SHIFTPIXY, INC. The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Form 10-Q.
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, uncertain and risky. 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
Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report 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.
Our Management's Discussion & Analysis of Financial Condition and Results of
Operations (MD&A) includes references to our performance measures presented in
accordance with
Overview
Our current business, and the primary source of our revenues to date, has been
under a traditional staffing services business model. Our initial market focus
is to use this traditional approach, coupled with developed technology, and
address an underserved market containing predominately lower wage employees with
high turnover, in light industrial, services, and food and hospitality. The
Company provides Human Resources, employment compliance, insurance, payroll, and
operational employment services solutions for our business clients ("clients")
and shift work or "gig" opportunities for worksite employees ("WSEs"). We
receive admin or processing fees as a percentage of a business 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
and for the quarter ended
We provide services to businesses and we define a "client" as any business
paying us to provide employee related services. We are currently focused on
clients in the restaurant and hospitality industries, traditionally market
segments with high employee turnover and low pay rates; however, we have clients
in a variety of other industries as well. All have written client service
agreements. The basic client agreement is substantially similar for all clients,
with minor modifications to fit each client's specific situation, and some
differences to account for whether the engagement is with
Our founders' initial goal was to bring Employment Administration Services
("EAS") and traditional staffing services ("Staffing") to an underserved segment
of the market; namely small businesses who lack HR and Payroll infrastructure
and therefore struggle with the HR compliance requirements and high turnover
that is prevalent for many businesses who employ lower income and part time
workers. Since our inception in 2015, we have built a client employee pool of
over 25,000 persons that is populated by lower wage employees, averaging
approximately
Beginning in 2015, our core business model is to provide payroll services and to facilitate workers compensation insurance to small businesses in exchange for an administration fee calculated as a percentage of their gross payroll. We provide such services by employing an operations team consisting of taxation, customer service, HR Compliance, benefits, and workers compensation specialists and which allows us to deliver "best practices" HR, tax compliance, workers compensation insurance, and payroll services at a lower cost than it would cost our clients to provide on their own.
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Our revenues through the first quarter of fiscal 2020 primarily consist of admin
fees calculated as a percentage of gross payroll processed, payroll taxes due on
worksite employees billed to the client and remitted to the taxation authority,
and workers compensation premiums billed to the client for which we facilitate
workers compensation coverage. Our costs of revenues consist of the accrued and
paid payroll taxes and our costs to provide the workers compensation coverage
including premiums and loss reserves. A significant portion of our assets and
liabilities is for our workers compensation reserves, carried as cash balances,
and our estimates of projected workers compensation claims, carried as
liabilities. We provide a self-funded workers compensation policy up to
· Payroll tax compliance and management services
· Governmental HR compliance such as for the Affordable Care Act compliance
requirements
· Reduced client workers compensation premiums or enhanced coverage
· Access to an employee pool of potential applicants to reduce turnover
costs
· Offset by increased administrative fee cost to the client payable to
ShiftPixy We see our technology platform as a key competitive advantage and differentiator to our market competitors. Our founders believed that providing this baseline business, coupled with a technology solution to address additional concerns such as employee scheduling and turnover, would provide a unique, cost effective solution to the HR compliance, staffing, and scheduling problems that faced these businesses. Our next goal, currently underway, is to match the small business needs of companies with paying "gigs" with a fully compliant and lower cost staffing solution. For this, we need to acquire a significant number of worksite employees ("WSE") to provide our paying clients with a variety of solutions for their unique staffing needs and facilitate the employment relationship. We further believe that our pool of WSEs will provide an opportunity to be highly competitive in "last mile" delivery solutions using gig employees within our technology solution.
Over the past four years, the Company has invested heavily in a robust, cloud-based Human Resources Information System (HRIS) platform in order to:
· reduce WSE management costs,
· automate new WSE and client onboarding, and
· provide additional value-add services for our business clients resulting
in additional revenue streams to the Company
As of
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Our cloud-based HRIS platform captures, holds, and processes HR and payroll information for the clients and WSEs through an easy to use customized front end interface coupled with a secure, remotely hosted database. The HRIS system can be accessed by either a desktop computer or an easy to use electronic mobile phone 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 our client employees into our HRIS ecosystem and thereby have created a technological solution for employers and their workers. Once onboarded, the client employees are included as our worksite employees and who are available for shift work within our business ecosystem. This allows our HRIS platform to serve as a "gig" marketplace for WSEs and clients and allows for client businesses to better manage their staffing needs.
As of
Our Services:
Our core EAS services are provided via standard legal contracts with our
business clients, customized for each client's specific needs and that are
typically one year in length and are cancelable with 30 days' notice. Through
We provide our solution in the developing nextGEN or "gig" economy primarily by
absorbing our clients' workers, who we call worksite employees (WSEs) but may
also be called "shift workers," "shifters," "gig workers," or "assigned
employees." WSEs are carried under a
At the heart of
In 2019, we implemented additional functionality to provide a scheduling component of our software, which enables each client worksite to schedule workers and to identify shift gaps that need to be filled. We utilize computer algorithms to maintain schedules and fulfillment, using an active methodology to engage and move people to action. We began using this functionality at the end of fiscal 2019 on a test basis and had additional deployments in the first fiscal quarter.
The final phase of our initial platform now beginning to be deployed, consists
of our "shift intermediation" functionality, which is designed to enable our WSE
shift workers to receive information regarding and to accept available shift
work opportunities. The intermediation functionality becomes useful only to the
extent that we have meaningful numbers of available workers and client shift
opportunities in the same geographic region. We reached geographical
concentration in
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Our goal is to have a mature and robust hosted cloud based HRIS platform coupled
with a seamless and technically sophisticated mobile phone application ("App")
that will act as both a revenue generation system as well as a "viral" customer
acquisition engine through the combination of the scheduling, delivery, and
intermediation features and interactions. We believe that once a critical mass
of clients and WSEs is achieved, additional shift opportunities will be created
pulling in additional WSEs and additional client businesses in food service and
hospitality industries. Our approach to achieving this critical mass is to
market our services to restaurant owners and franchisees, focusing on specific
brands and geographical locations. We expect critical mass to be a function of
both geography, such as in
Our initial market focus was chosen based on our understanding of the issues and challenges facing "Quick Service Restaurants" ("QSRs"), including fast food franchises and local restaurants. We have chosen to invest in two key features of our mobile application to this end consisting of: i) scheduling functionality, designed to enhance the client's experience through scheduling of employees and reducing the impact of turnover and ii) delivery functionality, designed to increase revenues through delivery fulfillment as well as to bring "in house" the delivery fulfillment and thereby reducing delivery costs.
One of the most recent developments in the food and hospitality industry is the
rapid rise of third-party restaurant delivery providers such as
We provide a solution to the third-party delivery issues. We designed our HRIS
platform to manage food deliveries by the QSRs using internal personnel and a
customized "white label" smart phone App. Our recently released delivery feature
links this "white label" delivery ordering system to our delivery solution,
thereby freeing the QSR to have their own brand showcasing an ordering APP but
retaining similar back-office delivery technology including scheduling,
ordering, and delivery status pushed to a customer's smart phone. Our technology
and approach to human capital management allows the company a unique window into
the daily demands of QSR operators and the ability to extend our technology and
engagement to enable this unique self-delivery proposition.
The first phase of this component of our platform is the driver onboarding,
which was completed in 2019. The enhanced features will also "micro meter" the
essential commercial insurance coverages required by our operator clients on a
delivery-by-delivery basis (workers' compensation and auto coverages) which has
been a significant barrier for some QSRs to provide their own delivery services.
We began using the "delivery features" of our mobile platform for selected
customers on a trial basis in the fourth quarter of fiscal 2019 into the first
quarter of 2020 and is currently active in the
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We believe
· Large Potential Market. Current statistics show that there are over 14.7
million employees working in our current target market--the restaurant and
hospitality industries representing over $300 billion of annual revenues.
(U.S. Department of Labor . Bureau of Labor Statistics . February 2018 ).
Compared to the total workforce in all industries, workers in the
restaurant industry have a notably higher percentage of part-time workers.
(National Restaurant Association . "News & Research: Restaurant middle
class job growth 4x stronger than overall economy." 13 January 2016 ). At
our current monetization rate per employee, this represents an annual
revenue opportunity of over $9 billion per year for the United States . Our
current geographic presence in California , New York City and parts of
Texas , Illinois , and Florida provides coverage of over 50% of this
opportunity. Our intention is to expand both our geographic footprint and
our service offerings into other industries, particularly where part-time
work is a significant component of the applicable labor force, including
the retail and health care sectors.
· Positive External Market Forces. A significant problem for small
businesses and in particular businesses in the food service industry such
as QSRs, involve compliance with employment related regulations imposed by
federal, state and local governments. These regulations include the
provisions of the Affordable Care Act and recent developments in
California for Gig Economy companies such as Uber and Lyft under
California SB5 which requires these companies to treat their workers as
employees rather than independent contractors. We foresaw this change and
provide a viable solution to convert contract workers into employees under
our HRIS platform. We see significant business traction from this
development.
· Rapid Rise of Independent Workers . The number of independent workers,
totaling approximately 41 million in 2018, is expected to increase to 40%
of the private, non-farm U.S. workforce by 2021. (MBO Partners . "America's
Independents / A Rising Economic Force / 2016 State of Independence in
America Report / Sixth Annual." 2016.). As of early 2019, approximately
48% of the U.S. workforce has worked as an independent employee as either
part time or on a contract basis (Source:
http://www.mbopartners.com/state-of-independence).
· Technology Affecting and Attitudes towards Employment Related Engagements.
Gig-economy platforms have changed the way part-time workers can identify
and connect to work opportunities, and Millennials and others have
embraced such technologies as a means to secure short-term employment
related engagements. The significant increase in the adoption of smart
phone devices has provided the "last mile" platform to enable technology
solutions such as ours to provide a gig economy platform. Most
importantly, for our target audience of 18-35 year old workers as of
February 2019 , 92% of these workers regularly use a smart phone (Source:
Pew Research Center ).
· New ShiftPixy Mobile App is Designed to Provide Additional Benefits to
Employers and NextGen Shift Workers . Millennials represent approximately
40% of the independent workforce who are over the age of 21 and who work
15 hours or more each week. (MBO Partners . "America's Independents / A
Rising Economic Force / 2016 State of Independence in America Report /
Sixth Annual." 2016.) Mindful that most of its shifters will be
Millennials who connect with the outside world primarily through a mobile
device, ShiftPixy is poised to significantly expand its business through
the ShiftPixy mobile app. The ShiftPixy mobile app is a proprietary
application downloaded to mobile devices, allowing ShiftPixy's shifters to
access shift work opportunities at all of ShiftPixy's clients, not just
their current restaurant or hospitality provider, and with an added
feature, anticipated to be available in the first calendar quarter of
2020, also allowing shift employees not working at its clients to access
shift work opportunities at all of its clients.
Significant Developments in Q1 2020
Revised customer focus
Beginning in
We believe our new sales model is better served to incentivize our sales and
marketing personnel to acquire those customers that benefit from the HRIS value
proposition and will result in both increased revenues and profitability. We
also reviewed our legacy customers after this refocus as well as during the due
diligence process for the assignment transaction that closed in
As a result, our customer acquisition, compared to historical customer
acquisition, was not comparable. The "legacy" business consisting of clients in
industries such as landscaping and construction has historically driven a large
part of our growth but has lower gross margins and less upsell opportunity. We
saw a reduction of approximately 200 billable employees, resulting from two
customers that were acquired and changed service providers from the legacy
customer group as compared to
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Software Development
Prior to
The Company began building its internal software development team and transitioned away from its current software development vendor to expedite the Company's technology deployment. The tardy delivery of the user features from the Company's previous software development vendor and related on-going litigation slowed down the pace of the Company's growth. The completion of our technology and the deployment of these features would further accelerate the growth of the Company. Under licensing agreement, the Company launched version 2.0 of its app and enhanced user features (onboarding, scheduling and intermediation) during the fourth calendar quarter with all user features as well as the driver management. The release of these features will further accelerate the growth of our business and move the Company closer to its financial breakeven point.
We continued our software development internally in the first quarter of 2020 primarily feature enhancements such as delivery, scheduling, and onboarding functionality improvement, and better integration and more seamless process flow improvements resulting 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.
From inception of the project in 2017 through
The following table shows the technology and marketing spending for each period
reported:
Three months Three months
ending ending
November 30, November 30,
Development spending (in $ millions) 2019 2018
(unaudited) (unaudited)
Contract development and licenses $ 0.4 $ 0.8
Internal personnel costs 0.4 0.1
Total Development spending $ 0.8 $ 0.9
Marketing spending
Advertising and Outside Marketing $ 0.3 $ 0.4
Internal personnel costs 0.1 0.1
Subtotal, Marketing costs $ 0.4 $ 0.5
Total, HRIS platform and mobile application
spending $ 1.2 $ 1.4
Cumulative Investment $ 16.7 10.6
Portion of investment capitalized as fixed assets $ 3.7 0.4
Portion of investment expensed $ 13.0 10.2
For the quarters ended
Prior to
Under these licensing agreements, the Company launched version 2.0 of its app and enhanced user features (onboarding, scheduling and intermediation) during the fourth calendar quarter of 2019 with all user features as well as the driver management to selected customers on a test basis. The development team used the experience from these real-world test cases to further enhance the process flows, usability, and user experience for the mobile app and accompanying desktop application software during the first quarter of 2020. The feature enhancements such as delivery, scheduling, and onboarding functionality improvement, and better integration and more seamless process flow improvements 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. We are currently preparing additional test activities in advance of a full commercial rollout later in fiscal 2020.
The mobile app is one of the software components of what we call the mobile
platform, and together with the
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 use the app to gather required
compliance documents such as
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Key Developments subsequent to
Nasdaq delisting notice:
On
The first letter noted that the Company's security had filed to maintain a
minimum bid price of
The second letter noted that the Company's security had filed to maintain one of
the other listing requirements, either: i) a minimum Market Value of
On
On
We have provided a response to the NASDAQ regulatory body of our plans. We
believe that we have satisfied the first two letters by way of our 1 for 40
reverse for the minimum share price requirement. With our recent gain on the
assignment transaction and note settlements described below, we will have in
excess of
March 2019 Note Exchange:
On
On
Convertible Note Settlements and Litigation Settlements:
In
In
On
Performance Highlights
Q1 FYE 2019 vs. Q1 FYE 2018
· Served approximately 270 clients and co-employed average 13,400 worksite
employees, a 49% increase in average worksite employees compared to the
same period in FYE 2019, and
· Processed approximately $110.5 million in gross billings, an increase of
55.9% over the same period in 2018.
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Our financial performance for the first quarter ended
Revenues increased 50.8% to
Cost of Revenue increased 75.9% to
Gross profit decreased 5.0% to
Operating expenses increased by 18.8% to
Other expense, net decreased by 77% to
Net Loss increased to
Results of Operations
The following table summarizes the condensed consolidated results of our
operations for the three months ended
For the Three Months Ended
November 30,
2019 2018
(Restated)
Revenues (gross billings of
$ 15,866,000 $ 10,520,000 Cost of revenue 12,552,000 7,134,000 Gross profit 3,314,000 3,386,000 Operating expenses: Salaries, wages and payroll taxes 2,283,000 1,872,000 Commissions 774,000 553,000 Professional fees 840,000 624,000 External Software development 353,000 310,000 General and administrative 1,401,000 1,316,000 Total operating expenses 5,651,000 4,675,000 Operating Loss (2,337,000 ) (1,289,000 ) Other income (expense) Interest expense (1,161,000 ) (957,000 ) Change in fair value of derivative liability 942,000 - Total other income (expense) (219,000 ) (957,000 ) Net Loss$ (2,556,000 ) $ (2,246,000 ) Net loss per common share Basic and diluted$ (2.86 ) $ (3.11 ) Weighted average number of common shares Basic and diluted 893,094 723,033 31 Table of Contents
Revenue for the three months ended
Gross billings are a non-GAAP measurement and are the metric in which we
currently earn our revenue. Gross billings for the three months ended
The gross payroll costs of our worksite employees account for 85.7 % and 85.2%
of our gross billings for the three months ended
Revenues' increase was primarily due to the increase in worksite employee by an
average of 3,521 to an average of 8,990 employees, compared to 5,470 employees
in the three months ended
Cost of Revenues mainly includes the costs of employer-side taxes and workers'
compensation insurance coverage. Our cost of revenues for the three months ended
Approximately
Gross Profit for the three months ended
Operating Expenses
The following table presents certain information related to our operating
expenses (unaudited)
Three months ended November 30,
2019 2018 % Change
(in thousands) (in thousands)
Salaries, wages and payroll taxes $ 2,283 $ 1,872 21.9 %
Commissions 774 553 40.0 %
Professional fees 840 624 34.6 %
External Software development 353 310 13.9 %
General and Administrative 1,401 1,316 6.5 %
Total operating expenses $ 5,651 $ 4,675 20.9 %
Operating expenses increased
Salaries, wages and payroll taxes consist of gross salaries, benefits, and
payroll taxes associated with our executive management team and corporate
employees and share based compensation and increased by
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Commissions consist of commissions payments made to third party brokers and
inside sales personnel. Commissions increased by
Professional fees consist of legal fees, accounting and public company costs,
board fees, and consulting fees. Professional fees for the quarter ended
External software development consists of payments to third party contractors
for licenses, software development, IT related spending for the development of
our HRIS platform and mobile application. External software development
increased by
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 ended
Other expenses represented in the table below decreased from$0.9 million for the quarter endedNovember 30, 2018 to$0.2 million for the quarter endedNovember 30, 2019 : For the three months ended (unaudited) November 30, 2019 2018 (Restated) Interest expense (1,161,000 ) (947,000 ) Change in fair value of derivative liability 942,000 - Total other income (expense) (219,000 ) (947,000 )
Interest Expense consists of cash interest on interest bearing notes, financing
charges for the excess of fair value over carrying amounts of notes issued
during any reporting period, amortization of recorded discount and associated
deferred financing costs, and acceleration of discounts and deferred financing
costs due to early conversions on notes payable. Interest expense increased by
Change in fair value of derivative: The balance for the quarter ended
Net loss. As a result of the explanations described above, the net loss for the
fiscal quarter ended
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Liquidity and Capital Resources
As of
The ability of the Company to continue as a going concern is dependent upon
generating profitable operations in the future and obtaining additional funds by
way of public or private offering to meet the Company's obligations and repay
its liabilities when they become due. The Company has a recurring revenue
business model that generated
The Company's plans and expectations for the next 12 months include raising additional capital to help fund expansion of its operations, including the continued development and support of its IT and HR platform and settling its outstanding debt as it comes due. The Company engaged an investment banking firm to assist the Company in (i) preparing information materials, (ii) advising the Company concerning the structure, price and conditions and (iii) organizing the marketing efforts with potential investors in connection with a financing transaction.
Historically, the Company's principal source of financing has come through the
sale of its common stock and issuance of convertible notes. The Company
successfully completed an Initial Public Offering (IPO) on NASDAQ on
Subsequent to
The Company's management believes that the Company's current cash position, along with its revenue growth and the financing from potential institutional investors will be sufficient to fund its operations for at least a year from the date these financials are available. If these sources do not provide the capital necessary to fund the Company's operations during the next twelve months from the date of this report, the Company may need to curtail certain aspects of its operations or expansion activities, consider the sale of its 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 terms advantageous to the Company or that any such additional financing would be available to the Company. These condensed consolidated financial statements do not include any adjustments from this uncertainty.
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. 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.
We report our revenues as gross billings, net of related direct labor costs, for
our EAS clients and revenues without reduction of labor costs for staffing
services clients. For the years ended
Reconciliation of GAAP to Non-GAAP Measure: Gross Billings to Net Revenues
For the quarter
Ended
November 30,
2019 2018
Gross Billings in millions $ 110.7 $ 70.9
Less: Adjustment to gross billings 94.8 60.4
Revenues, in millions $ 15.9 $ 10.5
November 30, August 31, November 30,
2019 2019 2018
Active worksite employees (unaudited) 13,400 13,100 9,000
Material Commitments
We do not have any 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.
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Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements.
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. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
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, of the Condensed Notes to the Consolidated Financial Statements in "Part I, Item 1. Condensed Consolidated Financial Statements (unaudited)" of this report.
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