Due Diligence: Shift Pixy Quick Rundown



Everything written in this article is a direct quote from company SEC filings



We have warrants and convertible debt that may be converted into shares issued in the future, which would dilute your ownership in the Company

On June 4, 2018, December 20, 2018, and March 12, 2019 the Company issued senior secured convertible note agreements with certain institutional investors in which, at any time while there is an outstanding balance, the notes may be converted, at the option of the holders at a conversion price for the principal and interest, subject to adjustment from down round price protection. As of the date of this report, these notes were in default and therefore subject to a conversion price of 75% of the lowest volume weighted average price on any given trading day for the June 2018, December 2018 notes the March 2019 notes. As of the August 31, 2019 date, those notes, if converted at the applicable discount price, would be convertible into approximately 19.7 million shares of common stock. In conjunction with the above transactions, the Company also granted warrants to purchase up to 4.2 million shares of common stock, which may be exercised for up to five years from their issuance date. These warrants may also include the requirement for the Company to issue additional warrants if a future financing is entered into at a price per share below the warrant exercise price. Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to those of our common stock and which result in additional dilution of the existing ownership of our common shareholders.

The agreements governing our senior convertible notes contain a mandatory default amount when an event of default occurs

The indentures governing our senior secured convertible notes, contain mandatory default amounts when an event of default occurs. In general, interest is to be accrued at 18% annual rate from the date of default, the conversion feature is modified to be a discount of between 15% and 25% to the volume weighted average price on the date of conversion, and a mandatory redemption may be demanded at up to 130% of the remaining principal balance. We have been notified that our June 2018, December 2018, and March 2019 notes are in default by one of our noteholders for failure to honor a conversion notice sent in June 2019 for the March 2019 notes. We are currently in litigation with our note holders for this failure to honor conversions for the June 2018, December 2018, and March 2019 series. If we remain in default, one or a combination of the following could occur: i) we could have to repay a portion of the outstanding notes at a premium to the total non-default outstanding principal balance of approximately $6.8 million, the conversion price could be reduced resulting in additional shares issued which could cause dilution to common shareholders, and iii ) additional cash interest may be due.

During the year ended August 31, 2019, the Company entered into senior secured convertible notes with certain institutional investors in the principal amount of $4,750,000. The notes are senior and secured by all assets of the Company. Sales of all of these securities were made pursuant to rule 506(c) of Regulation D promulgated by the SEC under the Act.
Net Loss decreased to $16.4 million or $0.50 per share, from $16.8 million or $0.58 per share.
On July 9, 2019, the Company’s Board of Directors authorized the repurchase of up to 10 million shares of our outstanding common shares as market conditions warrant over a period of 18 months. The Company has not implemented the share repurchase plan to date and has not repurchased any shares under the plan.
On June 7, 2019, and June 10, 2019, the Company received notices from two of its institutional investors that the Company was in default due to missed principal and interest payments under the terms of the Notes. On June 27, 2019, the Company reported that is has informed its convertible note holders that it will cease honoring conversion requests of the 2018 and 2019 Notes forcing a voluntary default of these instruments. The Company is pursuing a renegotiation and amendment of these instruments in an effort to avoid litigation. The Company is requesting to amend the terms of the notes to remove the conversion features and revise the cash amortization, among other items.
Litigation

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will be resolved only when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.

During the ordinary course of business, the Company is subject to various claims and litigation. Management believes that the outcome of such claims or litigation will not have a material adverse effect on the Company’s financial position, results of operations or cash flow.

Convertible Note related litigation:

During 2019, three of the Company’s note holders have filed complaints:

Alpha Capital v. ShiftPixy , Inc.

On July 3, 2019 ShiftPixy was served with a complaint filing by Alpha Capital Anstalt ( ACA ) in the United States District Court, Southern District of New York alleging breach of contract in refusing to honor the conversion of certain convertible notes, specifically one for $310,000 submitted on June 20, 2019. ACA sought an injunction requiring the Company to issue 1 million common shares, damages for the claimed breaches, and attorney’s fees. In August 2019, the court denied the motion for a preliminary injunction but granted accelerated discovery which was completed in September 2019. As of August 31, 2019, the Company had convertible notes outstanding with ACA for approximately $1.7 million consisting of $0.3 million of the June 2018 series, $0.2 million of the December 2018 series and $1.2 million of the March 2019 series.

Dominion Capital LLC v. ShiftPixy ;

On July 18, 2019 ShiftPixy was served with a complaint filing by Dominion Capital LLC in the United States District Court, Southern District of New York alleging breach of contract in refusing to honor the conversion of certain convertible notes. Dominion sought injunctive relief, injunction to prohibit buyback, breach of contract on the June 2018, December 2018, and March 2019 notes, and declaratory judgment. In August 2019, the court denied the motion for a preliminary injunction but granted accelerated discovery which was completed in September 2019. As of August 31, 2019, the Company had convertible notes outstanding with Dominion for approximately $1.5 million consisting of $0.7 million of the June 2018 series, $0.2 million of the December 2018 series and $0.6 million of the March 2019 series.

Both ACA and Dominion have filed for summary judgment on their cases. The court referred those motions to a magistrate judge for a report and recommendation, and the magistrate judge filed his report on November 22, 2019, recommending that the court enter judgment for money damages in both cases consistent with the amounts accrued for by the Company, denying permanent injunctive relief, and granting declaratory relief with respect to the stock buyback program. The Company is awaiting a response from the court as of the date of this filing.

MEF I, LP v. ShiftPixy , Inc.;

On August 27, 2019 MEF filed a complaint in the United States District Court, Southern District of New York based upon the Company’s refusal to convert June 2018 notes. MEF seeks monetary relief of $2.1 million and seeks to appoint themselves as receiver of the Company. As of August 31, 2019 the Company had convertible notes outstanding to MEF at approximately $0.7 million face value consisting of approximately $0.5 million and $0.2 million for the June 2018 and December 2018 notes respectively. In November 2019 the Company filed a motion in response to the receiver request. A hearing on the receiver matter was conducted on November 20, 2019 and the Company is awaiting a response from the court on the hearing as of the date of this filing.

Lyons Capital, LLC Litigation

On June 21, 2018, ShiftPixy was served with a summons and complaint in connection with a claim by Lyons Capital, LLC, arising out of a contract wherein ShiftPixy , Inc., agreed to pay Lyons Capital, LLC, a total of 210,000 shares of the company’s common stock in exchange for introductions to brokers, research coverage, funds, investment banking firms, and market makers as well as board representation and business opportunities and for promotion of the company at Lyons Capital, LLC’s annual conference. This lawsuit was settled during fiscal 2019 for an immaterial amount which was included in general and administrative expenses on the statement of operations.

Kadima Ventures

The Company is in dispute with its software developer, Kadima Ventures, over incomplete but paid for software development work. In May 2016, the Company entered into a contract with Kadima Ventures for the development and deployment of user features that were proposed by Kadima for an original build cost of $8.5 million to complete. As of the date of this filing, the Company has spent approximately $11 million but has not received the majority of certain software modules. In addition to the non-delivery of the paid for user features, Kadima Ventures asserts that it is owed additional funds to turn over the work completed. The Company initiated litigation to force the delivery of the software modules paid for through fiscal 2019 and exit the development engagement. In April 2019, Kadima filed a complaint against ShiftPixy in the County of Maricopa, AZ alleging breach of contract, promissory estoppel and unjust enrichment and has demands for an additional $10 million prior to releasing the remaining features. The parties agreed to a transfer of the matter to an Arizona Commercial Court with the expectation that the matter would be sent to arbitration or mediation. In October 2019, Kadima provided the software code to a third party for technical evaluation of the software in question. The Company expects to enter into mediation once the technical evaluation is completed later in fiscal 2020. An answer to the Complaint is due January 31, 2020.

Splond Litigation

On April 8, 2019, claimant, Corey Splond, filed a class action lawsuit, naming ShiftPixy , Inc. and its client as defendants, claiming that he was scheduled to work for more than 8 hours during 24-hour periods without being paid overtime, to which he was entitled. In addition, claimant is seeking waiting time penalties for the delay in payment. This lawsuit is in the initial stages; the financial impact to the Company, if any, cannot be estimated. No liability has been recorded for this matter at this time. In the event of an unfavorable outcome the Company’s client is contractually obligated to indemnify the Company for misreported hours and portions of the claim would be covered under the Company’s employment practices liability insurance.

Consolidated Statements of Operations – USD ($)
12 Months Ended
Aug. 31, 2019 Aug. 31, 2018
Consolidated Statements of Operations
Revenues (gross billings of $352.6 million and $222.4 million (unaudited) less worksite employee payroll cost of $299.2 million and $187.5 million (unaudited), respectively) $ 53,436,000 $ 34,959,000
Cost of revenue 41,046,000 29,458,000
Gross profit 12,390,000 5,500,000
Operating expenses:
Salaries, wages and payroll taxes 7,702,000 5,383,000
Share-based compensation – general and administrative 632,000 363,000
Commissions 2,732,000 1,594,000
Professional fees 3,918,000 2,078,000
Software development 1,209,000 3,828,000
Marketing and advertising 1,208,000 547,000
General and administrative 3,823,000 3,005,000
Depreciation and amortization 839,000 274,000
Total operating expenses 22,063,000 17,072,000
Operating Loss (9,673,000) (11,572,000)
Other income
Interest expense (8,507,000) (1,751,000)
Loss on debt extinguishment (3,927,000)
Change in fair value of derivative 2,569,000
Gain (Loss) associated with note defaults, net 811,000 (3,500,000)
Total Other income (expense) (9,054,000) (5,251,000)
Net Loss $ (18,727,000) $ (16,823,000)
Net loss per common share
Basic and diluted $ (0.57) $ (0.58)
Weighted average number of common shares
Basic and diluted 32,708,800 28,810,103

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