Discontinued Operation and Assets and Liabilities Related to Discontinued Operation

9 Months Ended

Sep. 30, 2023

Discontinued Operation and Assets and Liabilities Related to Discontinued Operation

Discontinued Operation and Assets and Liabilities Related to Discontinued Operation

2. Discontinued Operation and Assets and Liabilities Related to Discontinued Operation

As disclosed in the Company's Form 10-Q as of June 30, 2023, the Company’s decision to sell certain assets and wind down the operations of OKC met the “held for sale” criteria and represented a strategic shift that had a significant impact on the Company’s operations and financial results under ASC 205-20-45-9 Discontinued Operations. Therefore, the assets and liabilities of OKC are reflected as “Assets and Liabilities related to Discontinued Operation” in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (as reclassified). The operating results, the loss on sale of assets, wind down costs, and impairment of long-lived assets were reclassified to “Loss from Discontinued Operation, net of tax” in the Condensed Consolidated Statements of Operations for the three- and nine-months ended September 30, 2023 and September 30, 2022, respectively.

Under the terms of the APA, which divestiture closed on August 1, 2023, the Company sold inventory, machinery & equipment and intellectual property (patents & trademarks/tradenames) to the buyer for approximately $2,196,000 (original purchase price of $2,100,000 for the period ending June 30, 2023), which resulted in a change in purchase price and estimated loss on the sale of assets of $96,000 for the three-month period ending September 30, 2023 based on asset purchase reconciliations.  In accordance with the sale, the Company evaluated whether the fair value of OKC assets sold ($2,196,000), less estimated costs to sell, exceeded the net carrying values.  The Company concluded that the net carrying values exceeded the fair value, less estimated costs to sell, resulting in an estimated impairment charge of approximately $3,127,000 (original estimate of $3,223,000 for the period ending June 30, 2023).  This impairment charge is included in the Loss from Discontinued Operation for the nine-month period ending September 30, 2023.

In addition, as a direct result of selling OKC’s assets, management’s focus on winding down the OKC operations, and actively marketing the real property for sale, the Company incurred an impairment charge of approximately $1,098,000 related to the real property based on independent, third party appraisals (less estimated costs to sell).  Estimated wind down costs of approximately $1,208,000 ($1,129,000 for the period ending June 30, 2023 and included in the other accrued liabilities caption within the table presented below), were recorded for key employee retention agreements, employee severance agreements, and supplier purchase order obligations currently in negotiations.  This resulted in additional costs of $79,000 for the three-month period ending September 30, 2023.  This aggregate total of approximately $2,306,000 is included in the Loss from Discontinued Operation for the nine-month period ending September 30, 2023.

Finally, OKC’s operating losses of approximately $403,000 and $1,893,000 for the three- and nine-month periods ended September 30, 2023, respectively, are also included in the Loss from Discontinued Operation (compared to Income from Discontinued Operation of $271,000 and $127,000 for the three- and nine-month periods ended September 30, 2022, respectively, as reclassified).

Based on the above, the total Loss from Discontinued Operation, net of tax, is approximately $386,000 and $7,326,000 for the three- and nine-month periods ended September 30, 2023, respectively (compared to Income from Discontinued Operation of approximately $271,000 and $127,000 for the three- and nine-months ended September 30, 2022, respectively, as reclassified), and had a significant impact on the Company’s financial position in 2023.

As shown in the Statement of Cash Flows and disclosed in Note 1, the sale of OKC assets occurred on August 1, 2023 and the cash proceeds received of $2,100,000 were used to paydown the outstanding line of credit during the third quarter (current balance outstanding of approximately $2,164,000 as of September 30, 2023 compared to approximately $3,697,000 outstanding as of June 30, 2023) and fund the discontinued operations.

Discontinued Operation Financial Information

A summary of the results of operations classified as a discontinued operation, net of tax, in the Condensed Consolidated Statements of Operations, are as follows:

	Three Months Ended		Three Months Ended
	September 30, 2023		September 30, 2022
		($000’s omitted)
Net Sales	$	336	$	2,168
Operating costs		(739)		(1,897)
Loss/(income) from discontinued operation		(403)		271
Loss from discontinued operation - impairment and divestiture costs		(79)		—
Change in purchase price		96		—
(Loss)/income from discontinued operation before income taxes		(386)		271
Income tax benefit		—		—
(Loss)/income from discontinued operation, net of tax	$	(386)	$	271

	Nine Months Ended		Nine Months Ended
	September 30, 2023		September 30, 2022
	($000’s omitted)
Net Sales	$	3,423	$	6,650
Operating costs		(5,316)		(6,523)
(Loss)/income from discontinued operation		(1,893)		127
Loss from discontinued operation - impairment and divestiture costs		(2,306)		—
Estimated loss on sale of assets		(3,127)		—
(Loss)/income from discontinued operation before income taxes		(7,326)		127
Income tax benefit		—		—
(Loss)/income from discontinued operation, net of tax	$	(7,326)	$	127

Assets & Liabilities Related to Discontinued Operation Financial Information

A summary of the carrying amounts of major classes of assets and liabilities, which are included in assets and liabilities related to discontinued operation in the Condensed Consolidated Balance Sheets, are as follows:

	September 30, 2023		Dec 31, 2022
	($000’s omitted)
Accounts receivable, net	$	335	$	1,016
Prepaid assets		96		313
Inventories, net		—		4,766
Machinery and equipment, net		—		567
Patents and trademark, net		—		140
Building and improvements, net		1,550		2,726
Assets related to discontinued operation	$	1,981	$	9,528
Accounts payable	$	777	$	1,272
Accrued employee compensation and other costs		964		473
Liabilities related to discontinued operation	$	1,741	$	1,745

The OKC assets not being sold under the terms of the APA include accounts receivable, prepaid assets, and the building totaling $1,981,000 as of September 30, 2023.  The Company retains and will liquidate these assets in conjunction with the wind down of the OKC operations during the remainder of 2023.  The accounts receivable of approximately $335,000 represents amounts due from customers and from the buyer of OKC’s assets in accordance with the terms of the APA, and is net of a reserve for credit losses of approximately $100,000. In addition, the OKC liabilities not assumed under the terms of the APA include the accounts payable and accrued expenses totaling approximately $1,741,000 as of September 30, 2023.