Discontinued Operations and Assets Held for Sale

3 Months Ended

Mar. 31, 2022

 DISCONTINUED OPERATIONS

Discontinued Operations and Assets Held for Sale

 Note 2: Discontinued Operations and Assets Held for Sale 

         In August 2021, the Company announced an agreement with Fagron Compounding Services, LLC (“Fagron”) to sell to Fagron certain assets of the Company’s subsidiary, US Compounding, Inc. (“USC”), related to the Company’s human compounding pharmaceutical business including certain customer information and information on products sold to such customers by USC, including related formulations, know-how, and expertise regarding the compounding of pharmaceutical preparations, clinical support knowledge and other data and certain other information relating to the customers and products. The agreement includes fixed consideration of approximately $107,000 and variable consideration estimated at approximately $6,385,000, and the Company has recorded a gain of approximately $4,637,000 for the year ended December 31, 2021 within discontinued operations related to this asset sale to Fagron, which was the total estimated consideration net of approximately $1,856,000 of allocated costs related to USC’s customer relationships intangible that was sold to Fagron. The variable consideration is tied to Fagron’s sales to former USC customers over the twelve-month-period commencing on the agreement date. The Company used the expected value method to estimate Fagron’s sales over the twelve-month period following the agreement date. Additionally, the Company relied on historical data and its judgement to make estimates, and as such, the total variable consideration is subject to change as more information becomes available, which would result in adjustments to the receivable from Fagron recorded at December 31, 2021. At March 31, 2022, based on the Company’s evaluation, the estimated variable consideration related to the sale of certain assets to Fagron was reduced by approximately $440,000. The timing of the holidays and the impact of seasonality primarily contributed to the reduction of variable consideration. The Company recognized a loss for the same amount which was included in net loss from continued operations on the Company’s condensed consolidated statement of operations, as the change occurred subsequent to the disposal of  US Compounding business. In connection with the transaction, the Company accrued as of December 31, 2021 and paid in January 2022 a $700,000 liability for a transaction fee payable to a financial advisor which was recorded in selling, general and administrative expenses of continuing operations. 

            In July 2021, the Company approved a restructuring process to wind down and cease the remaining operations at USC, with the remaining USC assets to be sold, liquidated or otherwise disposed of. As of December 31, 2021, the Company had shut down the operations of USC, terminated all of USC’s employees and is engaged in the process of selling or attempting to sell or otherwise dispose of USC’s remaining assets. The Company’s current goal is to attempt to substantially complete the disposal of USC’s assets by the end of December 2022.  

           In August 2021, the Company and its wholly-owned USC subsidiary entered into an Asset Purchase Agreement effective as of August 31, 2021 with a third party buyer, providing for the sale and transfer by USC of certain assets related to USC’s veterinary compounded pharmaceuticals business. The sale covers the transfer of all the veterinary business customers’ information belonging to USC or in USC’s control and possession and USC’s know how, information and expertise regarding the veterinary business. Pursuant to the agreement, the buyer agreed to pay the Company, for any sales of products in USC’s veterinary products list or equivalent products made to the customers included in the agreement during the five-year period after the date of the agreement, an amount equal to twenty percent (20%) of the amount actually collected by the buyer on such sales during the period ending three months after the end of such five year period. The Company did not record a receivable related to the variable consideration as it was deemed immaterial.

           Discontinued operations comprise those activities that were disposed of during the period, abandoned or which were classified as held for sale at the end of the period and represent a separate major line of business or geographical area that was previously distinguished as Compounded Pharmaceuticals segment for operational and financial reporting purposes in prior reported financial statements.

Assets Held for Sale

          The Company considers assets to be held for sale when management approves and commits to a plan to actively market the assets for sale at a reasonable price in relation to its fair value, the assets are available for immediate sale in their present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the assets is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company ceases to record depreciation and amortization expenses and measures the assets at the lower of their carrying value or estimated fair value less costs to sell. Assets held for sale are included as other current assets in the Company’s consolidated balance sheets and the gain or loss from sale of assets held for sale is included in the Company’s general and administrative expenses.

            The major assets and liabilities associated with discontinued operations included in our consolidated balance sheets are as follows (unaudited):

            Carrying amounts of major classes of assets included as part of discontinued operations (unaudited):

	March 31, 2022		December 31, 2021
Cash and Cash Equivalents	$	23,629	$	37,849
Accounts Receivable, net		—		693
Inventories		12,000		12,000
Fixed Assets, net		4,189,648		6,799,090
Other assets		51,875		72,469
Loss recognized on classification as held for sale		—		(2,601,442	)
Total assets of the disposal group classified as held for sale in the statement of financial position	$	4,277,152	$	4,320,659
Carrying amounts of major classes of liabilities included as part of discontinued operations
Accounts Payable		623,670		681,646
Accrued Other Expenses		84,161		133,313
Lease Liabilities		370,020		412,357
Contingent Loss Liability		410,000		410,000
Deferred Tax Liability		45,930		45,930
Total liabilities of the disposal group classified as held for sale in the statement of financial position	$	1,533,781	$	1,683,246

             The revenues and expenses associated with discontinued operations included in our consolidated statements of operations were as follows (unaudited):

	Three-Months Ended March 31,
	2022			2021
Major line items constituting pretax profit (loss) of discontinued operations
REVENUE, net	$	—		$	2,775,853
COST OF GOODS SOLD		—			(1,857,129	)
Gross Profit		—			918,724
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		(172,472	)		(2,401,422	)
RESEARCH AND DEVELOPMENT		—			(11,578	)
OTHER INCOME (EXPENSE)
Interest Expense		—			(37,441	)
Interest Income		11			14,751
Gain from asset disposal		7,600			—
Loss from discontinued operations before income taxes		(164,861	)		(1,516,966	)
Income tax benefit		—			—
Loss from discontinued operations after income taxes	$	(164,861	)	$	(1,516,966	)

Discontinued Operations - Revenue

            Compounded Pharmaceuticals Facility Revenue Recognition. With respect to sales of prescription compounded medications by the Company’s USC subsidiary, revenue arrangements consist of a single performance obligation which is satisfied at the point in time when goods are delivered to the customer. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer which is the price reflected in the individual customer’s order. Additionally, the transaction price for medication sales is adjusted for estimated product returns that the Company expects to occur under its return policy. The estimate is based upon historical return rates, which has been immaterial.  The standard payment terms are 2%/10 and Net 30. The Company does not have a history of offering a broad range of price concessions or payment term changes, however, when the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for any changes.  Variable consideration is not a significant component of the transaction price for sales of medications by USC. 

 Discontinued Operations - Lease

              USC has two operating leases, one for an office space and one for office equipment. As of March 31,2022 the leases have remaining terms between more than one year and less than four years. The operating leases do not include an option to extend beyond the life of the current term. There are no short-term leases, and the lease agreements do not require material variable lease payments, residual value guarantees or restrictive covenants. The Company leases a building which requires monthly base rent of $10,824 through December 31, 2023.

             As part of the restructuring process to wind down and cease the operations at USC, the Company is working to cancel or transfer the leases of the discontinued operations. During the year ended December 31, 2021, the Right-of-Use assets related to the leases of approximately $448,000 were fully impaired because there is no benefit expected from the subject leases. As of December 31, 2021, and March 31, 2022 the liabilities of the discontinued operations included approximately $412,000 and $370,000 in lease liabilities, respectively.

Discontinued Operations - Restructuring Costs 

            Due to the facts and circumstances detailed above, the Company has identified three major types of restructuring activities related to the disposal of USC. These three types of activities are employee terminations, contract termination costs, and chemical destruction costs. For those restructuring activities, the Company recorded approximately $920,000 for employee termination costs, approximately $410,000 for contract termination costs, and approximately $422,000 for chemical destruction costs for the year ended December 31, 2021 within selling, general and administrative expenses of discontinued operations. The estimated amount of approximately $410,000 of contract termination cost was related to the termination of a contract between USC and a vendor. The amount for contract termination cost was recorded as a loss contingency as the Company believes a loss is probable and can be reasonably estimated.

         As of March 31, 2022 and December 31, 2021, the outstanding liabilities related to the contract termination costs recorded in contingent loss liability of discontinued operations was approximately $410,000, respectively. As of March 31, 2022 and December 31, 2021, the outstanding liabilities related to chemical destruction costs recorded in accounts payable of discontinued operations was approximately $3,000.

 Discontinued Operations - Building Loan

           On November 10, 2016, a Loan Amendment and Assumption Agreement was entered with into the lender. Pursuant to the agreement, as subsequently amended, the Company agreed to pay the lender monthly payments of principal and interest which were approximately $19,000 per month, with a final payment due and payable in August 2021.

           In July 2021, the Company, in connection with the sale of certain USC assets to Fagron, paid to the lender the outstanding principal balance, accrued unpaid interest and other obligations under the Company’s loan agreement, promissory note and related loan documents relating to the outstanding building loan relating to the building and property on which USC’s offices are located. The land and building were included in the assets of discontinued operations.

          As of  March 31, 2022 and December 31, 2021, the outstanding principal balance owed on the applicable note was  $0 and $0 , respectively. The loan currently bore an interest of 6.00% per year and interest expense for the quarter ended March 31, 2022  and March 31, 2021 was approximately $0 and $37,000, respectively. The amount of interest allocated to the discontinued operations was based on the legal obligations of USC.