See accompanying notes to the unaudited interim condensed consolidated financial statements.
See accompanying notes to the unaudited interim condensed consolidated financial statements.
See accompanying notes to the unaudited interim condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
November 30, 2017
Note 1: Nature of Operations
ShiftPixy, Inc. (the “Company”) was incorporated in the State of Wyoming on June 3, 2015. The Company is a specialized staffing service provider that provides solutions for large contingent part-time workforce demands, primarily in the restaurant, hospitality and maintenance service trades. The Company’s initial focus is on the restaurant industry in Southern California.
Shift Human Capital Management Inc. (“SHCM”), a wholly-owned subsidiary of ShiftPixy, Inc., is incorporated in the State of Wyoming. SHCM functions substantially as a professional employer organization (“PEO”); under our co-employment model, SHCM assumes certain of the responsibilities of being an employer and helps our clients mitigate employer-related risks and manage many of the complex and burdensome administrative and compliance responsibilities associated with employment. SHCM also functions as an administrative services only (“ASO”) provider, in response to client needs for only administrative and processing services, performing functions in the nature of a payroll processor, human resources consultant, administrator of worker’s compensation coverages and claims, under circumstances wherein the client remains as the sole employer of the subject employees. These services are also available to businesses in all industries, not limited to the restaurant and hospitality industries. The Company hopes that this mechanism may become a way to onboard new clients into the ShiftPixy Ecosystem when eligible clients to whom the Company is providing these services recognize the value of the services provided by the parent Company.
The Company is operating in one reportable segment.
Note 2: Summary of significant accounting policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim reports of companies filing as a smaller reporting company. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three months period ended November 30, 2017, are not necessarily indicative of the results that may be expected for the year end August 31, 2018.
The condensed consolidated balance sheet as of August 31, 2017, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial information.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended August 31, 2017, filed with the SEC on December 14, 2017.
Principles of Consolidation
The Company and its wholly-owned subsidiary have been consolidated in the accompanying unaudited condensed consolidated financial statements. All intercompany balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include:
|
|
·
|
Liability for legal contingencies,
|
|
|
|
|
|
|
·
|
Useful lives of property and equipment,
|
|
|
|
|
|
|
·
|
Assumptions made in valuing equity instruments issued for service, and
|
|
|
|
|
|
|
·
|
Deferred income taxes and related valuation allowance.
|
Computer Software Development
Software development costs relate primarily to software coding, systems interfaces and testing of our proprietary professional employer information systems and are accounted for in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal Use Software. Internal software development costs are capitalized from the time the internal use software is considered probable of completion until the software is ready for use. Business analysis, system evaluation and software maintenance costs are expensed as incurred. Capitalized software development costs are amortized using the straight-line method over the estimated useful life of the software, which ranges from 3 to 10 years.
Revenue Recognition
The Company’s revenues are primarily attributable to fees for providing staffing solutions and PEO/ASO services. The Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the services have been rendered to the customer; (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
We account for our PEO revenues in accordance with Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition, Principal Agent Considerations. Our PEO solutions revenue is primarily derived from our gross billings, which are based on (i) the payroll cost of its worksite employees and (ii) a mark-up computed as a percentage of payroll costs.
The gross billings are invoiced concurrently with each periodic payroll of its worksite employees. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup are recognized ratably over the payroll period as worksite employees perform their service at the client worksite.
Consistent with our revenue recognition policy, our direct costs do not include the payroll cost of our worksite employees. Our cost of revenue is primarily comprised of all other costs related to our worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.
Cash and Cash Equivalents and Concentration of Credit Risk
The Company considers all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash with a commercial bank and from time to time exceed the federally insured limits. The deposits are made with a reputable financial institution, and the Company does not anticipate realizing any losses from these deposits. The Company did not have any cash equivalents at November 30, 2017, and August 31, 2017. None of the Company’s clients represents more than 10% of our annualized revenues for fiscal years 2018 or 2017. However, three clients represent approximately 54% of total accounts receivable at November 30, 2017, compared to three clients representing approximately 48% of our total accounts receivable at August 31, 2017.
Workers’ Compensation
A portion of the Company’s workers’ compensation risk is covered by a retrospective rated policy, which calculates the final policy premium based on our loss experience during the term of the policy and the stipulated formula set forth in the policy. The Company funds the policy premium based on standard premium rates on a monthly basis and based on the gross payroll applicable to workers covered by the policy. During the policy term and thereafter, periodic adjustments may involve either a return of previously paid premiums or a payment of additional premiums by the Company or a combination of both. If the Company’s losses under that policy exceed the expected losses under that policy, then the Company could receive a demand for additional premium payments. The Company funded an initial deposit of $2.3 million, which is included in prepaid expenses on the condensed consolidated balance sheet. As of November 30, 2017, the Company has not been notified of any adverse loss ratio as compared to the standard premium.
Fair Value Measurements
The fair value accounting guidance defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The definition is based on an exit price rather than an entry price, regardless of whether the entity plans to hold or sell the asset. This guidance establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The carrying value of accounts receivable, and accounts payable approximates the fair value due to their short-term maturities.
Earnings (Loss) Per Share
The Company utilizes Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 common shares 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 share equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common share 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 share equivalents if their effect would be anti-dilutive.
The reconciliation of basic and diluted earnings per share on common stock in the three months ended November 30, 2017, and 2016 follows:
|
|
For the
three
Months Ended
|
|
|
|
November 30,
2017
|
|
|
November 30,
2016
|
|
|
|
|
|
|
|
|
Net (loss) earnings available to common shareholders
|
|
$
|
(3,341,217
|
)
|
|
$
|
378,099
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,767,850
|
|
|
|
26,213,800
|
|
Dilutive share awards
|
|
|
-
|
|
|
|
760,350
|
|
Diluted
|
|
|
28,767,850
|
|
|
|
26,974,150
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.12
|
)
|
|
$
|
0.01
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.12
|
)
|
|
$
|
0.01
|
|
Securities that are excluded from the calculation of weighted average dilutive common shares, because their inclusion would have been antidilutive, are stock options and warrants for the three months ended November 30, 2017, and 2016. In the three months ended November 30, 2017, the number of warrants that were excluded from the diluted (loss) earnings per share amounted to 108,671 shares.
Stock options were excluded from the computation of diluted earnings per share due to their anti-dilutive effect in the three months ended November 30, 2017, and 2016.
Recent Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, issued as a new Topic, ASC Topic 606 (ASU 2014-09). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The premise of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
On April 1, 2015, the FASB decided to defer the effective date of the new revenue standard by one year. The update is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019.
We are currently developing an adoption plan of how we currently recognize revenue compared to the accounting treatment required under the new guidance. This plan includes a review of client contracts and revenue transactions to determine the impact of the accounting treatment under the new guidance, evaluation of the adoption method and completing a rollout plan for the new guidance. Additionally, we are in the process of assessing the impact of the new standard on our disclosures and internal controls.
In February 2016, the FASB issued new accounting guidance on leases ASU 2016-02, Leases. The new standard requires that a lessee recognize assets and liabilities on the balance sheet for leases with terms longer than 12 months. The recognition, measurement and presentation of lease expenses and cash flows by a lessee will depend on its classification as a finance or operating lease. The guidance also includes new disclosure requirements providing information on the amounts recorded in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.The Company is currently evaluating the impact that this standard will have on its consolidated financial statement.
In March 2016, the FASB issued ASU 2016-09 amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled, with prospective application required. The guidance also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance required the classification of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows, with retrospective application required. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. Adoption of this guidance had no impact on our Consolidated Financial Statements.
In November 2016, the FASB issued ASU 2016-18 amending the presentation of restricted cash within the statement of cash flows. The new guidance requires that restricted cash be included within cash and cash equivalents on the statement of cash flows. The ASU is effective retrospectively for reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted.
In May 2017, FASB issued ASU 2017-09 clarifying when changes to the terms and conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. It does not change the accounting for modifications. The ASU is effective prospectively for reporting periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. Adoption of this guidance had no impact on our Consolidated Financial Statements.
Note 3: Liquidity
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
As of November 30, 2017, the Company has accumulated losses since inception of approximately $12.7 million. The Company has a history of negative cash flows from operations.
Since inception, the Company’s principal source of financing has come through the sale of its common stock. The Company successfully completed an Initial Public Offering (IPO) on June 29, 2017, raising a gross amount of $12 million ($10.9 million net of costs).
As of November 30, 2017, the Company had cash and cash equivalents of $2.8 million and working capital of $2.0 million. During the three months ended November 30, 2017, the Company has used approximately $3.0 million in cash from operation, of which $2.2 million was attributed to the mobile application development costs ($1.9 million) and workers’ compensation deposit ($0.3 million). Exclusive of the development costs which, if needed, can be deferred and/or suspended with proper notification until funding is available, the Company is currently using $0.8 million each quarter from its operations or less than $0.3 million per month.
As a consequence of changing certain providers and achieving some economies of scale, the Company has realized a significant reduction to its workers’ compensation expense going forward. In addition, the Company has experienced significant growth in the number of worksite employees and clients in the months following its fiscal quarter end. Since November 30, 2017, the Company has added, through executed service agreements, approximately 16 clients, servicing 2,100 worksite employees with approximately $130 million in additional gross billings per year.
We also anticipate that, as a result of the significant growth in activity that we have experienced so far in the second quarter and the savings realized in connection with our workers’ compensation program, that cash used in operations will be reduced from its current level of less than $0.3 million per month. We believe that our current cash position, along with our revenue growth will be sufficient to fund our operations for at least a year from the date these financials are available, assuming the Company postpones the funding of further development of its technology platform, which the Company has the right to do and without scaling back any of its operations.
Additional funding sources could include issuance of equity or other sources. If the Company is unable to raise sufficient additional funds or generate positive cash flow when required, it will have to develop and implement a plan which may include but may not be limited to such measures as extending payables, reducing overhead, suspending the development of our technology platform and/or delaying the remittance of taxes.
There can be no assurance that such a plan will be successful. We have considerable discretion over the extent of expenditures and have the ability to curtail the related cash flows as needed. We believe that all of these factors are sufficient to alleviate substantial doubt about the Company’s ability to continue as a going concern.
Note 4: Stockholders’ Equity
Preferred Stock
In September of 2016, the Company issued options to purchase preferred stock at $0.0001 per share. This issuance was approved by our shareholders. The number of options is equal to the lesser of (a) the number of shares of common stock held by such Shareholder on September 28, 2016, which accounts for approximately 25.6 million shares, or (b) the number of shares of common stock held by such Shareholder on date of the Shareholder’s exercise of the aforesaid option. The preferred stock that is the subject of such contingent option provides a right to elect a majority of the directors on the Board of Directors of the Corporation and does not include any rights to dividends, conversion to shares of common stock, or preference upon liquidation of the Corporation. The contingent option is exercisable only upon the acquisition of a 20% or greater voting interest in the Corporation by a party other than the founding shareholders, or prior to any proposed merger, consolidation (in which the Corporation’s common stock is changed or exchanged) or sale of at least 50% of the Corporation’s assets or earning power (other than a reincorporation). The right to exercise the option terminates on December 31, 2023.
Common Stock and Warrants
During the three months ended November 30, 2017, the Company issued 25,000 shares of common stock following the exercise of warrants with an exercise price of $2 and received gross proceeds of $50,000.
On March 16, 2017, the Company granted 50,000 common shares, through the ShiftPixy, Inc., 2017 Stock Option /Stock Issuance Plan (the “Plan”) to Kenneth W. Weaver, of which 25,000 common shares were committed at an assumed fair market value of $3.80 per share, and deemed to have been purchased and vested on December 5, 2017 as a consequence of Mr. Weaver’s continued service as director through that date. During the three months ended November 30, 2017, the Company recognized 12,432 shares of common stock for services that vested during the three months ended November 30, 2017, at a fair value of $47,240. There was no common stock issued for services during the three months ended November 30, 2016.
The following tables summarize our warrants outstanding as of November 30, 2017:
|
|
Number
of
shares
|
|
|
Weighted
average
remaining
life
(years)
|
|
|
Weighted
average
exercise
price
|
|
Warrants outstanding, August 31, 2017,
|
|
|
2,595,413
|
|
|
|
1.55
|
|
|
$
|
2.99
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Exercised)
|
|
|
(25,000
|
)
|
|
|
-
|
|
|
$
|
2.00
|
|
(Cancelled)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Expired)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding, November 30, 2017,
|
|
|
2,570,413
|
|
|
|
1.25
|
|
|
$
|
3.00
|
|
Warrants exercisable, November 30, 2017,
|
|
|
2,570,413
|
|
|
|
1.25
|
|
|
$
|
3.00
|
|
The following table summarizes information about warrants outstanding as of November 30, 2017:
Exercise price
|
|
|
Warrants Outstanding
|
|
|
Weighted average life of outstanding warrants
in years
|
|
$
|
2.00
|
|
|
|
931,300
|
|
|
|
1.25
|
|
$
|
3.00
|
|
|
|
1,003,800
|
|
|
|
1.25
|
|
$
|
4.00
|
|
|
|
535,313
|
|
|
|
1.25
|
|
$
|
6.90
|
|
|
|
100,000
|
|
|
|
1.25
|
|
|
|
|
|
|
2,570,413
|
|
|
|
1.25
|
|
Note 5: Stock based Compensation
The Company granted options to purchase an aggregate total of 35,000 shares of Common Stock during the three months ended November 30, 2017. The Company recognized approximately $70,000 of compensation expense in the three months ended November 30, 2017. The weighted average remaining contract life of the options is 9.61 years. The aggregate intrinsic value of the options outstanding as of November 30, 2017, is $0.
Stock option activity during the three months ended November 30, 2017, is summarized as follows:
|
|
Options Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
Options outstanding at August 31, 2017
|
|
|
790,000
|
|
|
$
|
4.44
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
35,000
|
|
|
|
3.10
|
|
Forfeited
|
|
|
(75,000
|
)
|
|
$
|
4.00
|
|
Expired
|
|
|
-
|
|
|
|
|
|
Options outstanding at November 30, 2017
|
|
|
750,000
|
|
|
$
|
4.61
|
|
Options Exercisable at November 30, 2017
|
|
|
-
|
|
|
|
-
|
|
Note 6: Related Parties
Our Sales Manager is an advisor to and significant shareholder of the Company. The Company incurred $170,000 and $0 in professional fees for management consulting services in the three months ended November 30, 2017, and 2016, respectively.
Note 7: Income Taxes
The Company accounts for income taxes pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Income Taxes.” Under FASB 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.
FASB ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. Under FASB 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.
The Company has generated a net loss of $3.3 million in the three months ended November 30, 2017, compared to a net income of $0.4 million in the three months ended November 30, 2016. The Company did not recognize any provision for income tax in the three months ended November 30, 2016, as the Company anticipated a loss for the year ended August 31, 2017.
Note 8: 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.
Note 9: Subsequent Events
On December 5, 2017, the Company recognized 820 shares of common stock for services at a fair value of $3,115.
On December 22, 2017, the President signed into legislation the Tax Cuts and Jobs Act (the Act), The Act changes existing U.S. tax law and includes numerous provisions that will affect our business, including our income tax accounting, disclosure and tax compliance. We believe the most impactful changes within the Act are those that will reduce the U.S. corporate tax rates, business-related exclusions and deductions and credits. ASC 740, “Income Taxes” (Topic 740), requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, as of the date of enactment, and during the three months ended February 28, 2018, the Company will value all deferred tax assets and liabilities at the newly enacted Corporate U.S income tax rate.
Management has evaluated subsequent events pursuant to the issuance of the interim unaudited consolidated financial statements and has determined that other than listed above, no other subsequent events exist through the date of this filing.