Trading at an enterprise value of $9 million, with a revenue run rate of $62 million and annual results that showed 53% growth, ShiftPixy (NASDAQ:PIXY) certainly deserves a second look. With a new year and a new CFO, the company has put behind it a few of its missteps and has a plan to fix the rest. Clearly investors have been wary of the company, as it has been difficult to assess how much dilution would occur as the result of disputes with the convertible bondholders. But since the dispute with largest holder (CVI Investments) has been settled, wiping out a potential 250,000 shares of dilution, there is more clarity on the range of possibilities for the rest. As it now stands, at most an additional 400,000 shares could possibly be converted putting the all-in share count at 1.3 million shares. Since all the options and warrants are also out of the money, the fully diluted number is currently the same as the shares outstanding of 915,000 shares. Where the company ends up will be somewhere between 1.3 million and the 915,000. Because of this agreement with CVI the company should be reversing the $1.8 million reserve it took below the line in FYQ4 2019, either in FYQ1 or FYQ2, depending on the decision of the auditors.
While the company could use cash and a war chest to grow it has found a source of cash on its own balance sheet. It plans to get a bank loan against deposits for workers’ compensation, which could provide some $3 million in cash. Longer term it will need to raise capital to fund its growth. With normalized expenses its cash burn currently runs about $400,000 a month. It should be able to reach cash breakeven shortly through increased worksite employee numbers, increased average gross margin per employee and reduced baseline expenses as litigation ends.
The company had a delay in the launch of its much anticipated mobile application and technology platform due to a dispute with its outsourced developer that has withheld code and which is ongoing. To avoid further delays, in Q3 2019 ShiftPixy has hired an in-house group to write a lot of the code and is also licensing some software at a cost of $75,000 a month. If possible it would like to settle with the outsourced developer and get the withheld code but is progressing forward with its technology solution, in customer testing at the end of 2019, which will turn on some additional revenue streams for the company in 2020.
Longer term the ShiftPixy should continue to increase margins through economies of scale. Its novel approach to employee management, which enables companies to reduce their insurance and compliance costs by outsourcing the workforce to ShiftPixy, should attract more and more customers. Having delivery sharing and insurance metering should attract more chain restaurants, which are the higher margin customers for ShiftPixy.
Q4 FY2019 Results
Once again ShiftPixy beat our gross billings number, at $104.8 million compared with $73.4 million in FYQ4 2018, up 43%. Revenues were also slightly higher than expected strong at $15.4 million, up 38% year over year and inline with our estimates.
Gross margin dollars increased 68.3%, while the gross margin percentage also increased to 19.9% from 16.3% in 2018. While year over year improvements have been caused by lower insurance costs, the company also experiences seasonal trends. The first quarter always has the highest margins as it pays lower social security as worker max out on contributions at the end of the calendar year. As a result we expect FYQ1 to be much higher than Q4 as well as higher than the year ago period.
Worksite employees rose from an average of 10,860 employees for the three months ended May 31, 2019, to an average of 13,100 employees in this year’s quarter, up 20.4% sequentially and 53.4% year over year.
Source: Zacks Investment Research
Operating expenses were $6.1 million versus $5.5 million a year ago an increase of $582,000. For year end the company added a Sales and Marketing Expense category and rearranged expenses in the stock-based comp, professional fees and general and administrative line items so we cannot analyze the quarterly changes for those categories. In the remaining lines:
• Salaries increased $560,000 with increased headcount mostly driven by bringing software development in-house
• Commissions increased $305,000 with increased sales. The company hopes to bring this down as a percentage as it sells more services to current customers, which will not incur commission payments. Also it is shifting internal resources to more of an internal, lower commissioned sales force and focusing on larger deals with multiple location franchises.
• Software development decreased $1.2 million as the company moved development in-house.
• Depreciation was up $100,000 and will increase with increased capitalized software
• The remaining categories sum increased $878,000.
• The company is working on bringing down expenses particularly in professional fees that have been elevated due to legal expenses that should end once a deal with the remaining two convertible holders have been completed as well as with the software developer. Increased spending on sales and marketing will offset these declines as its new delivery service and staff sharing on its mobile app rolls out to new customers. In these expenses is $430,000 in one-time expenses mostly from legal expenses for the Kadima and note related litigation.
The operating loss was $3.0 million versus $3.7 million loss a year ago and a loss of $3.1 million in FYQ3 2019.
Total other income was an expense of $6.3 million versus $5.3 last year. Interest expense was $2.2 million from amortization expense related to the debt discount and debt issuance costs related to the March 2019 and June 2018 financings. No interest was paid in cash. Two other charges were in other income; a non-cash $98,000 inducement loss from debt and a $2.2 million non-cash gain on the change in fair value of the derivative and warrant liabilities.
With no taxes paid, the company reported a loss of $9.3 million versus a loss of $8.9 million a year ago or a loss of $10.32 per share versus a $12.41 per share loss. On a non-GAAP basis the loss per share was $9.32 versus a loss of $12.14 year ago. In this number we have taken out stock based compensation and the $430,000 in one-time expenses. Average shares outstanding for the quarter were 905,000 million, up 26% from a year ago. Shares outstanding as of December 13, 2019 were 915,000 post split and the all in share count is now 1.3 million, an increase of 39%.
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