Sale of Manufacturing Operations’ Assets

January 1, 2019,

we entered into a Purchase Agreement with Nutracom, LLC (Nutracom) pursuant to which Nutracom purchased the following assets previously used by us in our 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 approximately

$435,000

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

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

third

-party expert to render a fairness opinion on the transaction.

Concurrently with the execution of the Purchase Agreement, we 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 our headquarters building from us 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

over the

seven

-year term.

Nutracom provided the following consideration to us 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 under the facility lease agreement.

●

Nutracom management transferred to us its ownership of

99,200

shares of our common stock valued at

$540,144.

●

Nutracom issued to us 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,

our 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 us).

Our non-voting Class B

15%

equity membership interest in Nutracom was valued by the aforementioned

third

-party expert at

$505,000.

As our non-voting membership interest does

not

participate in the management of Nutracom, nor do we share in any Nutracom operating profits or losses, we are accounting for our Nutracom equity investment under the cost method.

December 31, 2018,

we 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 condensed consolidated balance sheets. We have accounted for the Nutracom transactions in our

first

quarter

2019

financial results.