Quarterly report pursuant to Section 13 or 15(d)

4. Disposition of Latin American Operations

4. Disposition of Latin American Operations
6 Months Ended
Sep. 30, 2017
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 was paid on March 16, 2017 upon the delivery of certain equipment, and $2,500,000 is to 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 percent 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. During the six months ended September 30, 2017, the Company recorded $39,000 of service revenue and $33,000 of interest income related to technical assistance which is reflected in the accompanying condensed consolidated statement of comprehensive loss for the six months ended September 30, 2017. The Company agreed to forego recognition any royalty in the second quarter until certain replacement parts will be delivered in the third quarter.


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 six months ended September 30, 2017, the Company reported $754,000 and $1,323,000, respectively, 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.


Discontinued operations


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



Three Months Ended

September 30,


Six Months Ended

September 30,

    2017     2016     2017     2016  
Revenues   $     $ 1,311,000     $     $ 2,484,000  
Cost of revenues           265,000             500,000  
Income from discontinued operations before tax           1,046,000             1,984,000  
Income tax expense           (356,000 )           (675,000 )
Income from discontinued operations, net of tax   $     $ 690,000     $     $ 1,309,000