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Table of Contents
UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2022
oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______ to _______
SEC File No. 001-37954
SHIFTPIXY, INC.
(Exact name of registrant as specified in its charter)
Wyoming47-4211438
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
501 Brickell Key Drive, Suite 300, Miami, FL
33131
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number: (888) 798-9100
N/A
(Former name, former address and former three months, if changed since last report)
Securities registered under Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per sharePIXYThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated fileroAccelerated filero
Non-accelerated filerxSmaller reporting companyx
Emerging growth companyx
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s only class of common stock issued and outstanding as of July 15, 2022, was 38,334,873.




Table of Contents
TABLE OF CONTENTS
  
 


Table of Contents
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ShiftPixy, Inc. 
Condensed Consolidated Balance Sheets
May 31,
2022
August 31,
2021
(Unaudited)
ASSETS
Current assets
Cash$70,000 $1,199,000 
Accounts receivable352,000 498,000 
Unbilled accounts receivable3,470,000 2,741,000 
Deposit – workers’ compensation 155,000 
Prepaid expenses 782,000 605,000 
Other current assets95,000 126,000 
Current assets of discontinued operations 356,000 
Total current assets4,769,000 5,680,000 
Cash and marketable securities held in Trust Account (See Notes 2 and 5)116,765,000  
Fixed assets, net2,898,000 2,784,000 
ROU operating lease8,209,000 — 
Note receivable, net 4,004,000 
Deposits – workers’ compensation 386,000 
Deposits and other assets944,000 944,000 
Deferred offering costs – SPACs (See Note 5) 48,261,000 
Non-current assets of discontinued operations 883,000 
Total assets$133,585,000 $62,942,000 
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities
Accounts payable and other accrued liabilities$11,525,000 $6,553,000 
Payroll related liabilities14,459,000 7,876,000 
Accrued workers’ compensation costs663,000 663,000 
Current liabilities of discontinued operations1,251,000 1,516,000 
Total current liabilities27,898,000 16,608,000 
Non-current liabilities
Operating lease liability, non-current7,929,000 — 
Accrued workers’ compensation costs1,351,000 1,646,000 
Non-current liabilities of discontinued operations3,074,000 3,765,000 
Total liabilities40,252,000 22,019,000 
Commitments and contingencies
Class A common shares subject to possible redemption 11,500,000 and no shares at $10.15 per share redemption value as of May 31, 2022 and August 31, 2021 (See Notes 2 and 5)
116,725,000  
Stockholders’ equity (deficit)
Preferred stock, 50,000,000 authorized shares; $0.0001 par value
  
Common stock, 750,000,000 authorized shares; $0.0001 par value; 38,334,873 and 25,863,099 shares issued as of May 31, 2022 and August 31, 2021  
4,000 3,000 
Additional paid-in capital146,877,000 142,786,000 
Accumulated deficit (179,767,000)(149,338,000)
Total ShiftPixy, Inc. Stockholders' deficit(32,886,000)(6,549,000)
Non-controlling interest in consolidated subsidiaries (See Note 5)$9,494,000 $47,472,000 
Total Equity (Deficit)$(23,392,000)$40,923,000 
Total liabilities and equity deficit$133,585,000 $62,942,000 
The accompanying notes are an integral part of these condensed consolidated financial statements.
2

Table of Contents
ShiftPixy, Inc. 
Condensed Consolidated Statements of Operations 
(Unaudited)
For the Three Months Ended
For the Nine Months
Ended
May 31,
2022
May 31,
2021
May 31,
2022
May 31,
2021
Revenues (See Note 2)$9,643,000 $9,475,000 $29,021,000 $14,397,000 
Cost of revenue9,039,000 9,922,000 27,782,000 13,968,000 
Gross profit  (loss)604,000 (447,000)1,239,000 429,000 
Operating expenses:
Salaries, wages, and payroll taxes3,253,000 2,993,000 10,796,000 7,778,000 
Stock-based compensation – general and administrative321,000 444,000 1,069,000 1,363,000 
Commissions17,000 49,000 73,000 136,000 
Professional fees2,680,000 1,129,000 6,094,000 2,842,000 
Software development287,000 1,057,000 2,521,000 2,720,000 
Depreciation and amortization133,000 120,000 386,000 268,000 
Impaired asset expense4,004,000  4,004,000  
General and administrative2,630,000 1,309,000 6,576,000 4,448,000 
Total operating expenses13,325,000 7,101,000 31,519,000 19,555,000 
Operating Loss(12,721,000)(7,548,000)(30,280,000)(19,126,000)
Other (expense) income:
Interest expense(1,000)(3,000)(2,000)(9,000)
Other income27,000  43,000  
Expensed SPAC offering costs  (515,000) 
Total other expense26,000 (3,000)(474,000)(9,000)
Loss from continuing operations(12,695,000)(7,551,000)(30,754,000)(19,135,000)
Total (loss) income from discontinued operations, net of tax(132,000)23,000 (283,000)(1,512,000)
Net loss attributable to ShiftPixy, Inc. shareholders $(12,827,000)$(7,528,000)$(31,037,000)$(20,647,000)
Deemed dividend from change in fair value from warrants modification  (7,731,000) 
Net loss attributable to common shareholders$(12,827,000)$(7,528,000)$(38,768,000)$(20,647,000)
Net loss  per share, Basic and diluted
Continuing operations$(0.33)$(0.22)$(1.01)$(0.59)
Discontinued operations  (0.01)(0.05)
Net  loss per common share – Basic and diluted$(0.34)$(0.22)$(1.02)$(0.64)
Weighted average common shares outstanding – Basic and diluted38,372,633 35,596,111 37,834,867 32,385,287 

The accompanying notes are an integral part of these condensed consolidated financial statement.
3

Table of Contents
ShiftPixy, Inc. 
Condensed Consolidated Statements of Equity (Deficit) 
For the Nine Months Ended May 31, 2022
(Unaudited)
Preferred Stock
Issued
Common Stock
Issued
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Deficit ShiftPixy, Inc.
Noncontrolling interestTotal
Equity
(Deficit)
SharesAmountSharesAmount
Balance, September 1, 2021 $ 25,863,099 $3,000 $142,786,000 $(149,338,000)$(6,549,000)$47,472,000 $40,923,000 
Cumulative effect adjustment for ASC 842 lease accounting adoption— — — — — 608,000 608,000 — $608,000 
Common stock issued for private placement, net of offering cost— — 2,850,000 — 4,183,000 — 4,183,000 — $4,183,000 
Common stock issued on exercised warrants, net of offering costs— — 9,621,774 1,000 5,409,000 — 5,410,000 — $5,410,000 
Prefunded warrants from private placement, net of offering costs— — — — 6,861,000 — 6,861,000 — $6,861,000 
Stock-based compensation expense— — — — 1,069,000 — 1,069,000 — $1,069,000 
Remeasurement of IHC temporary equity— — — — (13,431,000)— (13,431,000)— $(13,431,000)
Withdrawal of SPAC registrations under Form S-1— — — — — (37,978,000)$(37,978,000)
Net Loss— — — — — (31,037,000)(31,037,000)$(31,037,000)
Balance, May 31, 2022 $ 38,334,873 $4,000 $146,877,000 $(179,767,000)$(32,886,000)$9,494,000 $(23,392,000)
ShiftPixy, Inc.
Condensed Consolidated Statements of Equity (Deficit) 
For the Three Months Ended May 31, 2022
(Unaudited)
Preferred Stock
Issued
Common Stock
Issued
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Deficit ShiftPixy, Inc.
Noncontrolling interestTotal
Equity
(Deficit)
SharesAmountSharesAmount
Balance, March 1, 2022 $ 33,661,552 $3,000 $146,716,000 $(166,940,000)$(20,221,000)$9,494,000 $(10,727,000)
Cumulative effect adjustment for ASC 842 lease accounting adoption— — — — — — $— — $— 
Common stock issued on exercised warrants, net of offering costs— — 4,673,321 1,000 — — $1,000 — $1,000 
Stock-based compensation expense— — — — 321,000 — 321,000 — $321,000 
Remeasurement of IHC temporary equity(160,000)(160,000)$(160,000)
Net Loss— — — — — (12,827,000)(12,827,000)— $(12,827,000)
Balance, May 31, 2022 $ 38,334,873 $4,000 $146,877,000 $(179,767,000)$(32,886,000)$9,494,000 $(23,392,000)

The accompanying notes are an integral part of these condensed consolidated financial statements.
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ShiftPixy, Inc. 
Condensed Consolidated Statements of Equity (Deficit) 
For the Nine Months Ended May 31, 2021
(Unaudited)
Preferred Stock
Issued
Common Stock
Issued
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Deficit ShiftPixy, Inc.
Noncontrolling interestTotal
Equity
(Deficit)
SharesAmountSharesAmount
Balance, Balance, September 1, 2020 $ 16,902,146 $1,000 $119,431,000 $(119,462,000)$(30,000)$ $(30,000)
Common stock issued for private placement, net of offering cost— — 2,320,000 1,000 11,062,000 — 11,063,000 — 11,063,000 
Common stock issued for underwritten public offering, net of offering costs— — 4,000,000 — 10,701,000 — 10,701,000 — 10,701,000 
Stock-based compensation expense— — — — 1,250,000 — 1,250,000 — 1,250,000 
Excess fair value of SPAC Founder shares transferred to underwriters— — — — — — — 47,472,000 47,472,000 
Preferred stock issued for preferred option exercised12,500 — — — — — — — — 
Common stock issued on preferred stock conversion(12,500)— 12,500 — — — — — — 
Net Loss— — — — — (20,647,000)(20,647,000)— $(20,647,000)
Balance, May 31, 2021 $ 23,234,646 $2,000 $142,444,000 $(140,109,000)$2,337,000 $47,472,000 $49,809,000 

ShiftPixy, Inc.
Condensed Consolidated Statements of Equity (Deficit) 
For the Three Months Ended May 31, 2021
(Unaudited)

Preferred Stock
Issued
Common Stock
Issued
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Deficit ShiftPixy, Inc.
Noncontrolling interestTotal
Equity
(Deficit)
SharesAmountSharesAmount
Balance, Balance, March 1, 2021 $ 20,914,646 $1,000 $130,995,000 $(132,581,000)$(1,585,000)$(1,585,000)
Common stock issued for private placement, net of offering costs— — 2,320,000 1,000 11,062,000 — 11,063,000 — 11,063,000 
Stock-based compensation expense— — — — 387,000 — 387,000 — 387,000 
Excess fair value of SPAC Founder shares transferred to underwriters— — — — — — — 47,472,000 47,472,000 
Net Loss— — — — — (7,528,000)(7,528,000)— (7,528,000)
Balance, Balance, May 31, 2021 $ 23,234,646 $2,000 $142,444,000 $(140,109,000)$2,337,000 $47,472,000 $49,809,000 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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ShiftPixy, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months
Ended
May 31,
2022
May 31,
2021
OPERATING ACTIVITIES
Net loss$(31,037,000)$(20,647,000)
Loss from discontinued operations(283,000)(1,512,000)
Net loss from continuing operations(30,754,000)(19,135,000)
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
Depreciation and amortization 386,000 268,000 
Impaired asset expense4,004,000  
Stock-based compensation1,069,000 1,250,000 
Expensed SPAC offering costs515,000  
Non-cash lease expense727,000 — 
Changes in operating assets and liabilities:
Accounts receivable146,000 196,000 
Unbilled accounts receivable(729,000)(378,000)
Prepaid expenses and other current assets(146,000)212,000 
Deposits – workers’ compensation541,000 268,000 
Deposits and other assets (502,000)
Accounts payable and other accrued liabilities4,573,000 1,218,000 
Payroll related liabilities6,583,000 2,659,000 
Accrued workers’ compensation costs(295,000)317,000 
Total Adjustments17,374,000 5,509,000 
Net cash used in continuing operating activities(13,380,000)(13,626,000)
Net cash used in discontinued operating activities (1,035,000)
Net cash used in operating activities(13,380,000)(14,661,000)
INVESTING ACTIVITIES
Note receivable 41,000 
Investment of IHC IPO proceeds into Trust Account(116,765,000) 
Purchase of fixed assets (500,000)(1,885,000)
Net cash (used in) provided by investing activities(117,265,000)(1,844,000)
FINANCING ACTIVITIES
Deferred offering costs— (611,000)
SPAC related offering costs paid(3,663,000)— 
Proceeds from initial public offering of IHC116,725,000  
Proceeds from exercised warrants, net of offering costs5,410,000  
Proceeds from underwritten public offering, net of offering costs 10,701,000 
Proceeds from private placement, net of offering costs4,183,000 11,063,000 
Proceeds from private placement prefunded warrants, net of offering costs6,861,000  
Net cash provided by financing activities129,516,000 21,153,000 
Net (decrease) increase in cash(1,129,000)4,648,000 
Cash - Beginning of Period1,199,000 4,303,000 
Cash -End of Period$70,000 $8,951,000 
Supplemental Disclosure of Cash Flows Information:
Cash paid for interest$2,000 $9,000 
Cash paid for income taxes   
Non-cash Investing and Financing Activities:
Excess fair value of SPAC founder share transferred to underwriter$ $47,472,000 
Elimination of deferred offering costs on abandoned SPACs IPOs.$37,978,000 $ 
Change in fair value due to warrants modification13,728,000 $ 
Operating lease assets and liabilities from ASC 8428,970,000 $— 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ShiftPixy, Inc. 
Notes to the Condensed Consolidated Financial Statements 
(Unaudited)
Note 1: Nature of Operations
ShiftPixy, Inc. (the "Company") was incorporated on June 3, 2015, in the State of Wyoming. The Company is a specialized Human Capital service provider that provides solutions for large contingent part-time workforce demands, primarily in the restaurant and hospitality service trades. The Company’s historic focus has been on the quick service restaurant industry in Southern California, but has begun to expand into other geographic areas and industries that employ temporary or part-time labor sources.
The Company functions as an employment administrative services (“EAS”) provider primarily through its wholly-owned subsidiary, ReThink Human Capital Management, Inc. (“HCM”), as well as a staffing provider through another of its wholly-owned subsidiaries, ShiftPixy Staffing, Inc. (“Staffing”). These subsidiaries provide a variety of services to our clients (as a co-employer through HCM and a direct employer through Staffing), including the following: administrative services, payroll processing, human resources consulting, and workers’ compensation administration and coverage (as permitted and/or required by state law). The Company has built a human resources information systems (“HRIS”) platform to assist in customer acquisition that simplifies the onboarding of new clients into the Company’s closed proprietary operating and processing information system (the “ShiftPixy Ecosystem”). We expect this HRIS platform to facilitate additional value-added services in future reporting periods.

In January 2020, the Company sold the assets of Shift Human Capital Management Inc. (“SHCM”), a wholly-owned subsidiary of the Company, pursuant to which the Company assigned the majority of the Company’s billable clients at the time of the sale to a third party for cash. The continuing impact of this transaction on the Company’s financial statements is described below in Note 3, Discontinued Operations.
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 accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim reports of companies filing as a small reporting company. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The results of operations for the three and nine months ended May 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending August 31, 2022.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K and 10-K/A for the fiscal year ended August 31, 2021 (“Fiscal 2021”), filed with the SEC on December 3, 2021 and February 28, 2022, respectively.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of ShiftPixy, Inc., and its wholly-owned subsidiaries. The condensed consolidated financial statements also include the accounts of (a) Industrial Human Capital, Inc. ("IHC"), which is a special purpose acquisition company, or "SPAC", for which we serve as the financial sponsor (as described below), and which is deemed to be controlled by us as a result of our 15% equity ownership stake, the overlap of three of our executive officers as executive officers of IHC, and significant influence that we currently exercise over the funding and acquisition of new operations for an initial business combination ("IBC"). (See Note 2, Variable Interest Entity). All intercompany balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company 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;
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Useful lives of property and equipment;
Deferred income taxes and related valuation allowance;
Valuation of illiquid non-controlling interest in SPAC shares transferred;
Valuation of long-lived assets including long term notes receivable prior to January 1, 2021; and
Projected development of workers’ compensation claims.
Revenue and Direct Cost Recognition
For the year ended August 31, 2021 ("Fiscal 2021"), we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective approach. Under this method, the guidance is applied only to the most current period presented in the financial statements. ASU No. 2014-09 outlines a single comprehensive revenue recognition model for revenue arising from contracts with customers and superseded most of the previous revenue recognition guidance, including industry-specific guidance. Under ASU No. 2014-09, an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Our revenue recognition policies remained substantially unchanged as a result of the adoption of ASU No. 2014-09 and we did not have any significant changes in our business processes or systems.
The Company’s revenues are primarily disaggregated into fees for providing staffing solutions and EAS/HCM services. The Company enters into contracts with its clients for Staffing or EAS based on a stated rate and price in the contract. Contracts generally have a term of 12 months, however are cancellable at any time by either party with 30 days’ written notice. The performance obligations in the agreements are generally combined into one performance obligation, as they are considered a series of distinct services, and are satisfied over time because the client simultaneously receives and consumes the benefits provided as the Company performs the services. Payments for the Company’s services are typically made in advance of, or at the time that the services are provided. The Company does not have significant financing components or significant payment terms for its customers and consequently has no material credit losses. The Company uses the output method based on a stated rate and price over the payroll processed to recognize revenue, as the value to the client of the goods or services transferred to date appropriately depicts our performance towards complete satisfaction of the performance obligation.
Staffing Solutions
The Company records gross billings as revenues for its staffing solutions clients. The Company is primarily responsible for fulfilling the staffing solutions services and has discretion in establishing price. The Company includes the payroll costs in revenues with a corresponding increase to cost of revenues for payroll costs associated with these services. As a result, we are the principal in this arrangement for revenue recognition purposes. For the three and nine months ended May 31, 2021, the Company recognized no revenues that should have been evaluated under a staffing solutions model.
EAS Solutions

EAS solutions revenue is primarily derived from the Company’s gross billings, which are based on (i) the payroll cost of the Company’s worksite employees (“WSEs”) and (ii) a mark-up computed as a percentage of payroll costs for payroll taxes and workers’ compensation premiums.

Gross billings are invoiced to each EAS client concurrently with each periodic payroll of the Company’s WSEs, which coincides with the services provided and which is typically a fixed percentage of the payroll processed. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup, are recognized ratably over the payroll period as WSEs perform their services at the client worksite. Although the Company assumes responsibility for processing and remitting payroll and payroll related obligations, it does not assume employment-related responsibilities such as determining the amount of the payroll and related payroll obligations. As a result, the Company records revenue on a “net” basis in this arrangement for revenue recognition purposes. Revenues that have been recognized but not invoiced for EAS clients are included in unbilled accounts receivable on the Company’s consolidated balance sheets, and were $3,470,000 and $2,741,000, as of May 31, 2022 and August 31, 2021, respectively.

Consistent with the Company’s revenue recognition policy for EAS clients, direct costs do not include the payroll cost of its WSEs. The cost of revenue associated with the Company’s revenue generating activities is primarily comprised of all other
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costs related to its WSEs, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.

The fees collected from the worksite employers for benefits (i.e. zero-margin benefits pass-through), workers’ compensation and state unemployment taxes are presented in revenues and the associated costs of benefits, workers’ compensation and state unemployment taxes are included in operating expenses for EAS clients, as the Company does retain risk and acts as a principal with respect to this aspect of the arrangement. With respect to these fees, the Company is primarily responsible for fulfilling the service and has discretion in establishing price.

Disaggregation of Revenue

The Company’s primary revenue streams include HCM and staffing services. The Company’s disaggregated revenues for the three and nine months ended May 31, 2022 and May 31, 2021 were as follows:


For the Three Months Ended
For the Nine Months Ended
Revenue (in millions):
May 31, 2022
May 31, 2021
May 31, 2022
May 31, 2021
HCM1
$1.7 9.5$4.0 14.4
Staffing7.9  25.0  
$9.6 $9.5 $29.0 $14.4 
1 HCM revenue is presented net, $22.6 million and $65.2 million gross billings less WSE payroll costs of $13.0 million and $36.2 million for the three and nine months ended May 31, 2022, respectively and $20.1 million and $57.7 million gross less WSE payroll cost of $10.6 million and $43.3 million for the three and nine months ended May 31, 2021, respectively.
During Fiscal 2021 the Company announced the launch of ShiftPixy Labs. We generated no revenue from this initiative during the three or three and nine months ended May 31, 2022.

For the three and nine months ended May 31, 2022 and May 31, 2021, the following geographical regions represented more than 10% of total revenues:

For the Three Months Ended
For the Nine Months Ended
Region:
May 31, 2022
May 31, 2021
May 31, 2022
May 31, 2021
California49 %65 %52 %67 %
Washington 15 %12 %14 %11 %
Incremental Cost of Obtaining a Contract

Pursuant to the “practical expedients” provided under ASU No 2014-09, the Company expenses sales commissions when incurred because the terms of its contracts are cancellable by either party upon 30 days' notice. These costs are recorded in commissions in the Company’s Condense Consolidated Statements of Operations.
Segment Reporting
Prior to Fiscal 2021, the Company operated as one reportable segment under ASC 280, Segment Reporting. The chief operating decision maker regularly reviews the financial information of the Company at a consolidated level in deciding how to allocate resources and in assessing performance. During Fiscal 2021, the Company entered into new business lines and geographic areas that, to date, are not material. However, with the migration to Staffing during the fiscal quarter ending May 31, 2021, the Company is beginning to manage the business on a segmented basis and therefore intends to report such information once systems and processes are updated accordingly. Reporting and monitoring activities on a segment basis will allow the chief operating decision maker to evaluate operating performance more effectively. See also Disaggregation of Revenue, above.
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Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. The Company had no such investments as of May 31, 2022 or August 31, 2021.
Marketable Securities Held in Trust Account

As of May 31, 2022, substantially all of the assets held in the Trust Account were invested in U.S. Treasury securities with maturities of 180 days or less. These funds are restricted for use and may only be used for purposes of completing an initial business combination ("IBC") or redemption of the public common shares of IHC.

Concentration of Credit Risk
The Company maintains cash with a commercial bank, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company has deposits in this financial institution in excess of the amount insured by the FDIC. The Company has not experienced any losses related to these balances and believes its credit risk to be minimal. As of May 31, 2022, there was $720,000 of cash on deposit in excess of the amounts insured by the FDIC.
No individual clients represented more than 10% of revenues for the three and nine months ended May 31, 2022. However, five clients represented 99% of total accounts receivable as of May 31, 2022. For the three and nine months ended May 31, 2021, one and zero individual clients represented more than 10% of revenues, respectively, and two clients represented 92% of total accounts receivable.
Fixed Assets
Fixed assets are recorded at cost, less accumulated depreciation and amortization. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When fixed assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Leasehold improvements are amortized over the shorter of the useful life or the initial lease term.
Fixed assets are recorded at cost and are depreciated over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives of property and equipment for purposes of computing depreciation are as follows:
Equipment:5 years
Furniture & Fixtures:
5 - 7 years
Leasehold improvements
Shorter of useful life or the remaining lease term, typically 5 years
The amortization of these assets is included in depreciation expense on the condensed consolidated statements of operations.
Internal Use Software
Software development costs relate primarily to software coding, systems interfaces and testing of the Company’s proprietary employer information systems and are accounted for in accordance with 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. The capitalized computer software development costs are reported under the section fixed assets, net in the condensed consolidated balance sheets.
The Company determined that there were no material capitalized internal software development costs for the three and nine months ended May 31, 2022. All capitalized software recorded was purchased from third party vendors. Capitalized software development costs are amortized using the straight-line method over the estimated useful life of the software, generally three to five years from when the asset is placed in service.

The Company incurred research and development costs for the three and nine months ended May 31, 2022 and May 31, 2021, of approximately $1.05 million and $5.0 million and $1.0 million and $2.7 million, respectively. All costs were related to internally developed or externally contracted software and related technology for the Company’s HRIS platform and related mobile application. In addition, no software costs were capitalized for the three months ended May 31, 2022 and May 31, 2021, respectively.
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Lease Recognition

In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02 (“ASC 842”), which required lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The standard established a right-of-use model (“ROU”) that required a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the Condensed Statement of Operations.

The Company adopted the standard on December 1, 2021 with an effective date of September 1, 2021. A modified retrospective transition approach was required, applying the standard to all leases existing at the date of initial application. An entity could choose to use either (1) the effective date of the standard or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chose the second option, the transition requirements for existing leases also applied to leases entered into between the date of initial application and the effective date. The entity had to also recast its comparative period financial statements and provide the disclosures required by the standard for the comparative periods. The Company elected to use the effective date as its date of initial application. Consequently, financial information was not updated and the disclosures required under the standard were not provided for dates and periods prior to September 1, 2021.

The standard provided a number of optional practical expedients as part of transition accounting. The Company elected the “package of practical expedients”, which allowed the Company to avoid reassessing its prior conclusions about lease identification, lease classification and initial direct costs under the standard. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements as these were not applicable to the Company.

The standard had a material effect on the Company’s Condensed Consolidated Financial Statements. The most significant changes related to (1) the recognition of ROU assets and lease liabilities on the Condensed Consolidated Balance Sheet for the Company's office equipment and real estate operating leases and (2) providing significant disclosures about the Company’s leasing activities.

Upon adoption, the Company recognized additional operating liabilities of approximately $7.7 million, with corresponding ROU operating lease asset, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The Company determined if an arrangement was a lease at inception. The Company used an incremental borrowing rate based on the information available at the commencement date of the lease to determine the present value of lease payments. In determining the ROU asset and lease liability at lease inception, the lease terms could include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The standard also provided practical expedients for an entity’s ongoing accounting for leases. The Company elected the short-term lease recognition exemption for office equipment leases. For those current and prospective leases that qualify as short-term, the Company will not recognize ROU assets or lease liabilities. The Company also elected the practical expedient to not separate lease and non-lease components for all of its real estate leases.
Impairment and Disposal of Long-Lived Assets
The Company periodically evaluates its long-lived assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment. ASC 360-10 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed not to be recoverable. If events or circumstances were to indicate that any of our long-lived assets might be impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, the Company may record an impairment loss to the extent that the carrying value of the asset exceeds the fair value of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset. We recorded an expense related to asset impairment of $4,004,000 for the three and nine months ended May 31, 2022. There were no indicators noted of impairments during the three and nine months ended May 31, 2021.
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Workers’ Compensation
Everest Program
Until July 2018, a portion of the Company’s workers’ compensation risk was covered by a retrospective rated policy, which calculates the final policy premium based on the Company’s 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 exceed the expected losses under that policy, then the Company could receive a demand for additional premium payments. The Company is currently engaged in litigation regarding such a demand for additional premium payments, which we believe to be without merit, as discussed at Note 11, Contingencies, Everest Litigation, below.
Sunz Program
From July 2018 through February 28, 2021, the Company’s workers’ compensation program for its WSEs was provided primarily through an arrangement with United Wisconsin Insurance Company and administered by Sunz Insurance Solutions, LLC (“Sunz”). Under this program, the Company has financial responsibility for the first $0.5 million of claims per occurrence. The Company provides and maintains a loss fund that is earmarked to pay claims and claims related expenses. The workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim loss funds”). The level of claim loss funds is primarily based upon anticipated WSE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as Deposit - workers’ compensation, a short-term asset, while the remainder of claim funds are included in Deposit- workers’ compensation, a long-term asset in our condensed consolidated balance sheets. The Company is currently engaged in litigation regarding demands by Sunz for additional claims loss funds, which we believe to be without merit, as discussed at Note 11, Contingencies, Sunz Litigation, below.
Current Program
Effective March 1, 2021, the Company migrated its clients to a guaranteed cost program. Under this program, the Company’s financial responsibility is limited to the cost of the workers’ compensation premium. The Company funds the workers’ compensation premium based on standard premium rates on a monthly basis and based on the gross payroll applicable to workers covered by the policy. Any final adjustments to the premiums are based on the final audited exposure multiplied by the applicable rates, classifications, experience modifications and any other associated rating criteria.
Under the Everest and Sunz programs, the Company utilized a third party to estimate its loss development rate, which was based primarily upon the nature of WSEs’ job responsibilities, the location of WSEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the assumptions resulting from changes in actual claims experience and other trends are incorporated into its workers’ compensation claims cost estimates.

As of May 31, 2022, the Company had no Deposit – workers’ compensation related to these programs. As of August 31, 2021, the Company had $0.2 million, in Deposit – workers’ compensation classified as a short-term asset and $0.4 million, classified as a long-term asset, respectively.
The Company’s estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while its estimate of incurred claim costs expected to be paid beyond one year is included in long-term liabilities on its consolidated balance sheets. As of May 31, 2022 and August 31, 2021, the Company had short term accrued workers’ compensation costs of $0.7 million and $0.7 million, and long term accrued workers’ compensation costs of $1.4 million and $1.6 million, respectively.
The Company retained workers’ compensation asset reserves and workers’ compensation related liabilities for former WSEs of clients transferred to Shiftable HR Acquisition, LLC, a wholly-owned subsidiary of Vensure Employer Services, Inc. (“Vensure”), in connection with the Vensure Asset Sale described in Note 3, Discontinued Operations, below. As of May 31, 2022, the retained workers’ compensation assets and liabilities are presented as a discontinued operation net asset or liability. As of May 31, 2022, the Company had $1.3 million in short term liabilities, and $3.1 million in long term liabilities. The Company had no related worker's compensation assets as of May 31, 2022.
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Because the Company bears the financial responsibility for claims up to the level noted above, such claims, which are the primary component of its workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. In estimating ultimate loss rates, the Company utilizes historical loss experience, exposure data, and actuarial judgment, together with a range of inputs that are primarily based upon the WSE’s job responsibilities, their location, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into the Company’s workers’ compensation claims cost estimates. The estimated incurred claims are based upon: (i) the level of claims processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan.
The Company has had very limited and immaterial COVID-19 related claims between March 2020 through the date of this Quarterly Report, although there is a possibility of additional workers’ compensation claims being made by furloughed WSEs as a result of the employment downturn caused by the pandemic. On May 4, 2020, the State of California indicated that workers who become ill with COVID-19 would have a potential claim against workers’ compensation insurance for their illnesses. There is a possibility that additional workers’ compensation claims could be made by employees required to work by their employers during the COVID-19 pandemic, which could have a material impact on our workers’ compensation liability estimates. While the Company has not seen significant additional expenses as a result of any such potential claims to date, which would include claims for reporting periods after May 31, 2022, we continue to monitor closely all workers’ compensation claims made as the COVID-19 pandemic continues.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurement, requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practical to estimate fair value. ASC 820 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of May 31, 2022 and August 31, 2021, the carrying value of certain financial instruments (cash, accounts receivable and payable) approximated fair value due to the short-term nature of the instruments. Notes Receivable is valued at estimated fair value as described below.
The Company measures fair value under a framework that utilizes a hierarchy prioritizing the inputs to relevant valuation techniques. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs used in measuring fair value are:
Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2: Inputs to the valuation methodology include:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in inactive markets;
Inputs other than quoted prices that are observable for the asset or liability;
Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Funds held in trust represent U.S. treasury bills that were purchased with funds raised through the initial public offering of IHC. The funds raised from SPACs are held in trust accounts that are restricted for use and may only be used for purposes of completing an IBC or redemption of the public shares of common stock of the SPACs as set forth in their respective trust agreements. The funds held in trust are included within Level 1 of the fair value hierarchy and included in Cash and marketable securities held in Trust Account in the accompanying condensed consolidated balance sheets.
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The Company did not have other Level 1 or Level 2 assets or liabilities at May 31, 2022 or August 31, 2021. We recorded the fair value of the SPAC founder shares that the Company transferred to the underwriters using non-recurring Level 3 assumptions, including quoted asset prices for SPAC shares and warrants and estimates of the likelihood of the IPOs and IBCs of our sponsored SPACs being consummated. See also Note 5, Deferred Offering Costs – SPACS, below.
The valuation of the Note Receivable from the Vensure Asset Sale (as defined below), is a Level 3 fair value measurement as of August 31, 2020 and through December 31, 2020 (end of the earn-out period as defined under the terms of the Note Receivable).

The Note Receivable, as described in Note 3, Discontinued Operations, below, was estimated using a discounted cash flow technique based on expected contingent payments identified in the Vensure Asset Sale contract and with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The Company valued the Note Receivable on the January 1, 2020 transaction date using a 10% discount rate, and on August 31, 2020 and through December 31, 2020 using a 15% discount rate, which contemplates the risk and probability assessments of the expected future cash flows. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the Vensure Asset Sale, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the Vensure Asset Sale agreement. For our fiscal year ended August 31, 2020 ("Fiscal 2020"), the expected cash payments from the Note Receivable were based on estimated gross wages billed for the clients transferred to Vensure pursuant to the Vensure Asset Sale as of the measurement date.
The Company used the following assumptions to value the Note Receivable as of August 31, 2020:
Discount rate of 15%
Actual monthly wages billed to the extent available to the Company
For interim reporting periods after December 31, 2020, including as of May 31, 2022 and August 31, 2021, the Company valued the Note Receivable as discussed in Note 3, Discontinued Operations, below.

The development and determination of the unobservable inputs for Level 3 fair value measurements and the fair value calculations are the responsibility of the Company’s chief financial officer and are approved by the chief executive officer. There were no transfers out of Level 3 for the three and nine months ended May 31, 2022.
Advertising Costs
The Company expenses all advertising as incurred. The Company incurred advertising costs totaling $0.4 million and $1.4 million for the three and nine months ended May 31, 2022 and $0.4 million and $1.3 million for the three and nine months ended May 31, 2021, respectively.
Income Taxes
The Company accounts for income taxes pursuant to ASC 740, Income Taxes. Under ASC 740, deferred income taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The provision for income taxes represents the tax expense for the period, if any, and the change during the period in deferred tax assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. Under ASC 740, the impact of an uncertain tax position on the income tax return may only be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.
Earnings (Loss) Per Share
The Company utilizes ASC 260, Earnings per Share. Basic Net Income (Net Loss) per common share is computed by dividing Net Income (Net Loss) attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the reporting period. Common stock outstanding for purposes of Net Income (Net Loss) per share calculations include unexercised Preferred Options and unexercised prefunded warrants, as described in Note 7, Stockholders' Equity, below. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the
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denominator is increased to include additional common stock equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common stock equivalents include the dilutive effect of in-the-money stock equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any common stock equivalents if their effect would be anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive common stock shares are considered anti-dilutive and thus are excluded from the calculation. Securities that are excluded from the calculation of weighted average dilutive common stock, because their inclusion would have been antidilutive, are:
For the Three and Nine Months Ended
May 31, 2022
May 31, 2021
Options (See Note 8)1,549,845 1,826,548 
Warrants (See Note 7)22,440,225 9,592,086 
Total potentially dilutive shares23,990,070 11,418,634 
For the table above, “Options” represent all options granted under the Company’s 2017 Stock Option/Stock Issuance Plan (the "Plan"), as described in Note 8, Stock Based Compensation, below.
Stock-Based Compensation
As of May 31, 2022, the Company had one stock-based compensation plan under which the Company may issue awards, as described in Note 8, Stock Based Compensation, below. The Company accounts for the Plan under the recognition and measurement principles of ASC 718, Compensation-Stock Compensation, which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated statements of operations at their fair values.
The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, the Company recognizes expense on an accelerated basis over the employee’s requisite service period (generally the vesting period of the equity grant).
The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. The expected volatility is based on the historical volatility of the Company’s common stock since our initial public offering. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
The Company elects to account for forfeitures as they occur. As such, compensation cost previously recognized for an unvested award that is forfeited because of the failure to satisfy a service condition is revised in the period of forfeiture.
The methods and assumptions used in the determination of the fair value of stock-based awards are consistent with those described in the Company's Annual Report on Form 10-K and 10-K/A for Fiscal 2021, filed with the SEC on December 3, 2021 and on February 28, 2022, respectively, which includes a detailed description of the Company's stock-based compensation awards, including information related to vesting terms, service and performance conditions, payout percentages, and process for estimating the fair value of stock options granted.
Recent Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This standard requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, each reporting entity should estimate an allowance for expected credit losses, which is intended to result in more timely recognition of losses. This model replaces multiple existing impairment models in current U.S. GAAP, which generally requires a loss to be incurred before it is recognized. The new standard applies to trade receivables arising from revenue transactions such as contract assets and accounts receivable. Under ASC 606, revenue is recognized when, among other criteria, it is probable that an entity will collect the consideration it is entitled to when goods or services are transferred to a customer. When trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. This guidance is effective for smaller reporting companies for annual periods beginning after December 15, 2022, including the interim periods in the year. Early adoption is permitted. The Company will adopt the guidance when it becomes effective.

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Variable Interest Entity
The Company has been involved in the formation of various entities considered to be Variable Interest Entities (“VIEs”). The Company evaluates the consolidation of these entities as required pursuant to ASC Topic 810 relating to the consolidation of VIEs. These VIEs are primarily formed to sponsor the related SPACs.

The Company’s determination of whether it is the primary beneficiary of a VIE is based in part on an assessment of whether or not the Company and its related parties are exposed to the majority of the risks and rewards of the entity. Typically, the Company is entitled to substantially all or a portion of the economics of these VIEs. The Company is the primary beneficiary of the VIE entities.

During the nine months ended May 31, 2022, our sponsored SPAC, IHC, completed its IPO, selling 11,500,000 units (the "IHC Units") pursuant to a registration statement and prospectus, as described below. The IPO closed on October 22, 2021, raising gross proceeds of $115 million. These proceeds were deposited in a trust account established for the benefit of the IHC public shareholders and, along with an additional $1.7 million deposited in trust by the Company reserved for interest payments for future possible redemptions by IHC stockholders, are included in Cash and marketable securities held in Trust Account in the accompanying condensed consolidated balance sheet at May 31, 2022. These proceeds are invested only in U.S. treasury securities in accordance with the governing documents of IHC.

Each IHC Unit had an offering price of $10.00 and consisted of one share of IHC common stock and one redeemable warrant. Each warrant entitles the holder thereof to purchase one share of IHC common stock at a price of $11.50 per share. The IHC public stockholders have a right to redeem all or a portion of their shares of IHC common stock upon the completion of its IBC, subject to certain limitations. Under the terms of the registration statement and prospectus, IHC is required to consummate its IBC within 12 months of the completion of the IPO. If IHC is unable to meet this deadline, IHC could request an extension. If no extension is granted, then IHC will redeem 100% of the public shares of common stock outstanding for cash, subject to applicable law and certain conditions.

In connection with the IPO, we purchased, through investments, 4,639,102 private placement warrants ("Placement Warrants") at a price of $1.00 per warrant, for an aggregate purchase price of $4,639,102, and we currently own 2,110,000 Founder Shares of IHC common stock, representing approximately 15% of the issued and outstanding common stock of IHC. Before the closing of the IPO, the Sponsor transferred 15,000 Founder Shares to IHC's independent directors, reducing its shareholdings from 2,125,000 to 2,110,000. Each Placement Warrant is identical to the warrants sold in the IPO, except as described in the IPO registration statement and prospectus. Following the completion of the IHC IPO, we determined that IHC is a Variable Interest Entity ("VIE") in which we have a variable interest because IHC does not have enough equity at risk to finance its activities without additional subordinated financial support. We have also determined that IHC's public stockholders do not have substantive rights, and their equity interest constitutes temporary equity, outside of permanent equity, in accordance with ASC 480-10-S99-3A. As such, we have concluded that we are currently the primary beneficiary of IHC as a VIE, as we have the right to receive benefits or the obligation to absorb losses of the entity, as well as the power to direct a majority of the activities that significantly impact IHC's economic performance. Since we are the primary beneficiary, IHC is consolidated into our condensed consolidated financial statements.

Shares Subject to Possible Redemption

The Company accounts for its common stock holdings in its sponsored SPACs (which are consolidated in our condensed consolidated financial statements), that are subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Shares of common stock subject to mandatory redemption are classified as a liability instrument and are measured at fair value. Conditionally redeemable shares of common stock (including shares of common stock that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, shares of common stock are classified as shareholders’ equity. Each sponsored SPAC's shares of common stock feature certain redemption rights that are considered to be outside of the SPAC's control and subject to occurrence of uncertain future events. Accordingly, as of May 31, 2022, shares of common stock subject to possible redemption are presented as temporary equity, outside of the shareholders’ equity section of the Company’s condensed consolidated balance sheets.

The Company recognizes changes in redemption value of these shares immediately as they occur and adjusts the carrying value of redeemable shares of common stock to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of the redeemable common stock are affected by charges against additional paid in capital and accumulated deficit. As of May 31, 2022, the carrying amount of the sponsored SPAC shares of IHC common stock subject to redemption was recorded at their redemption value of $116.7 million. The remeasurement of the redemption value of the redeemable shares of common stock is recorded in equity. The remeasurement in equity comprised of offering cost incurred in
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connection with the sale of public shares of the SPACs was $13 million, consisting of approximately $9.5 million of offering costs related to the Founder Shares transferred to the SPACs’ underwriter representative as described in Note 5, Deferred Offering Costs, and $3.5 million in other offering costs related to the IPO paid at closing in cash.
Note 3: Discontinued Operations
On January 3, 2020, the Company executed an asset purchase agreement assigning client contracts comprising approximately 88% of its quarterly revenue through the date of the transaction, including 100% of its existing professional employer organization (“PEO”) business effective as of December 31, 2019, and transferring $1.5 million of working capital assets, including cash balances and certain operating assets associated with the assigned client contracts included in the agreement, to a wholly owned subsidiary of Vensure (the “Vensure Asset Sale”). Gross proceeds from the Vensure Asset Sale were $19.2 million, of which $9.7 million was received at closing and $9.5 million was scheduled to be paid out in equal monthly payments over the four years following the closing of the transaction (the “Note Receivable”), subject to adjustments for working capital and customer retention (as measured by a gross wage guarantee included in the governing agreement), over the twelve month period following the Vensure Asset Sale.

For Fiscal 2020, the Company estimated the value of the Note Receivable at fair value as discussed in Note 2, Summary of Significant Accounting Policies, above. For the period ended May 31, 2022, the Company recorded the Note Receivable based on our estimate of expected collections which, in turn, was based on additional information obtained through discussions with Vensure and evaluation of our records. On March 12, 2021, the Company received correspondence from Vensure proposing approximately $10.7 million of working capital adjustments under the terms of the Vensure Asset Sale agreement which, if accepted, would have had the impact of eliminating any sums owed to the Company under the Note Receivable. As indicated in the reconciliation table below, the Company has recorded $2.6 million of working capital adjustments, subject to final review and acceptance, and has provided for an additional reserve of $2.9 million for potential claims. By letter dated April 6, 2021, the Company disputed Vensure’s proposed adjustments.The disputes between the Company and Vensure regarding working capital adjustments under the Vensure Asset Sale agreement are currently the subject of litigation pending in the Delaware Chancery Court, as discussed at Note 11, Contingencies, Vensure Litigation, below.
The following is a reconciliation of the gross proceeds to the net proceeds from the Vensure Asset Sale as presented in the condensed consolidated balance sheet for the period ended May 31, 2022.
Gross proceeds$19,166,000 
Cash received at closing – asset sale(9,500,000)
Cash received at closing – working capital(166,000)
Gross note receivable$9,500,000 
Less:  Transaction reconciliation – estimated working capital adjustments(2,604,000)
Adjusted Note Receivable6,896,000 
Reserve for estimated potential claims(2,892,000)
Reserve for potential collectability concerns
$(4,004,000)
Long-term note receivable, estimated net realizable value$ 
As of May 31, 2022, we recorded an asset impairment to adjust the net realizable value of the long-term note receivable to zero. The Note Receivable was recorded as a long term note receivable as of August 31, 2021 and May 31, 2021.
The Vensure Asset Sale generated a gain of $15.6 million for Fiscal 2020. The Company expected a minimal tax impact from the Vensure Asset Sale as it utilized its net operating losses accumulated since inception to offset the gain resulting from discontinued operations tax provision with a corresponding offset to the valuation allowance.
The Vensure Asset Sale met the criteria of discontinued operations set forth in ASC 205 and as such the Company has reclassified its discontinued operations for all periods presented and has excluded the results of its discontinued operations from continuing operations for all periods presented.
The terms of the Vensure Asset Sale call for adjustments to the Note Receivable either for: (i) working capital adjustments or (ii) in the event that the gross wages of the business transferred is less than the required amount.

(i) Working capital adjustments: Through May 31, 2022, the Company has identified $2.6 million of likely working capital adjustments, including $0.1 million related to lower net assets transferred at closing, and $2.5 million of cash
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remitted to the Company’s bank accounts, net of cash remitted to Vensure’s bank accounts. Under the terms of the Vensure Asset Sale, a reconciliation of the working capital was to have been completed by April 15, 2020. Due to operational difficulties and quarantined staff caused by the outbreak of COVID-19, Vensure requested a postponement of the working capital reconciliation that was due in Fiscal 2020. Although Vensure provided the Company with its working capital reconciliation on March 12, 2021, it failed to provide adequate documentation to support its calculations. Accordingly, the working capital adjustment recorded as of May 31, 2022, represents the Company’s estimate of the reconciliation adjustment by using Vensure’s claims and the limited supporting information Vensure provided as a starting point, and then making adjustments for amounts in dispute based upon our internal records and best estimates. There is no assurance that the working capital change identified as of May 31, 2022, represents the final working capital adjustment.

(ii) Gross billings adjustment: Under the terms of the Vensure Asset Sale, the proceeds of the transaction are reduced if the actual gross wages of customers transferred for Calendar 2020 are less than 90% of those customers’ Calendar 2019 gross wages. The Company has prepared an estimate of the Calendar 2020 gross wages based on a combination of factors including reports of actual transferred client billings in early Calendar 2020, actual gross wages of continuing customers of the Company, publicly available unemployment reports for the Southern California markets and the relevant COVID-19 impacts on employment levels, and other information. Based on the information available, the Company estimated that it would receive additional consideration below the required threshold and reduced the contingent consideration by $1.4 million. Vensure has not identified any such adjustments to date. Based on the information available, the Company reclassified the previously recorded gross wages claim to a general potential claims reserve during Fiscal 2021. No additional adjustment was made during the period ended May 31, 2022.

The carrying amounts of the classes of assets and liabilities from the Vensure Asset Sale included in discontinued operations are as follows:

May 31,
2022
August 31,
2021
Cash$ $ 
Accounts receivable and unbilled account receivable