|6 Months Ended|
Feb. 28, 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 six months ended February 28, 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 Asset Purchase Agreement governing the Vensure Asset Sale. As indicated in the reconciliation table below, the Company has initially recorded $2.6 million of working capital adjustments, subject to final review and acceptance and has provided for a reserve for an additional $2.9 million of additional potential claims and reserves. 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. As discussed in Note 10, below, any disputes regarding working capital adjustments under the Asset Purchase Agreement are subject to a resolution process that includes a 30-day negotiation period followed by binding arbitration. The parties are in the negotiation period 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 February 28, 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 February 28, 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 February 28, 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 February 28, 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 February 28, 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 had recorded a reserve of 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.
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 February 28, 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, the dispute is subject to a reconciliation and arbitration process. As such, although we are hopeful for a prompt resolution of our dispute, we do not currently anticipate any collections prior to February 28, 2022, and therefore have classified the note receivable as long-term.
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 months ended February 28, 2021, represents the change in the estimated workers’ compensation accruals required for the residual workers’ compensation liabilities retained after the Vensure Asset Sale.
No definition available.
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