Quarterly report pursuant to Section 13 or 15(d)

4. Disposition of Latin American Operations

4. Disposition of Latin American Operations
9 Months Ended
Dec. 31, 2016
Discontinued Operations and Disposal Groups [Abstract]  
Disposition of Latin American Operations

Description of Sale to Invekra

On October 27, 2016, the Company, along with its Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V. (“OTM”), closed on an asset purchase agreement with Invekra, S.A.P.I de C.V. (“Invekra”), an affiliate of Laboratorios Sanfer S.A. de C.V., for the sale of certain of its Latin America assets. Specifically, the Company agreed to sell certain patents, patent applications, trademarks and territory rights for Mexico, the Caribbean and South America, excluding the sale of dermatology products in Brazil, as well as to build and deliver equipment that Invekra will use to produce its own product.


The aggregate purchase price that Invekra will pay for the assets is $22,000,000, of which $18,000,000 was paid upon closing, $1,500,000 will be held in escrow until completion of the Company’s obligations to deliver certain equipment, and $2,500,000 will be paid in Mexican currency in quarterly installments over a period of ten years from closing as consideration for the provision of certain services and providing technical assistance, calculated as three per cent on net sales of certain products in Latin America, excluding Mexico. Because the $2,500,000 is to be paid in foreign currency, the Company may receive more or less than $2,500,000 due to currency fluctuations.


In connection with the asset purchase agreement, the Company agreed to provide the technology, know-how and assistance to Invekra to enable Invekra to manufacture on its own the products as currently produced by the Company (“Technical Services Arrangement”), and continue to supply product to Invekra for a two year transition period from the Sale Date, subject to mutual extension (“Supply Agreement”). During the three and nine months ended December 31, 2016, the Company reported $465,000 of Latin America product revenue related to the Supply Agreement with Invekra.


The Company will provide product under the Supply Agreement at a reduced price from its current price list, while Invekra builds its own manufacturing line. At the conclusion of the transition period, the Company will cease to be a supplier of product to Invekra. The Company is uncertain as to the duration of the transition period or when Invekra will complete the build out of its manufacturing line. Pursuant to the Supply Agreement the Company is subject to a potential penalty for failure to supply the products for a consecutive period of six months. The penalty, if triggered, will require the Company to make a one-time payment of $2,000,000 to Invekra. The penalty decreases by 12.5% each quarter of the term of the supply period. The Company does not expect to incur this penalty. The Company will incur costs of approximately $325,000 to fulfill its obligations to build and deliver certain production equipment to Invekra.


Accounting for the disposition


For accounting purposes, the Company determined that there were three discrete components of the sale to Invekra. These components were the intellectual property and territory rights, the services to be provided under the Technical Services Arrangement and the production equipment to be manufactured for Invekra.


The Company determined an arm’s length selling price for each component of the sale and then allocated the net proceeds received to the components on a relative selling price basis. The Company estimated the selling prices of each component as described below:


Component of Sale Methodology to Estimate Selling Price
Services under the Technical Services Arrangement

Based upon revenues expected from a market participant to provide technical services at expected service levels


Production equipment to be manufactured Based upon an expected selling price derived from costs marked up to selling price at market participant margins
Intellectual property and territory rights

Based upon a discounted cash flow analysis of the benefit to Invekra of producing rather than purchasing its product and operating royalty free


The Company determined proceeds, net of estimated transaction costs and net of the discount to adjust for consideration to be received in the future. The total proceeds were as follows:

Cash received on October 27, 2016   $ 18,000,000  
Cash held in escrow until delivery of equipment     1,500,000  
Face value of variable consideration ($250,000 per year for ten years)     2,500,000  
Total proceeds from sale     22,000,000  
Transaction costs     556,000  
Total proceeds, net of transaction costs     21,444,000  
Discount on variable consideration (using a 7.5% discount rate)     752,000  
Total proceeds, net of discount   $ 20,692,000  


Proceeds were allocated to the components of the sale based upon their relative selling prices are as follows:

Services under the Technical Services Arrangement   $ 708,000  
Production equipment to be manufactured     497,000  
Intellectual property and territory rights     19,487,000  
Total proceeds   $ 20,692,000  


The proceeds related to the intellectual property and territory rights were included in gain on sale on the date of the sale. The proceeds allocated to the services under the Technical Services Agreement were recorded in deferred revenue as of the date of the sale and will be recognized as technical services are provided. The proceeds related to the production equipment to be manufactured were included in deferred gain and will be recognized upon delivery of the equipment.


Discontinued operations


As of December 31, 2016, the Company determined that the sale of its Latin American operations to Invekra qualified as a sale of a component of its business and, as such, all such activity prior to consummation of the sale is required to be included in discontinued operations on the Company’s statement of operations. This includes the direct labor and materials for the product delivered to Invekra, the revenue on the sales to Invekra and the gain on the sale to Invekra, net of tax.


The carrying value of the assets and liabilities of discontinued operations on the condensed consolidated balance sheets as of December 31, 2016 and March 31, 2016 were as follows:



December 31,



March 31,


Accounts receivable (net)   $     $ 766,000  
Inventories           45,000  
Total current assets of discontinued operations   $     $ 811,000  
Deferred Revenue   $     $ 300,000  
Total current liabilities of discontinued operations   $     $ 300,000  
Deferred Revenue, less current portion   $     $ 112,000  
Total Long-term liabilities of discontinued operations   $     $ 112,000  


The operations of its Latin American business included in discontinued operations is summarized as follows:



Three Months Ended

December 31,


Nine Months Ended

December 31,

    2016     2015     2016     2015  
Revenues   $ 621,000     $ 1,336,000     $ 3,105,000     $ 4,760,000  
Cost of Revenues     62,000       271,000       561,000       954,000  
Income from discontinued operations before tax     559,000       1,065,000       2,544,000       3,806,000  
Gain on disposal of discontinued operations before income taxes     19,487,000             19,487,000        
Total income from discontinued operations, before tax     20,046,000       1,065,000       22,031,000       3,806,000  
Income Tax benefit (expense)     (4,581,000 )           (4,581,000 )      
Income from discontinued operations, net of tax   $ 15,465,000     $ 1,065,000     $ 17,450,000     $ 3,806,000