Contingencies	3 Months Ended
Nov. 30, 2023
Contingencies
Contingencies	Note 11: Contingencies 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 assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. Legal During the ordinary course of business, the Company is subject to various claims and litigation. Everest Litigation On December 18, 2020, the Company was served with a Complaint filed in the United States District Court for the Central District of California by its former workers’ compensation insurance carrier, Everest National Insurance Company. The Complaint asserts claims for breach of contract, alleging that the Company owes certain premium payments to plaintiff under a retrospective rated policy, and seeks damages of approximately $0.6 million, which demand has since increased to approximately $1.6 million. On February 5, 2021, the Company filed an Answer to Plaintiff’s Complaint denying its claims for relief, and also filed a crossclaim against the third-party claims administrator, Gallagher Bassett Services, Inc., for claims sounding in breach of contract and negligence based upon its administration of claims arising under the policy. By order dated April 7, 2021, the Court dismissed the Company’s complaint against Gallagher Bassett without prejudice to re-filing in another forum. On May 17, 2021, the Company refiled its complaint against Gallagher Basset in the Circuit Court of Cook County, Illinois. Everest subsequently filed a complaint against Gallagher Bassett in New Jersey. Discovery proceeded in the cases, and the California Court set a trial date in the Everest case of August 8, 2023, while no trial date has been set in either of the related Illinois or New Jersey cases, which are in preliminary stages. Mediation in the matter was conducted on December 14, 2022, and the matter was kept open until further notice as the parties endeavored to settle the case. On or about June 28, 2023, the Company entered into a confidential settlement agreement with Everest National Insurance Company and Gallagher Bassett, resolving the litigation amongst the parties. see Note 8 Discounted Operations. Sunz Litigation On March 19, 2021, the Company was served with a Complaint filed in the Circuit Court for the 11th Judicial Circuit, Manatee County, Florida, by its former workers’ compensation insurance carrier, Sunz Insurance Solutions, LLC. The Complaint asserts claims for breach of contract, alleging that the Company owes payments for loss reserve funds totaling approximately $10 million, which represents approximately 200% of the amount of incurred and unpaid claims. The Company denies the plaintiff’s allegations and is defending the lawsuit vigorously. On May 12, 2021, the Company filed a motion to dismiss the complaint, and Sunz filed an amended complaint in response. Discovery is proceeding in the matter and no trial date has been set. On June 21, 2022, the Court granted Plaintiff’s partial motion for summary judgment, holding that Defendant is liable under the contract, but further finding that the number of damages, if any, to which Plaintiff is entitled should be determined at trial. We believe that partial summary judgment was improvidently granted, and therefore appealed the Court’s Order by filing a petition for writ of certiorari with the Court of Appeal, which appeal is now pending. On or about November 14, 2022, a court granted Sunz’ motion for summary judgment on a contractual issue—holding that the Company waived claims regarding Sunz’ management of claims to the extent that the Company did not complain about such management within 6 months of the alleged mismanagement of the claims. This ruling may limit the scope of the Company’s counterclaim. Trial in the case has been set for February 2024. The parties have agreed to a settlement for $3,500,000 to be paid as follows: $350,000 cash payment on or before March 1, 2024 and $75,000 per month payments until the balance of is paid in full. There is a 15% discount to be applied to a full balance payment if paid before the final due payment. There is a default provision if the payment if the Company does not pay according to the terms of the settlement agreement and the default payment can go up to $7.8 million. The parties have agreed to stay all litigation in Florida and dismiss all California litigation and a Stipulated Judgment will be held by Sunz, unfiled, until the amount is paid in full. As of November 30. 2023 the liability owed of $7.8 million to Sunz is recorded in accounts payable and other liabilities. As of August 31, 2023, the Company recorded $5.6 million in accrued workers compensation cost discounted operations liabilities. *Vensure Litigation* On September 7, 2021, Shiftable HR Acquisition, LLC, a wholly owned subsidiary of Vensure, filed a complaint against the Company in the Court of Chancery of the State of Delaware asserting claims arising from the Asset Purchase Agreement (the “APA”) governing the Vensure Asset Sale described above. The APA provided for Vensure to purchase, through its wholly owned subsidiary, certain of the Company’s assets for total consideration of $19 million in cash, with $9.5 million to be paid at closing, and the remainder to be paid in 48 equal monthly installments (the “Installment Sum”). The Installment Sum was subject to certain adjustments to account for various post-closing payments made by the parties, and the APA provided for a procedure to determine the final amount of the Installment Sum. In early September 2021, Vensure filed suit against the Company in Delaware Chancery Court for breach of contract and declaratory judgment, seeking unspecified damages. The Company vigorously disputed and denied each of Vensure’s claims. The case is now settled for $2.5 million, and the Company received the funds on November 22, 2023. This resolves all claims and the case was dismissed. Courvoisier Centre Litigation On August 24, 2022, the landlord of our former headquarters offices, Courvoisier Centre, LLC, filed a complaint against the Company in the Eleventh Judicial Circuit Court (Miami-Dade County, Florida) alleging breach of the lease. The Company vacated the offices and ceased payments under the lease in July of 2022, after repeatedly complaining to the landlord regarding the impact of its extensive renovations of the campus and building in which the Company's offices were situated, citing substantial impairments to the Company's ability to conduct business as well as concerns regarding the health and well-being of the Company’s employees and guests, and the landlord’s inability and refusal to provide any adequate relief. On or about October 10, 2022, the Company filed our answer to the complaint and the Company's counterclaim. The Company intends to vigorously defend the lawsuit and seek recovery for its costs of relocation. Mediation is scheduled for January 31, 2024. The Company has accrued for this liability as of November 30, 2023 and August 31, 2023, respectively. Certified Tire Litigation On June 29, 2020, the Company was served with a complaint filed by its former client, Certified Tire, in the Superior Court of the State of California, Orange County, naming the Company, two of its officers, and one of its former subsidiaries as defendants. The Complaint asserts multiple causes of action, all of which stem from the former client’s claim that the Company is obligated to reimburse it for sums it paid in settlement of a separate lawsuit brought by one of its employees pursuant to Private Attorney General Act or PAGA. This underlying lawsuit alleged the Company's former client was responsible for multiple violations of the California Labor Code. The Company and the officers named as defendants deny the former client’s allegations, and the Company is defending the lawsuit vigorously based primarily on the Company's belief that the alleged violations that gave rise to the underlying lawsuit were the responsibility of Certified Tire and not the Company. Substantial discovery has taken place; trial was set for September 5, 2023, but was moved to January 15-26, 2024. The Company’s dispositive motion for summary judgment was denied by the court because of its determination that factual disputes exist. In Re John Stephen Holmes Bankruptcy Litigation On November 8, 2022, the Chapter 7 trustee of the bankruptcy estate of John Stephen Holmes filed an action against the Company, asserting that the cancellation by the Company of Mr. Holes' 491,250 preferred options on October 22, 2021, violated the automatic stay applicable to Mr. Holmes' Chapter 7 proceedings. After the Company filed a motion to dismiss the trustee's complaint, the trustee endeavored to exercise an option 520,833 preferred shares) that had been issued in the early stages of the Company but that was later superseded by a modified option that did not provide for convertibility of the preferred shares to common stock and which modified option was in effect at the time that Mr. Holmes filed for bankruptcy. The trustee insists that it has a right to exercise the option for 520,833 preferred shares series A and convert the shares to common stock, notwithstanding (a) the fact that the preferred shares were not convertible to common stock at the time Mr. Holmes filed his bankruptcy petition, (b) the lapse of more than 3 years' time during which the trustee failed to take any action in relation to the option, (c) the connection of the option to Mr. Holmes, who now competes with and is believed to have taken clients from the Company, (d) the intervening 1-for-100 reverse stock split and extensive corporate governance actions and (e) the negative impact that the issuance of up to 520,833 shares would have on the Company and its shareholders. Were the trustee to be successful in its claim, the Company would be obligated to issue up to 520,833 restricted shares of the Company's common stock to the trustee, which issuance would materially dilute the share ownership of the existing shareholders and could cause a material decline in the price per share of the Company's common stock. The Company has asserted a number of defenses and intends to vigorously defend itself against the claim. Another mediation in this case was set for December 8^th, 2023. The parties have engaged in mediation and are continuing their settlement discussions. The trustee has also named the Directors in a new amended complaint; the E&O carrier responded with the assignment of counsel; a 2nd mediation was held on 12/8/2023, and the parties have agreed to a settlement of $550,000 in stock ($500,000 if paid off early) but the final Agreement has not been received to be signed. This is included accounts payable and accrued liabilities as of November 30, 2023 and August 31, 2023, in the condensed consolidated balance sheets. Employee Retention Tax Credit (“ERTCs”) Claims The Company has filed various ERTCs claims with the IRS on behalf of its clients that have otherwise failed to obtain the related benefits afforded to them pursuant to the filing of Form 7200—the time for the filing of which has expired. To date, the Company has received ERTCs amounting to $2.0 million. In addition, the Company anticipates filing additional ERTCs claims as clients continue to request that the Company complete the submission thereof to the IRS. Because of the Company’s currently existing payroll tax liability, the Company presently receives ERTCs from the IRS in the form of a credit to the Company’s outstanding payroll tax liability. The Company is not presently able to remit the ERTCs to its clients and plans to offer its clients restricted shares of the Company’s common stock in payment of the ERTCs applicable to such clients. If a client rejects the payment of its respective ERTCs in the form of the restricted shares of the Company’s common stock as proposed by ShiftPixy, such client may seek to enforce its rights to recover its ERTCs by filing lawsuits against the Company. Capistrano Catering, Inc. v. ShiftPixy, Inc. On June 13, 2022, a Complaint was filed in the Superior Court of the State of California, Orange County, Case No. 30-2022-01264583, by its former client, Capistrano Catering, Inc., asserting claims for specific performance, breach of contract, and breach of the covenant of good faith. Plaintiff’s complaint alleges that we violated our client services agreement by not applying for an employee retention tax credit (“ERTC”) on behalf of Capistrano Catering pursuant to Section 3134 of the Internal Revenue Code and seeks damages of “at least $0.5 million plus prejudgment interest thereon at the legal rate.” The Company initially maintained that it has no legal basis to apply for the ERTC on behalf of Plaintiff, and that the claim is therefore without merit. However, the Company has changed its position, based on its understanding of applicable law and is now actively offering to file for the credit on the client’s behalf. The parties have entered into a stipulation providing for the submission to the IRS by the Company of ERTC claims on behalf of Capistrano Catering and remittance to Capistrano Catering of any credit amounts received from the IRS in response thereto by the Company. The IRS has announced a suspension of accepting further ERTC claims until 2024, so the Company is unable to affect the subject submission until permitted by the IRS. The Court has set a status conference for February 15, 2024, to assess the status of the Company’s filing of ERTC claims on behalf of Capistrano Catering. The Company intends to remit to Capistrano Catering the full amount of any credits received from the IRS, although the Company may request a reasonable fee for its processing services. The Company has offered to issue to plaintiff shares of ShiftPixy’s stock in payment of the ERTC in the event that ShiftPixy receives the credit from the IRS and is unable at such time to forward the payment to plaintiff, provided, however, Capistrano Catering has not indicated whether it will accept the offer of shares, and it may insist on receiving cash in such event. Foundry ASVRF Sawgrass, LLC v. ShiftPixy, Inc. On or around October 16, 2023, the company received a variety of legal proceedings documents as filed in the County Court of the 17th Judicial Circuit in and for Broward County, Florida, as case No. COWE-23-003124, arising out of the Company’s abandonment of a lease of premises at Suite 650, 13450 W. Sunrise Blvd., Sunrise, Florida 33323. Most of the Company’s $0.3 million security deposit has been applied to the cost of unpaid improvements and rent past due for the months of June, July, August and September of 2023 (as well as unreplenished security deposit amounts for prior months). Rent and operating costs per month were approximately $0.1 million. The lease term continues until December 31, 2028. The Landlord has sued for eviction, replenishment of the security deposit and damages for future payments under the lease. Although the plaintiff will claim damages equal to the full value of the lease, the Company has defenses in the nature of the plaintiff’s duty to mitigate damages by securing one or more replacement tenants. The parties are anticipated to engage in mediation wherein the parties are expected to settle plaintiff’s claims. The Company has recorded the value the value of its lease obligation. Given the early stage of the matter, it is too early to assess the anticipated amount to which the plaintiff will be entitled; however, the plaintiff will likely be entitled to damages approximately equal to the amount of the monthly lease payment due times the number of months it would reasonably take the plaintiff to secure one or more replacement tenants, plus costs associated with the preparation of the premises for such new tenant(s), plus costs associated with the brokerage fee associated with securing the new tenant. The Parties are in active negations to settle this claim. Golden West Wings LLC v. ShiftPixy, Inc. On September 21, 2022, another of ShiftPixy’s clients, including a number of affiliates, filed suit in U.S. District Court, Southern District of California (San Diego), Case No. 822CV1834ADS, asserting claims for specific performance, breach of contract, and breach of the covenant of good faith. Plaintiff’s complaint alleges that the Company violated its client services agreement by not applying for an employee retention tax credit ERTC on behalf of client pursuant to Section 3134 of the Internal Revenue Code and seeks damages of at least $2.3 million plus prejudgment interest thereon at the legal rate. The Company was served with the complaint and summons in this matter on October 21, 2022, and the Company has filed a motion to dismiss. Plaintiffs amended their complaint to allege a claim of fraud against the CEO, Scott Absher. The Company initially maintained that it has no legal basis to apply for the ERTC on behalf of Plaintiff, and that the claim is therefore without merit. However, the Company changed its position, based on its understanding of applicable law and filed the ERTC claims on behalf of the client in July of 2023, and intends to remit to the client the full amount of the credit if and as received from the IRS. Golden West Wings voluntarily dismissed their entire complaint against all Parties on November 10, 2023. Olen Commercial Realty Corp. v. ShiftPixy: In late August of 2023, the Company abandoned its leased premises at 1 Venture, Suite 150, Irvine, CA 92618. Monthly rent is approximately $24,500. The lease term continues until June 30, 2027. The landlord has demanded approximately $1.2 million for the balance of payments due under the lease, including miscellaneous expenses as offset by security deposit funds. While the landlord has not filed suit, it is anticipated that the landlord may file suit within the next few months. In the event the landlord does file suit, the Company will assert rights of offset as a consequence of the landlord’s failure to mitigate its damages. Given the early stage of the matter, it is too early to assess the anticipated amount to which the landlord will be entitled; however, the landlord will likely be entitled to damages approximately equal to the amount of the monthly lease payment due times the number of months it would reasonably take the landlord to secure one or more replacement tenants, plus costs associated with the preparation of the premises for such new tenant(s), plus costs associated with the brokerage fee associated with securing the new tenant. It is anticipated that the parties will negotiate and endeavor to settle the claims. The Company has accrued the lease liability and the amount included in long-term operating lease as of November 30, 2023 and August 31, 2023 was $0.8 million and $0.8 million and the short-term portion included in accounts payable and other liabilities as of November 30, 2023 and August 31, 2023 was $0.2 million and $0.2 million, respectively. Robert Angueira, as US Chapter 7 Trustee v. Shiftpixy, Inc, Shiftpixy Investments, On December 14, 2023, the Officers and Directors received notice of an Adversarial proceeding in a bankruptcy case, captioned Robert Angueira, as US Chapter 7 Trustee v. Shiftpixy, Inc, Shiftpixy Investments, Inc et al. The case is related to Industrial Human Capital, “IHC”, a company that was an attempted SPAC in 2022, the Company was unable to finish the listing requirements and $117.6 million was returned to the investors on December 1, 2022. Because some creditors were unpaid after the IHC was closed due to insolvency, some IHC creditors filed an involuntary bankruptcy in the Southern District of Florida. The Company was owed a substantial sum of money related to IHC SPAC’s sponsorship and transferred $600,000 to Shiftpixy from IHC in partial repayment of that money. The Chapter 7 Bankruptcy Trustee asserted a claim against that transfer and the Company is working to make arrangements for payment to the Trustee. In relation to the recent filing by the Chapter 7 Trustee, the Trustee asserts, amongst other things, that some Officers and Directors of ShiftPixy acted inappropriately in transferring those funds back to the investors in IHC and subsequent to the filing of the involuntary bankruptcy. These claims forced the Company to put ShiftPixy’s director and officer carrier on notice and the Company is waiting for their decision on the matter(s). The Chapter 7 Trustee claims to be entitled to the $117 million dollars from the investors, shareholders, officers, and directors and Shiftpixy, Inc, for a bankruptcy estate with claims totaling $1.8 million ($282,000 of which are claims by the Company). Given the early stage of the litigation, it is too early to assess whether an unfavorable outcome for the Company is either probable or remote. The Company recorded in accounts payable and other liabilities, $0.6 million and $0.6 million as of November 30, 2023 and August 31, 2023, respectively. Other Matters Washington Dept of Rev v. ShiftPixy Staffing, Inc. On or about April 25, 2023, the State of Washington Dept. of Rev. issued a tax warrant against the a subsidiary of the Company claiming that (a) its prior communications were unanswered, and (b) asserting that the Company owes $0.7 million in Business & Occupation (“B&O”) Taxes and interest for periods from June 2018 to December 2021. The state essentially claims that such a subsidiary owes B&O Taxes as a consequence of its having conducted staffing services in Washington. The Company has responded, indicating that the subject services provided were actually in the nature of professional employer organization or PEO services (as defined under applicable law) and not staffing services (as defined under applicable law) and that the subsidiary’s tax obligation, if any, pursuant to the state’s own Excise Tax Advisory ETA 3192.2014,would be a small fraction of the amount claimed by the state. The Company further argued that the assessment is improperly made such subsidiary because that entity did not even exist until January of 2021, and it did not start billing a client in Washington until calendar year 2022. The state reviewed documentation submitted by the Company in support of its position and issued a modified tax adjustment, asserting that the sum of $0.3 million is due for the period June 2018 to December 20020. Additionally, Washington State assessed another subsidiary of ShiftPixy approximately $0.5 million for excise tax. The Company filed a request for an administrative hearing on both matters. The Company was informed that the amount due must be paid prior to any appeal. The Company has recorded in accounts payable and other liabilities, $0.8 million and $0.2 million as of November 30, 2023 and August 31, 2023, respectively on the condensed consolidated balance sheets. On August 2, 2023, ShiftPixy received a letter (the “August 2, 2023 NASDAQ Letter”) from the staff of the Listing Qualifications Department of NASDAQ, which notifies the Company that, in view of the recent resignation of an independent director who was a member of the Company’s audit committee, the Company does not presently comply with NASDAQ’s Listing Rule 5605, which requires that a majority of the Company’s board of directors be comprised of independent directors, and that the Company has an audit committee comprised of at least three independent directors, one of which “has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. On January 16, 2024, the Company added an independent director to the audit committee.

Contingencies

3 Months Ended

Nov. 30, 2023

Note 11: Contingencies

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 assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.

Legal

During the ordinary course of business, the Company is subject to various claims and litigation.

Everest Litigation

On December 18, 2020, the Company was served with a Complaint filed in the United States District Court for the Central District of California by its former workers’ compensation insurance carrier, Everest National Insurance Company. The Complaint asserts claims for breach of contract, alleging that the Company owes certain premium payments to plaintiff under a retrospective rated policy, and seeks damages of approximately $0.6 million, which demand has since increased to approximately $1.6 million. On February 5, 2021, the Company filed an Answer to Plaintiff’s Complaint denying its claims for relief, and also filed a crossclaim against the third-party claims administrator, Gallagher Bassett Services, Inc., for claims sounding in breach of contract and negligence based upon its administration of claims arising under the policy. By order dated April 7, 2021, the Court dismissed the Company’s complaint against Gallagher Bassett without prejudice to re-filing in another forum. On May 17, 2021, the Company refiled its complaint against Gallagher Basset in the Circuit Court of Cook County, Illinois. Everest subsequently filed a complaint against Gallagher Bassett in New Jersey. Discovery proceeded in the cases, and the California Court set a trial date in the Everest case of August 8, 2023, while no trial date has been set in either of the related Illinois or New Jersey cases, which are in preliminary stages. Mediation in the matter was conducted on December 14, 2022, and the matter was kept open until further notice as the parties endeavored to settle the case. On or about June 28, 2023, the Company entered into a confidential settlement agreement with Everest National Insurance Company and Gallagher Bassett, resolving the litigation amongst the parties. see Note 8 Discounted Operations.

Sunz Litigation

On March 19, 2021, the Company was served with a Complaint filed in the Circuit Court for the 11th Judicial Circuit, Manatee County, Florida, by its former workers’ compensation insurance carrier, Sunz Insurance Solutions, LLC. The Complaint asserts claims for breach of contract, alleging that the Company owes payments for loss reserve funds totaling approximately $10 million, which represents approximately 200% of the amount of incurred and unpaid claims. The Company denies the plaintiff’s allegations and is defending the lawsuit vigorously. On May 12, 2021, the Company filed a motion to dismiss the complaint, and Sunz filed an amended complaint in response. Discovery is proceeding in the matter and no trial date has been set. On June 21, 2022, the Court granted Plaintiff’s partial motion for summary judgment, holding that Defendant is liable under the contract, but further finding that the number of damages, if any, to which Plaintiff is entitled should be determined at trial. We believe that partial summary judgment was improvidently granted, and therefore appealed the Court’s Order by filing a petition for writ of certiorari with the Court of Appeal, which appeal is now pending. On or about November 14, 2022, a court granted Sunz’ motion for summary judgment on a contractual issue—holding that the Company waived claims regarding Sunz’ management of claims to the extent that the Company did not complain about such management within 6 months of the alleged mismanagement of the claims. This ruling may limit the scope of the Company’s counterclaim. Trial in the case has been set for February 2024. The parties have agreed to a settlement for $3,500,000 to be paid as follows: $350,000 cash payment on or before March 1, 2024 and $75,000 per month payments until the balance of is paid in full. There is a 15% discount to be applied to a full balance payment if paid before the final due payment. There is a default provision if the payment if the Company does not pay according to the terms of the settlement agreement and the default payment can go up to $7.8 million. The parties have agreed to stay all litigation in Florida and dismiss all California litigation and a Stipulated Judgment will be held by Sunz, unfiled, until the amount is paid in full. As of November 30. 2023 the liability owed of $7.8 million to Sunz is recorded in accounts payable and other liabilities. As of August 31, 2023, the Company recorded $5.6 million in accrued workers compensation cost discounted operations liabilities.

Vensure Litigation

On September 7, 2021, Shiftable HR Acquisition, LLC, a wholly owned subsidiary of Vensure, filed a complaint against the Company in the Court of Chancery of the State of Delaware asserting claims arising from the Asset Purchase Agreement (the “APA”) governing the Vensure Asset Sale described above. The APA provided for Vensure to purchase, through its wholly owned subsidiary, certain of the Company’s assets for total consideration of $19 million in cash, with $9.5 million to be paid at closing, and the remainder to be paid in 48 equal monthly installments (the “Installment Sum”). The Installment Sum was subject to certain adjustments to account for various post-closing payments made by the parties, and the APA provided for a procedure to determine the final amount of the Installment Sum.

In early September 2021, Vensure filed suit against the Company in Delaware Chancery Court for breach of contract and declaratory judgment, seeking unspecified damages. The Company vigorously disputed and denied each of Vensure’s claims. The case is now settled for $2.5 million, and the Company received the funds on November 22, 2023. This resolves all claims and the case was dismissed.

Courvoisier Centre Litigation

On August 24, 2022, the landlord of our former headquarters offices, Courvoisier Centre, LLC, filed a complaint against the Company in the Eleventh Judicial Circuit Court (Miami-Dade County, Florida) alleging breach of the lease. The Company vacated the offices and ceased payments under the lease in July of 2022, after repeatedly complaining to the landlord regarding the impact of its extensive renovations of the campus and building in which the Company's offices were situated, citing substantial impairments to the Company's ability to conduct business as well as concerns regarding the health and well-being of the Company’s employees and guests, and the landlord’s inability and refusal to provide any adequate relief. On or about October 10, 2022, the Company filed our answer to the complaint and the Company's counterclaim. The Company intends to vigorously defend the lawsuit and seek recovery for its costs of relocation. Mediation is scheduled for January 31, 2024. The Company has accrued for this liability as of November 30, 2023 and August 31, 2023, respectively.

Certified Tire Litigation

On June 29, 2020, the Company was served with a complaint filed by its former client, Certified Tire, in the Superior Court of the State of California, Orange County, naming the Company, two of its officers, and one of its former subsidiaries as defendants. The Complaint asserts multiple causes of action, all of which stem from the former client’s claim that the Company is obligated to reimburse it for sums it paid in settlement of a separate lawsuit brought by one of its employees pursuant to Private Attorney General Act or PAGA. This underlying lawsuit alleged the Company's former client was responsible for multiple violations of the California Labor Code. The Company and the officers named as defendants deny the former client’s allegations, and the Company is defending the lawsuit vigorously based primarily on the Company's belief that the alleged violations that gave rise to the underlying lawsuit were the responsibility of Certified Tire and not the Company. Substantial discovery has taken place; trial was set for September 5, 2023, but was moved to January 15-26, 2024. The Company’s dispositive motion for summary judgment was denied by the court because of its determination that factual disputes exist.

In Re John Stephen Holmes Bankruptcy Litigation

On November 8, 2022, the Chapter 7 trustee of the bankruptcy estate of John Stephen Holmes filed an action against the Company, asserting that the cancellation by the Company of Mr. Holes' 491,250 preferred options on October 22, 2021, violated the automatic stay applicable to Mr. Holmes' Chapter 7 proceedings. After the Company filed a motion to dismiss the trustee's complaint, the trustee endeavored to exercise an option 520,833 preferred shares) that had been issued in the early stages of the Company but that was later superseded by a modified option that did not provide for convertibility of the preferred shares to common stock and which modified option was in effect at the time that Mr. Holmes filed for bankruptcy. The trustee insists that it has a right to exercise the option for 520,833 preferred shares series A and convert the shares to common stock, notwithstanding (a) the fact that the preferred shares were not convertible to common stock at the time Mr. Holmes filed his bankruptcy petition, (b) the lapse of more than 3 years' time during which the trustee failed to take any action in relation to the option, (c) the connection of the option to Mr. Holmes, who now competes with and is believed to have taken clients from the Company, (d) the intervening 1-for-100 reverse stock split and extensive corporate governance actions and (e) the negative impact that the issuance of up to 520,833 shares would have on the Company and its shareholders. Were the trustee to be successful in its claim, the Company would be obligated to issue up to 520,833 restricted shares of the Company's common stock to the trustee, which issuance would materially dilute the share ownership of the existing shareholders and could cause a material decline in the price per share of the Company's common stock. The Company has asserted a number of defenses and intends to vigorously defend itself against the claim. Another mediation in this case was set for December 8^th, 2023. The parties have engaged in mediation and are continuing their settlement discussions. The trustee has also named the Directors in a new amended complaint; the E&O carrier responded with the assignment of counsel; a 2nd mediation was held on 12/8/2023, and the parties have agreed to a settlement of $550,000 in stock ($500,000 if paid off early) but the final Agreement has not been received to be signed. This is included accounts payable and accrued liabilities as of November 30, 2023 and August 31, 2023, in the condensed consolidated balance sheets.

Employee Retention Tax Credit (“ERTCs”) Claims

The Company has filed various ERTCs claims with the IRS on behalf of its clients that have otherwise failed to obtain the related benefits afforded to them pursuant to the filing of Form 7200—the time for the filing of which has expired. To date, the Company has received ERTCs amounting to $2.0 million. In addition, the Company anticipates filing additional ERTCs claims as clients continue to request that the Company complete the submission thereof to the IRS. Because of the Company’s currently existing payroll tax liability, the Company presently receives ERTCs from the IRS in the form of a credit to the Company’s outstanding payroll tax liability. The Company is not presently able to remit the ERTCs to its clients and plans to offer its clients restricted shares of the Company’s common stock in payment of the ERTCs applicable to such clients. If a client rejects the payment of its respective ERTCs in the form of the restricted shares of the Company’s common stock as proposed by ShiftPixy, such client may seek to enforce its rights to recover its ERTCs by filing lawsuits against the Company.

Capistrano Catering, Inc. v. ShiftPixy, Inc.

On June 13, 2022, a Complaint was filed in the Superior Court of the State of California, Orange County, Case No. 30-2022-01264583, by its former client, Capistrano Catering, Inc., asserting claims for specific performance, breach of contract, and breach of the covenant of good faith. Plaintiff’s complaint alleges that we violated our client services agreement by not applying for an employee retention tax credit (“ERTC”) on behalf of Capistrano Catering pursuant to Section 3134 of the Internal Revenue Code and seeks damages of “at least $0.5 million plus prejudgment interest thereon at the legal rate.” The Company initially maintained that it has no legal basis to apply for the ERTC on behalf of Plaintiff, and that the claim is therefore without merit. However, the Company has changed its position, based on its understanding of applicable law and is now actively offering to file for the credit on the client’s behalf. The parties have entered into a stipulation providing for the submission to the IRS by the Company of ERTC claims on behalf of Capistrano Catering and remittance to Capistrano Catering of any credit amounts received from the IRS in response thereto by the Company. The IRS has announced a suspension of accepting further ERTC claims until 2024, so the Company is unable to affect the subject submission until permitted by the IRS. The Court has set a status conference for February 15, 2024, to assess the status of the Company’s filing of ERTC claims on behalf of Capistrano Catering. The Company intends to remit to Capistrano Catering the full amount of any credits received from the IRS, although the Company may request a reasonable fee for its processing services. The Company has offered to issue to plaintiff shares of ShiftPixy’s stock in payment of the ERTC in the event that ShiftPixy receives the credit from the IRS and is unable at such time to forward the payment to plaintiff, provided, however, Capistrano Catering has not indicated whether it will accept the offer of shares, and it may insist on receiving cash in such event.

Foundry ASVRF Sawgrass, LLC v. ShiftPixy, Inc.

On or around October 16, 2023, the company received a variety of legal proceedings documents as filed in the County Court of the 17th Judicial Circuit in and for Broward County, Florida, as case No. COWE-23-003124, arising out of the Company’s abandonment of a lease of premises at Suite 650, 13450 W. Sunrise Blvd., Sunrise, Florida 33323. Most of the Company’s $0.3 million security deposit has been applied to the cost of unpaid improvements and rent past due for the months of June, July, August and September of 2023 (as well as unreplenished security deposit amounts for prior months). Rent and operating costs per month were approximately $0.1 million. The lease term continues until December 31, 2028. The Landlord has sued for eviction, replenishment of the security deposit and damages for future payments under the lease. Although the plaintiff will claim damages equal to the full value of the lease, the Company has defenses in the nature of the plaintiff’s duty to mitigate damages by securing one or more replacement tenants. The parties are anticipated to engage in mediation wherein the parties are expected to settle plaintiff’s claims. The Company has recorded the value the value of its lease obligation. Given the early stage of the matter, it is too early to assess the anticipated amount to which the plaintiff will be entitled; however, the plaintiff will likely be entitled to damages approximately equal to the amount of the monthly lease payment due times the number of months it would reasonably take the plaintiff to secure one or more replacement tenants, plus costs associated with the preparation of the premises for such new tenant(s), plus costs associated with the brokerage fee associated with securing the new tenant. The Parties are in active negations to settle this claim.

Golden West Wings LLC v. ShiftPixy, Inc.

On September 21, 2022, another of ShiftPixy’s clients, including a number of affiliates, filed suit in U.S. District Court, Southern District of California (San Diego), Case No. 822CV1834ADS, asserting claims for specific performance, breach of contract, and breach of the covenant of good faith. Plaintiff’s complaint alleges that the Company violated its client services agreement by not applying for an employee retention tax credit ERTC on behalf of client pursuant to Section 3134 of the Internal Revenue Code and seeks damages of at least $2.3 million plus prejudgment interest thereon at the legal rate. The Company was served with the complaint and summons in this matter on October 21, 2022, and the Company has filed a motion to dismiss. Plaintiffs amended their complaint to allege a claim of fraud against the CEO, Scott Absher. The Company initially maintained that it has no legal basis to apply for the ERTC on behalf of Plaintiff, and that the claim is therefore without merit. However, the Company changed its position, based on its understanding of applicable law and filed the ERTC claims on behalf of the client in July of 2023, and intends to remit to the client the full amount of the credit if and as received from the IRS. Golden West Wings voluntarily dismissed their entire complaint against all Parties on November 10, 2023.

Olen Commercial Realty Corp. v. ShiftPixy:

In late August of 2023, the Company abandoned its leased premises at 1 Venture, Suite 150, Irvine, CA 92618. Monthly rent is approximately $24,500. The lease term continues until June 30, 2027. The landlord has demanded approximately $1.2 million for the balance of payments due under the lease, including miscellaneous expenses as offset by security deposit funds. While the landlord has not filed suit, it is anticipated that the landlord may file suit within the next few months. In the event the landlord does file suit, the Company will assert rights of offset as a consequence of the landlord’s failure to mitigate its damages. Given the early stage of the matter, it is too early to assess the anticipated amount to which the landlord will be entitled; however, the landlord will likely be entitled to damages approximately equal to the amount of the monthly lease payment due times the number of months it would reasonably take the landlord to secure one or more replacement tenants, plus costs associated with the preparation of the premises for such new tenant(s), plus costs associated with the brokerage fee associated with securing the new tenant. It is anticipated that the parties will negotiate and endeavor to settle the claims. The Company has accrued the lease liability and the amount included in long-term operating lease as of November 30, 2023 and August 31, 2023 was $0.8 million and $0.8 million and the short-term portion included in accounts payable and other liabilities as of November 30, 2023 and August 31, 2023 was $0.2 million and $0.2 million, respectively.

Robert Angueira, as US Chapter 7 Trustee v. Shiftpixy, Inc, Shiftpixy Investments,

On December 14, 2023, the Officers and Directors received notice of an Adversarial proceeding in a bankruptcy case, captioned Robert Angueira, as US Chapter 7 Trustee v. Shiftpixy, Inc, Shiftpixy Investments, Inc et al. The case is related to Industrial Human Capital, “IHC”, a company that was an attempted SPAC in 2022, the Company was unable to finish the listing requirements and $117.6 million was returned to the investors on December 1, 2022. Because some creditors were unpaid after the IHC was closed due to insolvency, some IHC creditors filed an involuntary bankruptcy in the Southern District of Florida.

The Company was owed a substantial sum of money related to IHC SPAC’s sponsorship and transferred $600,000 to Shiftpixy from IHC in partial repayment of that money. The Chapter 7 Bankruptcy Trustee asserted a claim against that transfer and the Company is working to make arrangements for payment to the Trustee.

In relation to the recent filing by the Chapter 7 Trustee, the Trustee asserts, amongst other things, that some Officers and Directors of ShiftPixy acted inappropriately in transferring those funds back to the investors in IHC and subsequent to the filing of the involuntary bankruptcy. These claims forced the Company to put ShiftPixy’s director and officer carrier on notice and the Company is waiting for their decision on the matter(s).

The Chapter 7 Trustee claims to be entitled to the $117 million dollars from the investors, shareholders, officers, and directors and Shiftpixy, Inc, for a bankruptcy estate with claims totaling $1.8 million ($282,000 of which are claims by the Company). Given the early stage of the litigation, it is too early to assess whether an unfavorable outcome for the Company is either probable or remote. The Company recorded in accounts payable and other liabilities, $0.6 million and $0.6 million as of November 30, 2023 and August 31, 2023, respectively.

Other Matters

Washington Dept of Rev v. ShiftPixy Staffing, Inc.

On or about April 25, 2023, the State of Washington Dept. of Rev. issued a tax warrant against the a subsidiary of the Company claiming that (a) its prior communications were unanswered, and (b) asserting that the Company owes $0.7 million in Business & Occupation (“B&O”) Taxes and interest for periods from June 2018 to December 2021. The state essentially claims that such a subsidiary owes B&O Taxes as a consequence of its having conducted staffing services in Washington. The Company has responded, indicating that the subject services provided were actually in the nature of professional employer organization or PEO services (as defined under applicable law) and not staffing services (as defined under applicable law) and that the subsidiary’s tax obligation, if any, pursuant to the state’s own Excise Tax Advisory ETA 3192.2014,would be a small fraction of the amount claimed by the state. The Company further argued that the assessment is improperly made such subsidiary because that entity did not even exist until January of 2021, and it did not start billing a client in Washington until calendar year 2022. The state reviewed documentation submitted by the Company in support of its position and issued a modified tax adjustment, asserting that the sum of $0.3 million is due for the period June 2018 to December 20020. Additionally, Washington State assessed another subsidiary of ShiftPixy approximately $0.5 million for excise tax. The Company filed a request for an administrative hearing on both matters. The Company was informed that the amount due must be paid prior to any appeal. The Company has recorded in accounts payable and other liabilities, $0.8 million and $0.2 million as of November 30, 2023 and August 31, 2023, respectively on the condensed consolidated balance sheets.

On August 2, 2023, ShiftPixy received a letter (the “August 2, 2023 NASDAQ Letter”) from the staff of the Listing Qualifications Department of NASDAQ, which notifies the Company that, in view of the recent resignation of an independent director who was a member of the Company’s audit committee, the Company does not presently comply with NASDAQ’s Listing Rule 5605, which requires that a majority of the Company’s board of directors be comprised of independent directors, and that the Company has an audit committee comprised of at least three independent directors, one of which “has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. On January 16, 2024, the Company added an independent director to the audit committee.