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Note 4. Commitments and Contingencies
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9 Months Ended |
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Dec. 31, 2011
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| Commitments and Contingencies Disclosure [Text Block] |
Legal
Matters
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 with Executives
As
of December 31, 2011, the Company had employment agreements
in place with five of its key executives. The agreements
provide, among other things, for the payment of six to
twenty-four months of severance compensation for terminations
under certain circumstances. With respect to these
agreements, at December 31, 2011, potential severance
amounted to $1,918,000 and aggregated annual salaries
amounted to $1,360,000.
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 and/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. Nonrefundable 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 nine months ended
December 31, 2010, the Company recorded as revenue the
remaining balance of the unamortized upfront fees which
amounted to $210,000. For the three months ended December 31,
2011 and 2010, the Company recorded revenues of $7,000,
respectively, related to the non-refundable upfront payments.
For the nine months ended December 31, 2011 and 2010, the
Company recorded revenues of $21,000 and $230,000,
respectively, related to the non-refundable upfront payments.
These amounts were included in product revenue in the
accompanying condensed consolidated statements of
operations.
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
will be amortized on a straight line basis over the first
contract year. During the three and nine months ended
December 31, 2011, the Company recorded revenue of $80,000
and $263,000, respectively, related to the upfront fee which
is included in product revenue in the accompanying condensed
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.
Agreements
with Related Party
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,
remained 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 the 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 their 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 the Company’s 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 three months
ended December 31, 2011 and 2010, the Company recorded
revenue related to these agreements in the amounts of
$755,000 and $292,000, respectively. During the nine months
ended December 31, 2011 and 2010, the Company recorded
revenue related to these agreements in the amounts of
$2,400,000 and $1,400,000, respectively. The revenue is
recorded in product revenues in the accompanying condensed
consolidated statements of operations. At December 31, 2011
and March 31, 2011, the Company had outstanding accounts
receivable of $102,000 and $118,000, respectively, related to
the Innovacyn agreement.
Other
Matters
On
September 16, 2005, the Company entered into a series of
agreements with Quimica Pasteur S.A. de C.V.
(“QP”), a Mexico-based company engaged in the
business of distributing pharmaceutical products to hospitals
and health care entities owned or operated by the Mexican
Ministry of Health. These agreements provided, among other
things, for QP to act as the Company’s exclusive
distributor of Microcyn to the Mexican Ministry of Health for
a period of three years. In connection with these agreements,
the Company was concurrently granted an option to acquire all
except a minority share of the equity of QP directly from its
principals in exchange for 150,000 shares of common stock,
contingent upon QP’s attainment of certain financial
milestones. The Company’s distribution and related
agreements were cancelable by the Company on thirty
days’ notice without cause and included certain
provisions to hold the Company harmless from debts incurred
by QP outside the scope of the distribution and related
agreements. The Company terminated these agreements on March
26, 2006 without having exercised the option.
Due
to its liquidity circumstances, QP was unable to sustain
operations without the Company’s subordinated financial
and management support. Accordingly, QP was deemed to be a
variable interest entity in accordance with Topic 810 and its
results were consolidated with the Company’s
consolidated financial statements for the period of September
16, 2005 through March 26, 2006, the effective termination
date of the distribution and related agreement, without such
option having been exercised.
Subsequent
to having entered into the agreements with QP, the Company
became aware of an alleged tax avoidance scheme involving the
principals of QP. The audit committee of the Company’s
board of directors engaged an independent counsel, as well as
tax counsel in Mexico to investigate this matter. The audit
committee of the board of directors was advised that
QP’s principals could be liable for up to $7,000,000 of
unpaid taxes; however, the Company is unlikely to have any
loss exposure with respect to this matter because the alleged
tax omission occurred prior to the Company’s
involvement with QP. The Company has not received any
communications to date from Mexican tax authorities with
respect to this matter.
Based
on an opinion of Mexican counsel, the Company’s
management and the audit committee of the Company’s
board of directors do not believe that the Company is likely
to experience any loss with respect to this matter. However,
there can be no assurance that the Mexican tax authorities
will not pursue this matter and, if pursued, that it would
not result in a material loss to the Company.
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