Quarterly report pursuant to Section 13 or 15(d)

Nature of Operations and Restatement

v3.21.2
Nature of Operations and Restatement
9 Months Ended
May 31, 2021
Nature of Operations and Restatement  
Nature of Operations and Restatement

Note 1: Nature of Operations and Restatement

Nature of Operations

ShiftPixy, Inc., (“we,” “us,” “our,” the “Company” or “ShiftPixy”), was incorporated on June 3, 2015, in the State of Wyoming. We are currently operating as a human capital outsourcing services provider that offers solutions for large contingent part-time workforce demands, primarily in the restaurant and hospitality service trades. Our historic focus has been on the quick service restaurant industry in Southern California, but we have begun to expand into other geographic areas and industries employing temporary or part-time labor sources as well as additional services ancillary to those labor sources.

The Company offers a variety of human capital services to its clients, including staffing, employment administrative services (“EAS”), payroll processing, human resources consulting, and workers’ compensation coverage and administration related services, as permitted by applicable law. We offer these services through various wholly-owned subsidiaries, including the following: (i) ShiftPixy Staffing, Inc., which provides traditional staffing services; (ii) ReThink Administrative Services, Inc., which operates as an administrative services organization, or “ASO”, often in conjunction with ShiftPixy Staffing; and (iii) Rethink Human Capital Management, Inc., which offers a combination of services provided by ShiftPixy Staffing and ReThink Administrative Services, including EAS. We have built a human resources information systems (“HRIS”) platform to assist in customer acquisition that simplifies the onboarding of new clients into our closed proprietary operating and processing information system (the “ShiftPixy Ecosystem”). This platform is expected to facilitate additional value-added services in future reporting periods. In January 2020, we sold the assets of Shift Human Capital Management, Inc. (“SHCM”), a wholly-owned subsidiary of the Company, pursuant to which we assigned the majority of our billable clients, at that time, to a third party for cash as described below in Note 3.

The Company also announced, in late 2020, its “ShiftPixy Labs” initiative, which includes the creation of incubator “ghost kitchens” to be operated in conjunction with its wholly-owned subsidiary, ShiftPixy Ghost Kitchens, Inc. Through this initiative, the Company intends to provide resources and guidance to entrepreneurs seeking to bring their food delivery concepts to market, in return for the opportunity to combine with the ShiftPixy HRIS platform to create a co-branded, or “ghost” branded, food preparation and delivery solution. The initial phase of this initiative will be implemented in a dedicated showcase kitchen facility located in close proximity to our Miami headquarters, which is currently under renovation and which we expect to be operational in the fourth quarter of our fiscal year ending August 31, 2021 (“Fiscal 2021”). We intend to partner with various culinary training organizations and experts in testing these concepts, and to showcase these efforts through the distribution of video programming on social media produced and distributed by our wholly owned subsidiary, ShiftPixy Productions, Inc. If successful, we intend to replicate this initiative in similarly constructed facilities throughout the United States and in selected international locations. We also intend to provide similar services via mobile kitchen concepts, all of which will be heavily reliant on our HRIS platform and which we believe will capitalize on trends observed during the COVID-19 pandemic toward providing customers with a higher quality prepared food delivery product that is more responsive to their needs.

On March 25, 2020, the Company filed Amended and Restated Articles of Incorporation (the “Restated Articles of Incorporation”) with the Wyoming Secretary of State, which were approved by the Company’s board of directors (the “Board of Directors”) and its shareholders representing a majority of its outstanding shares of capital stock. The Restated Articles of Incorporation, among other things, set conversion rights for the Company’s Class A Preferred Stock, par value $0.0001 per share, to convert into shares of common stock on a one-for-one basis. On March 31, 2021, shareholders representing a majority of the Company’s outstanding shares of capital stock approved a further amendment to the Restated Articles of Incorporation (the “Amended Restated Articles of Incorporation”), which makes the federal district courts of the United States the exclusive forum for the resolution of any complaint asserting a cause of action against the Company arising under the Securities Act of 1933, as amended. On May 13, 2021, the Company filed the Amended Restated Articles of Incorporation with the Wyoming Secretary of State.

 

Restatement of Financial Statements

During the preparation of our consolidated financial statements for our fiscal year ended August 31, 2021 (“Fiscal 2021), we determined that we had not consolidated our majority owned special purpose acquisition companies ("SPACs "). In addition, upon review of the Company’s billings and revenue recognition during our transition from ASC 605 to ASC 606 we determined that additional staffing solutions revenues and an equivalent amount of additional cost of revenues should have been recorded for the three and nine months ended May 31, 2021. As a result, we are restating these financial statements to properly reflect the consolidation of these majority owned SPACs and for the inclusion of the additional revenues and cost of revenues. The revenue and cost of revenue increases had no impact on the Company’s gross profit or net loss for the periods affected .

On April 22, 2021, we transferred a total of 10,000,000 Founder Shares that we held in four SPACs that we are sponsoring through our wholly-owned subsidiary, Investments. Prior to the transfer, we were the sole shareholder in each of the SPACs through Investments. The transfer of these shares created a minority unaffiliated interest in each of the four SPACs.

The accounting guidance provided under Staff Accounting Bulletin Topic 5T, ASC 340-10-S99-1, and SAB Topic 5A requires that, when shares of common stock such as these Founder Shares are transferred to an unaffiliated third party at below fair market value, the difference is deemed a capital contribution by the shareholder and the incremental fair value recorded as a deferred offering cost for the SPAC, and the creation of a minority interest. The deferred offering cost consists of $47,472,000 related to the minority unaffiliated interest and $611,000 of professional fees consisting of legal and accounting fees related to the initial public offerings of the SPACs, which the Company previously accounted for as professional fees ($456,000) and deposits ($155,000).

In addition, as part of our transition to the adoption of ASC 606, which became effective for the year ended August 31, 2021 and was implemented as of the Fiscal 2021 reporting period, we performed a review of all of our client billings during Fiscal 2021. Beginning in the third quarter of Fiscal 2021, our clients began to migrate to an updated CSA that changed the nature of the legal relationship with our clients to clarify our status as the legal employer of our clients’ WSEs, along with the power to control such factors as the wages paid to the WSE, hours worked, and placement of work assignments. As such, this differentiation of control results in the recognition of those WSEs as staffing solutions revenues as opposed to EAS solutions revenues. As originally reported, all revenues pertaining to these clients were recorded as EAS solutions revenues, which provides for the exclusion of gross payroll billings as an element of revenues. The change to a staffing solutions revenue recognition model for these clients, however, requires us to include gross payroll billings as revenues, and to include such billings as an element of cost of revenues. The impact of this change is to increase our revenues and cost of revenues for the three and nine months ended May 31, 2021 by $6,827,000. There was no impact to our gross profit (loss) as a result of this correction.

The effect of this restatement on the line items included in our condensed consolidated financial statements for our fiscal quarter ended May 31, 2021, is as follows:

 

 

 

 

 

 

 

 

 

 

 

    

May 31, 2021

 

    

As

    

 

    

 

 

 

 

Previously

 

 

 

As

 

 

Reported

 

Adjustments

 

Restated

Prepaid expenses and other current assets

 

$

738,000

 

(155,000)

 

$

583,000

Deferred Offering Costs - SPACs

 

 

 —

 

48,083,000

 

 

48,083,000

Total Assets

 

 

22,139,000

 

47,928,000

 

 

70,067,000

Noncontrolling interests in consolidated subsidiaries

 

 

 —

 

47,472,000

 

 

47,472,000

Total Equity (Deficit)

 

 

22,139,000

 

47,928,000

 

 

70,067,000

Revenues – three months ended May 31, 2021

 

 

2,648,000

 

6,827,000

 

 

9,475,000

Cost of revenues – three months ended May 31, 2021

 

 

3,095,000

 

6,827,000

 

 

9,922,000

Gross profit – three months ended May 31, 2021

 

 

(447,000)

 

 —

 

 

(447,000)

Revenues – nine months ended May 31, 2021

 

 

7,570,000

 

6,827,000

 

 

14,397,000

Cost of revenues – nine months ended May 31, 2021

 

 

7,141,000

 

6,827,000

 

 

13,968,000

Gross profit - nine months ended May 31, 2021

 

 

429,000

 

 —

 

 

429,000

 

 

 

 

 

 

 

 

 

Three months ended May 31, 2021:

 

 

 

 

 

 

 

 

Operating expenses – Professional fees

 

 

1,585,000

 

(456,000)

 

 

1,129,000

All other operating expenses

 

 

5,972,000

 

 —

 

 

5,972,000

Total Operating expenses

 

 

7,557,000

 

(456,000)

 

 

7,101,000

 

 

 

 

 

 

 

 

 

Nine months ended May 31, 2021:

 

 

 

 

 

 

 

 

Operating expenses – Professional fees

 

 

3,298,000

 

(456,000)

 

 

2,842,000

All other operating expenses

 

 

16,713,000

 

 —

 

 

16,713,000

Total Operating expenses

 

 

20,011,000

 

(456,000)

 

 

19,555,000

 

 

 

 

 

 

 

 

 

Net loss – three months ended May 31, 2021

 

 

7,984,000

 

(456,000)

 

 

7,528,000

Net loss – nine months ended May 31, 2021

 

 

21,103,000

 

(456,000)

 

 

20,647,000

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

 

 

 

 

 

 

 

Continuing operations for the 3 months ended May 31, 2021

 

 

(0.24)

 

0.02

 

 

(0.22)

Continuing operations for the 9 months ended May 31, 2021

 

 

(0.60)

 

0.01

 

 

(0.59)

 

 

 

 

 

 

 

 

 

Cash used in operations

 

 

(15,272,000)

 

611,000

 

 

(14.661,000)

Cash provided by financing operations

 

 

21,764,000

 

(611.000)

 

 

21,153,000

 

We arrived at these adjustments by estimating the total value of the 10,000,000 shares transferred, which represents deferred compensation to the underwriter (as defined below), to be $47,472,000. We arrived at this valuation as set forth below:

1.

Consistent with most SPAC IPOs, the market price of units (consisting of some combination of common stock and warrants) sold to the public in a SPAC IPO is $10 per unit.

2.

We have valued the warrant portion of each Unit at $0.75. We arrived at this value though reference to a variety of factors and data available through examination of publicly available information regarding typical SPAC IPOs. Deducting this value from the Unit yields a value of $9.25 per common share at the time of the IPO, which we have applied to value of each of the Founder Shares that we issued to the underwriter (as defined below).

3.

We have applied a further discount of 48.8%, exclusive of the warrant, which is a blended discount designed to reflect the following contingencies and uncertainties: (a) 20% probability that the IPOs for our sponsored SPAC are never consummated; (b) 20% probability that none of our sponsored SPACs successfully completed their initial business combinations (“IBCs”); and (c) 21% additional discounts to account for future sponsor and Representative concessions, as well as the possibility of decrease in the value of the common stock of each SPAC.