On May 20, 2019, the Company closed on an Asset Purchase Agreement for the sale of certain animal health product rights and assets for the Asian and European markets to Petagon, Limited, (“Petagon”) an international importer and distributor of quality pet food and products. The purchase price for the assets was $2,700,000. The Company agreed that it will continue to supply products to Petagon for five years at certain agreed upon transfer prices. The sale involves certain Asian patents and trademarks, the exclusive right to distribute animal health care products in Asia and Europe and production equipment.

The Company determined that there were two separate performance obligations under the Asset Purchase Agreement. These performance obligations were the delivery of production equipment to Petagon and the transfer of the intellectual property and territory rights.

The Company estimated the value of the production equipment by determining the cost and applying a mark up to the selling price at a market participant margin. The Company then applied the residual approach to derive the fair value of the intellectual property and territory rights.

The Company will provide product under a reduced price from its prior list price, while Petagon builds its own manufacturing line. At the conclusion of the transition period, the Company will cease to be a supplier of product to Petagon. The Company is uncertain as to the duration of the transition period or when Petagon will complete the build out of its manufacturing line. The Company will incur costs of approximately $163,000 to fulfill its obligations to deliver certain production equipment to Petagon.

The proceeds from the sale were allocated to the components of the sale utilizing the residual approach as follows:

The proceeds related to the production equipment were included in deferred revenue and will be recognized upon delivery of the equipment. The proceeds related to the intellectual property and territory rights were included in gain on sale on the closing date.

In connection with the Asset Purchase Agreement the Company agreed to continue to supply product to Petagon for a five-year transition period from the date of sale, subject to mutual extension (“Supply Agreement”). During the three months ended June 30, 2019, the Company reported $155,000 of product revenue related to the Supply Agreement with Petagon.

For a certain period after closing, Petagon shall have first refusal rights to acquire certain marketing territories.