Annual report pursuant to Section 13 and 15(d)

NOTE 11 - Commitments and Contingencies

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NOTE 11 - Commitments and Contingencies
12 Months Ended
Mar. 31, 2012
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):

For Years Ending March 31,
     
2013
 
$
341
 
2014
   
324
 
2015
   
235
 
2016
   
11
 
Total minimum lease payments
 
$
911
 

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.

Legal Matters

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.

Commercial Agreements

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.