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NOTE 11 - Commitments and Contingencies
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Mar. 31, 2012
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| Commitments and Contingencies Disclosure [Text Block] |
NOTE 11 —
Commitments and Contingencies
Lease
Commitments
On
May 31, 2011, the Company entered into Amendment No. 6 to its
property lease agreement in Petaluma, California, extending
the lease expiration to September 30, 2014.
On
October 31, 2011, the Company leased approximately
1,800 square feet of office and manufacturing space in
Sacramento, California, under a lease that is set to expire
on December 31, 2012.
Minimum
lease payments for non-cancelable operating leases are as
follows (in thousands):
Rental
expense amounted to $431,000 and $486,000 for the years ended
March 31, 2012 and 2011, respectively and is recorded in
the accompanying consolidated statement of operations.
In
June 2006, the Company received a written
communication from the grantor of a license to an earlier
version of its technology indicating that such license was
terminated due to an alleged breach of the license
agreement by the Company. The license agreement extends
to its use of the technology in Japan only.
While the Company does not believe that the
grantor’s revocation is valid under the terms of the
license agreement and no legal claim has been threatened to
date, the Company cannot provide any assurance
that the grantor will not take legal action to
restrict its use of the technology in the licensed
territory. While the Company's management does
not anticipate that the outcome of this matter is likely to
result in a material loss, there can be no assurance that
if the grantor pursues legal action, such legal action
would not have a material adverse effect on its financial
position or results of operations.
On
July 25, 2011, the Company received notice of a lawsuit filed
in Mexico by Cesar Mangotich Pacheco and Prodinnv, S.A. de
C.V. represented by Cesar Mangotich Pacheco. The lawsuit
appears to allege conversion of assets, tortious interference
and defamation, among other claims. The Company is currently
evaluating the lawsuit, conferring with local counsel and
translating the documents it has received. The
Company’s preliminary assessment is that the lawsuit is
completely without merit and intends to vigorously defend its
position. The Company has not accrued a loss reserve for this
matter.
The
Company, from time to time, is involved in legal matters
arising in the ordinary course of its business including
matters involving proprietary technology. While management
believes that such matters are currently not material, there
can be no assurance that matters arising in the ordinary
course of business for which the Company is or could become
involved in litigation, will not have a material adverse
effect on its business, financial condition or results of
operations.
Employment
Agreements
As
of March 31, 2012, the Company had employment agreements in
place with five of its key executives. The agreements
provide, among other things, for the payment of nine to
twenty-four months of severance compensation for terminations
under certain circumstances. With respect to these
agreements, at March 31, 2012, potential severance amounted
to $1,918,000 and aggregated annual salaries amounted to
$1,360,000.
Related Party Agreements
On
January 26, 2009, the Company entered into a commercial
agreement with VetCure, Inc., a California corporation, to
market and sell its Vetericyn products. VetCure, Inc. later
changed its name to Vetericyn, Inc., which, at the time, was
wholly-owned by Mr. Robert Burlingame. This agreement was
amended on February 24, 2009, July 24, 2009, June
1, 2010, and November 1, 2010. Pursuant to the agreement, the
Company provides Vetericyn, Inc. with bulk product and
Vetericyn, Inc. bottles, packages, and sells Vetericyn
products. The Company receives a fixed amount for each
bottle of Vetericyn sold by Vetericyn, Inc. At the time
of these 2009 transactions, Vetericyn was wholly-owned by Mr.
Burlingame, who was also a director of the Company at that
time. Mr. Burlingame resigned from the Company’s board
of directors on February 10, 2010. After his
resignation, Mr. Burlingame continued to own a significant
portion of the Company’s stock from a transaction in
2009. To the Company’s knowledge, he ceased being a
holder of more than 5% of its common stock in 2010.
On
September 15, 2009, the Company entered a commercial
agreement with V&M Industries, Inc., a California
corporation, to market and sell its Microcyn over-the-counter
liquid and gel products. V&M Industries, Inc.
subsequently changed its name to Innovacyn, Inc. On June 1,
2010, September 1, 2010, and November 1, 2010, the Company
amended this agreement granting Innovacyn, Inc. the exclusive
right to sell certain of its over-the-counter products. At
the time of the 2009 transaction, V&M Industries, Inc.
was wholly-owned by Robert Burlingame, who was also a
director of the Company at that time. Mr. Burlingame resigned
from the Company’s board of directors on
February 10, 2010. After his resignation, Mr. Burlingame
continued to own a significant portion of the Company’s
common stock from a transaction in 2009. To the
Company’s knowledge, he ceased being a holder of more
than 5% of its common stock in 2010.
Additionally,
beginning on July 1, 2011, the Company shares profits related
to Vetericyn and Microcyn over-the-counter sales. During the
years ended March 31, 2012 and 2011, the Company recorded
revenue related to these agreements in the amounts of
$3,367,000 and $1,810,000, respectively. The revenue is
recorded in product revenues in the accompanying consolidated
statements of operations. At March 31, 2012, the Company had
outstanding accounts receivable of $290,000 and $118,000,
respectively, related to Innovacyn, Inc.
On
May 8, 2007, and June 11, 2007, the Company entered into
separate commercial agreements with two unrelated customers
granting such customers the exclusive right to sell the
Company’s products in specified territories or for
specified uses. Both customers are required to maintain
certain minimum levels of purchases of the Company’s
products in order to maintain the exclusive right to sell the
Company’s products. Non-refundable up-front payments
amounting to $625,000 were paid under these agreements and
were recorded as deferred revenue. On April 16, 2010, the
Company terminated the exclusive agreement with one of the
customers. Accordingly, during the year ended March 31,
2011, the Company recorded as revenue the remaining balance
of the unamortized upfront fees which amounted to
$210,000. For the years ended March 31, 2012 and 2011,
the Company recorded revenues of $28,000 and $238,000,
respectively, related to the non-refundable upfront
payments. These amounts were included in product
revenue in the accompanying consolidated statements of
operations. At March 31, 2012, deferred revenue related
to the remaining agreement amounted to $160,000 of which
$28,000 was short-term and is included in deferred revenue in
the accompanying consolidated balance sheet. The
remaining up-front fee will be amortized on a straight-line
basis over the term of the underlying agreement.
On
January 28, 2011, the Company entered into an agreement with
a distributor in China to sell specific Company products into
the People’s Republic of China. Pursuant to the
agreement, the distributor paid a $350,000
non-refundable upfront payment for which they were given
exclusivity to sell these products for the first contract
year. The upfront fee was amortized on a straight line basis
over the first contract year. During the years
ended March 31, 2012 and 2011, the Company recorded revenue
of $291,000 and $59,000 related to the upfront fee which is
included in product revenue in the accompanying consolidated
statement of operations. In order to
maintain exclusivity in subsequent years,
the distributor will need to meet minimum purchase
requirements each contract year. The initial term of the
contract is for five years, and the contract is cancellable
if certain conditions are not met.
On
June 26, 2011, the Company entered into an
agreement with Shanghai Sunvic Technology Co. Ltd., a
distributor in China, to sell certain of its gel
products, which are currently sold under the product name
“Microcyn” in the United States, into the
People’s Republic of China. The initial term of the
contract is for five years and is cancellable if certain
conditions are not met.
On
February 14, 2011, the Company entered into an Exclusive
Sales and Distribution Agreement with Quinnova
Pharmaceuticals, Inc., pursuant to which the Company granted
Quinnova the right to act as an exclusive sales, marketing,
and distribution agent in the United States, its territories
and possessions, and Canada for certain liquid and gel
products in the prescription dermatology market. Under the
Agreement, the Company will manufacture products and samples.
Quinnova will be responsible for all sales, marketing and
clinical activity associated with the current products and
any future products later approved by the FDA. The Company
retained final approval on any and all new promotional
materials or portions of materials specific to the products
developed by Quinnova. The Agreement is for a term
of five years and will automatically renew for successive
one-year terms. Additionally, Quinnova made a
payment of $500,000 as an advance for the first $500,000 of
product purchases. At
March 31, 2012 and 2011, the remaining prepayment balance
amounted to $309,000 and $500,000, respectively, and is
recorded as deferred revenue in the accompanying consolidated
balance sheets.
On
February 14, 2011, the Company entered into a Product Option
Agreement with an Amneal affiliate, AmDerma Pharmaceuticals,
LLC (“AmDerma”). The Company plans to
use its proprietary Microcyn technology to develop a
prescription pharmaceutical product for the treatment of acne
(the “Future Acne Product”). Pursuant to the
Agreement, the Company sold the option to exclusively sell
and distribute the Future Acne Product to AmDerma for a
one-time non-refundable payment of $500,000. On June 23,
2011, AmDerma exercised its option to license rights to the
drug candidate. The Company expects to finalize a license
agreement, outlining AmDerma’s U.S. and European rights
to the product, in the near future. The Company will retain
rights to the “rest of world,” including
undisclosed upfront, milestone and royalty payments. Upon
execution of a separate license and supply agreement for the
future Acne Product, the option payment of $500,000 will be
credited against payments in the transaction. This amount is
recorded in deferred revenue in the March 31, 2012
accompanying consolidated balance sheet.
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