Assets Held For Sale

January 1, 2019,

the Company entered into a Purchase Agreement with Nutracom, LLC (Nutracom) pursuant to which Nutracom purchased the following assets used by the Company in its manufacturing operations:

●

Inventories (sold at cost of

$1.56

million) and,

●

Machinery and other equipment with a net book value of

$565,000

(sold for

million; gain on disposal of

$435,000

Nutracom was formed by the Company’s manufacturing operations management which included former officers of the Company. Employees of the Company’s manufacturing operations were offered employment by Nutracom.

Prior to its approval of the transaction, the Company’s Board of Directors formed a special committee consisting of the Company’s independent directors to review the transaction. To assist in its review, the special committee engaged a qualified

third

-party expert to opine a fairness opinion on the transaction and related agreements as detailed below.

Concurrently with the execution of the Purchase Agreement, the Company entered into several agreements with Nutracom including a product supply agreement for a term of

seven

years, a fulfillment agreement, and a facility lease agreement whereby Nutracom will lease manufacturing, warehouse, and certain office space of the Company’s headquarters building from the Company for a term of

seven

years, with a Nutracom option for an additional

five

-year term. Annual lease amounts range from

$193,000

$410,000

per year over the

seven

-year term.

Nutracom provided the following consideration to the Company for the manufacturing operations and related identified assets and agreements:

●

million secured promissory note,

seven

year term, fixed interest rate of

5.5%,

principal and interest payable monthly;

●

$764,344

unsecured promissory note,

seven

year term, fixed interest rate of

7.0%,

interest only payable for the

first

two

years with monthly payment of principal and interest thereafter under a

ten

-year amortization schedule. The face value of the unsecured note includes the

first

year’s rent due the Company under the facility lease agreement.

●

Nutracom management transferred to the Company its ownership of

99,200

shares of the Company’s common stock valued at

$540,144.

●

Nutracom issued to the Company a non-voting Class B

15%

equity membership interest in Nutracom, LLC. The Class B interest does

not

share in any profits or losses from operations of Nutracom. As defined within the Nutracom Operating Agreement, upon any merger, consolidation, disposition, or liquidation of Nutracom, the Class B equity membership interest converts to a Class A equity membership interest.

●

Commencing

January 1, 2020,

the Company’s Class B interest will be entitled to receive a percentage, (ranging from

1.0%

1.25%

) of Nutracom’s annual revenues (excluding Nutracom’s revenues from sales to the Company).

The Company’s non-voting Class B

15%

equity membership interest in Nutracom was valued by the aforementioned

third

-party expert at

$505,000.

As the Company’s non-voting membership interest does

not

participate in the management of Nutracom, nor does the Company share in any Nutracom operating profits or losses, the Company anticipates accounting for its Nutracom equity investment under the cost method.

As of

December 31, 2018,

the Company has presented inventories and machinery and other equipment sold to Nutracom as a current asset under the caption of “Assets held for sale” in the accompanying consolidated balance sheets. The Company will account for the Nutracom transactions in its

first

quarter

2019

financial results.