Quarterly report pursuant to Section 13 or 15(d)

Discontinued Operations

v3.20.2
Discontinued Operations
9 Months Ended
May 31, 2020
Discontinued Operations  
Discontinued Operations

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 (the “Asset Sale”). Gross proceeds from the Asset Sale were $19.2 million, of which $9.7 million was received at closing and $9.5 million will be paid out in equal monthly payments over the next four years (the “Note Receivable”), subject to adjustments for working capital and customer retention over the twelve month period following the Asset Sale.

The following is a reconciliation of the gross proceeds to the net proceeds from the Asset Sale as presented in the statement of cash flows for the period ending May 31, 2020.

 

 

 

 

 

Gross proceeds

    

$

19,166,000

Cash received at closing – asset sale

 

 

(9,500,000)

Cash received at closing – working capital

 

 

(166,000)

Discount recorded

 

 

(1,818,000)

Less: Transaction reconciliation – working capital adjustment

 

 

(1,283,000)

Adjusted Note Receivable

 

 

6,399,000

Short-term note receivable

 

 

1,291,000

Long-term note receivable

 

$

5,108,000

 

The Asset Sale generated a gain of $15.7 million for the nine months ended May 31, 2020. The Company expects a minimal tax impact from the Asset Sale as it intends to utilize its net operating losses accumulated since inception to offset the gain resulting from discontinued operations tax provision with a corresponding offset to the valuation allowance.

The Asset Sale met the criteria of discontinued operations set forth in ASC 205 and 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. The Company recorded the Note Receivable net of a discount using its estimated cost of capital at a discount rate of (10%).

The Asset Sale calls for adjustments to the Note Receivable either for: (i) working capital adjustments or (ii) in the event that the gross profit of the business transferred is less than the required amount. Through May 31, 2020, the Company has identified $1,283,000 of working capital adjustments, including $88,000 related to lower net assets transferred at closing, $201,000 of liabilities paid on behalf of the Company, and $994,000 of cash remitted to the Company's bank accounts, net. Under the terms of the 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, the reconciliation remains unresolved. The working capital adjustment recorded as of May 31, 2020 represents the Company’s estimate of the reconciliation. There is no assurance that the working capital change identified as of May 31, 2020 represents the final working capital adjustment.

The carrying amounts of the classes of assets and liabilities from the Asset Sale included in discontinued operations were as follows:

 

 

 

 

 

 

 

 

 

 

May 31, 

 

August 31,

 

 

2020

 

2019

 

 

Unaudited

 

Unaudited

Cash

    

$

 -

    

$

 -

Accounts receivable and unbilled account receivable

 

 

 -

 

 

8,526,000

Prepaid expenses and other current assets

 

 

 -

 

 

171,000

Deposits – workers’ compensation

 

 

2,386,000

 

 

1,722,000

Total current assets

 

 

2,386,000

 

 

10,419,000

Fixed assets, net

 

 

 -

 

 

40,000

Deposits - workers' compensation

 

 

1,749,000

 

 

5,527,000

Total assets

 

$

4,135,000

 

$

15,986,000

Accounts payable and other current liabilities

 

$

 -

 

$

457,000

Payroll related liabilities

 

 

 -

 

 

7,879,000

Accrued workers’ compensation cost

 

 

2,386,000

 

 

1,722,000

Total current liabilities

 

 

2,386,000

 

 

10,058,000

Accrued workers’ compensation cost

 

 

5,533,000

 

 

3,853,000

Total liabilities

 

 

7,919,000

 

 

13,911,000

Net assets/(liability)

 

$

(3,784,000)

 

$

2,075,000

 

Reported results for the discontinued operations by period were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

    

May 31,

    

May 31,

    

May 31,

    

May 31,

 

 

2020

 

2019

 

2020

 

2019

Revenues (gross billings of $0 and $82.3 million less worksite employee payroll cost of $0 million and $69.7 million, respectively for the three months ended; gross billings of $120.0 million and $221.7 million less worksite employee payroll cost of $103.3 million and $187.3 million, respectively for Nine Months ended)

 

$

 -

    

$

12,666,000

    

$

17,138,000

    

$

34,354,000

Cost of revenue

 

 

1,490,000

 

 

10,125,000

 

 

17,025,000

 

 

25,567,000

Gross profit (loss)

 

 

(1,490,000)

 

 

2,541,000

 

 

113,000

 

 

8,787,000

 

 

 

  

 

 

  

 

 

  

 

 

  

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Salaries, wages and payroll taxes

 

 

 -

 

 

662,000

 

 

658,000

 

 

2,414,000

Commissions

 

 

 -

 

 

701,000

 

 

748,000

 

 

1,777,000

Total operating expenses

 

 

 -

 

 

1,363,000

 

 

1,406,000

 

 

4,191,000

(Loss) income from discontinued operations

 

$

(1,490,000)

 

$

1,178,000

 

$

(1,293,000)

 

$

4,596,000