Annual report pursuant to Section 13 and 15(d)

Discontinued Operations

v3.21.2
Discontinued Operations
12 Months Ended
Aug. 31, 2021
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 transferring $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 scheduled to be paid out in equal monthly payments over the four years following the closing of the transaction  (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.

For Fiscal 2020, the Company estimated the value of the Note Receivable at fair value as discussed in Note 2,  Summary of Significant Acounting Policies, above. For Fiscal 2021, the Company recorded the Note Receivable based on the estimate of expected collections based on additional information obtained through discussions with Vensure and evaluation of our records. 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. The disputes between the Company and Vensure regarding working capital adjustments under the Vensure Asset Sale agreement are currently the subject of litigation pending in the Delaware Chancery Court, as discussed at Note 16, Contingencies, Vensure Litigation, below.

The following is a reconciliation of the gross proceeds to the net Note Receivable from the Vensure Asset Sale as presented on the Company’s consolidated balance sheet for Fiscal 2021.

 

 

 

 

 

Gross proceeds

    

$

19,166,000

Cash received at closing – asset sale

 

 

(9,500,000)

Cash received at closing – working capital

 

 

(166,000)

Gross note receivable

 

$

9,500,000

Less: Transaction reconciliation – estimated working capital adjustment

 

 

(2,604,000)

Adjusted note receivable

 

 

6,896,000

Less: Reserve for estimated potential claims

 

 

(2,892,000)

Long-term note receivable

 

$

4,004,000

 

The entire Note Receivable is recorded as a long term note receivable as of August 31, 2021. Any adjustments to the Note Receivable are applied against payments in the order they are due to be paid. As such, the estimates of the working capital and reserves for estimated potential claims would not result in any cash payments due to the Company until Fiscal 2022.

The Vensure Asset Sale generated a gain of $15.6 million for Fiscal 2020. The Company expected a minimal tax impact from the Vensure Asset Sale as it utilized 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 Vensure 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 terms of the Vensure Asset Sale call 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.

(i) Working capital adjustments: Through August 31, 2021, the Company has identified $2.6 million of likely working capital adjustments, including $88,000 related to lower net assets transferred at closing, and $2.5 million 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 August 31, 2021, represents the Company’s estimate of the reconciliation adjustment 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 August 31, 2021 represents the final working capital adjustment.

(ii) 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' Calendar 2019 gross wages. The Company has prepared an estimate of the Calendar 2020 gross wages based on a combination of factors including reports of actual transferred client billings in early Calendar 2020, actual gross wages of continuing customers of the Company, publicly available unemployment reports for the Southern California markets and the relevant COVID-19 impacts on employment levels, and other information. Based on the information available, the Company estimated that it would receive additional consideration below the required threshold and reduced the contingent consideration by $1.4 million. Vensure has not identified any such adjustments to date. Based on the information available, the Company reclassified the previously recorded gross wages claim to a general potential claims reserve during Fiscal 2021. No additional adjustment was made during Fiscal 2021.

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

 

 

 

 

 

 

 

 

 

    

August 31, 

    

August 31, 

 

 

2021

 

2020

Cash

 

$

 —

 

$

 —

Accounts receivable and unbilled account receivable

 

 

 —

 

 

 —

Prepaid expenses and other current assets

 

 

 —

 

 

 —

Deposits – workers’ compensation

 

 

356,000

 

 

1,030,000

Total current assets

 

 

356,000

 

 

1,030,000

Fixed assets, net

 

 

 —

 

 

 —

Deposits – workers’ compensation

 

 

883,000

 

 

2,582,000

Total assets

 

$

1,239,000

 

$

3,612,000

 

 

 

 

 

 

 

Accounts payable and other current liabilities

 

$

 —

 

$

 —

Payroll related liabilities

 

 

 —

 

 

 —

Accrued workers’ compensation cost

 

 

1,516,000

 

 

1,746,000

Total current liabilities

 

 

1,516,000

 

 

1,746,000

Accrued workers’ compensation cost

 

 

5,411,000

 

 

4,377,000

Total liabilities

 

 

6,927,000

 

 

6,123,000

Net liability

 

$

(5,688,000)

 

$

(2,511,000)

 

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

 

 

 

 

 

 

 

 

 

 

For the Year Ended

 

 

August 31, 

 

August 31, 

 

 

2021

 

2020

Revenues (gross billings of $120.7 million less WSE payroll cost of $103.0 million, respectively for the year ended August 31, 2020)

    

$

    

$

17,632,000

Cost of revenue

 

 

2,509,000

 

 

16,899,000

Gross profit

 

 

(2,509,000)

 

 

733,000

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Salaries, wages and payroll taxes

 

 

 

 

553,000

Commissions

 

 

 

 

741,000

Total operating expenses

 

 

 

 

1,294,000

 

 

 

 

 

 

 

(Loss) income from discontinued operations

 

$

(2,509,000)

 

$

(561,000)

 

During Fiscal 2021, the Company recorded net operating loss from discontinued operations totaling $8,632,000 that were fully reserved. During Fiscal 2020, the Company utilized fully reserved net operating loss carryforwards of approximately $15,669,000 to offset income from discontinued operations. The components of income tax expense for discontinued operations are as follows:

 

 

 

 

 

 

 

 

 

 

For the Year Ended

 

 

August 31, 

 

 

2021

 

2020

Provision for income tax expense

    

 

  

    

 

  

Federal tax expense

 

$

(500,000)

 

$

3,436,000

State tax expense

 

 

(129,000)

 

 

1,565,000

Total tax expense

 

 

(629,000)

 

 

5,001,000

Tax benefit for utilization of tax loss carryforwards

 

 

629,000

 

 

(5,001,000)

Provision for income tax expense from discontinued operations

 

$

 —

 

$

 —