initial businesses combination for IHC and legal fees paid related to several of our current active litigation. Software development consists of costs associated with research and development outsourced to third parties. Software development costs decreased by$1.2 million or 32.6%, from$3.8 million in Fiscal 2021 to$2.5 million in Fiscal 2022. The decreased costs is driven by the significant reduction in eternal developer in Fiscal 2022 since our HRIS application is substantially completed and is now in the maintenance and minor functionality improvements that are driven or managed by our internal development team. Depreciation and amortization increased by$0.2 million , or 42.6% in Fiscal 2022 compared to Fiscal 2021. Increase is due to depreciation on asset purchased in late Fiscal 2021 and Fiscal 2022 to support our growth initiatives for the period. Asset impairment expense increased by$4.0 million in Fiscal 2022, due to the non-recurring impairment of the notes receivable from theVensure sale in Fiscal 2020. ROU asset impairment increased by$4.0 million in Fiscal 2022, this non-recurring impairment was the result of the Company decision to formally abandon the leases for its offices in the Courvoisier Center. The determination was based on its inability to utilize the premises as they were under extensive construction by the landlord resulting in a significant negative impact on the Company's ability to conduct business and the health and well-being of the Company's employees and guests. As a result of the abandonment, the Company evaluated the Right-Of-Use ("ROU") Assets for impairment as ofAugust 31, 2022 , and recorded an impairment charge. General and administrative expenses consist of office rent and related overhead, software licenses, insurance, penalties, business taxes, travel and entertainment, and other general business expenses. General and administrative expenses increased by$4.6 million or 56.1% in Fiscal 2022 compared to Fiscal 2021, from$8.2 million in Fiscal 2021 to$12.8 million in Fiscal 2022. The increase is mainly driven by the$1.2 million D&O insurance for IHC, approximately$1 million in expenses related to interest and penalties accrued for payroll taxes and$2.9 million increase in compensation expense under the ASC 718, 57
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Compensation accounting guidance, related to the preferred stocks granted to the CEO in exchanged for the surrender of its preferred options in Fiscal 2022. Other components of the increase include marketing expenses related to our growth initiatives. For the Years Ended August 31, 2022 August 31, 2021 Interest expense (1,000) (5,000) Other income 316,000 25,000 Expensed SPAC offering costs (515,000) - Total other income (expense) (200,000) 20,000 Other income (expense) increased by$0.2 million in Fiscal 2022 due to the$0.3 million increase in interest and dividends received from the Trust Account, net by the$0.5 million increase in expensed offering cost from the SPACs S-1 abandonment. Loss from discontinued operations represents the reassessment of the workers' compensation claims reserve associated with our former clients that we transferred toVensure as part of the Vensure Asset Sale. Loss from discontinued operations decreased by$1.9 million or 76.5% in Fiscal 2022. Deemed dividends represents the difference in fair value for a warrant's price modifications and its original exercised price as an inducement for exercise the warrants. In Fiscal 2022 the Company entered into two warrant modifications agreements one inJanuary 2022 reducing the exercise price from$2.425 to$1.20 and the second one inJuly 19, 2022 reducing the exercise price from$1.55 to$.26 , resulting in a reduction of income available to common shareholders in our basic earnings per share calculation. No comparable expense was recognized during Fiscal 2021. Net Loss increased by$29.8 million or$61.08 per share in Fiscal 2022, from$29.9 million or$88.67 per share in Fiscal 2021 to$59.7 million or$149.75 per share in Fiscal 2022.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. As ofAugust 31, 2022 , the Company had cash of$0.6 million and a working capital deficit of$31.2 million . During this period, the Company used approximately$17.5 million of cash from its continuing operations and incurred recurring losses, resulting in an accumulated deficit of$192.7 million as ofAugust 31, 2022 . Historically, our principal source of financing has come through the sale of our common stock and issuance of convertible notes. InSeptember 2021 , we raised approximately$12 million ($11.1 million net of costs) in connection with the sale of common stock and warrants, inJanuary 2022 , we entered into a warrant exercise agreement that raised approximately$5.9 million ($5.4 million net of costs), and inJuly 2022 , we entered into a warrant exercise agreement that raised approximately$1.3 million ($1.2 million net of costs). The following table sets forth a summary of changes in cash flows for Fiscal 2022 and Fiscal 2021: For the year endedAugust 31, 2022 2021 Net cash used in operating activities (17,520,000)
(21,512,000)
Net cash provided by (used in) investing activities (117,463,000) (2,566,000) Net cash provided by financing activities
134,402,000 20,974,000 Change in cash$ (581,000) $ (3,104,000) 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. Our 58
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plans and expectations for the next twelve months include raising additional capital to help fund expansion of our operations and strengthening of our sales force strategy by focusing on staffing services as our key driver to improve our margin and the continued support and functionality improvement of our 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 our 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 sound 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 significant value for its shareholders. Also, as discussed in the Financing Activities section above, onSeptember 20, 2022 , the Company entered into a securities purchase agreement with a large institutional investor pursuant to which the Company sold to the Purchaser an aggregate of 416,667 shares of its common stock together with 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 . We expect to engage in additional sales of our securities during Fiscal 2023, either through registered public offerings or private placements, the proceeds of which we intend to use to fund our operations and growth initiatives. The Company's 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 be sufficient to 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. These consolidated financial statements do not include any adjustments for this uncertainty.
Off-Balance Sheet Arrangements
None
Critical Accounting Policies and Estimates
See Note 2, Summary of significant accounting policies in the accompanying Consolidated Financial Statements.
Emerging Growth Reporting Requirements
We are a public reporting company under the Securities Exchange Act of 1934 (the "Exchange Act"). We are required to publicly report on an ongoing basis as an "emerging growth company" (as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the "JOBS Act") under the reporting rules set forth under the Exchange Act. For so long as we remain an "emerging growth company", we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not "emerging growth companies", including but not limited to:
•not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
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•taking advantage of extensions of time to comply with certain new or revised financial accounting standards;
•being permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
•being exempt from the requirement to hold a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We are permitted to remain an "emerging growth company" for up to the fifth anniversary of the completion of our first sale of common equity securities under an effective Securities Act registration statement, which occurred onOctober 29, 2018 , although if the market value of our Common Stock that is held by non-affiliates exceeds$700 million as of anyJune 30 before that time, we would cease to be an "emerging growth company" as of the followingDecember 31 . In the event that we cease to be anEmerging Growth Company as a result of a lapse of the five year period, but continue to be aSmaller Reporting Company , we would continue to be subject to similar exemptions available to Emerging Growth Companies until such time as we were no longer aSmaller Reporting Company . 60
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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 intended to enhance the reader's understanding of certain aspects of our financial performance. It is 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 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 clients, and revenues without reduction for labor costs for staffing clients. For Fiscal 2022, our gross billings from HCM and staffing services totaled approximately$52.2 million and 29.6 million (total of$81.3 ), representing 64.0% and 36.0% of our gross revenue, respectively. For Fiscal 2021, our gross billings were approximately$79.0 million ,$63.8 million from our HCM services and$15.2 million from staffing, representing 81% and 19% and of our gross billings for the period. (We had no revenues generated from technology services during Fiscal 2022 or Fiscal 2021). Gross billings represent billings to our business clients and include WSE gross wages, employer payroll taxes, and workers' compensation premiums as well as administrative fees for our value-added services and other charges for workforce management support. Gross billings for our HCM services are a non-GAAP measurement that we believe to represent a key revenue-based operating metric, along with the number of WSEs and the number of clients. Active WSEs are defined as employees on our HRIS platform that have provided services for at least one of our clients for any reported period. Our primary profitability metrics are gross profit, and our primary driver of gross profit is administrative fees.
Reconciliation of GAAP to Non-GAAP Measure
Gross Billings to Net Revenues
The following table presents a reconciliation of our Gross Billings (unaudited) to Revenues: For the year Ended August 31, 2022 2021 Gross Billings in millions$ 81.3 $ 79.0 Less: Adjustment to Gross Billings$ 45.3 $ 55.6 Revenues, in millions$ 36.0 $ 23.4
The following table provides the key revenue and our primary gross profit driver used by management.
2022 2021 Administrative Fees (in millions, unaudited)$1.8 $ 1.5 Increase, year over year (in millions) 0.3 0.3 Percentage Increase, year over year 20.0 % 20.0 % Administrative Fee % of Gross Billings 2.3 % 2.0 % Average WSEs by year (unaudited) 3,000 3,000
Average Gross Billings per Average WSE
Our billed WSEs as of the end of Fiscal 2022 averaged approximately 3,000, which is consistent with continuous growth and recovery to our pre-pandemic levels. The increase in administrative fees was consistent with our billings growth over the same time period. The increase in average gross billings per WSE was due to growth in the higher wages commanded by our 61
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healthcare WSEs, as well as an increase in billings to our restaurant clients as their operations recovered from the worst effects of the COVID-19 pandemic.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
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