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SHIFTPIXY, INC. – 10-Q/A – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Quarterly Report, as well as the information contained in our Annual Report on Form 10-K for Fiscal 2020, filed with theSEC onNovember 30, 2020 , including the "Risk Factors" set forth in Part I, Item IA of the Form 10-K, as well as the amendment to our Annual Report on Form 10-K/A, filed with theSEC onJanuary 12, 2021 .
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Quarterly Report, the other reports, statements, and information that we have previously filed or that we may subsequently file with theSEC , and public announcements that we have previously made or may subsequently make, contain "forward-looking statements" within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. Unless the context is otherwise, the forward-looking statements included or incorporated by reference in this Quarterly Report and those reports, statements, information and announcements address activities, events or developments that we expect or anticipate will or may occur in the future. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about: · our future financial performance, including our revenue, costs of revenue and operating expenses; · our ability to achieve and grow profitability;
· the sufficiency of our cash, cash equivalents and investments to meet
our liquidity needs; · our predictions about industry and market trends; · our ability to expand successfully internationally; · our ability to manage effectively our growth and future expenses; · our estimated total addressable market;
· our ability to maintain, protect and enhance our intellectual property;
· our ability to comply with modified or new laws and regulations
applying to our business;
· the attraction and retention of qualified employees and key personnel;
· the effect that the novel coronavirus disease ("COVID-19") or other
public health issues could have on our business and financial
condition
and the economy in general; and · our ability to be successful in defending litigation brought against us.
We caution you that the forward-looking statements highlighted above do not
encompass all of the forward-looking statements made in this Quarterly Report.
We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2020 filed with theSEC onNovember 30, 2020 , which is expressly incorporated herein by reference, and elsewhere in this Quarterly Report. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. 36
The forward-looking statements made in this Quarterly Report relate only to
events as of the date on which the statements are made. We undertake no
obligation to update any forward-looking statements made in this Quarterly
Report to reflect events or circumstances after the date of this Quarterly
Report or to reflect new information or the occurrence of unanticipated events,
except as required by law. We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you should not
place undue reliance on our forward-looking statements. Our forward-looking
statements do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures, other strategic transactions or
investments we may make or enter into.
The risks and uncertainties we currently face are not the only ones we face. New
factors emerge from time to time, and it is not possible for us to predict which
will arise. There may be additional risks not presently known to us or that we
currently believe are immaterial to our business. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. If any such risks occur, our
business, operating results, liquidity and financial condition could be
materially affected in an adverse manner.
The industry and market data contained in this Quarterly Report are based either
on our management's own estimates or, where indicated, independent industry
publications, reports by governmental agencies or market research firms or other
published independent sources and, in each case, are believed by our management
to be reasonable estimates. However, industry and market data are subject to
change and cannot always be verified with complete certainty due to limits on
the availability and reliability of raw data, the voluntary nature of the data
gathering process and other limitations and uncertainties inherent in any
statistical survey of market shares. We have not independently verified market
and industry data from third-party sources. In addition, consumption patterns
and customer preferences can and do change. As a result, you should be aware
that market share, ranking and other similar data set forth herein, and
estimates and beliefs based on such data, may not be verifiable or reliable.
Our Management's Discussion & Analysis of Financial Condition and Results of
Operations (MD&A) includes references to our performance measures presented in
accordance with GAAP and other non-GAAP financial measures that we use to manage
our business, make planning decisions and allocate resources. Refer to the
Non-GAAP Financial Measures within our MD&A for definitions and reconciliations
from GAAP measures.
37
Overview
We provide human resources, employment compliance, insurance, payroll, and
operational employment services solutions for our business clients ("clients" or
"operators") and shift work or "gig" opportunities for worksite employees
("WSEs" or "shifters"). As consideration for providing these services, we
receive administrative or processing fees as a percentage of a client's gross
payroll, process and file payroll taxes and payroll tax returns, provide
workers' compensation coverage and administration related services, and provide
employee benefits. We have built a substantial business on a recurring revenue
model since our inception in 2015. Our market focus is to use a traditional
staffing services business model, coupled with developed technology, to address
underserved markets containing predominately lower wage employees with high
turnover, including the light industrial, services, and food and hospitality
markets.
Although we have recently expanded into other industries, as noted below, our
current primary focus continues to be on clients in the restaurant and
hospitality industries, traditionally market segments with high employee
turnover and low pay rates. We believe that these industries will be better
served by our HRIS technology platform and related mobile application, which
provide payroll and human resources tracking for our clients and we believe will
result in lower operating costs, improved customer experience and revenue growth
acceleration. All of our clients enter into service agreements with us or one of
our wholly-owned subsidiaries, as detailed in Note 1 to our financial
statements, above.
Our revenues through the third quarter of Fiscal 2021 primarily consisted of
administrative fees calculated as a percentage of gross payroll processed,
payroll taxes due on WSEs billed to the client and remitted to the taxation
authority, and workers' compensation premiums billed to the client for which we
facilitate coverage. Our costs of revenues primarily consisted of the accrued
and paid payroll taxes and our costs to provide the workers' compensation
coverage and administration related services, including premiums and loss
reserves. A significant portion of our assets and liabilities is for our
workers' compensation reserves, carried as cash balances, and our estimates of
projected workers' compensation claims, carried as liabilities. We provided a
self-funded workers' compensation policy up to $500,000 and purchased
reinsurance for claims in excess of that limit up to February 28, 2021 , after
which we changed to a direct cost premium only workers' compensation program.
We believe that our customer value proposition is to provide a combination of
overall net cost savings to our clients, for which they are willing to pay
increased administrative fees, as follows:
· Payroll tax compliance and management services;
· Governmental HR compliance services, such as compliance with the
Affordable Care Act ("ACA");
· Reduced client workers' compensation premiums or enhanced coverage; and
· Access to an employee pool of potential applicants to reduce turnover
costs.
We have invested heavily in a robust, cloud-based HRIS platform (the
"Ecosystem") in order to:
· reduce WSE management costs;
· automate new WSE and client onboarding; and
· provide value-added services for our business clients resulting in
additional revenue streams to the Company.
Our cloud-based HRIS platform captures, holds, and processes HR and payroll
information for clients and WSEs through an easy-to-use customized front-end
interface coupled with a secure, remotely hosted database. The HRIS platform can
be accessed by either a desktop computer or an easy to use smartphone
application designed with legally binding HR workflows in mind. Once fully
implemented, we expect to reduce the time, expense, and error rate for
on-boarding WSEs into our ecosystem. This allows our HRIS platform to serve as a
"gig" marketplace for WSEs and clients and for client businesses to better
manage their human capital needs.
38
We see our technology platform as a key competitive advantage and differentiator
to our market competitors and one that will allow us to expand our human capital
business beyond our current focus of low-wage employees and healthcare workers.
We believe that providing this baseline business, coupled with a technology
solution to address additional concerns such as employee scheduling and
turnover, will provide a unique, cost effective solution to the HR compliance,
staffing, and scheduling problems that these businesses face. We are completing
additional features, expected to generate additional revenue streams in calendar
2021, that will enhance and expand our product offering, increase our client
customer and WSE counts, and increase the revenues and profit per existing WSE.
The COVID-19 pandemic has had a significant impact upon and delayed our expected
growth, which we observed initially through a decrease in our billed customers
and WSEs beginning in mid-March 2020 , when the State of California first
implemented "lockdown" measures. Substantially all of our May 31, 2020 billed
WSEs worked for clients located in Southern California , primarily in the quick
service restaurant industry, and many of these clients were required to furlough
or lay off employees or, in some cases, completely shutter their operations. For
our clients serviced immediately prior to the March 2020 pandemic lockdown, we
experienced an approximate 30% reduction in business levels within 6 weeks after
the initial lockdown. The combination of our sales efforts and the tools that
our services provide to businesses impacted by the COVID-19 pandemic resulted in
additional business opportunities for new client location additions, as did the
fact that many of our clients received Paycheck Protection Program ("PPP") loans
under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which
supported their businesses and payroll payments during in-store lockdowns.
Nevertheless, during the quarter ended May 31, 2020 , our WSE billings per client
location decreased as many of our clients were forced to cease operations or
reduce staffing. On July 13, 2020 , the Governor of the State of California
re-implemented certain COVID-19 related lockdown restrictions in most of the
counties in the state, including those located in Southern California where most
of our clients are located. The fluid nature of the pandemic following those
renewed lockdowns resulted in the issuance of additional orders by state and
county health authorities, yielding uneven patterns of business openings and
closings throughout the state and leading ultimately to significant lockdowns
beginning in late November 2020 and through the year-end holiday season as a
spike in COVID-19 cases was observed. In late March 2021 , California began to
lift restrictions in certain regions as those areas complied with the California
4-tiered COVID-19 reopening plan, which allowed for the restoration of
additional business services. On June 15, 2021 , the Governor of California
terminated and phased out the vast majority of executive orders and actions that
had been issued beginning in March 2020 as part of the pandemic response, which
has had the effect of facilitating the ongoing economic recovery.
The lifting of these lockdown restrictions has supported our recent billings and
revenue growth. Our gross billings for the quarter ended May 31, 2021 , increased
by approximately $5.6 million , or 39.1%, over the same period in Fiscal 2020,
and these results represent a sequential 12.3% increase over the second quarter
of Fiscal 2021 that we attribute to the easing of the COVID-19 restrictions and
accelerating vaccination efforts. We believe that our core business will
continue to grow to the extent that COVID-19 infection rates further decrease,
vaccination rates increase, and governmental authorities lift pandemic
restrictions, all of which we believe will fuel our clients' business
recoveries.
Significant Developments in the Nine Months Ended
Financing ActivitiesOctober 2020 Public Offering OnOctober 8, 2020 , the Company entered into the October Underwriting Agreement with AGP in connection with theOctober 2020 Offering. TheOctober 2020 Offering closed onOctober 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. The details of theOctober 2020 Offering are set forth in Note 5 to the financial statements,
above.May 2021 Private Placement OnMay 13, 2021 , the Company entered into a Securities Purchase Agreement with a large institutional investor in connection with theMay 2021 Private Placement. TheMay 2021 Private Placement closed onMay 17, 2021 for gross proceeds of approximately$12.0 million , prior to deducting$0.94 million of costs associated with commissions and offering expenses payable by the Company. The details of theMay 2021 Private Placement are set forth in Note 5 to the financial statements, above. 39 Growth Initiatives During the nine months endedMay 31, 2021 we launched two primary growth initiatives using internal resources described below. Each growth initiative is designed to leverage our technology solution, knowledge, and expertise to provide for significant revenue growth for the human capital management services we provide to our clients.
Sponsorship of Special Purpose Acquisition Companies
OnApril 29, 2021 , we announced our sponsorship, through our wholly-owned subsidiary,ShiftPixy Investments, Inc. , of four SPACs. Three of the SPACs are each seeking to raise$250 million , through IPOs, to acquire companies in the light industrial, healthcare, and technology segments of the staffing industry, while the fourth SPAC is seeking to raise$500 million through an IPO to acquire one or more insurance entities. We anticipate that, through our wholly-owned subsidiary, we will own approximately 20% of the issued and outstanding stock in each entity upon their IPOs being consummated, and that each will operate as a separately managed, publicly traded entity following the completion of their respective initial business combinations, or "De-SPAC". We anticipate entering into service agreements with each of the staffing entities that will allow them to participate in our HRIS platform. We also expect to facilitate the procurement of workers' compensation, personal liability, and other insurance products for these staffing entities through our anticipated relationship with the insurance SPAC after it completes the De-SPAC process. OnJune 14, 2021 andJune 30, 2021 , each SPAC sponsored by our wholly-owned subsidiary filed amended registration statements and prospectuses with theSEC in connection with their anticipated IPOs.
We believe that the staffing SPACs, after completing their initial business combinations, will generate significant revenues forShiftPixy by virtue of entering into client service agreements with us after completing the De-SPAC process. We also believe that the insurance SPAC, once licensed to operate as an insurance carrier, will generate additional payroll billings forShiftPixy through anticipated contractual relationships pursuant to which we expect to facilitate low-cost insurance product offerings for our future SPAC staffing clients, among others.
To date, we have incurred direct costs of
entities, primarily for legal and professional services related fees, which are
included as operating expenses for the three and nine months ended
OnApril 22, 2021 , we transferred a total of 10,000,000 shares of common stock (the "Founder Shares") that we held in the four special purpose acquisition companies ("SPACs"). Prior to the transfer, we were the sole shareholder in each of the SPACs through ShiftPixy Investments. The transfer of these shares represented the creation of a minority unaffiliated interest in each of the four SPACs. In conjunction with this transfer, we recorded an asset for the estimated fair value of the shares transferred of$47,472,000 . See also Note 2. Launch ofShiftPixy Labs We also announced, in late 2020, our "ShiftPixy Labs " initiative, which includes the creation of incubator "ghost kitchens" to be operated in conjunction with our wholly-owned subsidiary,ShiftPixy Ghost Kitchens, Inc. Through this initiative, we intend to provide resources and guidance to entrepreneurs seeking to bring their food delivery concepts to market, in return for the opportunity to combine with the ShiftPixy HRIS platform to create a co-branded, or "ghost" branded, food preparation and delivery solution. The initial phase of this initiative will be implemented in a dedicated showcase kitchen facility located in close proximity to ourMiami headquarters, which is currently under renovation. We intend to partner with various culinary training organizations and experts in testing these concepts, and to showcase these efforts through the distribution of video programming on social media produced and distributed by our wholly owned subsidiary,ShiftPixy Productions, Inc. If successful, we intend to replicate this initiative in similarly constructed facilities throughoutthe United States and in selected international locations. We also intend to provide similar services via mobile kitchen concepts, all of which will be heavily reliant on our HRIS platform and which we believe will capitalize on trends observed during the COVID-19 pandemic toward providing customers with a higher quality prepared food delivery product that is more responsive to their needs.ShiftPixy Labs is expected to create new restaurant incubation entities, each of which is anticipated to utilizeShiftPixy's human capital management services and solutions. To date, we have spent approximately$0.8 million of direct costs towards the launch ofShiftPixy Labs , most of which is related to equipment purchases expected to be placed into service during the final quarter of Fiscal 2021. 40 Impact of COVID-19 The COVID-19 pandemic has had a significant impact upon and delayed our expected growth, which we observed initially through a decrease in our billed customers and WSEs beginning inmid-March 2020 , when theState of California first implemented "lockdown" measures. Substantially all of ourFebruary 29, 2020 billed WSEs worked for clients located inSouthern California , primarily in the quick service restaurant industry, and many of these clients were required to furlough or lay off employees or, in some cases, completely shutter their operations. For our clients serviced immediately prior to theMarch 2020 pandemic lockdown, we experienced an approximate 30% reduction in business levels within 6 weeks after the initial lockdown. The combination of our sales efforts and the tools that our services provide to businesses impacted by the COVID-19 pandemic resulted in additional business opportunities for new client location additions, as did the fact that many of our clients received PPP loans under the CARES Act, which supported their businesses and payroll payments during in-store lockdowns. Nevertheless, during the quarter endedMay 31, 2020 , our WSE billings per client location decreased as many of our clients were forced to cease operations or reduce staffing. OnJuly 13, 2020 , the Governor of theState of California re-implemented certain COVID-19 related lockdown restrictions in most of the counties in the state, including those located inSouthern California where most of our clients are located. The fluid nature of the pandemic following those renewed lockdowns resulted in the issuance of additional orders by state and county health authorities, yielding uneven patterns of business openings and closings throughout the state and leading ultimately to significant lockdowns beginning in lateNovember 2020 and through the year-end holiday season as a spike in COVID-19 cases was observed. The negative impact of these lockdowns on our business and operations continued through our third quarter of Fiscal 2021, with improvement beginning after the removal of some restrictions inCalifornia inMarch 2021 followed by nearly full lifting of restrictions inJune 2021 . While the availability of PPP loans to our clients mitigated the negative impact on our business during the early stages of the pandemic, we believe that the failure of the government to renew this program exacerbated the negative impact of the holiday lockdowns on our financial results for the three and nine months endingMay 31, 2021 . Nevertheless, we have observed some degree of recovery during the third fiscal quarter, as these lockdowns have relaxed and vaccination efforts have accelerated. We believe that, to the extent that COVID-19 infection rates continue to decrease and vaccination rates increase, governmental authorities will continue to remove in-person dining restrictions, which will fuel our clients' business recoveries. We have also experienced increases in our workers' compensation reserve requirements, and we expect additional workers' compensation claims to be made by furloughed employees. We also expect additional workers' compensation claims to be made by employees required to work by their employers during the COVID-19 pandemic. OnMay 4, 2020 , theState of California indicated that workers who became ill with COVID-19 would have a potential claim against workers' compensation insurance for their illnesses. These additional claims, to the extent they materialize, could have a material impact on our workers' compensation liability estimates.
During the three and nine months endedMay 31, 2021 , the Company made a strategic decision to change its approach to securing workers' compensation coverage for our clients. This was primarily due to rapidly increasing loss development factors stemming in part from the COVID-19 pandemic. The combination of increased claims from WSEs, the inability of WSEs to obtain employment quickly and return to work after injury claims, and increasing loss development factor rates from our insurance and reinsurance carriers resulted in significantly larger potential loss exposures, claims payments, and additional expense accruals. Starting onJanuary 1, 2021 , we began to migrate our clients to our new direct cost program, which we believe significantly limits our claims exposure. EffectiveMarch 1, 2021 , all of our clients had migrated to the direct cost program.
For the quarter and nine months endedMay 31, 2021 , we recorded under cost of sales approximately$0.6 million of expense for claims estimate increases relating primarily to activity for calendar 2020. This additional expense resulted in negative gross profit for the quarter endedMay 31, 2021 of approximately$0.4 million . The claims estimates resulting in this reported negative gross profit are the subject of ongoing litigation with our former workers' compensation insurance provider, Sunz, as described in Note 9, above. We are currently re-evaluating the workers' compensation liability estimates under our legacy Sunz and Everest programs, with a primary focus on the basis for estimated loss development factors.
Vensure Asset Sale Note Receivable Reconciliation
OnJanuary 3, 2020 , we entered into an asset purchase agreement withShiftable HR Acquisition, LLC , a wholly-owned subsidiary ofVensure , pursuant to which we assigned client contracts representing approximately 88% of our quarterly revenue as ofNovember 30, 2019 , including 100% of our existing PEO business effective as ofDecember 31, 2019 , and we transferred$1.6 million of working capital assets, including cash balances and certain operating assets associated with the assigned client contracts included in the agreement. Gross proceeds from the Asset Sale were$19.2 million , of which$9.7 million was received at closing and$9.5 million was embodied in the Note Receivable described above, to be paid out in equal monthly payments for the next four years after certain transaction conditions were met. During the quarter endedMay 31, 2021 ,Vensure and the Company engaged in discussions and negotiations geared toward resolving certain disputes regarding the amount owed to the Company pursuant to the Note Receivable, as described above, and these discussions are ongoing as of the
date
of this Quarterly Report.
41
Quarterly Performance Highlights: Fiscal 2021 v. Fiscal 2020
· Served approximately 71 clients and an average of 3,000 WSEs. · Processed approximately$20 million in gross billings, representing an
increase of 39.1% over the same period in Fiscal 2020 and a sequential 12.3%
increase over the second quarter of Fiscal 2021 due to the easing of the
COVID-19 restrictions, which had a significant impact on our quick service
restaurant customer base in Fiscal 2020.
· Collected admin fees were
the same period of Fiscal 2020, but a sequential increase of 15.7% above the
second quarter of Fiscal 2021. The level achieved was due primarily to a large
one-time admin fee charge of
period. Excluding this one-time receipt from the prior balance would have
yielded a year-over-year increase consistent with our increase in gross wages.
· Operating loss was
period of Fiscal 2020, primarily driven by a
operating expenses offset by higher gross billings and healthcare related
admin fees.
Sales Efforts and Growth Initiatives
We believe that our HRIS platform is well suited to provide cross-functional services that will allow us to expand our reach into other human capital applications and expand our revenue base. Our strategy is to monetize this HRIS platform through multiple applications with the initial application being our historical restaurant-focused human capital solutions. We have begun to expand our services into industries that utilize higher paid employees on a temporary or part-time basis, including the medical/nurse staffing industry. InJuly 2020 , we signed our first healthcare client and began to onboard these WSEs in late July and into August on a very limited basis. We onboarded more significant numbers of nurses through this client during the recently completed quarter, for which we have begun to commence billings and recognize revenue. We expect these new healthcare WSEs to earn an average of 2 to 3 times more than the average restaurant WSE we have typically onboarded in the past, which should yield higher gross profits per healthcare WSE compared to a restaurant or other lower-wage worker. InAugust 2020 , we signed an agreement with Washington Hospitality, a consortium representing approximately 200,000 potential WSEs in the food industry located in theState of Washington . This agreement expands our geographic reach and is expected to drive revenue growth in calendar 2021. During the height of the COVID-19 pandemic, we adjusted our sales efforts to reduce or eliminate in-person contact, primarily through the use of video conferencing and webinar tools. The webinars that we staged during this time period were well-attended on both a live and recorded basis, which resulted in client acquisitions that we believe have the potential to generate significant positive results for the Company. Nevertheless, we believe that we will benefit from a return to traditional, in-person sales activities as the pandemic subsides. During the third quarter of Fiscal 2021, we began to invest significantly in additional areas where we see the potential for substantial revenue growth and enhanced shareholder value. We believe the combination of our human capital, scheduling, intermediation, and delivery services provides us with a unique opportunity for a vertically integrated restaurant and food fulfillment solution. To that end, in late 2020 we announced our "ShiftPixy Labs " initiative, which includes the creation of incubator "ghost kitchens" to be operated in conjunction with our wholly-owned subsidiary,ShiftPixy Ghost Kitchens, Inc. Through this initiative, the Company intends to provide resources and guidance to entrepreneurs seeking to bring their food delivery concepts to market, in return for the opportunity to combine with the ShiftPixy HRIS platform to create a co-branded, or "ghost" branded, food preparation and delivery solution. The initial phase of this initiative will be implemented in a dedicated showcase kitchen facility located in close proximity to ourMiami headquarters, which is current under renovation and which we expect to be operational during the fourth quarter of Fiscal 2021. We intend to partner with various culinary training organizations and experts in testing these concepts, and to showcase these efforts through the distribution of video programming on social media produced and distributed by our wholly owned subsidiary,ShiftPixy Productions, Inc. If successful, we intend to replicate this initiative in similarly constructed facilities throughoutthe United States and in selected international locations. We also intend to provide similar services via mobile kitchen concepts, all of which will be heavily reliant on our HRIS platform and which we believe will capitalize on trends observed during the COVID-19 pandemic toward providing customers with a higher quality prepared food delivery product that is more responsive to their needs. 42 Software Development We continued our software development internally in the third quarter of Fiscal 2021, primarily focusing on feature enhancements such as delivery, scheduling, and onboarding functionality improvement. Our efforts also focused on better integration and more seamless process flow improvements to create an improved user experience while reducing internal staff time required for onboarding. We believe these additional enhancements are critical to ourShiftPixy Labs and SPAC related growth initiatives described above. From inception of our software development efforts in 2017 throughMay 31, 2021 , we have spent approximately$26.3 million consisting of outsourced research and development, IT related expenses, development contractors and employee costs and marketing spending consisting of advertising, trade shows, and marketing personnel costs. The following table shows the technology and marketing spending for each period reported: Nine Nine months months ending endingMay 31 ,May 31 ,
Development spending (in $ millions) 2021
2020
(Unaudited)
(Unaudited)
Contract development and licenses $ 2.7
$ 1.3 Internal personnel costs 2.2 1.5 Total development spending $ 4.9 $ 2.8 Marketing spending
Advertising and outside marketing $ 1.1
$ 0.4 Internal personnel costs 0.4 0.2 Subtotal, Marketing costs $ 1.5 $ 0.6
Total, HRIS platform and mobile application spending $ 6.4
$ 3.4
Cumulative investment$ 23.9 20.3 Portion of investment capitalized as fixed assets - 3.2 Portion of investment expensed$ 23.9
17.1
For the quarters ended
development spending set forth in the table, above, into fixed assets.
43
Results of Operations
The following table summarizes the unaudited condensed consolidated results of our operations for the three and nine months endedMay 31, 2021 , andMay 31, 2020 . For the Three Months For the Nine Months Ended Ended (restated) (restated) May 31, May 31, May 31, May 31, 2021 2020 2021 2020 Revenues (gross billings of$20.1 million and$14.4 million less worksite employee payroll cost of$10.6 million and$12.4 million , respectively for the three months ended; gross billings of$57.7 million and$46.8 million less worksite employee payroll cost of$43.3 million and$40.5 million , respectively for nine months ended$ 9,475,000 $ 2,014,000 $ 14,397,000 $ 6,281,000 Cost of revenue 9,922,000 1,873,000 13,968,000 5,824,000 Gross profit (loss) (447,000 ) 141,000 429,000 457,000 Operating expenses: Salaries, wages, and payroll taxes 2,993,000 1,793,000 7,778,000 5,351,000 Stock-based compensation - general and administrative 444,000 150,000 1,363,000 895,000 Commissions 49,000 27,000 136,000 144,000 Professional fees 1,129,000 439,000 2,842,000 2,276,000
Software development 1,057,000 686,000 2,720,000 1,390,000 Depreciation and amortization 120,000 383,000 268,000 539,000 General and administrative 1,309,000 1,054,000 4,448,000 2,617,000 Total operating expenses 7,101,000 4,532,000
19,555,000 13,212,000 Operating Loss (7,548,000 ) (4,391,000 ) (19,126,000 ) (12,755,000 ) Other (expense) income: Interest expense (3,000 ) (559,000 ) (9,000 ) (2,524,000 ) Expense related to preferred option exchange (62,091,000 ) (62,091,000 ) Expense related to modification of warrants - - - (22,000 ) Loss from debt conversion - (2,842,000 ) - (3,500,000 ) Inducement loss - (57,000 ) - (624,000 ) Loss on debt extinguishment (1,592,000 ) (1,592,000 ) Change in fair value derivative and warrant liability - 6,000 - 1,777,000 Gain on convertible note penalties accrual - - - 760,000 Total other (expense) income (3,000 ) (67,135,000 ) (9,000 ) (67,816,000 ) Loss from continuing operations (7,551,000 ) (71,526,000 ) (19,135,000 ) (80,571,000 ) (Loss) income from discontinued operations (Loss) income from discontinued operations 23,000 (1,490,000 ) (1,512,000 ) (914,000 ) Gain from asset sale - - 15,682,000 Total (loss) income from discontinued operations 23,000 (1,490,000 ) (1,512,000 ) 14,768,000 Net loss$ (7,528,000 ) $ (73,016,000 ) $ (20,647,000 ) $ (65,803,000 ) 44
Revenuesfor the three months endedMay 31, 2021 increased by$7.5 million , or 370%, to$9.5 million compared to$2.0 million for the three months endedMay 31, 2020 . Revenues for the nine months endedMay 31, 2021 , increased by$8.1 million , or 129%, to$14.4 million compared to$6.3 million for the nine months endedMay 31, 2020 . The quarterly revenue increase was driven by higher gross billings of$1.3 million from our new nurse staffing client that was signed inAugust 2020 and higher gross billings from our quick service restaurant business of$3.7 million along with a$6.8 million increase due to the change in revenue accounting to staffing solutions from EAS solutions in the prior year. The increase in revenue of$8.1 million for the nine months endedMay 31, 2021 , compared to the same period in the prior year, was driven by our new nurse staffing client signed inAugust 2020 , by higher gross billings from our quick service restaurant food business, and by the$6.8 million increase due to the change in revenue recognition. Cost of revenue, which mainly consists of costs associated with employer-side taxes and workers' compensation insurance coverage for EAS Solutions revenue with the addition of gross payroll for Staffing Solutions revenue, was$9.9 million for the three months endedMay 31, 2021 , compared to approximately$1.9 million for the comparable period of Fiscal 2020, an increase of 430% or$8.0 million . Our cost of revenues for the nine months endedMay 31, 2021 increased by$8.2 million , or 140%%, to$14.0 million compared to$5.8 million for the nine months endedMay 31, 2020 . The increase includes the staffing related cost of revenues increase of$6.8 million (as noted above) and approximately$0.6 million of additional estimated claims expense related to our former high deductible Sunz insurance program for claims made in 2019 and 2020, the amount of which is currently the subject of litigation between the Company and Sunz, as discussed in Note 9, above. We also experienced increased expenses due to higher premiums resulting from our change from a high-deductible workers' compensation insurance model to a higher cost/lower risk direct cost program and increased employer-side taxes from gross billings for the period. Gross profit decreased by$0.6 million , or 417%, to negative$0.5 million for the quarter endedMay 31, 2021 , from$0.1 million , or 7% of revenues, for the same period of Fiscal 2020. The negative gross profit we experienced includes the$0.6 million of additional claims expense related to our Sunz insurance program described above. Accordingly, the gross profit decrease was driven by a higher workers' compensation premium cost stemming from the direct cost model and increased employer-side taxes from gross billings for the period. Gross profit decreased by 6.1% from$0.5 million for the nine months endedMay 31, 2020 to$0.4 million for the nine months endedMay 31, 2021 . Gross profit as a percentage of revenues decreased from 7.3% for the nine months endedMay 31, 2020 to 3% for the nine months endedMay 31, 2021 . Decrease in gross profit was driven by the increase in workers compensation premium cost and an increase in employer-side taxes from gross billings. Operating expenses increased by 56.7%, or$2.6 million , to$7.1 million for the quarter endedMay 31, 2021 , from$4.5 million for the same period of Fiscal 2020. Operating expenses for the nine months endedMay 31, 2021 , increased by$6.3 million , or 48.0%, to$19.6 million compared to$13.2 million for the nine months endedMay 31, 2020 . The increase for both periods was driven by investments in our growth initiatives consisting of increased headcount and outsourced development HRIS spending, marketing spending and rent for our new principal executive offices inMiami , as well as non-recurring relocation costs to moveCalifornia employees to our newMiami facility and marketing related expenses. 45 The following table presents certain information related to our operating expenses (unaudited): For the Three Months For the Nine Months Ended Ended (restated) (restated) May 31, May 31, May 31, May 31, 2021 2020 2021 2020 Operating expenses:
Salaries, wages, and payroll taxes$ 2,993,000 $ 1,793,000 $ 7,778,000 $ 5,351,000 Stock-based compensation - general and admin 444,000 150,000 1,363,000 896,000 Commissions 49,000 27,000 136,000 144,000 Professional fees 1,129,000 439,000 2,842,000 2,276,000 Software development 1,057,000 686,000 2,720,000 1,389,000 Depreciation and amortization 120,000 383,000 268,000 539,000 General and administrative 1,309,000 1,054,000 4,448,000 2,617,000 Total operating expenses$ 7,101,000 $ 4,532,000 $ 19,555,000 $ 13,212,000
The components of operating expenses changed from the same period of Fiscal 2020
as follows:
Salaries, wages and payroll taxes consist of gross salaries, benefits, and payroll taxes associated with our executive management team and corporate employees. For the three months endedMay 31, 2021 , salaries increased by$1.2 million , or 66.9%, to$3 million from$1.8 million for the comparable period of Fiscal 2020. For the nine months endedMay 31, 2021 , salaries increased by$2.4 million , or 45.4%, to$7.8 million compared to$5.4 million for the nine months endedMay 31, 2020 . The increase for both periods is due primarily to hiring additional employees in ourMiami principal executive offices to support our growth initiative efforts and for additions to our software development team located primarily in ourIrvine, CA offices. 46 Stock-based compensation consists of compensation expense related to our employee stock option plan. Stock-based compensation increased$0.3 million , or 196%, to$0.4 million from$0.2 million for the quarter endedMay 31, 2021 . For the nine months endedMay 31, 2021 , stock-based compensation increased by$0.5 million , or 52.1%, to$1.4 million from$0.9 million compared to the nine months endedMay 31, 2020 . The increase for both periods was due to the issuance of additional stock options granted onJuly 1, 2020 to existing employees, and sinceJuly 1, 2020 to new employees. Commissions consist of commission payments made to third party brokers and inside sales personnel. Commissions increased to$49,000 for the quarter endedMay 31, 2021 , from$27,000 for the comparable period of Fiscal 2020. Commissions are primarily associated with compensation to our sales force as well as to our property and casualty agents. Commissions expense increased due to the increase in gross billings during the quarter. For the nine months endedMay 31, 2021 , commissions expense decreased by$8,000 , or 5.6%, to$136,000 from$144,000 compared to the nine months endedMay 31, 2020 . The decrease is due to a change in our sales force structure. Professional fees consist of legal fees, accounting and public company costs, board fees, and consulting fees. Professional fees for the quarter endedMay 31, 2021 , increased by$0.7 million , or 157.2%, to$1.1 million , from$0.4 million for the comparable period of Fiscal 2020. Professional fees for the nine months endedMay 31, 2021 , increased by$0.6 million , or 24.8%, to$2.8 million , from$2.3 million for the nine months endedMay 31, 2020 . The increase is attributable to an increase in legal fees, and litigation related activities of$0.6 and$1.0 million for the three and nine months endedMay 31, 2021 , respectively. External software development consists of payments to third party contractors for licenses, software development, IT related spending for the development of our HRIS platform and mobile application. External software development costs for the quarter endedMay 31, 2021 increased by$0.4 million , or 54.1%, to$1.1 million from$0.7 million for the same period of the prior fiscal year. For the nine months endedMay 31, 2021 , external software development costs increased by$1.3 million , or 95.8%, to$2.7 million , from$1.4 million for the nine months endedMay 31, 2020 . The increase for both periods is due to an increase in contract development spending during the current periods in support of our growth initiatives within the Company. General and Administrative expenses consist of office rent and related overhead, marketing, insurance, penalties, business taxes, travel and entertainment, depreciation and amortization and other general business expenses. General and administrative expenses for the quarter endedMay 31, 2021 remained consistent at$1.4 million for the current quarter and the comparable period of Fiscal 2020. General and administrative expenses increased$1.5 million , or 49.4%, to$4.7 million for the nine months endedMay 31, 2021 , from$3.2 million for the nine months endedMay 31, 2020 . The increase for both periods was driven by increased rent for our new principal executive offices inMiami , non-recurring costs to relocate certainCalifornia employees to our newMiami facility, and marketing expenses related to our growth initiatives throughout the Company. Operating loss for the quarter endedMay 31, 2021 increased by$3.2 million , or 71.9%, to$7.5 million , from$4.4 million in the comparable period of Fiscal 2020. Operating loss for the nine months endedMay 31, 2021 increased by$6.4 million , or 49.9%, to$19.1 million , compared to a loss of$12.8 million for the nine months endedMay 31, 2020 . The operating loss for the three and nine month periods endedMay 31, 2021 , was due to an increase in operating expenses of$3.0 million and$6.8 million , respectively.
Other income (expense) for the quarter and nine months ended
negligible.
Income/(loss) from discontinued operations was$23,000 for the quarter endedMay 31, 2021 , compared to a$1.5 million loss in the same period of Fiscal 2020. The Fiscal 2020 period included operations from former clients that we transferred toVensure pursuant to the Vensure Asset Sale. While these discontinued operations are not included in our Fiscal 2021 results, we still recorded estimates of workers' compensation liabilities during the quarter to cover WSEs who were transferred toVensure . The negligible income is a result of the decrease in the claims reserve. Loss from discontinued operations amounted to$1.5 million for the nine months endedMay 31, 2021 , compared to$0.9 million in income for the nine months endedMay 31, 2020 . Net loss for the quarter endedMay 31, 2021 , was$7.5 million compared to$73.0 million for the comparable period of Fiscal 2020, representing a decrease in net loss of$65.5 million or 89.7%. The decrease was due to a$67.1 million reduction in other expenses incurred in 2020 related to the conversion losses on Preferred Shares and the Convertible Notes and the net decrease of$1.5 million in net loss from discontinued operations offset by$3.6 million of additional operating losses for the quarter endedMay 31, 2021 . Net loss for the nine months endedMay 31, 2021 , was$20.6 million compared to$65.8 million for the nine months endedMay 31, 2020 . The$45.1 million net decrease is due to a$67.8 million reduction in other expenses offset by a$6.8 million increase in additional operating losses, an increase of$0.6 million in the net loss from discontinued operations, and a$15.7 million gain related to the Vensure Asset Sale that occurred in the comparable period of Fiscal 2020. 47
Liquidity and Capital Resources
For a discussion of our liquidity and capital resources, see Note 4, Going
Concern, to the Notes to the Condensed Consolidated Financial Statements in
"Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)" of
this Quarterly Report.
Non-GAAP Financial Measures In addition to financial measures presented in accordance with GAAP, we monitor other non-GAAP measures that we use to manage our business, make planning decisions and allocate resources. These key financial measures provide an additional view of our operational performance over the long term and provide useful information that we use to maintain and grow our business. The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. They are not meant to be considered in isolation, superior to, or as a substitute for the directly comparable financial measures presented in accordance with GAAP. Gross billings, which represent billings to our business clients and include WSE gross wages, employer payroll taxes, and workers' compensation premiums as well as administrative fees for our value-added services and other charges for workforce management support, are a non-GAAP measurement that represents a key operating metric for management along with number of WSEs and number of clients. Active WSEs are defined as employees on our HRIS platform that have provided services for at least one of our client customers for any reported period. Our primary non-GAAP profitability metrics are gross profit, gross profit per WSE, and gross profit percentage of gross billings, as gross billings and the number of active WSEs represent the primary drivers of our business operations. Gross billings for the three months endedMay 31, 2021 , increased by$5.6 million , or 39.1%, to$20.1 million (or$80.4 million on an annualized basis), compared to$14.4 million for the three months endedMay 31, 2020 , (or$57.6 million on an annualized basis). The gross payroll costs of our WSEs accounted for 86.8% and 86.0% of our gross billings for the three months endedMay 31, 2021 andMay 31, 2020 , respectively. Gross billings for the nine months endedMay 31, 2021 , increased by$10.7 million , or 22.7%, to$57.7 million (or$230.8 million on an annualized basis), compared to$47 million for the nine months endedMay 31, 2020 (or$188 million on an annualized basis). The gross payroll costs of our WSEs accounted for 86.9% and 86.6% of our gross billings for the nine months endedMay 31, 2021 andMay 31, 2020 , respectively. Reconciliation of GAAP to Non-GAAP Measure: Gross Billings to Net Revenues Three Months Ended, Nine Months Ended, May 31, May 31, May 31, May 31, 2021 (revised) 2020 2021 (revised) 2020 Gross Billings$ 20,060,000 $ 14,425,000 $ 57,694,000 $ 46,777,000 Less: Adjustment for EAS gross billings (revised) 10,585,000 12,411,000 43,297,000 40,496,000 Revenues$ 9,475,000 $ 2,014,000 $ 14,397,000 $ 6,281,000 May 31, August 31, May 31, 2021 2020 2020 Active WSEs (unaudited) 3,000 3,200 2,700 In our financial reports for the three months endedMay 31, 2020 , we classified as discontinued operations all billed wages, revenues, and cost of revenues associated with those clients who terminated services with us prior toJanuary 1, 2020 , and therefore did not generate recurring revenue afterJanuary 1, 2020 , (including those clients transferred toVensure as part of the Vensure Asset Sale). In the financial reports included in this Quarterly Report, we have classified only those clients transferred toVensure as part of the Vensure Asset Sale as discontinued operations, and have reclassified the remaining non-transferred, terminated clients to continuing operations. 48 Our gross billings and revenues are both derived from gross payroll wages paid to WSEs. Gross wages is a key underlying metric that management uses to analyze business activities, as it is an important component of net revenues and gross margins. The table and analysis that follows illustrates the impact of the reclassification described above on gross wages: Quarter Quarter Quarter Quarter ended ended ended ended
Client Wages (billed in $ millions) November February May August
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Fiscal Year 2021
Billed Client Wages - All Operations $ 17.3 $ 15.5
17.4
Less Discontinued Operations Billings (1) - - - Billed Client Wages for Continuing Operations (2) 17.3 15.5
17.4
Less Terminated Client Wages (3) - -
- Adjusted Billed Client Wages, Continuing Operations (4)$ 17.3 $ 15.5 17.4 Fiscal Year 2020
Billed Client Wages - All Operations$ 88.2 $ 36.3 $ 12.4 $ 16.4 Less Discontinued Operations Billings (1) (74.2 ) (23.8 ) - - Billed Client Wages for Continuing Operations (2) 14.0 12.5 12.4 16.4 Less Terminated Client Wages (3) (1.4 ) - - - Adjusted Billed Client Wages, Continuing Operations (4)$ 12.6 $ 12.5
Fiscal Year 2019 Billed Client Wages - All Operations$ 60.3 $ 67.6 $ 77.4 $ 87.1 Less Discontinued Operations Billings (1) (43.8 ) (51.2 ) (62.8 ) (72.8 ) Billed Client Wages for Continuing Operations (2) 16.5 16.4 14.6 14.3 Less Terminated Client Wages (3) (11.4 ) (9.3 ) (4.3 ) (2.8 ) Adjusted Billed Client Wages, Continuing Operations (4) $ 5.1 $ 7.1$ 10.3 $ 11.5
(1) Discontinued Operations Billings represents billings associated with the
clients transferred toVensure as part of the Vensure Asset Sale.
(2) Billed Client Wages for Continuing Operations represents the billed client
wages associated with the Fiscal 2019 and Fiscal 2020 revenues reported in
the financial statements included in our Form 10-K for Fiscal 2020, filed
with the
substantially all of the "Adjustment to Gross Billings" in the billings
reconciliation table above that reconciles gross billings to net revenues.
(3) Terminated Client Wages represents the billed wages associated with
clients that terminated services with the Company on or prior to
January 1, 2020 , but were not transferred to Vensure as part of the
Vensure Asset Sale. This group primarily consists of clients we identified
during calendar 2018 and 2019 as generating low profit margins, having
relatively high workers' compensation exposure, and/or not being
well-suited to take advantage of our HRIS platform. Billings from these
terminated clients were formerly classified under discontinued operations
billings.
49
(4) Adjusted Billed Client Wages from Continuing Operations represents client
billings for customers who were either active clients as of
2020, or were added as clients after
metric provides a useful indication of the volume, progression, and growth
in billings generated by our target client base as well as the impact of
the pandemic on our business. Material Commitments InMarch 2021 , we entered into an agreement to purchase four customized mobile kitchen units to support ourShiftPixy Labs growth initiative and made an initial deposit of$0.6 million . We expect delivery of these mobile kitchens during the fourth quarter of Fiscal 2021.
We do not have any additional contractual obligations for ongoing capital
expenditures at this time. We do, however, purchase equipment and software
necessary to conduct our operations on an as needed basis.
50
Contingencies
For a discussion of contingencies, see Note 9, Contingencies, to the Notes to the Condensed Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)" of the Quarterly Report.
New and Recently Adopted Accounting Standards
For a listing of our new and recently adopted accounting standards, see Note 2, Summary of Significant Accounting Policies, to the Notes to the Condensed Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated Financial Statements (Unaudited)" of this Quarterly Report.
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