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 for Fiscal 2020, filed with theSEC onNovember 30, 2020 , including the "Risk Factors" set forth in Part I, Item IA of the Form 10-K, as well as the amendment to our Annual Report on Form 10-K/A, filed with theSEC onJanuary 12, 2021 .
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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;
· 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 and financialcondition
and the economy in general; and
· our ability to be successful in defending litigation brought against us.
We caution you that the forward-looking statements highlighted above do not encompass all of the forward-looking statements made in this Quarterly Report.
We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2020 filed with theSEC onNovember 30, 2020 , which is expressly incorporated herein by reference, and elsewhere in this Quarterly Report. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. 30
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 in this Quarterly
Report to reflect events or circumstances after the date of this Quarterly
Report or to reflect new information or the occurrence of unanticipated events,
except as required by law. We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you should not
place undue reliance on our forward-looking statements. Our forward-looking
statements do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures, other strategic transactions or
investments we may make or enter into.
The risks and uncertainties we currently face are not the only ones we face. New
factors emerge from time to time, and it is not possible for us to predict which
will arise. There may be additional risks not presently known to us or that we
currently believe are immaterial to our business. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. If any such risks occur, our
business, operating results, liquidity and financial condition could be
materially affected in an adverse manner.
The industry and market data contained in this Quarterly Report are based either
on our management's own estimates or, where indicated, independent industry
publications, reports by governmental agencies or market research firms or other
published independent sources and, in each case, are believed by our management
to be reasonable estimates. However, industry and market data are subject to
change and cannot always be verified with complete certainty due to limits on
the availability and reliability of raw data, the voluntary nature of the data
gathering process and other limitations and uncertainties inherent in any
statistical survey of market shares. We have not independently verified market
and industry data from third-party sources. In addition, consumption patterns
and customer preferences can and do change. As a result, you should be aware
that market share, ranking and other similar data set forth herein, and
estimates and beliefs based on such data, may not be verifiable or reliable.
Our Management's Discussion & Analysis of Financial Condition and Results of
Operations (MD&A) includes references to our performance measures presented in
accordance with GAAP and other non-GAAP financial measures that we use to manage
our business, make planning decisions and allocate resources. Refer to the
Non-GAAP Financial Measures within our MD&A for definitions and reconciliations
from GAAP measures.
31
Overview
We provide human resources, employment compliance, insurance, payroll, and
operational employment services solutions for our business clients ("clients" or
"operators") and shift work or "gig" opportunities for worksite employees
("WSEs" or "shifters"). As consideration for providing these services, we
receive administrative or processing fees 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.
Our market focus is to use a traditional staffing services business model,
coupled with developed technology, to address underserved markets containing
predominately lower wage employees with high turnover, including the light
industrial, services, and food and hospitality markets.
Although we have recently expanded into other industries, as noted below, our
current primary focus continues to be on clients in the restaurant and
hospitality industries, traditionally market segments with high employee
turnover and low pay rates. We believe that these industries will be better
served by our HRIS technology platform and related mobile application, which
provide payroll and human resources tracking for our clients and we believe will
result in lower operating costs, improved customer experience and revenue growth
acceleration. All of our clients enter into service agreements with us or one of
our wholly-owned subsidiaries, as detailed in Note 1 to our financial
statements, above.
Our revenues through the second quarter of Fiscal 2021 primarily consisted 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. Our costs of revenues primarily consisted of the accrued
and paid payroll taxes and our costs to provide the workers' compensation
coverage, including premiums and loss reserves. A significant portion of our
assets and liabilities is for our workers' compensation reserves, carried as
cash balances, and our estimates of projected workers' compensation claims,
carried as liabilities. We provide a self-funded workers' compensation policy up
to $500,000 and purchase reinsurance for claims in excess of that limit.
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 in order to:
· reduce WSE management costs;
· automate new WSE and client onboarding; and
· provide value-added services for our business clients resulting in
additional revenue streams to the Company.
Our cloud-based HRIS platform captures, holds, and processes HR and payroll information for clients and WSEs through an easy-to-use customized front-end interface coupled with a secure, remotely hosted database. The HRIS platform can be accessed by either a desktop computer or an easy to use smartphone application designed with legally binding HR workflows in mind. Once fully implemented, we expect to reduce the time, expense, and error rate for on-boarding WSEs into our ecosystem. This allows our HRIS platform to serve as a "gig" marketplace for WSEs and clients and for client businesses to better manage their human capital needs. We see our technology platform as a key competitive advantage and differentiator to our market competitors and one that will allow us to expand our human capital business beyond our current focus of low-wage employees and healthcare workers. We believe that providing this baseline business, coupled with a technology solution to address additional concerns such as employee scheduling and turnover, will provide a unique, cost effective solution to the HR compliance, staffing, and scheduling problems that these businesses face. We are completing additional features, expected to generate additional revenue streams in calendar 2021, that will enhance and expand our product offering, increase our client customer and WSE counts, and increase the revenues and profit per existing WSE. The COVID-19 pandemic has had a significant impact upon and delayed our expected growth, which we observed initially through a decrease in our billed customers and WSEs beginning inmid-March 2020 , when theState of California first implemented "lockdown" measures. Substantially all of ourFebruary 29, 2020 billed WSEs worked for clients located inSouthern California , primarily in the quick service restaurant industry, and many of these clients were required to furlough or lay off employees or, in some cases, completely shutter their operations. For our clients serviced immediately prior to theMarch 2020 pandemic lockdown, we experienced an approximate 30% reduction in business levels within 6 weeks after the initial lockdown. The combination of our sales efforts and the tools that our services provide to businesses impacted by the COVID-19 pandemic resulted in additional business opportunities for new client location additions, as did the fact that many of our clients received Paycheck Protection Program ("PPP") loans under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which supported their businesses and payroll payments during in-store lockdowns. Nevertheless, during the quarter endedMay 31, 2020 , our WSE billings per client location decreased as many of our clients were forced to cease operations or reduce staffing. OnJuly 13, 2020 , the Governor of theState of California re-implemented certain COVID-19 related lockdown restrictions in most of the counties in the state, including those located inSouthern California where most of our clients are located. The fluid nature of the pandemic following those renewed lockdowns resulted in the issuance of additional orders by state and county health authorities, yielding uneven patterns of business openings and closings throughout the state and leading ultimately to significant lockdowns beginning in lateNovember 2020 and through the year-end holiday season as a spike in COVID-19 cases was observed. The negative impact of these lockdowns on our business and operations continued through our second quarter of Fiscal 2021. Despite experiencing billings and revenue growth from our new nurse staffing customer during this time period, our gross billings decreased sequentially by approximately$1.9 million , or 10%, below first quarter levels, and our ending WSEs billed decreased by approximately 800 sequentially from quarter to quarter. We believe that this decrease was directly related to the renewed lockdowns inCalifornia resulting from the COVID-19 spikes and discussed above. While the availability of PPP loans to our clients mitigated the negative impact on our business during the early stages of the pandemic, we believe that the failure of the government to renew this program exacerbated the negative impact of the holiday lockdowns on our financial results for the second quarter of Fiscal 2021. Nevertheless, we have observed some degree of recovery over the past month, as these lockdowns have relaxed and vaccination efforts have accelerated.Southern California counties experiencing decreased infection rates have begun to reopen in-person dining, albeit at reduced levels of 25% maximum occupancy. Most recently, theState of California announced that all residents over the age of 50 are currently eligible for COVID-19 vaccination and that, byApril 15 , all residents over the age of 16 will be eligible based on expected increases in vaccine availability. We believe that, to the extent that COVID-19 infection rates continue to decrease and vaccination rates increase, governmental authorities will continue to remove in-person dining restrictions, which will fuel our clients' business recoveries. Despite the negative impacts to our quick service restaurant related business resulting from COVID-19 restrictions, we saw an increase in our admin fees revenue during the second quarter, which was driven by the increased billings and revenues for our new health related business that we launched during Fiscal 2021. We expect to see additional growth in this business line in future quarters, and we expect it to be a significant contributor to our gross profit based upon the higher wages typically paid to healthcare WSEs. 32
Significant Second Quarter Developments
Quarterly Performance Highlights: Fiscal 2021 v. Fiscal 2020
· Served approximately 84 clients and an average of 3,000 WSEs.
· Processed approximately
17.9% over the same period in Fiscal 2020, but a sequential 10% decrease
below the first quarter of Fiscal 2021 due to COVID-19 impacts on our quick
service restaurant customer base and resets of payroll tax limits.
· Collected admin fees increased 10.9% from the second quarter of Fiscal 2020
to the same period of Fiscal 2021, and increased 11.9% sequentially from the
first quarter of Fiscal 2021. This increase was driven primarily by
healthcare related admin fees, which grew 46% sequentially from the first
quarter of Fiscal 2021.
· Gross margins increased by
revenues, to
billings and the increase in healthcare related admin fees.
· Operating loss was
period of Fiscal 2020, primarily driven by a
operating expenses offset by higher gross billings and healthcare related
admin fees.
Sales Efforts and Growth Initiatives
We believe that our HRIS platform is well suited to provide cross-functional services that will allow us to expand our reach into other human capital applications and expand our revenue base. Our strategy is to monetize this HRIS platform through multiple applications with the initial application being our historical restaurant-focused human capital solutions. We have begun to expand our services into industries that utilize higher paid employees on a temporary or part-time basis, including the medical/nurse staffing industry. InJuly 2020 , we signed our first healthcare client, representing a potential gain of 8,000 WSEs, and began to onboard these WSEs in late July and into August on a very limited basis. We onboarded more significant numbers of nurses through this client during the recently completed quarter, for which we have begun to commence billings and recognize revenue. We expect these new healthcare WSEs to earn an average of 2 to 3 times more than the average restaurant WSE we have typically onboarded in the past, which should yield higher gross profits per healthcare WSE compared to a restaurant or other lower-wage worker. InAugust 2020 , we signed an agreement with Washington Hospitality, a consortium representing approximately 200,000 potential WSEs in the food industry located in theState of Washington . This agreement expands our geographic reach and is expected to drive revenue growth starting in calendar 2021. Due to the COVID-19 pandemic, we have adjusted our sales efforts to reduce or eliminate in-person contact, primarily through the use of video conferencing and webinar tools. The webinars that we staged during the quarter were well-attended on both a live and recorded basis, which has resulted in client acquisitions that we believe have the potential to generate significant positive results
for the Company.
During the second quarter of Fiscal 2021, we began to invest significantly in additional areas where we see the potential for substantial revenue growth and enhanced shareholder value. We believe the combination of our human capital, scheduling, intermediation, and delivery services provides us with a unique opportunity for a vertically integrated restaurant and food fulfillment solution. To that end, in late 2020 we announced our "ShiftPixy Labs " initiative, which includes the creation of incubator "ghost kitchens" to be operated under our wholly-owned subsidiary,ShiftPixy Ghost Kitchens, Inc. Through this initiative, the Company intends to provide resources and guidance to entrepreneurs seeking to bring their food delivery concepts to market, in return for the opportunity to combine with the ShiftPixy HRIS platform to create a co-branded, or "ghost" branded, food preparation and delivery solution. The initial phase of this initiative will be implemented in a dedicated showcase kitchen facility located in close proximity to ourMiami headquarters, which is current under renovation and which we expect to be operational no later than the beginning of the fourth quarter of Fiscal 2021. We intend to partner with various culinary training organizations and experts in testing these concepts, and to showcase these efforts 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. 33 Software Development We continued our software development internally in the second quarter of Fiscal 2021, primarily focusing on feature enhancements such as delivery, scheduling, and onboarding functionality improvement. Our efforts also focused on better integration and more seamless process flow improvements to create an improved user experience while reducing internal staff time required for onboarding. From inception of our software development efforts in 2017 throughFebruary 28, 2021 , we spent approximately$26.3 million consisting of outsourced research and development, IT related expenses, development contractors and employee costs and marketing spending consisting of advertising, trade shows, and marketing personnel costs. The following table shows the technology and marketing spending for each period reported: Six months Six months ending endingFebruary 28 ,February 29 ,
Development spending (in $ millions) 2021
2020
(Unaudited) (Unaudited)
Contract development and licenses $ 1.6
$ 0.6
Internal personnel costs 1.2 1.0
Total development spending $ 2.8 $ 1.6
Marketing spendingAdvertising and outside marketing $ 0.9
$ 0.2
Internal personnel costs 0.2 0.2
Subtotal, Marketing costs $ 1.1 $ 0.4Total, HRIS platform and mobile application spending $ 3.9
$ 2.0
Cumulative investment $ 26.3 18.8 Portion of investment capitalized as fixed assets - 3.7 Portion of investment expensed $ 26.3
15.1
For the quarters ended
34
Results of Operations
The following table summarizes the condensed consolidated results of our
operations for the three and six months ended
For the Three Months Ended For the Six Months Ended
February 28, February 29, February 28, February 29,
2021 2020 2021 2020
Revenues (gross
billings of $17.9
million and $14.5
million less worksite
employee payroll cost
of $15.5 million and
$12.5 million ,
respectively for the
three months ended;
gross billings of $37.6
million and $32.4
million less worksite
employee payroll cost
of $32.7 million and
$28.1 million ,
respectively for six
months ended $ 2,419,000 $ 2,007,000 $ 4,922,000 $ 4,267,000
Cost of revenue 2,056,000 1,933,000 4,046,000 3,951,000
Gross profit 363,000 74,000 876,000 316,000
Operating expenses:
Salaries, wages, and
payroll taxes 2,592,000 1,802,000 4,785,000 3,557,000
Stock-based
compensation - general
and administrative 423,000 619,000 919,000 745,000
Commissions 49,000 46,000 87,000 118,000
Professional fees 1,006,000 997,000 1,713,000 1,837,000
Software development 786,000 350,000 1,663,000 703,000
Depreciation and
amortization 86,000 77,000 148,000 156,000
General and
administrative 1,380,000 403,000 3,139,000 1,564,000
Total operating
expenses 6,322,000 4,294,000 12,454,000 8,680,000
Operating Loss (5,959,000 ) (4,220,000 ) (11,578,000 ) (8,364,000 )
Other (expense) income: Interest expense (3,000 ) (806,000 ) (6,000 ) (1,967,000 ) Expense related to modification of warrants - (21,000 ) - (21,000 ) Loss from debt conversion - (657,000 ) - (657,000 ) Inducement loss - (567,000 ) - (567,000 ) Change in fair value derivative and warrant liability - 829,000 - 1,771,000 Gain on convertible note penalties accrual - 760,000 - 760,000 Total other (expense) income (3,000 ) (462,000 ) (6,000 ) (681,000 ) Loss from continuing operations (5,962,000 ) (4,682,000 ) (11,584,000 ) (9,045,000 ) (Loss) income from discontinued operations (Loss) income from discontinued operations (221,000 ) (1,393,000 ) (1,535,000 ) 576,000 Gain from asset sale - 15,682,000 - 15,682,000 Total (loss) income from discontinued operations (221,000 ) 14,289,000
(1,535,000 ) 16,258,000
Net (loss) income$ (6,183,000 ) $ 9,607,000 $ (13,119,000 ) $ 7,213,000 35 Revenuesfor the three months endedFebruary 28, 2021 , increased by$0.4 million , or 20.5%, to$2.4 million compared to$2.0 million for the three months endedFebruary 29, 2020 . Revenues for the six months endedFebruary 29, 2021 , increased by$0.7 million , or 15.4%, to$4.9 million compared to$4.3 million for the six months endedFebruary 29, 2020 . The quarterly revenue increase was driven by higher gross billings of$0.2 million for our new nurse staffing client that was signed inAugust 2020 and higher gross billings from our quick service restaurants business of$0.2 million . The increase in revenue of$0.3 million for the six months endedFebruary 28, 2021 , compared to the same period in the prior year, was driven by our new nurse staffing client signed inAugust 2020 and by$0.4 million of higher gross billings from our quick service restaurant food business.
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. For the three and six months ended
Cost of revenue, which mainly includes the costs of employer-side taxes and workers' compensation insurance coverage, was$2.1 million for the three months endedFebruary 28, 2021 , compared to approximately$1.9 million for the comparable period of Fiscal 2020, an increase of 6.4% or$0.1 million . Our cost of revenues for the six months endedFebruary 28, 2021 , increased by$0.1 million , or 2.4%, to$4.1 million compared to$4.0 million for the six months endedFebruary 29, 2020 . This marginal increase was due to offsetting increases in taxes and decreases in workers' compensation expense and overall higher gross billings for the period. New business from healthcare staffing provided more favorable margins on profitability which caused our cost of revenue to grow at a smaller rate than total revenues. Gross profit increased by$0.3 million , or 390.5%, to$0.4 million , or 15.0% of revenues for the quarter endedFebruary 28, 2021 , from$0.1 million , or 3.7% of revenues, for the same quarter of Fiscal 2020. The gross profit increase was driven by our growing healthcare staffing business which generates more profitable margin on a per WSE basis. Gross profit increased 177.2% to$0.9 million for the six months endedFebruary 28, 2021 from$0.3 million for the six months endedFebruary 29, 2020 . The gross profit, as a percentage of revenues, increased from 7.4% for the six months endedFebruary 29, 2020 to 17.8% for the six months endedFebruary 28, 2021 . Increase in gross profit for the six months endedFebruary 28, 2021 , compared to the same period in the prior year, was driven by our new nurse staffing client signed inAugust 2020 , higher overall gross billings from our quick service restaurant business, along with a reduction in worker's compensation loss accruals. Operating expenses increased by 47.4%, or$2.0 million , to$6.3 million for the quarter endedFebruary 28, 2021 , from$4.3 million for the same period of Fiscal 2020. Operating expenses for the six months endedFebruary 28, 2021 , increased by$3.8 million , or 43.5%, to$12.5 million compared to$8.7 million for the six months endedFebruary 29, 2020 . The increase for both periods was driven by investments in our growth initiatives consisting of increased headcount and outsourced development HRIS spending, marketing spending and rent for our new principal executive offices inMiami , as well as non-recurring relocation costs to moveCalifornia employees to our newMiami facility and marketing related expenses. The following table presents certain information related to our operating expenses (unaudited): For the Three Months Ended For the Six Months Ended February 28, February 29, February 28, February 29, 2021 2020 2021 2020 Operating expenses: Salaries, wages, and payroll taxes$ 2,592,000 $ 1,802,000 $ 4,785,000 $ 3,557,000 Stock-based compensation - general and admin 423,000 619,000 919,000 745,000 Commissions 49,000 46,000 87,000 118,000 Professional fees 1,006,000 997,000 1,713,000 1,837,000 Software development 786,000 350,000 1,663,000 703,000
Depreciation and amortization 86,000 77,000 148,000 156,000 General and administrative 1,380,000 403,000 3,139,000 1,564,000 Total operating expenses$ 6,322,000 $ 4,294,000
$ 12,454,000 $ 8,680,000
The components of operating expenses changed from the same period of Fiscal 2020 as follows:
Salaries, wages and payroll taxes, which consist of gross salaries, benefits, and payroll taxes associated with our executive management team and corporate employees. For the three months endedFebruary 28, 2021 , salaries increased by$0.8 million , or 43.8%, to$2.6 million from$1.8 million for the comparable period of Fiscal 2020. For the six months endedFebruary 28, 2021 , salaries increased by$1.2 million , or 34.5%, to$4.8 million compared to$3.6 million for the six months endedFebruary 29, 2020 . The increase for both periods is due to hiring additional employees in our newMiami principal executive offices for our growth initiative efforts and for additions to our software development team located in ourIrvine, CA offices. 36
Stock-based compensation, which consists of compensation expense related to our employee stock option plan. Stock-based compensation decreased$0.2 million , or 31.7%, to$0.4 million from$0.6 million for the quarter endedFebruary 28, 2021 . The decrease was driven by the one-time vesting of all options granted to employees transferred under the Vensure Asset Sale in the prior fiscal quarter. For the six months endedFebruary 28, 2021 , stock-based compensation increased by$0.2 million , or 23.4%, to$0.9 million from$0.7 million compared to the six months endedFebruary 29, 2020 . The increase was due to the issuance of additional stock options granted sinceJuly 1, 2020 , which are subject to shareholder approval, and which approval was obtained onMarch 31, 2021 . Commissionsconsist of commission payments made to third party brokers and inside sales personnel. Commissions increased to$49,000 from$46,000 for the comparable period of Fiscal 2020. Commissions are primarily associated with compensation to our sales force for sales as well as to our property and casualty agents. Commission expenses increased due to the increase in gross billings during the quarter. For the six months endedFebruary 28, 2021 , commissions expense decreased by$31,000 , or 26.3%, to$87,000 from$118,000 compared to the six months endedFebruary 29, 2020 . The decrease is due to a change in our sales compensation structure. Professional fees consist of legal fees, accounting and public company costs, board fees, and consulting fees. Professional fees for the quarter endedFebruary 28, 2021 , remained consistent at$1.0 million for the comparable period of Fiscal 2020. Professional fees for the six months endedFebruary 28, 2021 , decreased by$0.1 million , or 6.8%, to$1.7 million , from$1.8 million for the six months endedFebruary 29, 2020 . Such decrease can be attributed to a decrease in legal fees paid for litigation related activities in the current period. External software development consists of payments to third party contractors for licenses, software development, IT related spending for the development of our HRIS platform and mobile application. External software development increased by$0.4 million , or 124.6%, to$0.8 million from$0.4 million . For the six months endedFebruary 28, 2021 , external software development increased by$1.0 million , or 136.6%, to$1.7 million from$0.7 million for the six months endedFebruary 29, 2020 . The increase for both periods is due to an increase in contract development spending during the current periods in support of our growth initiatives within the Company, including efforts directed toShiftPixy Labs . General and Administrative expenses consist of office rent and related overhead, marketing, insurance, penalties, business taxes, travel and entertainment, depreciation and amortization and other general business expenses. General and administrative expenses for the quarter endedFebruary 28, 2021 increased by$1.0 million , or 205.2%, to$1.5 million from$0.5 million in the comparable period of Fiscal 2020. General and administrative expenses increased$1.6 million , or 91.1%, to$3.3 million for the six months endedFebruary 28, 2021 from$1.7 million for the six months endedFebruary 29, 2020 . The increase for both periods was driven by increased rent for our new principal executive offices inMiami , non-recurring relocation costs to moveCalifornia employees to our newMiami facility, and marketing expenses related to our growth initiatives throughShiftPixy Labs . Operating loss for the quarter endedFebruary 28, 2021 increased$1.7 million , or 41.2%, to$6.0 million from$4.2 million in the comparable period of Fiscal 2020. Operating loss for the six months endedFebruary 28, 2021 increased$3.2 million , or 38.4%, to$11.6 million compared to a loss of$8.4 million for the six months endedFebruary 29, 2020 . The operating loss for the three and six month periods endedFebruary 28, 2021 , was due to an increase in operating expenses of$2.0 million and$3.8 million , respectively. Other income (expense) for the quarter and six months endedFebruary 28, 2021 , was negligible. This item consisted of interest expense primarily from amortization of convertible note discount, which was offset by a gain in convertible note related derivative liabilities. The Company eliminated all such convertible notes in Fiscal 2020. Income/(loss) from discontinued operations was a$0.2 million loss for the quarter endedFebruary 28, 2021 , compared to a$1.4 million loss in the same period of Fiscal 2020. The Fiscal 2020 period included operations from former clients that we transferred toVensure pursuant to the Vensure Asset Sale. While these discontinued operations are not included in our Fiscal 2021 results, we still recorded estimates of workers' compensation liabilities during the quarter to cover WSEs who were transferred toVensure , which contributed to the loss. Loss from discontinued operations amounted to$1.5 million for the six months endedFebruary 28, 2021 , compared to$0.6 million in income for the six months endedFebruary 29, 2020 . Net income (loss) for the quarter endedFebruary 28, 2021 , was a net loss of$6.2 million , compared to net income of$9.6 million for the comparable period of Fiscal 2020, representing a decrease of$15.8 million or 164.3 %. The decrease in net income was due to$2.1 million of additional operating losses, a$0.4 million reduction in other expenses, and a net loss increase of$14.1 million resulting from the change in Gain/(Loss) from Discontinued Operations from a$13.9 million gain to a$0.2 million loss for the quarter endedFebruary 29, 2020 . Net income (loss) decreased to a net loss of$13.1 million from net income of$7.2 million for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. The change to net income is due to the one-time gain on asset sale of$15.7 million during the six months endedFebruary 29, 2020 .
37
Liquidity and Capital Resources
For a discussion of our liquidity and capital resources, see Note 4, Going Concern, to the Notes to the Condensed Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)" of this Quarterly Report.
Non-GAAP Financial Measures In addition to financial measures presented in accordance with GAAP, we monitor other non-GAAP measures that we use to manage our business, make planning decisions and allocate resources. These key financial measures provide an additional view of our operational performance over the long term and provide useful information that we use to maintain and grow our business. The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. They are not meant to be considered in isolation, superior to, or as a substitute for the directly comparable financial measures presented in accordance with GAAP. Gross billings, which 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, are a non-GAAP measurement that represents a key operating metric for management 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 client customers for any reported period. Our primary non-GAAP profitability metrics are gross profit, gross profit per WSE, and gross profit percentage of gross billings, as gross billings and the number of active WSEs represent the primary drivers of our business operations. Gross billings for the three months endedFebruary 28, 2021 , increased by$3.3 million , or 22.8%, to$17.9 million , (or$71.6 million on an annualized basis), compared to$14.6 million for the three months endedFebruary 29, 2020 , (or$58.2 million on an annualized basis). The gross payroll costs of our WSEs accounted for 86.5% and 86.2% of our gross billings for the three months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. Gross billings for the six months endedFebruary 28, 2021 , increased by$5.2 million , or 16.3%, to$37.6 million , (or$75.3 million on an annualized basis), compared to$32.3 million for the six months endedFebruary 29, 2020 , (or$64.6 million on an annualized basis). The gross payroll costs of our WSEs accounted for 86.9% and 86.8% of our gross billings for the three months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. Reconciliation of GAAP to Non-GAAP Measure: Gross Billings to Net Revenues Three Months Ended, Six Months Ended, February 28, February 29, February 28, February 29, 2021 2020 2021 2020 Gross Billings$ 17,868,000 $ 14,550,000 $ 37,634,000 $ 32,352,000
Less: Adjustment to gross billings 15,449,000 12,543,000
32,712,000 28,085,000 Revenues$ 2,419,000 $ 2,007,000 $ 4,922,000 $ 4,267,000 February 28, August 31, February 29, 2021 2020 2020 Active WSEs (unaudited) 3,000 3,200 3,100 In our financial reports for the three months endedFebruary 29, 2020 , we classified as discontinued operations all billed wages, revenues, and cost of revenues associated with those clients who terminated services with us prior toJanuary 1, 2020 , and therefore did not generate recurring revenue afterJanuary 1, 2020 , (including those clients transferred toVensure as part of the Vensure Asset Sale). In the financial reports included in this Quarterly Report, we have classified only those clients transferred toVensure as part of the Vensure Asset Sale as discontinued operations, and have reclassified the remaining non-transferred, terminated clients to continuing operations. 38 Our gross billings and revenues are both derived from gross payroll wages paid to WSEs. Gross wages is a key underlying metric that management uses to analyze business activities, as it is an important component of net revenues and gross margins. The table and analysis that follows illustrates the impact of the reclassification described above on gross wages: Quarter ended Quarter ended Quarter ended Quarter ended Client Wages (billed in $ millions) November February May August (Unaudited) (Unaudited) (Unaudited) (Unaudited) Fiscal Year 2021 Billed Client Wages - All Operations $ 17.3 $ 15.5 Less Discontinued Operations Billings (1) - - Billed Client Wages for Continuing Operations (2) 17.3 15.5 Less Terminated Client Wages (3) - - Adjusted Billed Client Wages, Continuing Operations (4) $ 17.3 $ 15.5 Fiscal Year 2020 Billed Client Wages - All Operations $ 88.2 $ 36.3 $ 12.4 $ 16.4 Less Discontinued Operations Billings (1) (74.2 ) (23.8 ) - - Billed Client Wages for Continuing Operations (2) 14.0 12.5 12.4 16.4 Less Terminated Client Wages (3) (1.4 ) -
- -
Adjusted Billed Client Wages,
Continuing Operations (4) $ 12.6 $ 12.5 $ 12.4 $ 16.4
Fiscal Year 2019Billed Client Wages - All Operations $ 60.3 $ 67.6 $ 77.4 $ 87.1 Less Discontinued Operations Billings (1) (43.8 ) (51.2 ) (62.8 ) (72.8 ) Billed Client Wages for Continuing Operations (2) 16.5 16.4 14.6 14.3 Less Terminated Client Wages (3) (11.4 ) (9.3 )
(4.3 ) (2.8 )
Adjusted Billed Client Wages,
Continuing Operations (4) $ 5.1 $ 7.1 $ 10.3 $ 11.5
(1) Discontinued Operations Billings represents billings associated with the
clients transferred to Vensure as part of the Vensure Asset Sale.
(2) Billed Client Wages for Continuing Operations represents the billed client
wages associated with the Fiscal 2019 and Fiscal 2020 revenues reported in
the financial statements included in our Form 10-K for Fiscal 2020, filed
with the
substantially all of the "Adjustment to Gross Billings" in the billings
reconciliation table above that reconciles gross billings to net revenues.
(3) Terminated Client Wages represents the billed wages associated with
clients that terminated services with the Company on or prior to
January 1, 2020 , but were not transferred to Vensure as part of theVensure Asset Sale. This group primarily consists of clients we identified
during calendar 2018 and 2019 as generating low profit margins, having
relatively high workers' compensation exposure, and/or not being
well-suited to take advantage of our HRIS platform. Billings from theseterminated clients were formerly classified under discontinued operations
billings.
(4) Adjusted Billed Client Wages from Continuing Operations represents client
billings for customers who were either active clients as of
2020, or were added as clients after
metric provides a useful indication of the volume, progression, and growth
in billings generated by our target client base during Fiscal 2019 and
2020, as well as the impact of the pandemic on our business. Our $2.2
million decrease in billings between February 29, 2020 , and May 31, 2020 ,
resulted from (i) a $3.9 million , or 27.3% decrease in billings to
existing customers during the quarter ended
million, or 4.2% of quarterly billings, from customers who discontinued
operations due to the pandemic), offset by (ii) an increase of
million, or 11.9% of billings during the quarter related to new customer
signings. Our
billings from existing customers, combined with
new customer signings during the quarter ended August 31, 2020 .
Material Commitments
In March 2021 , we entered into an agreement to purchase four customized mobile
kitchen units to support our ShiftPixy Labs growth initiative and made an
initial deposit of $0.3 million . We expect delivery of these mobile kitchens
during the early fourth quarter of Fiscal 2021.
We do not have any additional contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment and software necessary to conduct our operations on an as needed basis.
39
Contingencies
For a discussion of contingencies, see Note 9, Contingencies, to the Notes to the Condensed Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)" of the Quarterly Report.
New and Recently Adopted Accounting Standards
For a listing of our new and recently adopted accounting standards, see Note 2, Summary of Significant Accounting Policies, to the Notes to the Condensed Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)" of this Quarterly Report.
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