ShiftPixy, Inc.
Q2 2019 Earnings Call Transcript

Published: 15 Apr 2019

[Operator:]

Greetings and welcome to the ShiftPixy Fiscal Second Quarter 2019 Financial Results Conference Call. All participants will be in a listen-only mode. I'll now turn the call over to Vance Edelson with ICR.

[Vance Edelson:]

Thank you very much and welcome everyone to this morning's call. I'm here with ShiftPixy's CEO, Scott Absher; and CFO, Patrice Launay. Before we begin, I want to remind everyone that today's call will contain several forward-looking statements, all of which are subject to risks and uncertainties and the Company assumes no obligation to update or revise any forward-looking statements. These risks and uncertainties, some of which are described in today's press release and in the Company's SEC filings, could cause actual results to differ materially from those in the forward-looking statements. On today's call, management will be referring to certain non-GAAP financial measures. These non-GAAP measures allow investors to analyze operating trends and compare results of operations in the current period to prior results based on the Company’s fundamental performance. Also any comparisons made today to prior period results are based on a comparison to the same period in the prior year unless otherwise stated. Within the past hour, ShiftPixy released its financial results for the fiscal second quarter ended February 28, 2019. If you do not have a copy of the press release, please visit the Investor Relations section of the Company’s website. With that, it's my pleasure to turn the call over to Chief Executive Officer, Scott Absher.

[Scott Absher:]

Thanks, Vance, and good morning, everyone. We are excited you can join us today to hear about our ongoing progress and our continued rapid growth. I would like to start by welcoming two new members to the ShiftPixy team. In February, we announced the hiring of Kirk Flagg as Chief Compliance Officer and Corporate Secretary. Kirk is an accomplished veteran of the employer services industry. He served as the COO of Kelly Staff Leasing and Vice President of Human Resources and Government Relations there, as well as the senior trial attorney in the Civil Rights Division of the US Department of Justice. Kirk brings a tremendous amount of experience, having spent more than 30 years in the public and private sectors. Even more recently Amy Wang joined us to become our Chief Marketing Officer. Amy most recently served as Co-founder and CEO of Dawn Design Studios, where she helped businesses grow their brands and was previously the Marketing Manager for the International Skincare Line of Sebamed. Amy has several years experience in brand management, market strategy and business development. So, Kirk and Amy, welcome to the ShiftPixy team. We are pleased to have you on board at this exciting time. As I’ve done in recent quarters, I want to begin with a quick background on ShiftPixy for investors who are new to the story. I will then share the highlights of our second quarter results before turning it over to Patrice, who will walk us through the financials and operating metrics in greater detail. And then we will close with a Q&A section. At its heart, ShiftPixy is a staffing enterprise focused on both businesses and workers in the new Gig Economy. Our initial focus is on the restaurant and hospitality industries, which account for about half the workers in the fast-growing U.S part-time labor market. We are working to bring proprietary, sophisticated and compliance oriented technology platform to the Gig Economy, aimed at helping businesses with many burdensome compliance requirements it face. ShiftPixy hires the workers itself and manages the many compliance needs allowing our clients to efficiently gain access to a flexible and readily available employee base. On the other side of the equation, the workers on our platform who we refer to as shifters are able to easily move amongst a broader array of shifts bringing them the flexibility that they desire. The emergence of ShiftPixy is well timed for the growing convenience economy, in which an increasing number of restaurant chains are having to offer delivery options under third-party arrangements. Every day they're seeing the downside from this third-party approach and they’re turning to ShiftPixy as a better solution. We offer them an extension of their own platform so that they can professionally self deliver with all over better brand centric customer experience. As always we encourage you to visit our website to learn more. Turning to our quarterly financial performance, which Patrice will walk us through in a moment, ShiftPixy continued its rapid growth during the February quarter as evidenced by the sequential 16% expansion in gross billings just since the November quarter, and are 70% year-over-year growth. This was driven by continued expansion in the number of worksite employees on our platform which by the end of the quarter was approaching 10,000, which we believe underscores the meaningful value our clients see in our business proposition. With that, Patrice, will now walk us through the quarterly results and balance sheet in greater detail before we move into our Q&A session. Patrice?

[Patrice Launay:]

Thank you, Scott, and thank you everyone for joining us this morning -- on this morning's call. We are pleased to report our fiscal second quarter results, which include gross billings of $82.5 million, reflecting 16% sequential growth and a 70% increase over the same period in the prior fiscal year. This growth in gross billings was even faster than the increase in average number of worksite employees, which at 9,660 for this quarter was up 7% sequentially and 47% the past year. Gross profit was $3.2 million during the quarter as compared to $0.9 million in the corresponding quarter in the prior year and the gross margin of 24% was up significantly from 11% a year earlier. The higher gross margin is attributable to the [indiscernible] in our workers' compensation programs as well as a favorable outcome on employer payroll taxes. Our net loss per share was $0.01 during the quarter, which was an improvement over a loss of $0.09 in the prior year period. While we're only about halfway through our fiscal third quarter of 2019, which ends on May 31, the early indications are that the strong performance during our February quarter has continued with 19 new clients already brought onboard since the end of February. These new clients have added approximately 1,800 new worksite employees generating about $43 million in additional annual gross billings. Turning to the balance sheet. Our cash balance at the end of February stood at approximately $1.8 million, which were slightly above the $1.6 million level at the start of our fiscal year in September. I would also like to comment on our convertible debt activity, which is an ongoing source of funding for us. As of the February quarter end, we have converted approximately 4.6 million of principal and 290,000 of interest into shares of common stock and issued approximately 3 million shares of common stock. All right, this concludes our prepared remark for this morning. So we can now move on into our Q&A session. We again asked member of the investment committee to send us their questions, which Vance will now walk us through. Vance?

[Vance Edelson:]

All right. Thank you, Patrice and thank you to everyone who sent in questions this quarter. I’ve split the questions between those for Scott, which are largely of an operational nature and those for Patrice largely of a financial nature. So let's dive right in with the first question for Scott. Is anyone using your metered car insurance product yet? If so, what type of entity and what has been their experience so far? If not, when will it launch and do you already have customers waiting to use it?

[Scott Absher:]

The metered coverage, Vance, is tied to our launch of our driver management application, which is just getting launched into the [indiscernible] this month. We do have clients ready to jump into our beta in Southern California.

[Vance Edelson:]

Okay. That’s great. Another operational question for Scott, what is the status of the app features, which elements are in beta versus what is live and what is the current timetable?

[Scott Absher:]

We are launching this month our 2.0 version of our app and our enhanced user features. We are getting the sense for which features our clients want to prioritize since we are embedding in important parts of their business. Our sense right now is a driver management feature, which allows our clients to self deliver is a very high priority.

[Vance Edelson:]

All right. Thanks for that. Here's another question for Scott. This seems like an important one. How likely is it that ShiftPixy will reach 50,000 worksite employees by the end of calendar 2019? And as a reminder, for our audience, the company ended February with just under 10,000 worksite employees, so that would be a fivefold increase in less than a year. So how does that look Scott?

[Scott Absher:]

The current backlog suggest to me that we're on a good pace to hit our calendar year-end population goal.

[Vance Edelson:]

Okay. Good to hear. Here is another question for Scott. What percentage of new customers are coming from industries that are not restaurants? And I'll let you answer that that first question before I ask the related follow-up.

[Scott Absher:]

Sure. About 20% are coming in from outside restaurant. But we expect that to increase as we get further into the year.

[Vance Edelson:]

All right. Then here's the related follow-up. Speaking of those customers coming to you from outside the restaurant industry, what is the biggest reason that they’re coming to ShiftPixy?

[Scott Absher:]

The -- what I think people miss is that ShiftPixy is a human capital strategy supported by technology. Our operator community is motivated by the strategy and understand how we utilize technology to run and support the strategy. Many of the operators in various industries that rely on parts and labor see what we're doing and imagine how it might work in their operation to address the difficulties that they're dealing with.

[Vance Edelson:]

Okay. Makes a lot of sense. Thanks for that. Here's an interesting one, I don't think we've ever been asked. How would you describe the current business and competitive conditions in the industry?

[Scott Absher:]

Great question. Our view is that ours is a greenfield opportunity in that very few companies that work in the staffing and employer service sector have an interest in high turnover labor populations. This population is very hard to monetize and requires a lot of handling, so the market goes unserved. The U.S. has a population of 28 million people working part-time. So we hope our success inspires more companies who know the space to develop the same combination of business deliverables to help serve this neglected market. But for now we are the only one going after this market opportunity with the combination of -- this combination of deliverables.

[Vance Edelson:]

All right. That’s very interesting. Here's one, we've definitely been asked before. Could you discuss major new clients working with ShiftPixy?

[Scott Absher:]

Our approach is always to the franchised -- franchise operators under various national brands. Once we engage an operator under one of the national brands we approach the rest so you won't see "major clients", but rather depth within the brands whose operators we are continuing to stack.

[Vance Edelson:]

Okay. Makes sense. And here's a follow-up from a question that was asked and answered the last quarter. Are the three goals stated on the last call still expected to be achieved? So those goals were to rollout the high value user features, to get the business to breakeven, and to have at least 50,000 lives on the platform by December?

[Scott Absher:]

Those three remain our primary goals and we do expect to achieve all three this year.

[Vance Edelson:]

All right. That's terrific. And then here's an easy one. Is the Miami office open yet?

[Scott Absher:]

Our Miami office was aligned with our capital quest. We are moving very quickly to cash flow positive, so we put our capital quest on pause with our investment bank and we will revisit the Miami office probably mid-summer.

[Vance Edelson:]

Okay. So thank you for those answers, Scott. And we can now transition over to the questions for Patrice. The first one sounds familiar, Patrice. It's what is your current cash burn rate? When do you expect to reach breakeven and what revenue level would that be at?

[Patrice Launay:]

Yes. This one has come up before. I would like to again to remind everyone that as an early-stage company would continue to invest in the business to -- and not what we consider to be a tremendous potential and to leverage our work -- our market advantage. We’re also very comfortable with our growth trajectory and this growth positive contribution to our cash flow and that our early investment in our operations staff and fixed overhead give us sufficient capacity to support growth we're seeing with that having to add to our fixed overhead. However, we anticipate an increase in our operating expense as we begin to build our software development team internally. This will allow us to expedite the technology deployment which will further accelerate the growth of the company. Assuming expenditures are paid as incurred and [outside] [ph] product development, the company is now burning approximately $1.6 million per quarter, or slightly over $500,000 per month. We expect to generate additional cash flow from the growth of our base of clients and our worksite employees. The company is beginning to onboard larger clients and franchises of national brands, producing significant increase in the number of the worksite employees as business see our value proposition as necessary for their own success. It is still our goal to get to breakeven by the end of our fiscal year-end. We believe that critical mass is between 17,000 and 20,000 lives.

[Vance Edelson:]

All right. Thanks for all the detail there. That’s very exciting. Here's another finance related question for you. Can you explain the current state of your convertible bond instrument and when you expect it to be converted? Also, what is the current fully diluted share count?

[Patrice Launay:]

Sure. So to this date our current investors have continued to convert the principal of their notes into shares of common stock. And the company issued a total of 5.3 million shares of common. The remaining principal on convertible is close to 3.7 million. The current potential fully diluted share count is approximately 41.9 million. Our current investors would continue to convert into shares of common stock in order for the company to keep any of its cash to fund its operation to reach breakeven by the end of our fiscal year-end.

[Vance Edelson:]

Okay. Makes sense. Thanks for the answer there. The next question is how will you spend on -- sorry, how much will you spend on R&D this year?

[Patrice Launay:]

All right, Vance. As I mentioned earlier, the company began building its internal software development team and transition away from its current software development vendor to expedite the company's technology deployment. Such transition will further increase our quality cash burn by approximately $0.2 million. As Scott mentioned, we are about to release version 2 of our app and enhanced user features.

[Vance Edelson:]

Great. And with that, I believe, we've made it to the final question of the day. Could you provide realistic projections of revenue and profitability targets by the end of the fiscal year? And again for our listeners that means August, so go ahead, Patrice.

[Patrice Launay:]

Sure. It's still our objective to reach breakeven by the end of our fiscal year. Our margins are expected to increase as the company transitions to a SaaS engagement. And we should be able to improve the monetization of our service offerings. The strong sequential growth rate that we’ve experienced should provide a very good example [of the power] [ph] of the business model.

[Vance Edelson:]

All right. Terrific. That will conclude this morning's Q&A session. Thank you, Scott and Patrice for your detailed answers. And I'm now going to turn the call back over to Scott for closing remarks.

[Scott Absher:]

Great. Thanks, Vance. I want to thank everyone for joining this morning's call. Our entire team appreciates your interest in ShiftPixy and I look forward to updating you in the near future on our continued progress. Be sure to follow us on social media. We post regularly about our activities and opportunities. Have a great week everyone and we will speak with you soon.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.