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PIXY: Gross Margin Dollars Grow 266% in Q2 FY 2019

By Lisa Thompson

NASDAQ:PIXY

READ THE FULL PIXY RESEARCH REPORT

ShiftPixy (PIXY), again, missed our gross billings and revenue numbers for the quarter and more than compensated with its gross margin performance. We had expected the company to generate $2.5 million in gross margin, but it managed to achieve $3.2 million versus $880,000 a year ago. Gross margin dollars grew 266%. In Q1 it reported gross margin of 32.2%, but within that quarter it had had a one-time reversal of unemployment tax without which, margin would have been 22.7%. This quarter it achieved a gross margin of 24.2%, and the company expects gross margin to continue to increase with volume scale. The gross margin improved this quarter due to the advantage in scale of worker’s compensation programs as well as a favorable outcome on employer payroll taxes.

Worksite employees rose from an average of 6,798 employees for the three months ended February 28, 2018, to an average of 9,660 employees in this year’s quarter, up 42%. It ended the quarter with 10,090 worksite employees. Since the quarter ended the company indicted it has already added clients totally another 1,800 workers bringing that number to 11,890 today.


View Exhibit I

ShiftPixy reported gross billings for FY Q2 2019 ending February 28, 2019 of $82.5 million versus $48.6 million a year ago up 70%. This resulted in revenues of $13.2 million up 67%.

Operating expenses were $5.4 million versus $3.6 million a year ago. A third of the increase was due to increased salaries, wages, and payroll costs, followed by a $386,000 increase in professional fees and a $251,000 increase in commissions. In this year’s quarter there was $718,000 of development costs expense versus $486,000 in the 2018 quarter.

The operating loss was $2.2 million versus $2.7 million loss a year ago.

Interest expense was $722,000 from amortization expense related to the debt discount and debt issuance costs. Only $11,556 of interest was paid in cash. As expected in the quarter, the company reversed $2.6 million of the debt issuance penalty, a one-time gain.

With no taxes paid, the company reported a loss of $339,000 million versus a loss of $2.5 million a year ago or a loss of $0.01 per share versus a $0.09 per share loss, one cent better than expected.

On a non-GAAP basis, taking out the debt issuance penalty reversal, and stock-based compensation, the loss per share was $0.09, the same as a year ago. Average shares outstanding for the quarter were 31.2 million, up 8% from a year ago.

During the quarter the company added to senior management.

In February, ShiftPixy hired of Kirk Flagg as Chief Compliance Officer and Secretary. Kirk is an accomplished veteran of the employer services industry, having served as COO of Kelly Staff Leasing, VP of Human Resources & Government Relations, as well as a senior trial attorney in the Civil Rights Division of the US Department of Justice. Kirk earned his Juris Doctorate from the University of Notre Dame Law School. He brings a wealth of legal, operations, management, and planning experience from his more than 30 years in the public and private sectors. ShiftPixy also announced that Mark Absher, who served as the company's in-house counsel, Secretary, and a member of the Board of Directors, resigned. 

In March, it also hired Amy Wang as Chief Marketing Officer. She most recently served as co-founder and CEO of Dawn Design Studios, where she helped businesses grow their brands. She was previously the marketing manager for the international skin care line of Sebamed. Amy has several years experience in brand management, market strategy and business development.

Software Update

ShiftPixy continues to make progress with its app’s capabilities and expects to beta test the driver metering function starting this month. It already has customers in Southern California eager to use it. The company has gotten into a dispute with the software developer to which it has outsourced development. The company claims the developer owes it functionality for which it has been paid, and the developer is demanding further money to release features. As a result ShiftPixy is working to bring software development in-house.

Raising Capital

On the earnings call, ShiftPixy said it is currently burning $500,000 a month in cash not including costs for product development. As of February 28, it had $1.8 million in cash, a working capital deficit of $10.5 million, and debt from its convertible of $4.9 million. On March 11, 2019, the company entered PIPE transaction to sell $4.75 million of senior convertibles notes due September 12, 2020, and warrants to purchase 2,840,909 shares of common stock. These were sold for $3,750,000, and the net proceeds from the transaction to the company were approximately $3.4 million. The company now has an all in share count of 41.9 million shares. We believe this is sufficient to get the company to cash flow breakeven.

ShiftPixy’s Goal for 2019 is to Quintuple Business

ShiftPixy’s management reiterated on its earnings call that its goal for calendar year 2019 is to end the calendar year serving 50,000 worksite employees compared with approximately 10,000 at the end of 2018. It plans to do this while also reaching cash flow neutral by the end of August, which is the end of its fiscal year.

The stock currently trades at an enterprise value of $48 million or 0.8Xs EV to estimated calendar 2019 revenues. This is compared to Insperity at 1.2Xs and Trinet at 4.8Xs who have higher margins but much lower growth rates.

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