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Geneva Consulting Group Acquisition

9 Months Ended

Feb. 28, 2021

15.	Geneva Consulting Group Acquisition

On September 1, 2020, the Company completed the acquisition of all of the outstanding stock of Geneva Consulting Group, Inc., a New York corporation (“Geneva”) and provider of temporary and permanent information technology personnel based in Port Washington, New York. The stock of Geneva was purchased from the three shareholders of Geneva (the “Sellers”), none of which had, or will have following the acquisition, a material relationship with the Company or its affiliates.

The purchase price for the shares of Geneva is comprised of the following: (i) $1,452,000 in cash paid to Sellers at the closing of the acquisition, (ii) an amount of $748,000, that is equal to the amount of Geneva’s loan under the PPP that was not assumed by the Company and is expected to be substantially forgiven by the SBA, (iii) an amount up to $300,000 which may be paid as an earnout payment in part in February 2021 and in part in August 2021 (the “Earnout Payments”), (iv) bonus payments payable in $10,000 increments, (v) $747,000 for the net working capital of Geneva as of closing and (vi) other purchase price adjustments of which $36,000 has been paid to date. Any Earnout Payments and bonus payments will be determined based upon the achievement of certain criteria relating to the number the Company’s contractors working full-time at the Company’s clients on such dates.

On March 17, 2021, the Company entered into an agreement with the Sellers’ representatives pursuant to which the parties agreed to settle certain interpretive differences regarding the Sellers’ entitlement to the bonus payments described above. Pursuant to this agreement, and in full satisfaction of the Company’s obligations for deferred payments under the purchase agreement for the Geneva acquisition, the Sellers’ representative acknowledged receipt of the first Earnout Payment in the amount of $100,000, the parties agreed that the Company would make aggregate bonus payments to the Sellers’ representatives in the amount of $260,000, and the Company agreed to instruct the escrow agent to release to the Sellers’ representatives the second Earnout Payment in the amount of $200,000. All amounts relating to the Earnout Payments and bonus payments that had not been paid as of the date of the agreement were either paid by the Company or released by the escrow agent on March 18, 2021. No further earnout or bonus amounts can be earned or will be paid subsequent to March 18, 2021.

The acquisition was accounted for as an acquisition of a business in accordance with the acquisition method of accounting. The acquired assets and assumed liabilities have been recorded at their preliminary estimated fair values. The Company determined the preliminary estimated fair values with the assistance of valuations performed by an independent third-party specialist. There have been no changes made to the preliminary valuation as of February 28, 2021.

The Company has incurred approximately $498,000 in legal fees, business broker fees, valuation services, accounting fees and other expenses to complete the Geneva acquisition, of which $220,000 of these expenses were recorded in the quarter ended February 28, 2021. This amount primarily relates to the accrual of additional bonus payments to the Sellers of $210,000 related to the March 17, 2021 agreement discussed above. All acquisition related costs have been expensed as incurred and included in selling, general and administrative expenses.

The following table summarizes the components of the purchase price at fair values at September 1, 2020:

Cash consideration paid to date	$	2,983,264
Estimated earnout and other liabilities		358,796
Total purchase price	$	3,342,060

The following table summarizes the allocation of purchase price at preliminary estimated fair values at September 1, 2020:

Cash	$	241,946
Accounts receivable		778,930
Prepaid expenses		5,249
Intangible assets (see Note 17)		1,800,000
Goodwill		785,883
Accrued expenses		(269,948	)
Net assets	$	3,342,060

The purchase agreement for the Geneva acquisition provided for earn-out payments of up to $300,000 plus bonus amounts in $10,000 increments which are earned through August 2021. The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure (Level 3 of the fair value hierarchy). The earn-out was revalued quarterly prior to the settlement discussed above, using a present value approach and any resulting increase or decrease was recorded into selling, general and administrative expenses. Any changes in the amount of the actual results and forecasted scenarios could impact the fair value. Significant judgment was employed in determining the appropriateness of the assumptions used in calculating the fair value of the earn-out as of the acquisition date and subsequent period ends. The earn-out and bonus payments due through August 2021 were settled in full by the payments made in accordance with the agreement between the Company and the Sellers on March 17, 2021. This agreement resulted in a charge to selling, general and administrative expenses of $210,000 in the quarter ended February 28, 2021. No further earnout or bonus amounts can be earned or will be paid subsequent to March 18, 2021.

The following unaudited pro forma financial information presents the combined operating results of the Company and Geneva as if the acquisition had occurred as of the beginning of the earliest period presented. Pro forma data is subject to various assumptions and estimates and is presented for informational purposes only. This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future operating results.

Unaudited pro forma financial information assuming the acquisition of Geneva as of June 1, 2019 is presented in the following table (in thousands):

	Three Months Ended						Nine Months Ended
	February 28,			February 29,			February 28,			February 29,
	2021			2020			2021			2020
Revenue	$	17,160		$	16,601		$	49,180		$	51,591
Net loss	$	(305	)	$	(909	)	$	(779	)	$	(1,390	)
Earnings loss per share	$	(0.16	)	$	(0.46	)	$	(0.40	)	$	(0.71	)