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ARCADIA RESOURCES, INC

SIC 7200 · Services-Personal Services
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ARCADIA RESOURCES, INC

CIK:0001071941|SEC Filings
v2.4.0.6
Discontinued Operations
 9 Months Ended
Dec. 31, 2011
Discontinued Operations [Abstract]  
Discontinued Operations
Note 3 – Discontinued Operations

Pharmacy Segment

Pursuant to an Asset Purchase Agreement by and among PrairieStone Pharmacy, LLC (“PrairieStone”), the Company and Medication Adherence Solutions, LLC (“MAS”) dated as of December 6, 2011 (the “APA”), on February 17, 2012 the Company and PrairieStone sold substantially all of the operating assets of the Company's Pharmacy segment, which includes the DailyMedTM Pharmacy business, to MAS.  The assets purchased by MAS included accounts receivable and/or the proceeds from the collection of such accounts, equipment, inventory, assumed contracts and leases, intellectual property and intangible personal property used in or for the benefit of the Pharmacy segment business.  MAS paid $2.0 million cash at closing, which payment went directly to H.D. Smith, the secured lender to the Pharmacy segment as more fully described in the “Line of Credit – Discontinued Operations” section below.  In addition, MAS assumed or paid at closing trade payables to vendors of the Pharmacy segment in the amount of $1.5 million.   Subsequent to the Closing, the parties to the APA have agreed to make an adjustment to the purchase price based upon the Working Capital Balance (as defined in the APA) at closing.  The working capital adjustment will be made if the Working Capital Balance exceeds or is less than $400,000, subject to the provision that no working capital adjustment shall be made unless the amount of the adjustment exceeds $50,000.

The closing of the sale pursuant to the APA on February 17, 2012 also became the Effective Date under the Secured Creditor Assignment and Release Agreement between PrairieStone, the Company, H.D. Smith and MAS dated as of December 6, 2011 (the “Secured Creditor Agreement”).  Pursuant to the Secured Creditor Agreement, as of the Effective Date, H.D. Smith received the $2.0 million cash payment at closing from MAS and H.D. Smith agreed that there shall be no further amounts owed to them by PrairieStone or the Company under the Line of Credit and Security Agreement dated as of April 23, 2010 and the loan documents and agreements related thereto (the “HD Smith Loan Agreements”).  In addition, H.D. Smith (i) assigned to MAS all claims and liabilities (the “Assigned Claims”) that H.D. Smith held or may assert against PrairieStone under the H.D. Smith Loan Agreements, (ii) released, discharged and terminated any and all security interests in the assets of PrairieStone and the PrairieStone member interests pledged by the Company, (iii) terminated the H.D. Smith Loan Agreements (including the Company's guaranty of PrairieStone's indebtedness to HD Smith), the Forbearance Agreement and the Prime Vendor Agreement dated as of April 23, 2010 (“PVA”), (iv) terminated its outstanding common stock purchase warrants, (v) released the Company and PrairieStone from any claims related to the H.D. Smith Loan Agreements, the Forbearance Agreement and the PVA, and (vi)  permitted MAS for a period not to exceed six (6) months to purchase pharmaceutical products and supplies on the same conditions and terms as set forth in the PVA.  In addition, the Secured Creditor Agreement provides that MAS will not bring any claim or cause of action against the Company or PrairieStone with respect to the Assigned Claims, except that MAS may (x) file a claim in any bankruptcy or insolvency proceeding filed by, against or concerning PrairieStone or (y) assert the Assigned Claims defensively, including as an offset, in certain third-party actions.  H.D. Smith also released back to the Company $100,000 held as a collateral security deposit pursuant to the Forbearance Agreement.

The Management Services Agreement by and between the Company and MAS dated as of December 6, 2011 (the “Management Agreement”), also became effective upon the closing of the sale under the APA.  Under the Management Agreement, the Company is providing management services to MAS.   The Company will receive a monthly management fee of $25,000 for the management services provided.  The Company has designated Marvin Richardson, the Company's CEO and President, as the Manager under the Management Agreement, and, as such, he will assist MAS with the day-to-day supervision and management of the business for and on behalf of MAS.  The Management Agreement will be in effect from February 17, 2012 until the earlier of (i) May 17, 2012 and (ii) the date the Company and Marvin Richardson agree that Marvin Richardson no longer is to be employed by the Company as CEO and President and MAS and Mr. Richardson agree that he is to be employed by MAS or its affiliates.  MAS has offered to employ Mr. Richardson as Director of Pharmacy Operations – DailyMedTM subsequent to the Closing and following the termination or expiration of the Management Agreement.  Mr. Richardson has accepted the offer of employment.

As provided in the APA, MAS entered into an agreement to lease certain space in the Company's Indianapolis, Indiana facility previously occupied by the Pharmacy segment from the building owner.  The Company agreed to terminate the lease of the remaining space occupied by the Company's corporate office, and the building owner released the Company from any future obligations under the lease.  As partial consideration for the building owner's release of the Company, the Company agreed to release to the building owner $250,000 held in escrow as a security deposit. The Company continues to maintain its Corporate offices at this location.

In March 2011, the Company ceased the majority of its operations at its Minnesota pharmacy and began reflecting the ceased operations as discontinued operations in the consolidated financial statements.  A portion of the business and the majority of the Minnesota assets were transferred to the Indianapolis, Indiana pharmacy location.  The cost to close the Minnesota facility was immaterial.

Services Segment

On May 29, 2009, the Company finalized the sale of substantially all of the assets of its industrial and non-medical staffing business, which had been part of the Services segment, for cash proceeds of $250,000, which were paid in five equal installments through September 2009.  Additionally, the Company was to receive 50% of the future earnings of the business until the total payments equal $1,600,000.  During fiscal 2011 and 2010, the Company received $759,000 in total earn out payments.  During the nine month period ended December 31, 2011, the Company received the remaining $841,000 in earn out payments.  Due to the uncertainty about the ultimate collectability, the potential earn out payments were not originally recorded as receivables at the time of the transaction.  All earn out payments were recorded as additional gain on the transaction.

HHE Segment

On May 18, 2009, the Company completed the sale of its ownership interest in Lovell Medical Supply, Inc., Beacon Respiratory Services of Georgia, Inc., and Trinity Healthcare of Winston-Salem, Inc. to Aerocare Holdings, Inc. for total proceeds of $4,750,000, less fees of $150,000.  In May 2010, the Company received the final payment of $155,000.  This payment was recognized as an additional gain on the sale during the nine month period ended December 31, 2010.

On May 19, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to sell the assets of its Midwest region of the Company's HHE business.  Total proceeds were $4,000,000, less fees of $150,000.  $1,000,000 of the purchase price was held by the buyer to cover the Company's contingent obligations.  Subsequent to the transaction date, the buyer made certain claims, and in June 2010, the Company received a final settlement payment of $500,000 to resolve these claims.  This payment was recognized as an additional gain on the sale during the nine month period ended December 31, 2010.

As of May 2009, the Company had sold all of its HHE operations.

Catalog Segment

On October 1, 2010, the Company completed the sale of its ownership interest in Rite at Home Health Care Products, LLC to Home Health Depot, Inc.  The Company recorded a loss of $123,000 during fiscal 2011 in conjunction with this disposal.  This entity represented the Company's Catalog segment.

Prior to their actual disposal, the assets and liabilities associated with these discontinued business operations have been classified as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets.  The results of the above businesses are reported in discontinued operations in the accompanying consolidated statements of operations, and the prior period consolidated statements of operations have been recast to conform to this presentation.  The discontinued operations do not reflect the costs of certain services provided to these operations by the Company.  Such costs, which were not allocated by the Company to the various operations, included internal employee costs associated with administrative functions, including accounting, information technology, human resources, compliance and contracting as well as external costs for legal fees, insurance, audit fees, payroll processing, and various public-company expenses.  The Company uses a centralized approach to cash management and financing of its operations, and, accordingly, unsecured debt and the related interest expense were also not allocated specifically to these operations.  The consolidated statements of cash flows do not separately report the cash flows of the discontinued operations.

The components of the assets and liabilities of the discontinued operations are presented below (in thousands):

 
   
December 31, 2011
  
March 31, 2011
 
   
Pharmacy
  
Pharmacy
 
Assets
      
Accounts receivable, net of allowance of $468 and $399, respectively
 $869  $1,430 
Inventories, net
  425   795 
Prepaid expenses and other current assets
  319   489 
Total current assets of discontinued operations
  1,613   2,714 
Property and equipment, net
  791   940 
Total non-current assets of discontinued operations
  791   940 
Total assets of discontinued operations
 $2,404  $3,654 
          
Liabilities
        
Accounts payable
 $918  $514 
Line of credit (in default)
  4,521   - 
Accrued compensation and related taxes
  131   230 
Accrued health claims
  76   100 
Accrued other
  121   60 
Capital lease obligations, current portion
  6   21 
Long-term obligations, current portion
  -   189 
Total current liabilities of discontinued operations
  5,773   1,114 
Line of credit
  -   4,375 
Total liabilities of discontinued operations
 $5,773  $5,489 

The components of the earnings/(loss) from discontinued operations by segment are presented below (in thousands):

   
Three Month Period Ended December 31, 2011
 
   
Services
  
Pharmacy
  
Total
 
           
Revenues, net
 $-  $4,316  $4,316 
Cost of revenue
  -   3,764   3,764 
Gross profit
  -   552   552 
              
Selling, general and administrative
  -   1,203   1,203 
Depreciation and amortization
  -   71   71 
Total operating expenses
  -   1,274   1,274 
              
Interest expense
  -   78   78 
              
Loss from operations
  -   (800)  (800)
Net gain on disposal
  114   -   114 
              
Earnings (loss) from discontinued operations
 $114  $(800) $(686)

   
Three Month Period Ended December 31, 2010
 
   
Services
  
Pharmacy
  
Catalog
  
Total
 
              
Revenues, net
 $-  $5,033  $-  $5,033 
Cost of revenue
  -   4,219   -   4,219 
Gross profit
  -   814   -   814 
                  
Selling, general and administrative
  7   2,177   29   2,213 
Depreciation and amortization
  -   80   -   80 
Total operating expenses
  7   2,257   29   2,293 
                  
Interest expense
  -   131   -   131 
                  
Loss from operations
  (7)  (1,574)  (29)  (1,610)
Net gain (loss) on disposal
  292   -   (64)  228 
                  
Earnings (loss) from discontinued operations
 $285  $(1,574) $(93) $(1,382)

   
Nine Month Period Ended December 31, 2011
 
   
Services
  
Pharmacy
  
Total
 
           
Revenues, net
 $-  $13,249  $13,249 
Cost of revenue
  -   11,475   11,475 
Gross profit
  -   1,774   1,774 
              
Selling, general and administrative
  -   4,337   4,337 
Depreciation and amortization
  -   212   212 
Total operating expenses
  -   4,549   4,549 
              
Interest expense
  -   343   343 
              
Loss from operations
  -   (3,118)  (3,118)
Net gain on disposal
  841   -   841 
              
Earnings (loss) from discontinued operations
 $841  $(3,118) $(2,277)

   
Nine Month Period Ended December 31, 2010
 
   
Services
  
Pharmacy
  
HHE
  
Catalog
  
Total
 
                 
Revenues, net
 $-  $14,998  $-  $660  $15,658 
Cost of revenue
  -   12,759   -   397   13,156 
Gross profit
  -   2,239   -   263   2,502 
                      
Selling, general and administrative
  7   6,868   -   374   7,249 
Depreciation and amortization
  -   217   -   -   217 
Total operating expenses
  7   7,085   -   374   7,466 
                      
Interest expense
  -   330   -   -   330 
                      
Loss from operations
  (7)  (5,176)  -   (111)  (5,294)
Net gain (loss) on disposal
  683   -   655   (64)  1,274 
                      
Earnings (loss) from discontinued operations
 $676  $(5,176) $655  $(175) $(4,020)

Impairment Expense – Discontinued Operations

In accordance with our policy, the Company performs its annual impairment review during the fiscal fourth quarter.  As part of the fourth quarter fiscal 2011 Pharmacy goodwill impairment analysis, the Company recognized that the growth from the DailyMed program continued to be slower than anticipated and that there was uncertainty surrounding the timing and amount of future revenue and cash flow streams.  The Company determined that it was appropriate to write off the remaining goodwill balance and recorded a $2,500,000 impairment charge.  The Company had previously recognized a $13,217,000 goodwill impairment relating to the Pharmacy segment in conjunction with the fiscal 2009 goodwill impairment analysis.

Line of Credit – Discontinued Operations

The following table summarizes the line of credit for the Pharmacy segment (in thousands):

      
At December 31, 2011
       
Lending Institution
 
Maturity date
 
Maximum Available Borrowing
  
Balance
  
March 31,2011
  
Interest rate
 
H.D. Smith
 
April 23, 2013
  4,777   4,777   4,777   7%
Unamortized debt discount
         (256)  (402)    
           4,521   4,375     
Less current portion in default
         (4,521)  -     
          $-  $4,375     

On April 23, 2010, the Company's wholly-owned subsidiary, PrairieStone Pharmacy, LLC (“PrairieStone”) executed a Line of Credit and Security Agreement (the “HD Smith Credit Agreement”) with HD Smith Wholesale Drug Co. (“HD Smith”), its primary supplier of pharmaceutical products.  Under terms of the HD Smith Credit Agreement, PrairieStone was permitted to borrow up to $5,000,000, including amounts payable under normal product purchasing terms.  Beginning April 1, 2011, additional borrowings under the agreement were limited based upon a borrowing base of the assets.  The debt accrues interest at the greater of 7% and the prime rate plus 3%.   Interest during the first 12 months of the agreement was added to the debt balance.  Interest only payments are required from May 2011 through April 2012.    The debt is secured by all of the tangible and intangible assets of PrairieStone and is guaranteed by the Company.  The agreement includes certain financial covenants for the Pharmacy segment beginning with the fiscal fourth quarter 2012.  Specifically, the financial covenants are as follows: positive quarterly earnings before income tax, depreciation and amortization and current assets divided by current liabilities of greater than .75.  As of December 31, 2011, there was no additional availability under the line.

In conjunction with the HD Smith Credit Agreement, the Company issued HD Smith certain warrants to purchase common stock (see “Note 8 - Stockholders' Deficit” for more details) and incurred certain professional fees.  These costs, which originally totaled $561,000, were recorded as a debt discount and are being amortized over the term of the debt agreement.

On September 29, 2011, the Company and PrairieStone received a letter from HD Smith indicating that PrairieStone was in default of its obligations under the HD Smith Credit Agreement.  HD Smith declared all principal and accrued interest to be immediately due and payable.  In lieu of exercising certain rights and remedies under the loan agreements, HD Smith, the Company and PrairieStone entered into a forbearance agreement dated October 6, 2011 (the "Forbearance Agreement").  During the Forbearance Period (as defined below), HD Smith agreed to forbear from exercising its rights under the HD Smith Credit Agreement for a limited period of time to permit the Company and PrairieStone to seek a purchaser for all of PrairieStone's DailyMed business.  On December 6, 2011 and  simultaneous with the execution of the Asset Purchase Agreement (“APA”) more fully described in “Note 3 – Discontinued Operations”, the Company and PrairieStone entered into a Secured Creditor Assignment and Release Agreement (“Secured Creditor Agreement”) with HD Smith and Medication Adherence Solutions.  The Secured Creditor Agreement provided for HD Smith to receive the $2.0 million cash payment contemplated in the APA.  The Company received no cash proceeds from MAS as part of the transaction.  Additionally, H.D. Smith assigned to MAS its right to payment of all amounts due under the H.D. Smith Credit Agreement, less the $2.0 million cash payment (“Assigned Claims”).  MAS has agreed that it will not assert any claims or causes of action against PrairieStone or the Company to collect the Assigned Claims except under limited circumstances set forth in the Secured Creditor Agreement as set forth above in “Note 3 – Discontinued Operations.”