|9 Months Ended
May 31, 2019
|Notes to Financial Statements
|Note 3: Going Concern
As of May 31, 2019, the Company had cash of $2.9 million and a working capital deficiency of $9.2 million. During the nine months ended May 31, 2019, the Company used approximately $1.6 million of cash in its operations, of which $1 million was attributed to the mobile application development costs. The Company has incurred recurring losses resulting in an accumulated deficit of $34.6 million as of May 31, 2019. These conditions raise substantial doubt as to its ability to continue as going concern within one year from issuance date of the financial statements.
The ability of the Company to continue as a going concern is dependent upon generating profitable operations in the future and/or obtaining additional funds by way of public or private offering to meet the Company’s obligations and repay its liabilities when they become due.
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 June 29, 2017, raising a total of $12 million or $10.9 million net of costs. In June 2018, the Company completed a private placement of 8% senior secured convertible notes to institutional investors raising $9 million of gross proceeds or $8.4 million net of costs. In March 2019, the Company completed a private placement of senior secured convertible notes with certain of its existing institutional investors raising an additional $3.75 million of gross proceeds or $3.3 million net of closing costs.
The Company is in dispute with its former software developer, Kadima Ventures (“Kadima”), over incomplete but paid for software development work. The Company began building its internal software development team and transitioned away from Kadima to expedite the Company’s technology deployment. Such transition would further increase the Company’s quarterly cash burn by approximately $0.5 million per quarter. The tardy delivery of the user features from Kadima and related on-going litigation slowed down the pace of the Company’s growth. Under licensing agreements with new vendors for certain features, the Company will be launching version 2.0 of its app and enhanced user features during the Company’s fourth fiscal quarter with all user features including the self-delivery feature. The completion of our technology and the deployment of these features, expected in our fourth fiscal quarter, would further accelerate the growth of the Company.
Exclusive of the software development costs and assuming all payroll taxes are paid as incurred and excluding non-recurring expenditures, the Company is currently using $2.0 million each quarter from its operations or approximately $0.7 million per month. The Company continues to experience significant growth in the number of worksite employees, which would generate additional administrative fees and profit on employer-related taxes that would offset the current level of operational cash burn. Indeed, since May 31, 2019, the Company has added, through executed service agreements, approximately 17 new clients, servicing approximately 6,600 worksite employees with approximately $32.5 million in additional revenue per year, which would generate an additional of $1.1 million in quarterly gross profit.
The Company’s existing institutional investors from our senior secured convertibles have converted approximately $8.8 million of their principal into 6.8 million shares of the Company’s common stock, which allowed the Company to retain cash to fund its operations and build its IT department to complete the deployment of its technology platform. The Company seeks to renegotiate the 2018 and 2019 notes, without litigating the matter in courts, to amend the terms to remove the conversion features and revise the cash amortization schedule to be more in alignment with the Company’s cash flow.
With the added general and administrative costs from building its IT department, the Company anticipates using the actual cash position and continue leveraging its payables until it reaches breakeven at about 25,000 worksite employees.
The deployment of our technology features, especially our self-delivery feature, is expected to further accelerate the growth of the Company. The Company’s management believes that the current cash position, along with the resulted accelerated revenue growth will be sufficient to fund its operation 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