Item 7. Management’s Discussion and Analysis or Plan of Operation.
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 the SEC. 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.
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 our ShiftPixy 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 from Vensure 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 and New 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 in U.S. contingent labor through increasingly diverse service offerings. By helping Fortune 1000 companies rethink human
capital, ShiftPixy’s novel technology and proprietary sourcing tools are designed to disrupt not only traditional thinking about staffing, but also provide a cure to toxic employee turnover and thus provide labor cost certainty.
This new and compelling go-to-market strategy is prepared to leverage the recently expanded staffing platform on the ShiftPixy Human Resources Information System (“HRIS”) that offers clients an industry-leading digital and mobile technology to handle the duties and demands of human capital management at significant scale. An enhanced value proposition will offer clients automation, acceleration, liberation, and some indemnification, which we believe will drive growth and deliver value to stakeholders while also increasing our market share. Successful execution of this sales growth plan will leave ShiftPixy strategically positioned for secular growth in the $123 billion temporary and contract employment staffing market in the U.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 for ShiftPixy’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 the U.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.
ShiftPixy Labs
On July 29, 2020, we announced the launch of ShiftPixy 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 our Miami 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 throughout the 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 of ShiftPixy 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 with ShiftPixy’s technology stack, which includes order delivery and dispatch, we believe that the ghost kitchen solutions that emerge from ShiftPixy 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 for ShiftPixy 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 that ShiftPixy
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 in Miami 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 through ShiftPixy 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 of ShiftPixy’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 employee I-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 of I-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 that ShiftPixy 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 the ShiftPixy “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 the ShiftPixy 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.
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 to March 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 in March 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 by August 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 through August 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 ended August 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 | | | 1.1 | |
Total 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 | | | $ | 1.0 | | | $ | 1.6 | |
Total, HRIS platform and mobile application spending | | $ | 7.3 | | | $ | 9.4 | | | $ | 5.2 | | | $ | 4.9 | |
| | | | | | | | |
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 | | | $ | 17.0 | | | $ |
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 ended August 31, 2018 ("Fiscal 2018"), we capitalized $0.9 million and $2.8 million, respectively, of contract development spending into fixed assets.
Offices Update
In August 2020, we signed a lease to relocate our corporate headquarters to Miami, Florida, and largely completed the relocation for our administrative, marketing and East Coast sales and customer support staffs to Miami by the end of Calendar 2020. We currently maintain offices in California primarily for use by our research and development team and our West Coast sales and customer support, and plan to continue to maintain these offices for the foreseeable future.
Effective October 1, 2020, we entered into a non-cancelable 64-month lease for 23,500 square feet of light industrial space located in Miami, Florida, to house kitchen facilities, video production facilities, and certain marketing and technical functions, including those associated with ShiftPixy Labs. The lease contains escalation clauses relating to increases in real property taxes as well as certain maintenance costs.
Effective June 7, 2021, we entered into a sublease agreement with Verifone, Inc. to sublease premises consisting of approximately 8,000 square feet of office space located in Miami, Florida, that we are currently using primarily for our operations workforce. The lease has a term of three years expiring on May 31, 2024. The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the sublease.
Effective June 21, 2021, we entered into a 77 - month lease agreement, with an anticipated possession date of March 1, 2022, for premises consisting of approximately 13,418 square feet of office space located in Sunrise, 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.
Effective May 2, 2022, the Company entered into a non-cancelable 60-month operating lease commencing on July 1, 2022, for office space in Irvine, 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.
On August 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 in September 2021, and executed two Warrants Exercise Agreements ("The Agreements'). The Agreements generated aggregate proceeds of $5.9 million in January 2022 and $1.3 million in July 19, 2022. Furthermore, closed a $5 million private placement offering in September 2022, shortly after our fiscal year-end. As of August 31, 2022, and August 31, 2020, we had no convertible debt outstanding that carry anti-dilutive provisions, except as otherwise noted below.
September 2021 Private Placement
In September 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 each September 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 the September 2021 Common Warrants to purchase up to 75,235 shares of Common Stock, with each September 2021 Prefunded Warrant exercisable for one share of Common Stock at a price per share of $0.010. Each share of Common Stock and accompanying September 2021 Common Warrant were sold together at a combined offering price of $159.50 and each September 2021 Prefunded Warrant and accompanying September 2021 Common Warrant were sold together at a combined offering price of $159.49.
The September 2021 Prefunded Warrants are immediately exercisable, at a nominal exercise price of $0.010, and may be exercised at any time until all of the September 2021 Prefunded Warrants are exercised in full. The September 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 the September 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 the September 2021 Prefunded Warrants sold in the offering (the “September Placement Agent Warrants”). The September Placement Agent Warrants are exercisable for a period commencing on March 3, 2022 (six months after issuance) and expire four years from the effective date (which
occurred on May 3, 2022) of a registration statement for the resale of the underlying shares and have an initial exercise price per share of $175.45.
January 2022 Warrant Exercise Agreement
On May 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 on June 15, 2026. On January 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 such January 2022 Common Warrant being issued on the basis of two January 2022 Common Warrant shares for each share of the Existing Warrant that was exercised for cash. The January 2022 Common Warrant is exercisable commencing on July 28, 2022, terminates on July 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 the January 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 the January 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.
July 19, 2022 Warrant Exercise Agreement
On July 18, 2022, the Company entered into a warrant exercise agreement (the “Exercise Agreement”) with the holder of the September 2021 Warrants and January 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 its September 2021 Warrants (the “Investor Warrants”). In order to induce the Exercising Holder to exercise the Investor Warrants, the Exercise Agreement (i) amends the September 2021 Warrants and January 2022 Warrants to (a) reduce the exercise price per share of the September 2021 Warrants and January 2022 Warrants to $26.00, (b) extends the expiration date of the September 2021 Warrants to May 3, 2029, and (c) extends the expiration date of the January 2022 Warrants to July 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 the September 2021 Warrants and January 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. On July 25, 2022, the Company entered into an amendment with the holder of the Company’s warrants to purchase 348,408 shares of common stock, issued July 19, 2022. Pursuant to the amendment, the warrants were amended to be exercisable commencing January 19, 2023 (six months from the date of issuance) and will terminate January 19, 2030.
As a result of the warrant modification, which reduced the exercise price of the Existing Warrants, as well as the issuance of the July 2022 Common Warrants, the Company recorded approximately (i) $488,700 and $599,700 for the increased fair value of the September 2021 and January 2022 modified warrants, respectively; and (ii) $8,084,000 as the fair value of the July 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.
September 20, 2022 Private Placement Offering (subsequent to year-end)
On September 20, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with a large institutional investor (the “Purchaser”) pursuant to which the Company sold to the Purchaser an aggregate of 416,667 shares (the “Shares”) of its common stock together with warrants (the “Warrants”) to purchase up to 833,334 shares of common stock (collectively, the “Offering”). Each share of common stock and two accompanying Warrants were sold together at a combined offering price of $12.00. The Warrants are exercisable for a period of seven years commencing upon issuance at an exercise
price of $12.00, subject to adjustment. The Offering closed on September 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 on September 3, 2021, and (ii) 98,969 warrants issued on January 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 Vensure pursuant to the Vensure Asset Sale.
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 $0.2 million or 13.3% above Fiscal 2021.
•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
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 the Vensure sale and the $3.9 million ROU asset impairment for the two leases abandoned during the year.
Operating loss increased by $15.9 million or 58.1%, mainly driven by the increase in operating expenses as described above.
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 to Vensure 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 $29.8 million or $61.08 per share, to $59.7 million or $149.75 per share in Fiscal 2022, from $29.9 million or $88.67 per share in Fiscal 2021.
Results of Operations
Fiscal 2022 Compared to Fiscal 2021
The following table summarizes our consolidated results of operations:
| | | | | | | | | | | |
| For the year ended |
| August 31, 2022 | | August 31, 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) | | | $ | (29,876,000) | |
| | | |
Deemed dividend from change in fair value from warrants modification | (15,703,000) | | | — | |
Net loss attributable to common stockholders | $ | (59,698,000) | | | $ | (29,876,000) | |
| | | |
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) | | | $ | (88.67) | |
| | | |
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.
| | | | | | | | | | | |
| 2022 | | 2021 |
Net Revenues (in millions) | $ | 36.0 | | | $ | 23.4 | |
Increase (Decrease), year over year (in millions) | $ | 14.8 | | | $ | 14.8 | |
Percentage Increase (Decrease), year over year | 53.7 | % | | 171.0 | % |
| | | |
Cost of Revenues (in millions) | $ | (34.2) | | | $ | (23.1) | |
Increase (Decrease), year over year (in millions) | $ | (11.1) | | | $ | (15.4) | |
Percentage Increase (Decrease), year over year | 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.
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 and ShiftPixy 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 of August 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 the Vensure 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 of August 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,
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 to Vensure 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 in January 2022 reducing the exercise price from $2.425 to $1.20 and the second one in July 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 of August 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 of August 31, 2022.
Historically, our principal source of financing has come through the sale of our common stock and issuance of convertible notes. In September 2021, we raised approximately $12 million ($11.1 million net of costs) in connection with the sale of common stock and warrants, in January 2022, we entered into a warrant exercise agreement that raised approximately $5.9 million ($5.4 million net of costs), and in July 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 ended August 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
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 its ShiftPixy 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 to ShiftPixy in the future. The Company may also take equity stakes in various branded restaurants that it develops and operates with its partners through ShiftPixy 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, on September 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 on September 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;
•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 on October 29, 2018, although if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31. In the event that we cease to be an Emerging Growth Company as a result of a lapse of the five year period, but continue to be a Smaller Reporting Company, we would continue to be subject to similar exemptions available to Emerging Growth Companies until such time as we were no longer a Smaller Reporting Company.
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 | $ | 26,333 | | | $ | 26,372 | | |
| | | | |
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
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Balance Sheet Items Related To Workers’ Compensation
Under both the Everest and Sunz Programs, the Company utilized a third-party to estimate its loss development rate, which is based primarily upon the nature of WSE job responsibilities, the location of WSEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the assumptions resulting from changes in actual claims experience and other trends are incorporated into its workers’ compensation claims cost estimates.
As of August 31, 2022, the Company had no Deposit – workers’ compensation classified as a short-term or as a long-term asset related to any of these programs.
The Company’s estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while its estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on its consolidated balance sheets. As of August 31, 2022, the Company had short term accrued workers’ compensation costs of $0.6 million and long term accrued workers’ compensation costs of $1.2 million.
The Company retained workers’ compensation asset reserves and workers’ compensation related liabilities for former WSEs of clients transferred to Shiftable HR Acquisition, LLC, part of Vensure Employer Services, Inc. (“Vensure”), in connection with
the Vensure Asset Sale described in Note 3, Discontinued Operations, below. As of August 31, 2022, the retained workers’ compensation assets and liabilities are presented as a discontinued operation net asset or liability. As of August 31, 2022, the Company had $1.4 million of short term liabilities and $3.3 million of long term liabilities, with no short or long term assets.
Because the Company bears the financial responsibility for claims up to the level noted above, such claims, which are the primary component of its workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. In estimating ultimate loss rates, the Company utilizes historical loss experience, exposure data, and actuarial judgment, together with a range of inputs which are primarily based upon the WSE’s job responsibilities, their location, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into its workers’ compensation claims cost estimates. The estimated incurred claims are based upon: (i) the level of claims processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan.
The Company has had very limited and immaterial COVID-19 related claims between March 2020 through the date of this Quarterly Report, although there is a possibility of additional workers’ compensation claims being made by furloughed WSEs as a result of the employment downturn caused by the pandemic. On May 4, 2020, the State of California indicated that workers who become ill with COVID-19 would have a potential claim against workers’ compensation insurance for their illnesses. There is a possibility that additional workers’ compensation claims could be made by employees required to work by their employers during the COVID-19 pandemic, which could have a material impact on our workers’ compensation liability estimates. While the Company has not seen significant additional expenses as a result of any such potential claims to date, which would include claims for reporting periods after August 31, 2022, we continue to monitor closely all workers’ compensation claims made as the COVID-19 pandemic continues.
Debt Issuance Costs and Debt Discount
Debt issuance costs and debt discounts are being amortized over the lives of the related financings on a basis that approximates the effective interest method. Costs and discounts are presented as a reduction of the related debt in the accompanying consolidated balance sheets. Portions attributable to notes converted into equity are accelerated to interest expense upon conversion.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurement, requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practical to estimate fair value. ASC 820 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of August 31, 2022, and August 31, 2021, the carrying value of certain financial instruments (cash, accounts receivable and payable) approximated fair value due to the short-term nature of the instruments. Notes Receivable is valued at our estimate of expected collections value as described below and in Note 3, Discontinued Operations.
The Company measures fair value under a framework that utilizes a hierarchy prioritizing the inputs to relevant valuation techniques. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs used in measuring fair value are:
•Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
•Level 2: Inputs to the valuation methodology include:
◦Quoted prices for similar assets or liabilities in active markets;
◦Quoted prices for identical or similar assets or liabilities in inactive markets;
◦Inputs other than quoted prices that are observable for the asset or liability;
◦Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
◦If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
As of August 31, 2022, and August 31, 2021, the Company valued the Note Receivable as discussed in Note 3, Discontinued Operations, below.
Funds held in trust represent U.S. treasury bills that were purchased with funds raised through the initial public offering of IHC. The funds raised from SPACs are held in trust accounts that are restricted for use and may only be used for purposes of completing an IBC or redemption of the public shares of common stock of the SPACs as set forth in their respective trust agreements. The funds held in trust are included within Level 1 of the fair value hierarchy and included in Cash and marketable securities held in Trust Account in the accompanying Consolidated Balance Sheet.
The Company did not have other Level 1 or Level 2 assets or liabilities at August 31, 2022, or August 31, 2021. We recorded the fair value of the SPAC founder shares that the Company transferred to the underwriters using non-recurring Level 3 assumptions, including quoted asset prices for SPAC shares and warrants and estimates of the likelihood of the IPOs and IBCs of our sponsored SPACs being consummated. See also Note 5, Special Purpose Acquisition company (SPAC) and Note 6, Deferred Offering Costs – SPACS, below.
When the Company changes its valuation inputs for measuring financial assets and liabilities at fair value, either due to changes in current market conditions or other factors, it could be required to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the periods ended August 31, 2022, and August 31, 2021, there were no transfers of financial assets or financial liabilities between the hierarchy levels.
Advertising Costs
The Company expenses all advertising as incurred. The Company recorded expenses totaling $2.5 million and $2.6 million for Fiscal 2022 and Fiscal 2021, respectively.
Income Taxes
The Company accounts for income taxes pursuant to ASC 740, Income Taxes. Under ASC 740, deferred income taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The provision for income taxes represents the tax expense for the period, if any, and the change during the period in deferred tax assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. Under ASC 740, the impact of an uncertain tax position on the income tax return may only be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.
Stock-Based Compensation
As of August 31, 2022, and August 31, 2021, the Company had one stock-based compensation plan under which the Company may issue both share and stock option awards. The Company accounts for this plan under the recognition and measurement principles of ASC 718, Compensation- Stock Compensation, which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations at their fair values.
Share grants are valued at the closing market price on the date of issuance, which approximates fair value. For option grants, the grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. Option grants are typically issued with vesting depending on a term of service. For all employee stock options granted, the Company recognizes expense over the employee’s requisite service period (generally the vesting period of the equity grant).
The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. The expected volatility is based on the historical volatility of the Company’s common stock since its initial public offering. Any changes in these highly subjective assumptions could materially impact stock-based compensation expense.
Following the adoption of Accounting Standards Update (“ASU”) 2016-9, the Company elected to account for forfeitures as they occur. Any compensation cost previously recognized for an unvested award that is forfeited because of a failure to satisfy a service condition is reversed in the period of the forfeiture.
Earnings (Loss) Per Share
The Company utilizes FASB ASC 260, Earnings per Share. Basic earnings (loss) per share is computed by dividing earnings (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the reporting period. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common stock equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common stock equivalents include the dilutive effect of in-the-money share equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any common stock equivalents if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive common stock is considered anti-dilutive and thus is excluded from the calculation.
The number used for the weighted average number of shares of common stock outstanding for the earnings per share for the Fiscal 2022 and Fiscal 2021 was increased by 8,600,000 and 11,827,570, respectively. This increase reflects the inclusion of convertible preferred shares and common stock issuable upon full exercise of options to purchase a similar number of preferred shares and full conversion of those shares of preferred stock to shares of common stock.
Securities used in, or that are excluded from the calculation of weighted average dilutive common stock, because their inclusion would have been antidilutive, consist of the following:
| | | | | | | | | | | |
| For the Year Ended August 31, 2022 | | For the Year Ended August 31, 2021 |
Options | 11,753 | | | 17,761 | |
Warrants | 522,786 | | | 95,921 | |
Total potentially dilutive shares | 534,538 | | | 113,682 | |
Preferred Options are excluded from the potentially dilutive shares in the table above since they are included in the weighted average outstanding share count for the basic earnings per share calculation. For the table above, “Options” represent all options granted under the Company’s 2017 Stock Option/Stock Issuance Plan (the "Plan"), as described in Note 11, Stock Based Compensation, below. The number of options and warrants have been presented retroactively for the 1 for 100 reverse stock split, which was effective September 1, 2022, before issuance of the financial statements.
Recent Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This standard requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, each reporting entity should estimate an allowance for expected credit losses, which is intended to result in more timely recognition of losses. This model replaces multiple existing impairment models in current U.S. GAAP, which generally requires a loss to be incurred before it is recognized. The new standard applies to trade receivables arising from revenue transactions such as contract assets and accounts receivable. Under ASC 606, revenue is recognized when, among other criteria, it is probable that an entity will collect the consideration it is entitled to when goods or services are transferred to a customer. When trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. This guidance is effective for smaller reporting companies for annual periods beginning after December 15, 2022, including the interim periods in the year. Early adoption is permitted. The Company will adopt the guidance when it becomes effective.
In August 2022, the FASB issued ASU 2020-6, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. The update also requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. The new guidance is effective for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update can be adopted on either a fully retrospective or a modified retrospective basis. The Company does not expect the adoption of ASU 2020-6 to have any material impact on its consolidated financial statements.
Variable Interest Entity
The Company has been involved in the formation of various entities considered to be Variable Interest Entities (“VIEs”). The Company evaluates the consolidation of these entities as required pursuant to ASC Topic 810 relating to the consolidation of VIEs. These VIEs are primarily formed to sponsor the related SPACs.
The Company’s determination of whether it is the primary beneficiary of a VIE is based in part on an assessment of whether or not the Company and its related parties are exposed to the majority of the risks and rewards of the entity. Typically, the Company is entitled to substantially all or a portion of the economics of these VIEs. The Company is the primary beneficiary of the VIE entities.
During Fiscal 2022, our sponsored SPAC, IHC, completed its IPO, selling 11,500,000 units (the "IHC Units") pursuant to a registration statement and prospectus, as described below. The IPO closed on October 22, 2021, raising gross proceeds of $115 million. These proceeds were deposited in a trust account established for the benefit of the IHC public shareholders and, along with an additional $1.7 million deposited in trust by the Company reserved for interest payments for future possible redemptions by IHC stockholders, are included in Cash and marketable securities held in Trust Account in the accompanying Consolidated Balance Sheet at August 31, 2022. These proceeds are invested only in U.S. treasury securities in accordance with the governing documents of IHC.
Each IHC Unit had an offering price of $10.00 and consisted of one share of IHC common stock and one redeemable warrant. Each warrant entitles the holder thereof to purchase one share of IHC common stock at a price of $11.50 per share. The IHC public stockholders have a right to redeem all or a portion of their shares of IHC common stock upon the completion of its IBC, subject to certain limitations. Under the terms of the registration statement and prospectus, IHC is required to consummate its IBC within 12 months of the completion of the IPO. If IHC is unable to meet this deadline, IHC could request an extension. If no extension is granted, then IHC will redeem 100% of the public shares of common stock outstanding for cash, subject to applicable law and certain conditions.
In connection with the IPO, we purchased, through investments, 4,639,102 private placement warrants ("Placement Warrants") at a price of $1.00 per warrant, for an aggregate purchase price of $4,639,102, and we currently own 2,110,000 Founder Shares of IHC common stock, representing approximately 15% of the issued and outstanding common stock of IHC. Before the closing of the IPO, the Sponsor transferred 15,000 Founder Shares to IHC's independent directors, reducing its shareholdings from 2,125,000 to 2,110,000. Each Placement Warrant is identical to the warrants sold in the IPO, except as described in the IPO registration statement and prospectus. Following the completion of the IHC IPO, we determined that IHC is a Variable Interest Entity ("VIE") in which we have a variable interest because IHC does not have enough equity at risk to finance its activities without additional subordinated financial support. We have also determined that IHC's public stockholders do not have substantive rights, and their equity interest constitutes temporary equity, outside of permanent equity, in accordance with ASC 480-10-S99-3A. As such, we have concluded that we are currently the primary beneficiary of IHC as a VIE, as we have the right to receive benefits or the obligation to absorb losses of the entity, as well as the power to direct a majority of the activities that significantly impact IHC's economic performance. Since we are the primary beneficiary, IHC is consolidated into our Consolidated Financial Statements.
Shares Subject to Possible Redemption
The Company accounts for its common stock holdings in its sponsored SPACs (which are consolidated in our Consolidated Financial Statements), that are subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Shares of common stock subject to mandatory redemption are classified as a liability instrument and are measured at fair value. Conditionally redeemable shares of common stock (including shares of common stock that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, shares of
common stock are classified as shareholders’ equity. Each sponsored SPAC's shares of common stock feature certain redemption rights that are considered to be outside of the SPAC's control and subject to occurrence of uncertain future events. Accordingly, the Company classified the shares of common stock subject to possible redemption as temporary equity, outside of the shareholders’ equity section of the Company’s Consolidated Balance Sheet. Upon the November 9, 2022, filing of the Certificate of Correction with the Secretary of State of Delaware, effectively withdrawing the previously filed Extension Amendment and the November 14, 2022, filing of the Certificate of Dissolution, as described in Note 17, Subsequent Events, the Company reclassified these shares of common stock subject to possible redemption as a current liability of the Company's Consolidated Balance Sheet.
The Company recognizes changes in redemption value of these shares immediately as they occur and adjusts the carrying value of redeemable shares of common stock to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of the redeemable common stock are affected by charges against additional paid in capital and accumulated deficit. As of August 31, 2022, the carrying amount of the sponsored SPAC shares of IHC common stock subject to redemption was recorded at their redemption value of $117.0 million. The remeasurement of the redemption value of the redeemable shares of common stock is recorded in equity. The remeasurement in equity comprised of offering cost incurred in connection with the sale of public shares of the SPACs was $13 million, consisting of approximately $9.5 million of offering costs related to the Founder Shares transferred to the SPACs’ underwriter representative as described in Note 6, Deferred Offering Costs, and $3.5 million in other offering costs related to the IPO paid at closing in cash. The Company accounts for the warrants as equity-classified.
Note 3 – Discontinued Operations
On January 3, 2020, the Company executed an asset purchase agreement assigning client contracts comprising approximately 88% of its quarterly revenue through the date of the transaction, including 100% of its existing professional employer organization (“PEO”) business effective as of December 31, 2019, and transferring $1.5 million of working capital assets, including cash balances and certain operating assets associated with the assigned client contracts included in the agreement, to a wholly owned subsidiary of Vensure (the “Vensure Asset Sale”). Gross proceeds from the Vensure Asset Sale were $19.2 million, of which $9.7 million was received at closing and $9.5 million was scheduled to be paid out in equal monthly payments over the four years following the closing of the transaction (the “Note Receivable”), subject to adjustments for working capital and customer retention, (as measured by a gross wage guarantee included in the governing agreement), over the twelve month period following the Vensure Asset Sale.
For Fiscal 2022 and Fiscal 2021, the Company recorded the Note Receivable based on the estimate of expected collections based on additional information obtained through discussions with Vensure and evaluation of our records. On March 12, 2021, the Company received correspondence from Vensure proposing approximately $10.7 million of working capital adjustments under the terms of the Vensure Asset Sale agreement which, if accepted, would have had the impact of eliminating any sums owed to the Company under the Note Receivable. As indicated in the reconciliation table below, the Company has recorded $2.6 million of working capital adjustments, subject to final review and acceptance, and has provided for an additional reserve of $2.9 million for potential claims. By letter dated April 6, 2021, the Company disputed Vensure’s proposed adjustments, and maintains that the amount Vensure owes the Company pursuant to the Note Receivable is as much as $9.5 million. The Company assessed the collectibility of this note during its third quarter reporting of Fiscal 2022and determined that it was probable that all contractually required payments will not be collected and recorded a reserve on collectibility of approximately $4.0 million. The disputes between the Company and Vensure regarding working capital adjustments under the Vensure Asset Sale agreement are currently the subject of litigation pending in the Delaware Chancery Court, as discussed at Note 16, Contingencies, Vensure Litigation, below.
The following is a reconciliation of the gross proceeds to the net Note Receivable from the Vensure Asset Sale as presented on the Company’s consolidated balance sheet for Fiscal 2022.
| | | | | |
Gross proceeds | $ | 19,166,000 | |
Cash received at closing – asset sale | (9,500,000) | |
Cash received at closing – working capital | (166,000) | |
Gross note receivable | $ | 9,500,000 | |
Less: Transaction reconciliation – estimated working capital adjustment | (2,604,000) | |
Adjusted note receivable | 6,896,000 | |
Less: Reserve for estimated potential claims | (2,892,000) | |
Less: Reserve on potential collectibility | (4,004,000) | |
Long-term note receivable | $ | — | |
The Note Receivable was recorded as a long term note receivable as of August 31, 2021. The estimates of the working capital and gross billings adjustments would not result in any cash payments due to the Company as of Fiscal 2022 or Fiscal 2021.
The Vensure Asset Sale generated a gain of $15.6 million for Fiscal 2021. The Company expected a minimal tax impact from the Vensure Asset Sale as it utilized its net operating losses accumulated since inception to offset the gain resulting from discontinued operations tax provision with a corresponding offset to the valuation allowance.
The Vensure Asset Sale met the criteria of discontinued operations set forth in ASC 205 and as such the Company has reclassified its discontinued operations for all periods presented and has excluded the results of its discontinued operations from continuing operations for all periods presented.
The terms of the Vensure Asset Sale call for adjustments to the Note Receivable either for: (i) working capital adjustments or (ii) in the event that the gross wages of the business transferred is less than the required amount.
(i) Working capital adjustments: Through August 31, 2021, the Company has identified $2.6 million of likely working capital adjustments, including $0.1 million related to lower net assets transferred at closing, and $2.5 million of cash remitted to the Company’s bank accounts, net of cash remitted to Vensure’s bank accounts. Under the terms of the Vensure Asset Sale, a reconciliation of the working capital was to have been completed by April 15, 2020. Due to operational difficulties and quarantined staff caused by the outbreak of COVID-19, Vensure requested a postponement of the working capital reconciliation that was due in Fiscal 2020. Although Vensure provided the Company with its working capital reconciliation on March 12, 2021, it failed to provide adequate documentation to support its calculations. Accordingly, the working capital adjustment recorded as of August 31, 2022, represents the Company’s estimate of the reconciliation adjustment by using Vensure’s claims and the limited supporting information Vensure provided as a starting point, and then making adjustments for amounts in dispute based upon our internal records and best estimates. There is no assurance that the working capital change identified as of August 31, 2022, represents the final working capital adjustment.
(ii) Gross billings adjustment: Under the terms of the Vensure Asset Sale, the proceeds of the transaction are reduced if the actual gross wages of customers transferred for Calendar 2020 are less than 90% of those customers’ Calendar 2019 gross wages. The Company has prepared an estimate of the Calendar 2020 gross wages based on a combination of factors including reports of actual transferred client billings in early Calendar 2020, actual gross wages of continuing customers of the Company, publicly available unemployment reports for the Southern California markets and the relevant COVID-19 impacts on employment levels, and other information. Based on the information available, the Company estimated that it would receive additional consideration below the required threshold and reduced the contingent consideration by $1.4 million. Vensure has not identified any such adjustments to date. Based on the information available, the Company reclassified the previously recorded gross wages claim to a general potential claims reserve during Fiscal 2021. No additional adjustment was made during Fiscal 2022.
The carrying amounts of the classes of assets and liabilities from the Vensure Asset Sale included in discontinued operations are as follows:
| | | | | | | | | | | |
| August 31, 2022 | | August 31, 2021 |
Deposits – workers’ compensation | $ | — | | | $ | 356,000 | |
Total current assets | — | | | 356,000 | |
Deposits – workers’ compensation | — | | | 883,000 | |
Total assets | $ | — | | | $ | 1,239,000 | |
| | | |
Accrued workers’ compensation cost | $ | 1,362,000 | | | $ | 1,516,000 | |
Total current liabilities | 1,362,000 | | | 1,516,000 | |
Accrued workers’ compensation cost | 3,269,000 | | | 5,411,000 | |
Total liabilities | 4,631,000 | | | 6,927,000 | |
| | | |
Net liability | $ | (4,631,000) | | | $ | (5,688,000) | |
Reported results for the discontinued operations by period were as follows:
| | | | | | | | | | | |
| For the Year Ended |
| August 31, 2022 | | August 31, 2021 |
Revenues | $ | — | | | $ | — | |
Cost of revenue | 590,000 | | | 2,509,000 | |
Gross profit | (590,000) | | | (2,509,000) | |
| | | |
Operating expenses: | | | |
Salaries, wages and payroll taxes | — | | | — | |
Commissions | — | | | — | |
Total operating expenses | — | | | — | |
| | | |
(Loss) income from discontinued operations | $ | (590,000) | | | $ | (2,509,000) | |
During Fiscal 2022, the Company recorded net operating loss from discontinued operations totaling $0.6 million, that were fully reserved for income tax. During Fiscal 2021, the Company recorded net operating loss from discontinued operations totaling $8,632,000 that were fully reserved for income tax. The components of income tax expense for discontinued operations are as follows:
| | | | | | | | | | | |
| For the Year Ended August 31, |
| 2022 | | 2021 |
Provision for income tax benefits | | | |
Federal tax benefits | $ | (114,000) | | | $ | (500,000) | |
State tax benefits | (45,000) | | | (129,000) | |
Total tax benefits | (159,000) | | | (629,000) | |
Valuation allowance on loss carryforwards | 159,000 | | | 629,000 | |
Provision for income tax expense from discontinued operations | $ | — | | | $ | — | |
Note 4: Going Concern
The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. As of August 31, 2022, the Company had cash of $0.6 million and a working capital deficit of $31.2 million. See Note 9, Workers’ Compensation; Note 10, Accrued Payroll and Related Liabilities; and Note 15, Commitments. 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 of August 31, 2022. As of August 31, 2022, the Company is delinquent with respect to remitting payroll tax payments to the IRS. See Note 10: Accrued Payroll and Related Liabilities. The Company has been in communication with the IRS regarding amounts owing in relation to credits due. In addition, some clients have filed suits against the Company, demanding that the Company take action to seek additional ERTC tax credits for the subject periods. Until the matter is concluded and the taxes are paid, the IRS could, subject to its standard processes and the Company’s rights to respond, implement collection actions, including such actions as levying against Company bank accounts, to recover the amounts that it calculates to be due and owing.
Historically, our principal source of financing has come through the sale of our common stock and issuance of convertible notes. In September 2021, we raised approximately $12 million ($11.1 million net of costs) in connection with the sale of common stock and warrants; in January 2022, we entered into a warrant exercise agreement that raised approximately $5.9 million ($5.4 million net of costs), and in July 2022, we entered into a warrant exercise agreement that raised approximately $1.3 million ($1.2 million net of costs). See Note 11, Stockholders' Equity (Deficit).
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 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 its ShiftPixy Labs growth initiative to generate cash flow once launched, by functioning as an incubator of food service and restaurant concepts through collaboration and partnerships with local innovative chefs. If successful, the Company believes that this initiative will produce businesses that provide recurring revenue through direct sales, as well as through utilization of the ShiftPixy Ecosystem, HRIS platform, and other human capital services that the Company provides. To the extent that this business model is successful and can be replicated in other locations, the Company believes that it has the potential to contribute significant revenue to ShiftPixy in the future. The Company may also take equity stakes in various branded restaurants that it develops and operates with its partners through ShiftPixy Labs. Such ownership interests will be held to the extent that it is consistent with the Company’s continued existence as an operating company, and to the extent that the Company believes such ownership interests have the potential to create value for its shareholders.
The Company expects to engage in additional sales of its securities during Fiscal 2023, either through registered public offerings or private placements, the proceeds of which the Company intends to use to fund its 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 alleviate substantial doubt about its ability to continue as a going concern and to fund its operations for at least one year from the date these financials are available (especially when considering the absence of any funded debt outstanding on its balance sheet). If these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months, it may need to curtail certain aspects of its operations or expansion activities, consider the sale of additional assets, or consider other means of financing. The Company can give no assurance that it will be successful in implementing its business plan and obtaining financing on advantageous terms, or that any such additional financing will be available. If the Company is not successful on obtaining the necessary financing, we do not currently have the cash resources to meet our operating commitments for the next twelve months. These consolidated financial statements do not include any adjustments for this uncertainty.
Note 5: Special Purpose Acquisition Company ("SPAC") Sponsorship
On April 29, 2021, we announced our sponsorship, through our wholly-owned subsidiary, ShiftPixy Investments, Inc. ("Investments"), of four SPACs. Each SPAC was seeking to raise approximately $150 million in capital investment, through an IPO, to acquire companies in the healthcare and technology segments of the staffing industry, as well as one or more insurance entities. On March 18, 2022, the IPO registration statements related to the three other SPACs we had sponsored, Vital Human Capital, Inc. ("Vital"), TechStackery, Inc. ("TechStackery"), and Firemark Global Capital, Inc. ("Firemark"), were withdrawn. With the withdrawal of these IPO registrations, the Company recorded approximately $38.0 million of deferred costs against Non-controlling interest.
The registration statement and prospectus covering the IPO of IHC was declared effective by the SEC on October 19, 2021, and IHC Units, consisting of one share of common stock and an accompanying warrant to purchase one share of IHC common stock, began trading on the New York Stock Exchange (“NYSE”) on October 20, 2021. The IHC IPO closed on October 22, 2021, raising gross proceeds for IHC of $115 million. In connection with the IHC IPO, we purchased, through our wholly-owned subsidiary, 4,639,102 placement warrants at a price of $1.00 per warrant, for an aggregate purchase price of $4,639,102.
Following the closing of the IPO, the sum of $116,725,000 was placed in a trust account (the “Trust Account”), and was invested in U.S. government securities within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the "ICA"), with a maturity of 185 days or less, or in any open-ended investment company that holds itself out as a money market fund investing solely in U.S. Treasuries and meeting certain conditions under Rule 2a-7 of the ICA, as determined by the Company, until the earlier of: (i) the completion of the IBC and (ii) the distribution of the funds in the Trust Account to the Company’s shareholders, as described below. The $116,725,000 consisted of the $115,000,000 of gross proceeds from the sale of the IHC Units in the IPO and $1,725,000 funded by the Company, as the corporate parent of the Sponsor, representing guaranteed interest for future redemptions and calculated as one year's interest at 1.5%. With the completion of the IPO, the Company recorded approximately $9.5 million of deferred costs in APIC, and $0.3 million of offering costs paid on behalf of IHC. During Fiscal 2022, IHC incurred approximately $3.5 million in offering costs. No other offering costs have been incurred during the period for the withdrawn SPACs. The Trust Account generated interest and dividend income for the Fiscal 2022 of approximately $0.02 million. After completion of its IPO, IHC sought to acquire companies in the light industrial segment of the staffing industry.
Upon the completion of IHC's IPO, through our wholly-owned subsidiary, we owned approximately 15% of its issued and outstanding stock. Furthermore, we anticipated that IHC would operate as a separately managed, publicly traded entity following the completion of its IBCs. The operations of IHC have been consolidated in the accompanying financial statements for the reasons set forth above in Note 2, Summary of Significant Accounting Policies.
On October 14, 2022, the stockholders of IHC, approved the proposed action to file an amended and restated certificate of incorporation to extend the date by which the Company has to consummate a Business Combination from October 22, 2022, to April 22, 2023, or a such earlier date as determined by the board of directors. The Company accordingly filed the Amendment with the Secretary of State of Delaware. In connection with the meeting, however, shareholders holding 11,251,347 Public Shares exercised their right to redeem their shares for a pro rata portion of the funds in the Trust Account. leaving 248,653 of the Company’s remaining Public Shares outstanding and the Trust Account substantially below the $5,000,001 minimum net tangible asset amount required by IHC's Amended and Restated Certificate of Incorporation to be available upon consummation of such Business Combination. IHC's efforts to secure the decisions of some shareholders to reverse their redemptions were unsuccessful, and IHC accordingly declined to fund the extension, cancelled the Amendment as filed with the Secretary of State of Delaware, and proceeded to cease operations, dissolve and unwind. The board of directors of IHC accordingly adopted resolutions to liquidate, dissolve and unwind the entity. See Note 17, Subsequent Events. Since IHC was dissolved on November 14, 2022, and since the Trust released all the redemption funds to shareholders on December 2, 2022, effectively liquidating the Trust, we will evaluate the impact including de-consolidation of its operations during our first quarterly reporting for our Fiscal 2023.
Note 6: Deferred Offering Costs - SPACs
During Fiscal 2021, the Company incurred professional fees related to the filing of registration statements for the IPOs of four SPACs. The Company also transferred certain Founder Shares of those SPACs to a third party which created a non-controlling interest in those entities. These Founder Shares of common stock were transferred to the SPACs’ underwriter representative (the “Representative”) at below fair market value, resulting in compensation and therefore deferred offering costs for the SPACs, and the creation of a minority interest. The non-controlling interest is recorded as a minority interest on the Balance Sheet and the Statement of Equity.
As of August 31, 2021, Deferred offering costs - SPACs totaled $48,261,000, consisting of $789,000 of legal and accounting fees related to the SPACs’ IPOs and $47,472,000 related to the non-controlling interest in consolidated subsidiaries.
The non-controlling interest – deferred offering costs represents the estimated value of the portion of our Founder Shares in each of the following SPACs that we received as a result of our sponsorship, and which we transferred to the Representative on April 22, 2021, at a price below the fair market value of the shares, as follows: (i) 2,000,000 shares of IHC common stock; (ii) 2,000,000 shares of TechStackery common stock; (iii) 2,000,000 shares of Vital common stock; and (iv) 4,000,000 shares of Firemark common stock. We estimate the total value of the 10,000,000 shares transferred, which represents deferred compensation to the Representative, to be $47,472,000, or $4.7472 per share. We arrived at this valuation by reference to similar SPAC IPO transactions, as set forth below:
1.Consistent with most SPAC IPOs, the market price of units (consisting of some combination of common stock and warrants) sold to the public in a SPAC IPO is $10 per unit.
2.We have valued the warrant portion of each Unit at $0.75. Deducting this value from the Unit yields a value of $9.25 per share of common stock at the time of the IPO, which we have applied to the value of each of the Founder Shares that we issued to the Representative.
3.We have applied a further discount of 48.8%, which is a blended discount designed to reflect the following contingencies and uncertainties: (a) 20% probability that the SPAC IPOs are never consummated; (b) 20% probability that none of our sponsored SPACs successfully complete their IBC; and (c) 21% additional discounts to account for future sponsor and Representative concessions, as well as the possibility of decrease in the value of the common stock of each SPAC.
One of the Company's sponsored SPACs, IHC, completed its IPO on October 22, 2021, resulting in the recognition of approximately $13 million of offering costs, including $9.8 million that had been deferred as of August 31, 2021 in APIC. No offering costs were incurred for TechStackery, Vital, or Firemark during the quarter ended May 31, 2022, as these company's registration statements were withdrawn.
As discussed in Note 5, Special Purpose Acquisition Company ("SPAC") Sponsorship, the registration statements on Form S-1 previously filed with the SEC relating to three of its Sponsored SPACs — Vital, TechStackery, and Firemark have been withdrawn. The abandonment of these SPAC IPOs resulted in our recognition of approximately $38.5 million of deferred offering costs against $38 million in non-controlling interest and $0.5 million in the other expenses in our Consolidated Statement of Operations.
Note 7: Accounts Receivable
Accounts receivable represent outstanding gross billings to clients, and are reported net of allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of specific accounts and by making a general provision, based on its past experiences, for other potentially uncollectible amounts. The provision for doubtful accounts during Fiscal 2022 and Fiscal 2021 was not material. Write-offs for Fiscal 2022 and Fiscal 2021 were $0 and $45,000, respectively.
The Company makes an accrual at the end of each accounting period for the obligations associated with the earned but unpaid wages of its WSEs and for the accrued gross billings associated with such wages. These accruals are included in unbilled accounts receivable. The Company generally requires clients to pay invoices for service fees no later than 1 day prior to the applicable payroll date. As such, the Company generally does not require collateral.
Note 8: Fixed Assets
Fixed assets consisted of the following at August 31, 2022, and August 31, 2021:
| | | | | | | | | | | |
| August 31, 2022 | | August 31, 2021 |
Equipment | 2,700,000 | | | 2,386,000 | |
Furniture & fixtures | 614,000 | | | 599,000 | |
Leasehold improvements | 710,000 | | | 545,000 | |
| 4,024,000 | | | 3,530,000 | |
Accumulated depreciation & amortization | (1,255,000) | | | (746,000) | |
Fixed assets, net | $ | 2,769,000 | | | $ | 2,784,000 | |
Depreciation and amortization expense for Fiscal 2022 and Fiscal 2021 was $509,000 and $357,000, respectively.
Software consists primarily of customized software purchased from third-party providers, which is incorporated into the Company’s HRIS platform and related mobile application.
The Company has evaluated certain development costs of its software solution in accordance with ASC Topic 350-40, Internal Use Software, which outlines the stages of computer software development and specifies when capitalization of costs is required. Projects that are determined to be in the development stage are capitalized and amortized over their useful lives of five years. Projects that are determined to be within the preliminary stage are expensed as incurred. For Fiscal 2022 and Fiscal 2021, no internally developed software was capitalized.
Note 9: Workers’ Compensation
The Company had three workers’ compensation programs in effect at various points during Fiscal 2022 and Fiscal 2021. The Everest program covered corporate employees and WSEs from July 1, 2017 through June 30, 2018 and the SUNZ program covered corporate employees and WSEs from July 1, 2018 through February 28, 2021.
Effective March 1, 2021, the Company migrated its clients to a guaranteed cost program, pursuant to which the Company’s financial responsibility is limited to the cost of the workers’ compensation premium. The Company funds the workers’ compensation premium based on standard premium rates on a monthly basis and based on the gross payroll applicable to
workers covered by the policy. Any final adjustments to the premiums are based on the final audited exposure multiplied by the applicable rates, classifications, experience modifications and any other associated rating criteria.
The following table summarizes the workers’ compensation deposit from continuing operations for Fiscal 2022 and Fiscal 2021:
| | | | | | | | | | | | | | | | | |
| Everest Program | | SUNZ Program | | Total |
Workers’ Comp Deposit at August 31, 2020 | $ | — | | | 1,029,000 | | | $ | 1,029,000 | |
Premiums paid | — | | | — | | | — | |
Paid in deposits | — | | | 446,000 | | | 446,000 | |
Claim losses | — | | | (934,000) | | | (934,000) | |
Deposit refund | — | | | — | | | — | |
Workers’ Comp Deposit at August 31, 2021 | $ | — | | | 541,000 | | | $ | 541,000 | |
Paid in deposits | — | | | — | | | — | |
Claim losses | — | | | (541,000) | | | (541,000) | |
Workers’ Comp Deposit at August 31, 2022 | — | | | — | | | — | |
Less Current Amount | — | | | — | | | — | |
Long Term Balance at August 31, 2022 | $ | — | | | — | | | $ | — | |
The following table summarizes the workers’ compensation deposit from discontinued operations for Fiscal 2022 and Fiscal 2021:
| | | | | | | | | | | | | | | | | |
| Everest Program | | SUNZ Program | | Total |
Workers’ Comp Deposit at August 31, 2020 | $ | — | | | 3,611,000 | | | $ | 3,611,000 | |
Premiums paid | — | | | — | | | — | |
Paid in deposits | — | | | 1,062,000 | | | 1,062,000 | |
Claim losses | — | | | (3,434,000) | | | (3,434,000) | |
Deposit refund | — | | | — | | | — | |
Workers’ Comp Deposit at August 31, 2021 | $ | — | | | 1,239,000 | | | $ | 1,239,000 | |
Paid in deposits | — | | | — | | | — | |
Claim losses | — | | | (1,239,000) | | | (1,239,000) | |
Workers’ Comp Deposit at August 31, 2022 | — | | | — | | | — | |
Less Current Amount | — | | | — | | | — | |
Long Term Balance at August 31, 2022 | $ | — | | | — | | | $ | — | |
The following table summarizes the accrued workers’ compensation liability from continuing operations for Fiscal 2022 and Fiscal 2021:
| | | | | | | | | | | | | | | | | |
| Everest Program | | SUNZ Program | | Total |
Workers’ Comp Liability at August 31, 2020 | $ | 204,000 | | | 1,541,000 | | | $ | 1,745,000 | |
Claim loss development | 50,000 | | | 1,273,000 | | | 1,323,000 | |
Paid in losses | — | | | (760,000) | | | (760,000) | |
Workers’ Comp Liability at August 31, 2021 | $ | 254,000 | | | 2,054,000 | | | $ | 2,308,000 | |
Claim loss development | 101,000 | | | (130,000) | | | (29,000) | |
Paid in losses | — | | | (541,000) | | | (541,000) | |
Workers’ Comp Liability at August 31, 2022 | 355,000 | | | 1,383,000 | | | 1,738,000 | |
Less Current Amount | (135,000) | | | (376,000) | | | (511,000) | |
Long Term Balance at August 31, 2022 | $ | 220,000 | | | 1,007,000 | | | $ | 1,227,000 | |
The following table summarizes the accrued workers’ compensation liability from discontinued operations for Fiscal 2022 and Fiscal 2021:
| | | | | | | | | | | | | | | | | |
| Everest Program | | SUNZ Program | | Total |
Workers’ Comp Liability at August 31, 2020 | $ | 717,000 | | | 5,405,000 | | | $ | 6,122,000 | |
Claim loss development | 103,000 | | | 2,639,000 | | | 2,742,000 | |
Paid in losses | — | | | (3,583,000) | | | (3,583,000) | |
Workers’ Comp Liability at August 31, 2021 | $ | 820,000 | | | 4,461,000 | | | $ | 5,281,000 | |
Claim loss development | 130,000 | | | 459,000 | | | 589,000 | |
Paid in losses | — | | | (1,239,000) | | | (1,239,000) | |
Workers’ Comp Liability at August 31, 2022 | 950,000 | | | 3,681,000 | | | 4,631,000 | |
Less Current Amount | (361,000) | | | (1,001,000) | | | (1,362,000) | |
Long Term Balance at August 31, 2022 | $ | 589,000 | | | 2,680,000 | | | $ | 3,269,000 | |
The Company is currently engaged in litigation regarding a demand for additional premium payments from Everest and additional claims loss funds from Sunz, which we believe to be without merit, as discussed at Note 16, Contingencies, Everest and Sunz Litigation, below.
Note 10: Accrued Payroll and Related Liabilities
Accrued payroll liabilities consisted of the following at August 31, 2022, and August 31, 2021:
| | | | | | | | | | | |
| August 31, 2022 | | August 31, 2021 |
Accrued Payroll | $ | 2,270,000 | | | $ | 2,438,000 | |
Accrued Payroll Taxes | 13,278,000 | | | 4,758,000 | |
Corporate employee accrued paid time off | 506,000 | | | 680,000 | |
Accrued Payroll and related liabilities | $ | 16,054,000 | | | $ | 7,876,000 | |
Accrued payroll and accrued payroll taxes represent payroll liabilities associated with the Company’s WSEs as well as its corporate employees. The Company has recorded in its accrued expenses approximately $1.1 million in interest and penalties on approximately $12 million delinquent outstanding payroll taxes to the IRS and other state and local agencies.
Note 11: Stockholders’ Equity (Deficit)
Preferred Stock
As previously disclosed, in September 2016, the founding shareholders of the Company were granted options to acquire preferred stock of the Company (the “Preferred Options”). The number of Preferred Options granted was based upon the number of shares held at the time of the grant. These Preferred Options are nontransferable and forfeited upon the sale of the related founding shares of common stock held by the option holder. Upon the occurrence of certain specified events, such founding shareholders can exercise each Preferred Option to purchase one share of preferred stock of the Company at an exercise price of $0.0001 per share. The preferred stock underlying the Preferred Options does not include any rights to dividends or preference upon liquidation of the Company and is convertible into shares of the Company’s common stock on a one-for-one basis. The Preferred Options became exercisable upon the consummation of the Vensure Asset Sale in January 2020, as discussed above. During Fiscal 2020, the Company recorded an expense of $62.1 million, related to the triggering of the Preferred Options as other expense, which was calculated pursuant to the Black-Scholes-Merton methodology applicable to valuing the 24,634,560 Preferred Options that became exercisable and exchangeable into an equal number of shares of common stock.
The Company evaluated the Preferred Options on the same date using Level 2 inputs based on the offering price of the Company’s common stock and warrants issued in connection with its May 2020 Public Offering, as adjusted for the fair value of the warrants issued in conjunction with said public offering. The resulting allocated common share price was then discounted for a lack of marketability of shares subject to “lock-up” agreements entered into in connection with the May 2020 Public
Offering, which yielded a fair value of $2.52 per Preferred Option. The Company used the following assumptions to value the expense related to the Preferred Options: (i) option life of 3.77 years; (ii) risk free rate of 0.47%; (iii) volatility of 134%; (iv) exercise price of $0.0001 per share; and (v) a fair value of $3.62 per share of the Company’s common stock.
On June 4, 2020, Scott W. Absher, the Company’s Chief Executive Officer, exercised 12,500,000 Preferred Options to purchase 12,500,000 shares of our preferred stock for an aggregate purchase price of $1,250. Immediately following the exercise of the Preferred Options described above, Mr. Absher elected to convert the 12,500,000 shares of preferred stock into 12,500,000 shares of common stock, which were subject to a 24-month lock-up period during which such shares may not be traded. Between July 20, 2020 and November 30, 2020, an additional 294,490 Preferred Options were exercised and converted into 294,490 shares of common stock, which were subject to a six-month lock up period at the time they were issued, during which such shares could not be traded on the open market. As of August 31, 2022, the restrictions on 294,490 of these shares have been lifted, rendering them freely tradable. On October 22, 2021, the Company’s board of directors canceled the remaining 11,790,000 of these Preferred Options previously issued to its co-founder, J. Stephen Holmes, pursuant to the September 2016 grant. Accordingly, these Preferred Options are no longer exercisable. See Note 16 Contingencies and Note 17 Subsequent Events.
The amount of Preferred Options, and the number of shares of preferred stock issuable upon exercise of such options, is based upon the number of shares of common stock held by the option holders at the time the Preferred Options were issued in September 2016. Accordingly, in order to confirm the original intent of the granting of up to 25,000,000 Preferred Options to Mr. Absher, it has always been the Company’s intent to adopt a second grant of Preferred Options granting an additional 12,500,000 Preferred Options to Mr. Absher, whereby each option permits the holder to acquire one share of the Company’s preferred stock for $0.0001 per share. On August 13, 2021, consistent with this intent, the Company granted 12,500,000 Preferred Options to Mr. Absher to purchase shares of Preferred Stock, par value $0.0001 per share, for consideration of $0.0001 per share. Each Preferred Option is exercisable for a period of twenty-four months upon (i) the acquisition of a Controlling Interest (as defined below) in the Company by any single shareholder or group of shareholders acting in concert, (other than Mr. Absher), or (ii) the announcement of (x) any proposed merger, consolidation, or business combination in which the Company’s Common Stock is changed or exchanged, or (y) any sale or distribution of at least 50% of the Company’s assets or earning power, other than through a reincorporation. Each share of Preferred Stock is convertible into Common Stock on a one-for-one basis. “Controlling Interest” means the ownership or control of outstanding voting shares of the Company sufficient to enable the acquiring person, directly or indirectly and individually or in concert with others, to exercise one-fifth or more of all the voting power of the Company in the election of directors or any other business matter on which shareholders have the right to vote under the Wyoming Business Corporation Act.
On July 14, 2022, the Board of the Company approved the issuance to the Company’s founder and principal shareholder, Scott Absher, of 12,500,000 shares of the Company’s Preferred Class A Stock ("Preferred Shares"), par value $0.0001 per share, in exchange for (a) the surrender by Mr. Absher of his options to acquire 12,500,000 Preferred Shares, which Preferred Options provide for exercise upon certain triggering events as described above, and as detailed in our prior filings, and (b) the tender of payment by Mr. Absher of the sum of $5,000, representing four times the par value for such Preferred Shares. The Company evaluated the Preferred Shares on the same date using Level 2 inputs based on the closing market price of the Company’s common stock. The resulting allocated common share price was then discounted for a lack of marketability of shares, which yielded a fair value of $0.2322 per Preferred Share. The Company used the following assumptions to value the expense related to the Preferred Shares: (i) life of 10 years; (ii) risk free rate of 3.06%; (iii) volatility of 125.664%; (iv) exercise price of $0.0001 per share; and (v) a fair value of $0.2580 per share of the Company’s common stock. These were recorded as compensation expense in the general and administrative expenses in the Consolidated Statements of Operations.
On July 19, 2022, Mr. Absher converted 8,000,000 shares of the Preferred Shares to 8,000,000 shares of the Company’s Common Stock, par value $0.0001 per share. Pursuant to Rule 144, these 8,000,000 shares of Common Stock are subject to a six-month holding period during which they may not be sold in the marketplace. A remaining 4,500,000 Preferred Shares were still outstanding as of August 31, 2022.
On August 12, 2022, the Company entered into an agreement with Mr. Absher whereby he waived claims to certain unpaid compensation due to him through July 31, 2022, totaling $820,793.24, in exchange for an option to receive 4,100,000 shares of the Company's Preferred Class A Stock. The Company evaluated the Preferred Shares on the same date using Level 2 inputs based on the closing market price of the Company’s common stock. The resulting allocated common share price was then discounted for a lack of marketability of shares, which yielded a fair value of $0.2025 per Preferred Share. The Company used the following assumptions to value the expense related to the Preferred Shares: (i) life of 10 years; (ii) risk free rate of 2.970%; (iii) volatility of 125.700%; (iv) exercise price of $0.0001 per share; and (v) a fair value of $0.2250 per share of the Company’s common stock. Pursuant to Rule 144, these 4,100,000, when converted into shares of Common Stock are subject to a six-month holding period during which they may not be sold in the marketplace.
October 2020 Public Offering
On October 8, 2020, the Company entered into an underwriting agreement (the “October Underwriting Agreement”) with AGP in connection with a public offering (the “October 2020 Offering”) of an aggregate of (i) 40,000 shares of our common stock and (ii) warrants to purchase 23,000 shares of common stock (the “October 2020 Common Warrants”), which included the partial exercise of AGP’s over-allotment option to purchase 3,000 additional October 2020 Common Warrants.
Each share of common stock was sold together with an October 2020 Common Warrant as a fixed combination, with each share of common stock sold being accompanied by an October 2020 Common Warrant to purchase 0.5 shares of common stock. Each share of common stock and accompanying October 2020 Common Warrant was sold at a price to the public of $300.00. The October 2020 Common Warrants were immediately exercisable, will expire on October 13, 2025, and have an exercise price of $330.00 per share, subject to anti-dilution and other adjustments for certain stock splits, stock dividends, or recapitalizations.
The October 2020 Offering closed on October 14, 2020, for gross proceeds of approximately $12.0 million, prior to deducting $1.3 million of costs consisting of underwriting discounts and commissions and offering expenses payable by the Company, which includes a partial exercise of the underwriter’s over-allotment option to purchase additional October 2020 Common Warrants. Pursuant to the October Underwriting Agreement, the Company, upon closing of the October 2020 Offering, issued to AGP warrants to purchase up to 2,000 shares of common stock (the “October Underwriter Warrants”), which is equivalent to 5.0% of the aggregate number of shares of common stock sold in the October 2020 Offering. The October Underwriter Warrants are exercisable at any time and from time to time, in whole or in part, commencing six months after the closing date and ending 5 years from the closing date, at a price per share equal to $330.00, which is equivalent to 110% of the public offering price per share. The Company accounts for the warrants as equity-classified.
May 2021 Private Placement
On May 17, 2021, the Company closed a private placement with a large institutional investor pursuant to which it sold to the investor an aggregate of (i) 23,200 shares of the Company’s common stock, par value $0.010 per share (the “Common Stock”), together with warrants (the “May 2021 Common Warrants”) to purchase up to 23,200 shares of Common Stock, with each May 2021 Common Warrant exercisable for one share of Common Stock at a price per share of $242.50, and (ii) 26,285 prefunded warrants (the “May 2021 Prefunded Warrants”), together with the May 2021 Common Warrants to purchase up to 26,285 shares of Common Stock, with each May 2021 Prefunded Warrant exercisable for one share of Common Stock at a price per share of $0.010. Each share of Common Stock and accompanying May 2021 Common Warrant were sold together at a combined offering price of $242.50 and each May 2021 Prefunded Warrant and accompanying May 2021 Common Warrant were sold together at a combined offering price of $242.49.
The May 2021 Prefunded Warrants are immediately exercisable, at a nominal exercise price of $0.010, and may be exercised at any time until all of the May 2021 Prefunded Warrants are exercised in full. The May 2021 Common Warrants have an exercise price of $242.5 per share, are immediately exercisable, and will expire five years from June 15, 2021, which is the date that the registration statement covering the resale of the shares underlying the Common Warrants was declared effective. The private placement generated gross proceeds of approximately $12.0 million, prior to deducting $0.94 million of costs consisting of Placement Agent commissions and offering expenses payable by the Company. In addition to the seven percent (7.0%) of the aggregate gross proceeds cash fee, the Company issued to the Placement Agent warrants to purchase an aggregate of up to five percent (5%) of the aggregate number of shares of Common Stock issuable upon exercise of the May 2021 Prefunded Warrants sold in the private placement (the “May Placement Agent Warrants”). The May Placement Agent Warrants are exercisable for a period commencing on November 17, 2021 (six months after issuance), expire June 15, 2025, and have an initial exercise price of $266.75 per share.
September 2021 Private Placement
In September 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 each September 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 the September 2021 Common Warrants to purchase up to 75,235 shares of Common Stock, with each September 2021 Prefunded Warrant exercisable for one share of Common Stock at a price per share of $0.010. Each share of Common Stock and accompanying September 2021 Common Warrant were sold together at a combined offering price of $159.50 and each September 2021 Prefunded Warrant and accompanying September 2021 Common Warrant were sold together at a combined offering price of $159.49.
The September 2021 Prefunded Warrants are immediately exercisable, at a nominal exercise price of $0.010, and may be exercised at any time until all of the September 2021 Prefunded Warrants are exercised in full. The September 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 the September 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 the September 2021 Prefunded Warrants sold in the offering (the “September Placement Agent Warrants”). The September Placement Agent Warrants are exercisable for a period commencing on March 3, 2022 (six months after issuance) and expire four years from the effective date (which occurred on May 3, 2022) of a registration statement for the resale of the underlying shares, and have an initial exercise price per share of $175.45. The Company accounts for the warrants as equity-classified.
January 2022 Warrant Exercise Agreement
On May 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 on June 15, 2026. On January 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 such January 2022 Common Warrant being issued on the basis of two January 2022 Common Warrant shares for each share of the Existing Warrant that was exercised for cash. The January 2022 Common Warrant is exercisable commencing on July 28, 2022, terminates on July 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 the January 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 the January 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. The Company accounts for the warrants as equity-classified.
July 19, 2022 Warrant Exercise Agreement
On July 18, 2022, the Company entered into a warrant exercise agreement (the “Exercise Agreement”) with the holder of the September 2021 Warrants and January 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 its September 2021 Warrants (the “Investor Warrants”). In order to induce the Exercising Holder to exercise the Investor Warrants, the Exercise Agreement (i) amends the September 2021 Warrants and January 2022 Warrants to (a) reduce the exercise price per share of the September 2021 Warrants and January 2022 Warrants to $26.00, (b) extends the expiration date of the September 2021 Warrants to May 3, 2029, and (c) extends the expiration date of the January 2022 Warrants to July 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 the September 2021 Warrants and January 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. On July 25, 2022, the Company entered into an amendment with the holder of the Company’s warrants to purchase 348,408 shares of common stock, issued July 19, 2022. Pursuant to the amendment, the warrants were amended to be exercisable commencing January 19, 2023 (six months from the date of issuance) and will terminate January 19, 2030.
As a result of the warrant modification, which reduced the exercise price of the Existing Warrants, as well as the issuance of the July 2022 Common Warrants, the Company recorded approximately (i) $488,700 and $599,700 for the increased fair value of the September 2021 and January 2022 modified warrants, respectively; and (ii) $8,084,000 as the fair value of the July 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. The Company accounts for the warrants as equity-classified.
Common Stock and Warrants
During Fiscal 2022, the Company issued the following securities pursuant to the transactions described above:
•28,500 shares of common stock, prefunded warrants to purchase 46,735 shares of common stocks and warrants to purchase 75,235 common stock pursuant to the September 2021 PIPE.
•49,485 shares of common stock and warrants to purchase 98,969 shares of common stock pursuant to the January 2022 Warrant Exercise Agreement.
•50,000 shares of common stock and warrants to purchase 348,408 common stock in connection with the July 19 2022 Warrant Exercise Agreement.
•8,000,000 Preferred Shares converted into 80,000 shares of the Company’s Common Stock, par value $0.0001 per share.
During Fiscal 2021, the Company issued the following securities pursuant to the transactions described above:
• 40,000 shares of common stock pursuant to the October 2020 Public Offering at $300.00 per share and warrants to purchase 23,000 shares of common stock.
•23,200 shares of common stock, 26,285 May 2021 Prefunded Warrants and May 2021 Common Warrants to purchase up to 49,485 shares of common stock pursuant to the May 2021 Private Placement. Each share of Common Stock and accompanying May 2021 Common Warrant were sold together at a combined offering price of $242.50, and each May 2021 Prefunded Warrant and accompanying May 2021 Common Warrant were sold together at a combined offering price of $242.49.
The following table summarizes the changes in the Company’s issued and outstanding common stock and prefunded warrants from August 31, 2021, to August 31, 2022:
| | | | | | | | | | | | | | | | | |
| Number of shares | | Weighted average remaining life (years) | | Weighted average exercise price |
Warrants outstanding, August 31, 2021 | 95,921 | | | 4.4 | | $ | 384 | |
Issued | 573,109 | | | 7.6 | | 83 | |
(Cancelled) | (25) | | | 0 | | 27,600 | |
(Exercised) | (146,220) | | | 5.2 | | — | |
Warrants outstanding, August 31, 2022 | 522,786 | | | 7.2 | | $ | 78 | |
Warrants exercisable, August 31, 2022 | 174,377 | | | 5.8 | | $ | 161 | |
The following tables summarize the Company’s issued and outstanding warrants outstanding as of August 31, 2022:
| | | | | | | | | | | | | | | | | |
| Warrants Outstanding | | Weighted average Life of Outstanding Warrants in years | | Exercise price |
July 2022 Common Warrants (1) | 348,408 | | | 7.9 | | $ | 26.00 | |
January 2022 Common Warrants | 98,969 | | | 6.9 | | $ | 26.00 | |
September 2021 Common Warrants | 25,235 | | | 6.7 | | $ | 26.00 | |
September 2021 Underwriter Warrants | 3,762 | | | 6.7 | | $ | 175.00 | |
May 2021 Underwriter Warrants | 2,474 | | | 3.7 | | 267.00 | |
October 2020 Common Warrants | 23,000 | | | 3.1 | | 330.00 | |
October 2020 Underwriter Warrants | 2,000 | | | 3.1 | | 330.00 | |
May 2020 Common Warrants | 12,776 | | | 2.7 | | 540.00 | |
May 2020 Underwriter Warrants | 1,111 | | | 2.7 | | 540.00 | |
March 2020 Exchange Warrants | 4,237 | | | 3.1 | | 1,017.00 | |
Amended March 2019 Warrants | 663 | | | 1.5 | | 4,000.00 | |
March 2019 Services Warrants | 34 | | | 1.5 | | 7,000.00 | |
June 2018 Warrants | 63 | | | 1.3 | | 4,000.00 | |
June 2018 Services Warrants | 54 | | | 1.3 | | 9,960.00 | |
| 522,786 | | | 7.2 | | $ | 71.00 | |
(1)The July 2022 Common Warrants are not exercisable until January 19, 2023.
The number of warrants and exercise price have been presented retroactively for the 1 for 100 reverse stock split, which was effective September 1, 2022, before issuance of the financial statements.
Note 12: Stock Based Compensation
Employee Stock Option Plan Increase
In March 2017, the Company adopted its 2017 Stock Option/Stock Issuance Plan (the “Plan”). The Plan provides incentives to eligible employees, officers, directors and consultants in the form of incentive stock options (“ISOs”), non-qualified stock options (“NQs”), (each of which is exercisable into shares of common stock) (collectively, “Options”) or shares of common stock (“Share Grants”).
On July 1, 2020, the Company's board of directors unanimously approved an increase in the number of shares of common stock issuable under the Plan from 250,000 to 3,000,000. On March 31, 2021, the Company’s shareholders approved the increase in the number of shares of common stock issuable under the Plan as well as any contingent grant awards under the Plan on or subsequent to July 1, 2020. On June 4, 2021, the Company filed a registration statement on Form S-8 with the SEC to register the issuance of up to an aggregate of 3,000,000 shares, par value $0.0001 per share, reserved for issuance under the Plan.
For all options granted prior to July 1, 2020, each option has a term of service vesting provision over a period of time as follows: 25% vest after a 12-month service period following the award, with the balance vesting in equal monthly installments over the succeeding 36 months. Options granted on or after July 1, 2020 typically vest over four years, with 25% of the grant vesting one year from the grant date, and the remainder in equal quarterly installments over the succeeding 12 quarters. All options granted to date have a stated ten-year term and, as of August 31, 2022, all options granted to date are exercisable.
Stock grants are issued at fair value, considered to be the market price on the grant date. The fair value of option awards is estimated on the grant date using the Black-Scholes stock option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options and future dividends.
Following its adoption of ASU 2016-9, the Company elected to account for forfeitures under the Plan as they occur. Any compensation cost previously recognized for an unvested award that is forfeited because of a failure to satisfy a service condition is reversed in the period of the forfeiture.
The Company recognized approximately $4,184,267 and $1,593,579 of compensation expense recorded in “Stock-Based Compensation – General and Administrative Expenses" for Fiscal 2022 and Fiscal 2021, respectively.
The Company compensates its board members through grants of common stock for services performed. These services have been accrued within the accounts payable and other accrued liabilities on the consolidated balance sheet. The Company has incurred $225,000 and $169,000 for the Fiscal 2022 and Fiscal 2021, respectively.
At August 31, 2022, the total unrecognized deferred share-based compensation expected to be recognized over the remaining weighted average vesting periods of three years for outstanding grants was $1,783,000.
The following table summarizes the Company’s option grant, exercise and forfeiture activity from August 31, 2020, through August 31, 2022:
| | | | | | | | | | | | | | | | | |
| Options Outstanding and Exercisable |
| Number of Options | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price |
| | | (In years) | | |
Balance, August 31, 2020 | 13,987 | | | 9.5 | | $ | 818.00 | |
Granted | 8,400 | | | 8.5 | | 261.00 | |
Exercised | — | | | — | | | — | |
Forfeited | (4,626) | | | 5.9 | | 272.00 | |
Balance, August 31, 2021 | 17,761 | | | 8.9 | | 653.00 | |
Granted | 1,400 | | | 9.8 | | 105.00 | |
Exercised | — | | | — | | | — | |
Forfeited | (7,409) | | | 8.4 | | 454.00 | |
Balance at August 31, 2022 | 11,753 | | | 8.1 | | $ | 733.00 | |
Options outstanding as of August 31, 2022, and August 31, 2021 had aggregate intrinsic value of $0, respectively.
Option vesting activity from August 31, 2020, through August 31, 2022, was as follows:
| | | | | | | | | | | | | | | | | | | | |
Options Vested | | Number of Options | | Weighted Remaining Contractual Life | | Weighted Average Exercise Price |
| | | | (In years) | | |
Balance, August 31, 2020 | | 284 | | | 7.2 | | $ | 11,510.00 | |
Vested | | 2,816 | | | 8.8 | | $ | 715.00 | |
Exercised | | — | | | — | | | $ | — | |
Forfeited | | (8) | | | 6.1 | | $ | 6,717.00 | |
Balance, August 31, 2021 | | 3,092.57 | | | 8.6 | | $ | 1,691.00 | |
Vested | | 4,235 | | | 8.6 | | $ | 488.00 | |
Exercised | | — | | | 0 | | $ | — | |
Forfeited | | (2,059) | | | 8.1 | | $ | 610.00 | |
Balance at August 31, 2022 | | 5,269 | | | 8.1 | | $ | 1,146.00 | |
The following table summarizes information about stock options outstanding and vested at August 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Vested |
Exercise Prices | | Number of Options not Exercisable | | Number of Options Exercisable | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Number of Options | | Weighted Remaining Contractual Life | | Weighted Average Exercise Price |
| | | | | | (In years) | | | | | | (In years) | | |
$50.00-1,000.00 | | — | | | 11,391 | | | 8.1 | | $ | 425.00 | | | 4,920 | | | 8.1 | | $ | 461.00 | |
$1,001.00-$4,000.00 | | — | | | 20 | | | 7.0 | | 1,895.00 | | | 17 | | | 6.8 | | 1,900.00 | |
$4,001.00–$8,000.00 | | — | | | 121 | | | 6.8 | | 5,121.00 | | | 111 | | | 6.6 | | 5,120.00 | |
$8,001.00–$12,000.00 | | — | | | 101 | | | 6.0 | | 10,298.00 | | | 101 | | | 5.7 | | 10,300.00 | |
$12,001.00–$16,000.00 | | | | 109 | | | 5.1 | | 15,584.00 | | | 109 | | | 4.9 | | 15,590.00 | |
$16,001.00-$39,160.00 | | — | | | 11 | | | 5.1 | | 39,160.00 | | | 11 | | | 4.9 | | 39,160.00 | |
| | — | | | 11,753 | | | 8.1 | | $ | 733.00 | | | 5,269 | | | 8.1 | | $ | 1,146.00 | |
The number of options and exercise prices have been presented retroactively for the 1 for 100 reverse stock split, which was effective September 1, 2022.
Note 13: Related Parties
During Fiscal 2021, we made one-time payments to certain of our employees totaling approximately $650,000 in connection with their agreement to relocate from California to our new principal executive offices in Miami, Florida. Included among these were payments to the following related parties, in the amounts indicated: (i) Scott W. Absher, our board of directors Chair and Chief Executive Officer, $160,000; (ii) Amanda Murphy, our Director of Operations and a member of our Board, $80,000; (iii) David May, a member of our business development team, and the son-in-law of Mr. Absher, $80,000; (iv) Phil Eastvold, the Executive Producer of our wholly owned subsidiary, ShiftPixy Productions, Inc., and the son-in-law of Mr. Absher, $88,000; (v) Hannah Absher, an employee of the Company and the daughter of Mr. Absher, $18,000; and (vi) Jared Holmes, an employee of the Company and son of J. Stephen Holmes, $18,000.
Director Compensation
Amanda Murphy
On February 10, 2020, Amanda Murphy was appointed to our Board. Ms. Murphy was our Director of Operations at the time of her appointment. Ms. Murphy received a salary compensation of $240,000 and $264,152 in Fiscal 2021 and Fiscal 2022, respectively. On October 22, 2021, our Board approved the promotion of Ms. Murphy to the position of Chief Operating Officer, as well as an increase in her annual salary to $500,000, all of which were effective January 1, 2022. As of August 31, 2022, Ms. Murphy has deferred payment related to her salary increase of approximately $157,000. The deferred payment salary is recorded in the accrued liabilities on the Consolidated Balance Sheet.
During Fiscal 2021, in connection with her relocation to Miami, Florida as part of the relocation of our principal executive offices, Ms. Murphy received a one-time incentive payment of approximately $80,000 in addition to reimbursement of her expenses associated with her relocation.
Scott Absher
Scott W. Absher, our CEO and Chair of our Board, received compensation in the form of salary of approximately $764,673 and $750,000 for Fiscal 2022 and Fiscal 2021, respectively. On October 22, 2021, our Board approved raising Mr. Absher’s annual salary to $1,000,000, effective January 1, 2022, and also approved the payment of a $500,000 bonus to Mr. Absher, 50% of which was payable upon Board approval, and the remainder of which was payable on January 1, 2022. As of August 31, 2022, Mr. Absher received payment of 50% of his bonus, or $250,000, in March 2022. Furthermore, as discussed in Note 11, Stockholders' Equity (Deficit) on August 12, 2022, the Company entered into an agreement with Mr. Absher whereby he waived claims to certain unpaid compensation due to him through July 31, 2022, totaling $820,793.24, in exchange for an option to receive 4,100,000 Company Preferred Shares. The agreement settled, the deferred payment of his incremental base salary, his outstanding PTO as of July 31, 2022, and the remaining 50% of his approved bonus.
In addition, Mr. Absher received the following additional payments during Fiscal 2021: (i) a one-time incentive payment of approximately $170,000 in connection with his relocation to Miami, Florida as part of the relocation of our principal executive offices, in addition to reimbursement of his expenses associated with his relocation; and (ii) a one-time bonus payment in the amount of $240,000 in recognition of his efforts on behalf of the Company.
J. Stephen Holmes
J. Stephen Holmes formerly served as a non-employee sales manager advisor to and significant shareholder of the Company. The Company incurred $750,000 in professional fees for services provided by Mr. Holmes during Fiscal 2021. On October 22, 2021, the Company severed all ties with Mr. Holmes, effective immediately, and cancelled Preferred Options that had previously been issued to him but had not been exercised. As a result of these actions, the Company no longer has any financial obligation to Mr. Holmes, and believes that he is no longer a significant shareholder of the Company (See Note 11. Stockholders Equity (Deficit) and Note 16. Contingencies.)
Domonic J. Carney
On May 24, 2022, Domonic J. Carney resigned as Chief Financial Officer and Treasurer of the Company, according to a Sabbatical Leave Agreement, effective immediately. The Company's Board of Directors accepted Mr. Carney's resignation and ratified the agreement the same day. As part of the agreement, Mr. Carney will receive back pay in the sum of $354,670.49, which includes unpaid past regular salary, unpaid PTO compensation, and unpaid past committed bonus compensation (collectively, "Back Pay").
The Company shall, according to the regularly scheduled semi-monthly pay dates of the 5th and 20th of each month (as adjusted to the nearest date preceding or following a weekend or holiday), make payments to Mr. Carney of the Back Pay in the gross amounts as are outlined in the agreed Payment Schedule, until the entire sum is paid in full. All applicable employment-related tax and withholding shall apply.
On May 24, 2022, the Board of ShiftPixy appointed Manuel Rivera, 47, to the positions of Treasurer and Acting Chief Financial Officer of the Company. Since June 2021, Mr. Rivera has served as ShiftPixy's Vice President of Accounting. Mr. Rivera currently earns annual compensation as ShiftPixy's Vice President of Accounting of $194,606. There is currently no agreement between the Company and Mr. Rivera to adjust his current compensation.
Related Persons to Scott Absher
Mark Absher, the brother of Scott Absher, was previously employed as our Registered In-House Counsel, Director and Secretary. Mr. Absher resigned from his positions with the Company on February 6, 2019, and received compensation of $276,951 in Fiscal 2019. On November 18, 2021, Mr. Absher rejoined the Company as Deputy General Counsel – Special Projects, for an annual salary of 240,000 for Fiscal 2022. Based on his re-hire date, Mr. Absher did not receive any compensation from the Company in Fiscal 2021.
David May, a member of our business development team, is the son-in-law of Mr. Absher. In addition to the relocation bonus noted above, Mr. May received compensation, including sales commissions, of approximately $149,000 for Fiscal 2022 and $125,000 in Fiscal 2021.
Phil Eastvold, the Executive Producer of ShiftPixy Productions, Inc., is the son-in-law of Mr. Absher. In addition to the relocation bonus noted above, Mr. Eastvold received compensation of approximately $224,000 and $200,000 for Fiscal 2022 and Fiscal 2021, respectively.
Jason Absher, a member of our business development team, is the nephew of Scott Absher and the son of Mark Absher. Mr. Absher was hired on February 22, 2021, at an annual salary of $75,000, which was subsequently raised to $120,000, effective August 1, 2021. As of August 31, 2022, Mr. Jason Absher is still earning the same salary as of Fiscal Year 2021.
Connie Absher, (the spouse of Scott Absher), Elizabeth Eastvold, (the daughter of Scott and Connie Absher and spouse of Mr. Eastvold), and Hannah Absher, (the daughter of Scott and Connie Absher), are also employed by the Company. These individuals, as a group, received aggregate compensation of 240,000 and $183,000 for Fiscal 2022 and Fiscal 2021. In addition, as noted above, Hannah Absher received a relocation bonus of approximately $18,000 during Fiscal 2021, in connection with her relocation. Neither Connie Absher nor Elizabeth Eastvold received any such relocation bonus.
Note 14: Income Taxes
Current income taxes are based upon the year’s income taxable for federal and state tax reporting purposes. Deferred income taxes (benefits) are provided for certain income and expenses, which are recognized in different periods for tax and financial reporting purposes.
Deferred tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income. The Company’s deferred income taxes arise from the temporary differences between financial statement and income tax recognition of net operating losses. These loss carryovers would be limited under the Internal Revenue Code should a significant change in ownership occur within a three-year period.
Significant components of the net deferred tax assets as reflected on the consolidated balance sheets are as follows:
| | | | | | | | | | | |
| August 31, |
| 2022 | | 2021 |
Deferred tax liabilities: | | | |
Depreciation | $ | (587,000) | | | $ | (597,000) | |
Note receivable | — | | | (1,088,000) | |
Total deferred tax liabilities | (587,000) | | | (1,685,000) | |
| | | |
Deferred tax assets: | | | |
Net operating loss carryforward | 26,069,000 | | | 18,198,000 | |
Business interest | 2,942,000 | | | 2,998,000 | |
Other accruals | 896,000 | | | 458,000 | |
Workers’ compensation accruals | 1,734,000 | | | 2,061,000 | |
Stock-based compensation | 135,000 | | | 207,000 | |
Deferred rent | — | | | 168,000 | |
ASC 842 Lease liability | 31,000 | | | — | |
Other | 4,000 | | | 6,000 | |
Total deferred tax assets | 31,811,000 | | | 24,096,000 | |
Valuation allowance | (31,224,000) | | | (22,411,000) | |
Total net deferred tax assets | $ | 587,000 | | | $ | 1,685,000 | |
Net deferred tax assets | $ | — | | | $ | — | |
Income tax expense/(benefit) from continuing operations consists of the following:
| | | | | | | | | | | |
| For the Year Ended August 31, |
| 2022 | | 2021 |
Current | | | |
Federal | $ | — | | | $ | — | |
State | (38,000) | | | 42,000 | |
Total current | (38,000) | | | 42,000 | |
Deferred | | | |
Federal | (6,177,000) | | | (5,059,000) | |
State | (2,476,000) | | | (2,807,000) | |
Total deferred | (8,653,000) | | | (7,866,000) | |
Change in valuation allowance | $ | 8,653,000 | | | $ | 7,866,000 | |
Total Income Tax Expense (Benefit) | $ | (38,000) | | | $ | 42,000 | |
The reconciliation of the statutory federal rate to the Company’s effective income tax rate is as follows:
| | | | | | | | | | | |
| August 31, 2022 | | August 31, 2021 |
Federal statutory rate (21%) | $ | (9,124,000) | | | $ | (5,738,000) | |
Inducement Loss | 917,000 | | — | |
Non-deductible penalties and other permanent differences | 1,227,000 | | | 333,000 | |
State and local income taxes, net of federal benefit | (1,983,000) | | | (1,607,000) | |
Redetermination of prior year taxes | 272,000 | | | (812,000) | |
Change in valuation allowance | 8,653,000 | | | 7,866,000 | |
Net income tax provision (Benefit) | $ | (38,000) | | | $ | 42,000 | |
The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of August 31, 2022, and 2021, the Company had no accrued interest and penalties related to uncertain tax positions.
The deferred tax assets primarily comprise net operating loss carryforwards and other net temporary deductible differences such as stock-based compensation, deferred rent, depreciation and workers’ compensation accrual. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. Based on management’s analysis, they concluded that it was more likely than not that the deferred tax asset would not be realized. Therefore, the Company established a full valuation allowance against the deferred tax assets. The change in the valuation allowance in 2022 and 2021 was approximately $8,653,000 and $7,866,000, respectively.
As of August 31, 2022, and 2021, the Company had cumulative federal net operating loss ("NOL") carryforwards of approximately $93,597,000 and $64,652,000 respectively, which begin to expire in 2035 and state net operating loss carryforwards of approximately $100,780,000 and $68,034,000, respectively. The Company’s net operating losses may be limited by the provisions of IRC Section 382, for which the Company has not performed an analysis of the potential limitations. These limitations will be imposed when the Company attains taxable income against which the NOL will be utilized. As of August 31, 2022 and 2021, the company had NOLs of $66,755,000 and $37,809,000 which have an indefinite life but are limited to 80% of taxable income when used. As explained above, the Company has determined that it is more likely than not that the Company’s deferred tax assets related to NOL Carryforwards will not be utilized.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company' evaluated the impact of the CARES Act and determined that there was no material effect.
The Company is subject to taxation in the U.S. The tax years for 2018 and forward are subject to examination by tax authorities. The Company is not currently under examination by any tax authority.
Management has evaluated tax positions in accordance with FASB ASC 740, and has not identified any tax positions, other than those discussed above, that require disclosure. The Company does not expect a material change to this assessment over the 12 months following August 31, 2022.
In August 2022 the United States enacted tax legislation through the Inflation Reduction Act (IRA). The IRA introduces a 15% corporate alternative minimum tax (CAMT) for corporations whose average annual adjusted financial statement income (AFSI) for any consecutive three-tax-year period ending after 31 December 2021 and preceding the tax year exceeds $1 billion. The CAMT is effective for tax years beginning after 31 December 2022. The CAMT is currently not applicable to the Company.
Note 15: Commitments
Operating Lease
Effective April 15, 2016, the Company entered into a non-cancelable five-year operating lease for its Irvine office facility. On July 25, 2017, the Company entered into a non-cancelable operating lease for expansion space at its Irvine offices with a termination date that coincides with the termination date of the prior lease and extended the terms of the original lease until June 2022. The leases for certain facilities contain escalation clauses relating to increases in real property taxes as well as certain maintenance costs. Monthly rent expense under this lease is approximately $35,000.
Effective August 13, 2020, the Company entered into a non-cancelable seven-year lease for 13,246 square feet of office space located in Miami, Florida to house its principal executive offices commencing October 2020, and continuing through September 2027. The lease contains escalation clauses relating to increases in real property taxes as well as certain maintenance costs. Monthly rent expense under this lease is approximately $57,000.
Effective October 1, 2020, the Company entered into a non-cancelable 64-month lease for 23,500 square feet of primarily industrial space located in Miami, Florida, to house ghost kitchens, production facilities, and certain marketing and technical functions, including those associated with ShiftPixy Labs. The lease contains escalation clauses relating to increases in real property taxes as well as certain maintenance costs. Monthly rent expense under this lease is approximately $34,000.
Effective June 7, 2021, the Company entered into a non-cancelable sublease agreement with Verifone, Inc. to sublease premises consisting of approximately 8,000 square feet of office space located in Miami, Florida, that the Company anticipates using for its sales and operations workforce. The lease has a term of three years expiring on May 31, 2024. The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the sublease. Monthly rent expense under this lease is approximately $26,000.
Effective June 21, 2021, the Company entered into a non-cancelable 77-month lease for premises consisting of approximately 13,418 square feet of office space located in Sunrise, Florida, that the Company anticipates using primarily to house its operations personnel and other elements of its workforce. The Company lease had possession date of August 1, 2022. The base rent is paid monthly and escalates annually pursuant to a schedule set forth in the lease. Monthly rent expense under this lease is approximately $27,000.
Effective May 2, 2022, the Company entered into a non-cancelable 60-month operating lease commencing on July 1, 2022, for office space in Irvine, 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.
On August 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 has not been legally released from our primary obligations under the leases. The Company received a formal complaint from the landlord, and the matter is in litigation. The Company intends to vigorously defend the lawsuit and counterclaim for relocation costs. See Note 16, Contingencies. As a result of the abandonment, the Company evaluated the Right-Of-Use ("ROU") Assets for impairment as of August 31, 2022, and recorded an impairment charge of $3,866,802, within the impairment loss line item on the Consolidated Statements of Operations. Furthermore, the
Company released the corresponding lease liability and evaluated the need for a loss contingency in accordance with ASC 450, recording a contingent liability of $3,761,352 in the accrued expenses of the Consolidated Balance sheet.
The components of lease expense are as follows:
| | | | | | | | | | | |
| August 31, 2022 | | August 31, 2021 |
Operating Lease Cost | 1,362,902 | | | $ | 997,225 | |
| | | |
Future minimum lease and licensing payments under non-cancelable operating leases at August 31, 2022, are as follows: | | | | | |
| Minimum lease commitments |
2023 | 973,517 | |
2024 | 1,060,669 | |
2025 | 1,095,396 | |
2026 | 828,863 | |
2027 | 648,387 | |
Thereafter | 319,125 | |
Total minimum payments | $ | 4,925,957 | |
Less: present value discount | 631,033 | |
Lease Liability | $ | 4,294,924 | |
| |
Weighted-average remaining lease term - operating leases (months) | 70 |
Weighted-average discount rate | 5.54 | % |
The current portion of the operating lease liability is included within our accounts payable and other accrued liabilities in our Consolidated Balance Sheet.
Non-contributory 401(k) Plan
The Company has a non-contributory 401(k) Plan (the “401(k) Plan”). The 401(k) Plan covers all non-union employees who are at least 21 years of age and have completed 3 months of service. There were no employer contributions to the 401(k) Plan during Fiscal 2022 and Fiscal 2021.
SPAC Sponsorship
On April 29, 2021, the Company announced its sponsorship, through a wholly-owned subsidiary, of four SPAC IPOs. The Company purchased founder shares in each SPAC, through its wholly-owned subsidiary, for an aggregate purchase price of $25,000 per SPAC. The number of Founder Shares issued was determined based on the expectation that such Founder Shares would represent 20% of the outstanding shares of each SPAC after its IPO (excluding the private placement warrants described below and their underlying securities).
The registration statement and prospectus covering the IPO of one of these SPACs, IHC, was declared effective by the SEC on October 19, 2021, and IHC units (the “IHC Units”), consisting of one share of common stock and an accompanying warrant to purchase one share of IHC common stock, began trading on the NYSE on October 20, 2021. The IHC IPO closed on October 22, 2021, raising gross proceeds for IHC of $115 million. In connection with the IHC IPO, the Company purchased, through its wholly-owned subsidiary, 4,639,102 placement warrants at a price of $1.00 per warrant, for an aggregate purchase price of $4,639,102. The Company also anticipates purchasing private placement warrants in each of the three other SPACs it is sponsoring, at a price of $1.00 per warrant, for an aggregate of $17,531,408 (or up to $18,656,408 if the over-allotment option of each SPAC is exercised in full), which includes the Company’s investment in Founder Shares and assumes that all four SPAC IPOs are consummated and the pricing terms of each other SPAC IPO is identical to the pricing of the IHC IPO. Each private placement warrant is exercisable to purchase one whole share of common stock in each SPAC at $11.50 per share. The private placement warrants of each SPAC will be worthless to the extent that they do not complete an initial business combination.
The investment amounts set forth above do not include loans that the Company may extend to each SPAC in an amount not to exceed $500,000 individually (or $2 million in the aggregate), in its role as sponsor. As of October 31, 2021, the Company had advanced, through its wholly owned subsidiary, an aggregate of approximately $820,000 to the SPACs for payment of various expenses in connection with the SPAC IPOs, principally consisting of SEC registration, legal and auditing fees. With the IHC SPAC liquidation the Company impaired approximately $0.4 million in outstanding loans that are considered uncollectible. The effect of this impairment had been eliminated as part of the IHC consolidation.
Note 16: Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will be resolved only when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.
During the ordinary course of business, the Company is subject to various claims and litigation. Management believes that the outcome of such claims or litigation will not have a material adverse effect on the Company’s financial position, results of operations or cash flow.
Kadima Litigation
The Company is in a dispute with its former software developer, Kadima Ventures (“Kadima”), over incomplete but paid for software development work. In May 2016, the Company entered into a contract with Kadima for the development and deployment of user features that were proposed by Kadima for an original build cost of $2.2 million to complete. This proposal was later revised upward to approximately $7.2 million to add certain features to the original proposal. As of the date of this Form 10-K, the Company has paid approximately $11 million to Kadima, but has never been provided access to the majority of the promised software. Kadima refused to continue development work, denied access to developed software, and refuses to surrender to the Company any software that it has developed unless the Company pays an additional $12.0 million above the $11.0 million already paid. In April 2019, Kadima filed a complaint against the Company in the Superior Court of the State of Arizona, Maricopa County, alleging claims for breach of contract, promissory estoppel and unjust enrichment, and seeking damages in excess of $11.0 million. The Company vigorously disputes and denies each of Kadima’s claims, including that it owes any sums to Kadima, and further believes that it is entitled, at a minimum, to a refund of a substantial portion of the sums that it has already paid, along with the release of the software modules currently being withheld. In June 2020, the Company engaged in a mediation with Kadima in an attempt to resolve the matter, which was unsuccessful. On July 14, 2020, the Company filed an answer to Kadima’s complaint, which denied Kadima’s claims and asserted counter-claims for breach of contract and fraud. Trial in the matter concluded on September 21, 2022. Post-trial briefs were due November 4, 2022, and responses thereto were due on November 18, 2022. As discussed in Note 17, Subsequent Events to the Consolidated Financial Statements, which is incorporated herein by reference, on November 23, 2022, an order was entered by the court, finding in favor of the Company and against Kadima in the amount of $5 million plus costs and fees.
Splond Litigation
On April 8, 2019, claimant, Corey Splond, filed a class action lawsuit, on behalf of himself and other similarly situated individuals in the Eighth Judicial District Court for the State of Nevada, Clark County, naming the Company and its client as defendants, and alleging violations of certain wage and hour laws. This lawsuit is in the initial stages, and the Company denies any liability. Even if the plaintiff ultimately prevails, the potential damages recoverable will depend substantially upon whether the Court determines in the future that this lawsuit may appropriately be maintained as a class action. Further, in the event that the Court ultimately enters a judgment in favor of plaintiff, the Company believes that it would be contractually entitled to be indemnified by its client against at least a portion of any damage award.
Radaro Litigation
On July 9, 2020, the Company was served with a complaint filed by one of its former software vendors, Radaro Inc., in the United States District Court for the Central District of California, alleging damages arising from claims sounding in breach of contract and fraud. By Order filed October 21, 2020, the Court dismissed plaintiff’s claims for fraud and for punitive damages, with leave to replead. The Company denied plaintiff’s claims and defended the lawsuit vigorously. A trial date was set for September 6, 2022, but the date was extended. As discussed in Note 17, Subsequent Events to the Consolidated Financial
Statements, which is incorporated herein by reference, on October 31, 2022, the Company settled the claim with Radaro, the terms of which are confidential.
Everest Litigation
On December 18, 2020, the Company was served with a Complaint filed in the United States District Court for the Central District of California by its former workers’ compensation insurance carrier, Everest National Insurance Company. The Complaint asserts claims for breach of contract, alleging that the Company owes certain premium payments to plaintiff under a retrospective rated policy, and seeks damages of approximately $600,000, which demand has since increased to approximately $1.6 million. On February 5, 2021, the Company filed an Answer to Plaintiff’s Complaint denying its claims for relief, and also filed a cross-claim against the third party claims administrator, Gallagher Bassett Services, Inc., for claims sounding in breach of contract and negligence based upon its administration of claims arising under the policy. By order dated April 7, 2021, the Court dismissed the Company’s complaint against Gallagher Bassett without prejudice to re-filing in another forum. On May 17, 2021, the Company refiled its complaint against Gallagher Basset in the Circuit Court of Cook County, Illinois. Everest subsequently filed a complaint against Gallagher Bassett in New Jersey. Discovery is underway in the cases, and the California Court has set a trial date in the Everest case of August 8, 2023, while no trial date has been set in either of the related Illinois or New Jersey cases, which are in preliminary stages.
Sunz Litigation
On March 19, 2021, the Company was served with a Complaint filed in the Circuit Court for the 11th Judicial Circuit, Manatee County, Florida, by its former workers’ compensation insurance carrier, Sunz Insurance Solutions, LLC. The Complaint asserts claims for breach of contract, alleging that the Company owes payments for loss reserve funds totaling approximately $10 million. The Company denies plaintiff’s allegations and is defending the lawsuit vigorously. On May 12, 2021, the Company filed a motion to dismiss the complaint, and Sunz filed an amended complaint in response. Discovery is proceeding in the matter and no trial date has been set. On June 21, 2022, the Court granted Plaintiff’s partial motion for summary judgment, holding that Defendant is liable under the contract, but further finding that the amount of damages, if any, to which Plaintiff is entitled should be determined at trial. We believe that partial summary judgment was improvidently granted, and therefore appealed the Court’s Order by filing a petition for writ of certiorari with the Court of Appeal, which appeal is now pending.
Courvoisier Centre Litigation
On August 24, 2022, the landlord of our headquarters offices, Courvoisier Centre, LLC, filed a complaint against the Company in the Eleventh Judicial Circuit Court (Miami-Dade County, Florida) alleging breach of the lease. We vacated the offices and ceased payments under the lease in July of 2022, after repeatedly complaining to the landlord regarding the impact of its extensive renovations of the campus and building in which our offices were situated, citing substantial impairments to the Company's ability to conduct business as well as concerns regarding the health and well-being of the Company’s employees and guests, and the Landlord’s inability and refusal to provide any adequate relief. On or about October 10, 2022, we filed our answer to the complaint and our counterclaim. The Company intends to vigorously defend the lawsuit and seek recovery for its costs of relocation.
Certified Tire Litigation
On June 29, 2020, the Company was served with a complaint filed by its former client, Certified Tire, in the Superior Court of the State of California, Orange County, naming the Company, two of its officers, and one of its former subsidiaries as defendants. The Complaint asserts multiple causes of action, all of which stem from the former client’s claim that the Company is obligated to reimburse it for sums it paid in settlement of a separate lawsuit brought by one of its employees pursuant to PAGA. This underlying lawsuit alleged that our former client was responsible for multiple violations of the California Labor Code. The Company and the officers named as defendants deny the former client’s allegations, and the Company is defending the lawsuit vigorously based primarily on our belief that the alleged violations that gave rise to the underlying lawsuit were the responsibility of Certified Tire and not the Company. Discovery is currently proceeding, and trial is scheduled to commence on January 9, 2023. The Company’s dispositive motion for summary judgment was denied by the court because of its determination that factual disputes exist.
In Re John Stephen Holmes Bankruptcy Litigation
As discussed in Note 17, Subsequent Events to the Consolidated Financial Statements, which is incorporated herein by reference, the Chapter 7 trustee of the bankruptcy estate of John Stephen Holmes filed an action against the Company.
Note 17: Subsequent Events
The Company has evaluated events that have occurred after the date of these consolidated balance sheets though the date that the consolidated financial statements were issued, and has determined that, other than those listed below, no such reportable subsequent events exist through the date the financial statements were issued in accordance with FASB ASC Topic 855, “Subsequent Events.”
Effective August 31, 2022, the Company filed articles of amendment to the Company’s articles of incorporation to effect a one-for-one hundred (1:100) reverse split of the Company’s issued and outstanding shares of Common Stock. The reverse split became effective on Nasdaq September 1, 2022.
On September 1, 2022, after our reverse stock split had taken effect, our CEO and Director, Scott Absher, converted 8,600,000 of his shares of Preferred Class A Stock to 8,600,000 shares of our common stock.
On September 19, 2022, the Company received a letter from the staff of Nasdaq (the "Staff") notifying the Company that the Staff has determined that for the last 10 consecutive business days, from September 1 to September 16, 2022, the closing bid price of the Company’s common stock had been at $1.00 per share or greater and that accordingly, the Company has regained compliance with Listing Rule 5550(a)(2).
On September 20, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with a large institutional investor (the “Purchaser”) pursuant to which the Company sold to the Purchaser an aggregate of 416,667 shares (the “Shares”) of its common stock together with warrants (the “Warrants”) to purchase up to 833,334 shares of common stock (collectively, the “Offering”). Each share of common stock and two accompanying Warrants were sold together at a combined offering price of $12.00. The Warrants are exercisable for a period of seven years commencing upon issuance at an exercise price of $12.00, subject to adjustment. The Offering closed on September 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 on September 3, 2021, and (ii) 98,969 warrants issued on January 28, 2022, was reduced to $0.01.
A.G.P./Alliance Global Partners (the “Placement Agent”) acted as the exclusive placement agent in connection with the Offering pursuant to the terms of a placement agent agreement, dated September 20, 2022, between the Company and the Placement Agent (the “Placement Agent Agreement”). Pursuant to the Placement Agent Agreement, the Company paid the Placement Agent a fee equal to 7.0% of the aggregate gross proceeds from the Offering. In addition to the cash fee, the Company issued to the Placement Agent warrants to purchase up to 20,833 shares of common stock (5% of the number of shares sold in the Offering (the “Placement Agent Warrants”)). The Placement Agent Warrants will be exercisable for a period commencing six months from issuance, will expire four years from the effectiveness of a registration statement for the resale of the underlying shares, and have an initial exercise price of $13.20 per share.
On October 31, 2022, the Company settled the claims filed against it by the plaintiff and one of the Company's former software vendors, Radaro, Inc.
On November 8, 2022, the Chapter 7 trustee of the bankruptcy estate of John Stephen Holmes filed an action against the Company, asserting that the cancellation of Mr. Holmes' preferred options on October 22, 2021, violated the automatic stay applicable to Mr. Holmes' Chapter 7 proceedings. The matter is in the preliminary stages; the Company has not yet filed its response, but it plans to vigorously defend itself against the claim.
On November 14, 2022, the court in the Sunz case granted the plaintiff's motion for partial summary judgment, holding that ShiftPixy waived claims for years 2 and 3 of the applicable policy based upon claims disputes for which it did not serve a "dispute notice" within a six-month period as set forth in the applicable contracts.
On November 23, 2022, in the case filed against the Company by Kadima Ventures, an order was entered by the court, finding in favor of the Company and against Kadima in the amount of $5 million plus costs and fees. The order has not yet been reduced to a final judgment and will be subject to appeal.
Industrial Human Capital
At a special meeting of the stockholders of IHC (the SPAC sponsored by our subsidiary, ShiftPixy Investments, Inc.), held on October 14, 2022 (the “Meeting”), pursuant to a proxy statement, the stockholders by an affirmative vote of 73.70% of the 14,375,000 total shares of the Company’s common stock outstanding on the record date of September 6, 2022, approved IHC's proposed action to file an amended and restated certificate of incorporation (the “Amendment”) to extend the date by which the Company has to consummate a Business Combination from October 22, 2022, to April 22, 2023, or a such earlier date as determined by the board of directors. The Company accordingly filed the Amendment with the Secretary of State.
In connection with the Meeting, however, shareholders holding 11,251,347 Public Shares exercised their right to redeem their shares for a pro rata portion of the funds in the Trust Account. As a result, approximately $114,949,913.76 (approximately $10.2165 per Public Share) will be removed from the Trust Account to pay such holders, subject to applicable law. Following the redemption, the Company’s remaining Public Shares outstanding would be 248,653, and the amount left in the Trust Account would be substantially below the $5,000,001 minimum net tangible asset amount required by IHC's Amended and Restated Certificate of Incorporation to be available upon consummation of such Business Combination. IHC's efforts to secure the decisions of some shareholders to reverse their redemptions were unsuccessful, and IHC accordingly declined to fund the extension, cancelled the Amendment as filed with the Secretary of State of Delaware, and proceeded to cease operations, dissolve and unwind.
On November 9, 2022, the Company filed a Certificate of Correction with the Secretary of State of Delaware, effectively withdrawing the previously filed Extension Amendment. A Certificate of Dissolution was filed on November 14, 2022.