Note 4: Liquidity

As of August 31, 2020, the Company had cash of $4.3 million and a working capital deficit of $2.8 million.  Subsequent to the end of Fiscal 2020, in October 2020, the Company closed an additional equity financing for $12 million, or $10.7 million net of fees. During Fiscal 2020, the Company used approximately $15.5 million of cash from its continuing operations and repaid $1.2 million of convertible notes, after receiving $9.7 million of cash from the Vensure Asset Sale described above and closed an underwritten public offering that yielded $11.5 million in proceeds, net of offering costs. The Company has incurred recurring losses, resulting in an accumulated deficit of $119.5 million as of August 31, 2020. The recurring losses and cash used in operations are indicators of substantial doubt as to the Company’s ability to continue as going concern for at least one year from issuance of these financial statements. The Company’s plans to alleviate substantial doubt are discussed below.

Historically, the Company’s principal source of financing has come through the sale of its common stock and issuance of convertible notes. In March 2019, the Company completed a private placement of senior secured notes to certain institutional investors, raising $3.75 million ($3.3 million net of costs). Between September 1, 2019 and May 22, 2020, all convertible notes outstanding as of August 31, 2019 were repaid or converted into equity. On May 26, 2020, the Company successfully completed an underwritten public offering, raising a total of $12 million ($10.3 million net of costs), and closed an additional $1.35 million ($1.24 million net of costs) between June 1, 2020 and July 7, 2020 pursuant to the underwriter’s overallotment.  In October 2020, the Company closed an additional $12 million equity offering ($10.7 million net of costs). The Company’s plans and expectations for the next 12 months include raising additional capital to help fund expansion of its operations, including the continued development and support of its IT and HR platform. The Company has engaged an investment banking firm to assist in (i) preparing information materials, (ii) providing advice concerning the structure, price and conditions associated with a capital raise, and (iii) organizing marketing efforts in connection with a financing transaction.

In January 2020, the Company closed the Vensure Asset Sale, pursuant to which it assigned approximately 88% of its customer contracts in exchange for $9.7 million in cash at closing and received an additional $2.5 million of cash payments made on behalf of the Company, net of $0.9 million of cash paid on behalf of Vensure.  Pursuant to this transaction, the Company expects to receive an additional $5.6 million over the next four years, subject to certain closing conditions. The Company transferred $1.6 million of working capital, including $0.9 million of cash, in connection with the Vensure Asset Sale.

During Fiscal 2020, the Company instituted certain cost reductions, has reduced its anticipated monthly cash needs by approximately $1 million, and continues to experience significant growth in the number of WSEs, which it expects to generate additional administrative fees. The reduction in the Company’s monthly cash needs along with the anticipated additional administrative fees earned should mitigate its current level of operational cash burn. The Company retained its high growth business as part of the Vensure Asset Sale, which has accounted for billings and revenue growth for the customers that existed as of January 1, 2020 and who were not transferred to Vensure. The Company also retained the rights to monetize its existing pool of WSEs, including WSEs transferred to Vensure, and has begun to roll out its delivery and scheduling applications to its customers.

The Company has been and expects to continue to be impacted by the COVID-19 pandemic, from which it has experienced both positive and negative impacts. Its current business focus is providing payroll services for the restaurant and hospitality industries, which have seen a reduction in payroll and consequently a reduction in payroll processing fees on a per WSE and per location basis. However, the Company believes that it provides  the means for current and potential clients to adapt to many of the obstacles posed by COVID-19 by providing additional services such as delivery, which have facilitated an increase by the Company in its client and client location counts, resulting in recovery of billings lost during the first months of the pandemic. Beginning in June 2020, the Company’s billings per WSE and per location improved as lockdowns in its primary Southern California market were lifted. In November 2020, the State of California re-implemented lockdowns. The Company believes that many of its clients have modified their businesses after the initial lockdowns to adapt somewhat to these adverse circumstances. Nevertheless, if additional lockdowns persist, the Company’s clients delay hiring or rehiring employees, or if its clients shut down operations, the Company’s ability to generate operational cash flows may be significantly impaired.

The Company also signed a new client in July 2020 representing a significant revenue opportunity. This client provides outsourced nurses that are paid gross wages in an amount approximately three times what the Company’s typical food WSEs receive, with the Company receiving the same admin fee rates per wage dollar paid. We believe that this client will generate a significant amount of new business for the Company, as the need for nurses increases to administer COVID-19 testing and vaccination services.

The Company’s management believes that the Company’s current cash position, along with its anticipated revenue growth, expense reduction, no funded debt outstanding and anticipated financing from potential institutional investors, will be sufficient to alleviate substantial doubt and fund its operations for at least a year from the date these financials are available. If these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months, the Company may need to curtail certain aspects of its operations or expansion activities, consider the sale of additional assets, or consider other means of financing. The Company can give no assurance that it will be successful in implementing its business plan and obtaining financing on terms advantageous to the Company, or that any such additional financing will be available. These consolidated financial statements do not include any adjustments for this uncertainty.