Last night, ShiftPixy (NASDAQ:PIXY) announced it has sold off its PEO business, which was 60% of its revenue base to Vensure Employer Services of Duluth, Georgia for approximately $19 million in cash. This not only raises desperately needed cash, it hits the reset button for the company to strategically focus on its higher margin, value added services for restaurants. The business reassigned is mostly comprised of lower margin customers and those not in the restaurant chain business. The business it kept has double the gross margin of that that it sold, and as a result the company will retain half its gross margin dollars going forward.
This move shows how ridiculously low ShiftPixy’s valuation was at a $7 million market cap, when it could raise $19 million just by reassigning contracts for 60% of its business while retaining all its assets and its technology platform. Even now at $21.20 per share, ShiftPixy is only valued at a $20 million market cap, or subtracting the cash infusion in January of $9.7 million and adding the convertible debt, an enterprise value of $13.7 million.
The transaction was dated January 1, 2020 and on closing ShiftPixy received $9.7 million in cash (adjusted for working capital) with the rest being paid out over time. The remainder will be paid in 48 monthly installments of $197,916.66 (with the exception of the final monthly installment payment, which shall be equal to the remaining adjusted balance), due no later than the 15th day of each month beginning in April 2020 and ending April 2024. Given adjustments this transaction could raise a total of between $18 million and $22 million.
The company has been on boarding a large number of new customers since the beginning of the new year and hopes to be back to past quarterly gross margin dollars as soon as six months from now. Its operating expenses should also go down somewhat. By strategically focusing on chain restaurants, the company should be able to continue to increase gross margins, and upsell its new metered car insurance for delivery drivers, while retaining a meaningful base of restaurant workers to be able to implement shift sharing among the restaurants.
The company will retain the worksite employees in its ecosystem but they will no longer be processing their payroll or providing benefits. That will be provided by the purchasing company. The company will now categorize them as unbilled workers. The worksite employees will still be eligible to sign up for a shift at all of ShiftPixy’s customers if they are qualified for the gig.
We have adjusted our model to reflect this transaction and expect the company to report its November quarter (pre-divestiture) by January 14th for a further update.
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