Quarterly report pursuant to Section 13 or 15(d)

Discontinued Operations

v3.20.4
Discontinued Operations
3 Months Ended
Nov. 30, 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, to a wholly owned subsidiary of Vensure Employer Services, Inc. (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 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, (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 ended November 30, 2020, the Company identified an additional $41,000 of net cash paid on behalf of the Company and adjusted the note receivable accordingly.

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 November 30, 2020.

 

 

 

 

 

Gross proceeds

    

$

19,166,000

Cash received at closing – asset sale

 

 

(9,500,000)

Cash received at closing – working capital

 

 

(166,000)

Less: Transaction reconciliation – working capital adjustment

 

 

(88,000)

Less:  Transaction reconciliation – net cash paid by Vensure on behalf of the Company

 

 

(2,516,000)

Less: Transaction reconciliation – estimate of reduction due to gross wages

 

 

(1,400,000)

Adjusted Note Receivable

 

 

5,496,000

Discount recorded

 

 

(1,492,000)

Long-term note receivable

 

$

4,004,000

 

The entire note receivable is recorded as a long term note receivable as of November 30, 2020. 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 gross billings adjustments would not result in any cash payments due to the company within one year of November 30, 2020.

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 Company recorded the Note Receivable net of a discount using a discount rate of 15% per year.

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 November 30, 2020, 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. The working capital adjustment recorded as of November 30, 2020 represents the Company’s estimate of the reconciliation. There is no assurance that the working capital change identified as of November 30, 2020 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. The Company has prepared an estimate of the calendar year 2020 gross wages based on a combination of factors including reports of actual transferred client billings in early 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. The Company expects to conduct a full reconciliation in the first calendar quarter of 2021, after calendar 2020 wage information becomes available.

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

 

 

 

 

 

 

 

 

 

 

November 30, 

 

August 31,

 

 

2020

 

2020

Cash

    

$

 —

    

$

 —

Accounts receivable and unbilled account receivable

 

 

 —

 

 

 —

Prepaid expenses and other current assets

 

 

 —

 

 

 —

Deposits – workers’ compensation

 

 

960,000

 

 

1,030,000

Total current assets

 

 

960,000

 

 

1,030,000

Fixed assets, net

 

 

 —

 

 

 —

Deposits - workers' compensation

 

 

2,435,000

 

 

2,582,000

Total assets

 

$

3,395,000

 

$

3,612,000

 

 

 

 

 

 

 

Accounts payable and other current liabilities

 

$

 —

 

$

 —

Payroll related liabilities

 

 

 —

 

 

 —

Accrued workers’ compensation cost

 

 

1,764,000

 

 

1,746,000

Total current liabilities

 

 

1,764,000

 

 

1,746,000

Accrued workers’ compensation cost

 

 

4,475,000

 

 

4,377,000

Total liabilities

 

 

6,239,000

 

 

6,123,000

 

 

 

 

 

 

 

Net liability

 

$

(2,844,000)

 

$

(2,511,000)

 

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

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

    

November 30,

    

November 30,

 

 

2020

 

2019

Revenues (gross billings of $0.0 million and $93.5 million less WSE payroll cost of $0.0 million and $79.8 million, respectively for quarter ended)

 

$

 —

    

$

13,697,000

Cost of revenue

 

 

1,314,000

 

 

10,604,000

Gross profit

 

 

(1,314,000)

 

 

3,093,000

 

 

 

  

 

 

 

Operating expenses:

 

 

  

 

 

 

Salaries, wages and payroll taxes

 

 

 —

 

 

400,000

Commissions

 

 

 —

 

 

703,000

Total operating expenses

 

 

 —

 

 

1,103,000

(Loss) income from discontinued operations

 

$

(1,314,000)

 

$

1,990,000

 

The loss from discontinued operations for the three months ended November 30, 2020, represents the change in the estimated workers’ compensation accruals required for the residual workers’ compensation liabilities retained after the Vensure Asset Sale.