|9 Months Ended|
May 31, 2021
Note 3: Discontinued Operations
On January 3, 2020, the Company executed an asset purchase agreement assigning client contracts comprising approximately 88% of its quarterly revenue through the date of the transaction, including 100% of its existing professional employer organization (“PEO”) business effective as of December 31, 2019, and the transfer of $1.5 million of working capital assets, including cash balances and certain operating assets associated with the assigned client contracts included in the agreement, to a wholly owned subsidiary of Vensure (the “Vensure Asset Sale”). Gross proceeds from the Vensure Asset Sale were $19.2 million, of which $9.7 million was received at closing and $9.5 million was to be paid out in equal monthly payments over the next four years (the “Note Receivable”), subject to adjustments for working capital and customer retention, (as measured by a gross wage guarantee included in the governing agreement), over the twelve month period following the Vensure Asset Sale. During the three months and nine months ended May 31, 2021, the Company identified an additional $41,000 of net cash paid on behalf of the Company and adjusted the Note Receivable accordingly.
On March 12, 2021, the Company received correspondence from Vensure proposing approximately $10.7 million of working capital adjustments under the terms of the Vensure Asset Sale agreement which, if accepted, would have had the impact of eliminating any sums owed to the Company under the Note Receivable. As indicated in the reconciliation table below, the Company has recorded $2.6 million of working capital adjustments, subject to final review and acceptance, and has provided for an additional reserve of $2.9 million for potential claims. By letter dated April 6, 2021, the Company disputed Vensure’s proposed adjustments, and maintains that the amount Vensure owes the Company pursuant to the Note Receivable is as much as $9.5 million. Any disputes regarding working capital adjustments under the Vensure Asset Sale agreement are subject to a resolution process that includes a 30-day negotiation period followed by binding arbitration, which the parties have mutually agreed to extend as of the date of this filing.
The following is a reconciliation of the gross proceeds to the net proceeds from the Vensure Asset Sale as presented in the balance sheet for the period ended May 31, 2021.
The Vensure Asset Sale met the criteria of discontinued operations set forth in ASC 205. As such, the Company has reclassified its discontinued operations for all periods presented and has excluded the results of its discontinued operations from continuing operations for all periods presented.
Until December 31, 2020, the Company estimated the fair value of the adjustments to the Note Receivable using Level 3 inputs. For the period ended May 31, 2021, the Company estimated the net realizable value of the Note Receivable, which approximates the fair value as of December 31, 2020.
The Vensure Asset Sale calls for adjustments to the Note Receivable either for: (i) working capital adjustments or (ii) in the event that the gross wages of the business transferred is less than the required amount, as detailed below:
Working capital adjustments: Through May 31, 2021, the Company has identified $2,604,000 of likely working capital adjustments, including $88,000 related to lower net assets transferred at closing, and $2,516,000 of cash remitted to the Company’s bank accounts, net of cash remitted to Vensure’s bank accounts. Under the terms of the Vensure Asset Sale, a reconciliation of the working capital was to have been completed by April 15, 2020. Due to operational difficulties and quarantined staff caused by the outbreak of COVID-19, Vensure requested a postponement of the working capital reconciliation that was due in Fiscal 2020. Although Vensure provided the Company with its working capital reconciliation on March 12, 2021, it failed to provide adequate documentation to support its calculations. Accordingly, the working capital adjustment recorded as of May 31, 2021, represents the Company’s estimate of the reconciliation by using Vensure's claims and the limited supporting information Vensure provided as a starting point, and then making adjustments for amounts in dispute based upon our internal records and best estimates. There is no assurance that the working capital change identified as of May 31, 2021 represents the final working capital adjustment.
Gross billings adjustment: Under the terms of the Vensure Asset Sale, the proceeds of the transaction are reduced if the actual gross wages of customers transferred for calendar 2020 are less than 90% of those customers’ 2019 gross wages. For the year ended August 31, 2020 and the quarter ended November 30, 2020, the Company recorded a reserve for its estimate of a gross billings adjustment. Vensure did not identify any such adjustments in their March 2021 correspondence. Based on the information available, the Company reclassified the previously recorded gross wages claim to a general potential claims reserve during the quarter ended February 28, 2021. No additional adjustment was made during the three months ended on May 31, 2021.
The $2.9 million reserve for estimated potential claims is based on an evaluation of the disputed claims made by Vensure that are in excess of the $2.6 million of likely working capital claims previously identified.
The entire Note Receivable is recorded as a long term note receivable as of May 31, 2021. Any adjustments to the gross $9.5 million note receivable are to be applied against payments in the order they are due to be paid. Under the terms of the Vensure Asset Sale, any dispute regarding the amount due under the Note Receivable is subject to a reconciliation process that provides for negotiation, followed by binding arbitration of any disputes that cannot be resolved. As of the date of this filing, the parties agree that some amount is due to the Company under the Note Receivable, although the precise amount remains subject to ongoing negotiations. As such, although we are hopeful for a prompt resolution, we cannot state with certainty whether we anticipate any collections prior to May 31, 2022, and therefore have classified the Note Receivable as long-term.
Vensure Note Receivable Net Realizable Value
For the period ended May 31, 2021, the Company estimated the net realizable value based on the available information through the date of this report.
In March 2021, Vensure provided the Company with approximately $10.7 million of proposed working capital adjustments and no adjustments for the actual 2020 wages billed, which would have had the effect of eliminating any sums due to the Company under the Note Receivable. The Company used these proposed adjustments as a starting point and considered each potential adjustment based on items deemed to be more or less likely and the level of the dispute for any disputed items. The Company disputes a significant portion of the working capital adjustments, and Vensure has since conceded that the Company is owed sums under the Note Receivable, although the precise amount remains in dispute. In conducting its analysis, the Company identified approximately $2.6 million of adjustments deemed to be likely and retained a $2.9 million additional reserve for a total reserve of $5.5 million. The $2.9 million additional reserve was developed using a weighted probability approach of the known claims and demands and combined with an estimate of legal and collection costs. The total reserve of $5.5 million is equivalent to approximately 50% of the difference between the value of the Note Receivable after giving full effect to Vensure’s March 2021 proposed adjustments and the gross carrying value of the $9.5 million Note Receivable.
In April 2021, the Company provided Vensure with its objections to Vensure’s March 2021 proposed adjustments. Based upon ongoing negotiations between the parties, Vensure has conceded that sums remain due to the Company under the Note Receivable, though the precise amount owed remains in dispute, as noted above. Based on our analysis we made no material changes to the carrying value of the Note Receivable between December 31, 2020, the last internal measurement date, and the current reporting date of May 31, 2021.
The carrying amounts of the classes of assets and liabilities from the Vensure Asset Sale included in discontinued operations were as follows:
Reported results for the discontinued operations by period were as follows:
The loss from discontinued operations for the three and nine months ended May 31, 2021, represents the change in the estimated workers’ compensation accruals required for the residual workers’ compensation liabilities retained after the Vensure Asset Sale.
The entire disclosure related to a disposal group. Includes, but is not limited to, a discontinued operation, disposal classified as held-for-sale or disposed of by means other than sale or disposal of an individually significant component.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef