5. COMMITMENTS AND CONTINGENCIES

12 Months Ended

Aug. 31, 2014

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

Leases

We lease approximately 13,500 square feet of space in Lancaster, California. The original lease had a five-year term with two, three-year options to extend. The initial five-year term expired in February 2011, and we extended the lease to February 2, 2014. In June 2013, the lease was amended to extend the term to February 2, 2017. The amended lease also provides for an annual base rent increase of 3% per year and two, two-year options to extend. The current base rent is $24,272 per month; however, we had three months’ free base rent during the months of June, July and August of 2013. We record these three months as a discount divided equally through the first term of the amended lease from June 2013 through January 2017.

Rent expense, including common area maintenance fees for the years ended August 31, 2014 and 2013 was $295,410 and $305,636, respectively.

During our fiscal year ended August 31, 2012, we sold our former Words+ subsidiary, at which time we entered into a month-to-month sublease agreement commencing January 1, 2012 under which Words+ paid 20% of the monthly rent we paid to our landlord, plus 20% of facility-related operating expenses. We report our gross lease expense under Selling, General and Administrative expense; however, the sublease payments received from Words+ were reported under Other Income. The sublease to Words+ ended on February 28, 2013. Sublease payments totaled $35,500 for the fiscal year ended August 31, 2013.

Future minimum lease payments under non-cancelable operating leases with remaining terms of one year or more at August 31, 2014 were as follows:

Years Ending August 31,
2015	$	297,094
2016		306,007
2017		129,526
	$	732,627

The Company leases a copier/printer under an operating lease that expires in April 2015. The terms of the lease call for payments based on usage, and allow for earlier termination upon a 30-day written notice.

Employment Agreement

On August 22, 2013, the Company entered into an employment agreement with its President/Chief Executive Officer, Walter S. Woltosz, that expired in August 2014. The employment agreement provided for an annual base salary of $300,000 per year, and a performance bonus in an amount equal to 5% of the Company’s net income before taxes of the previous fiscal year, not to exceed $60,000. The employment agreement also provided stock options, exercisable for five years, to purchase 10 shares of the Company’s common stock for each $1,000 of net income before taxes at the end of each fiscal year up to a maximum of 20,000 shares over the term of the agreement. The Company may terminate the employment agreement upon 30 days written notice without cause. The Company's obligation under that circumstance would be to pay its President/Chief Executive Officer the greater of a) 12 months’ salary or b) the salary payable to him for the remainder of the term of the employment agreement from the date of notice of termination.

For fiscal year 2013, the Compensation Committee awarded a $30,000 performance bonus under that employment agreement, which was paid in September 2013.

Effective September 1, 2014, the Company entered into a new employment agreement with Mr. Woltosz to serve as Chief Executive Officer of the Company. Under the terms of this employment agreement, which has a one-year term, Mr. Woltosz is required to devote a minimum of 60% of his productive time to the position of Chief Executive Officer of the Company. He will receive annual compensation of $180,000, be eligible to receive stock options to purchase up to 12,000 shares of the Company’s common stock as determined by the Company’s Board of Directors, and will be paid an annual performance bonus of up to 5% of the Company’s net income before taxes not to exceed $36,000.

License Agreement

In 1997, the Company entered into an exclusive software licensing agreement with TSRL, Inc. (fka Therapeutic Systems Research Laboratories), to develop a computer simulation software program of the absorption of drug compounds in the gastrointestinal tract. Upon execution of that agreement the Company was obligated to pay a royalty of 20% of the net sales of the basic GastroPlus software without additional modules. On May 15, 2014, the parties entered into a termination and non-assertion agreement pursuant to which the parties agreed to terminate the 1997 exclusive software licensing agreement, as a result, the company obtained a perpetual right to use certain source code and data, and TSRL relinquished any rights and claims to any GastroPlus products and to any claims to royalties or other payments under that agreement. The Company agreed to pay TSRL total consideration of $6,000,000. The Company has no further obligation to pay royalties to TSRL. (See Note 4)

In September 2007, we entered into an agreement with Enslein Research, Inc. (“Enslein”) to jointly create a new metabolism module as part of ADMET Predictor. The fee for the exclusive license to the Enslein Data, in the form of a royalty, is 50% of the gross sales revenues of the ADMET Predictor Enslein Metabolism Module, and a $50,000 bonus at the time the cumulative revenue from ADMET Predictor Enslein Metabolism Module sales reaches $250,000. On February 28, 2012, we signed a buyout agreement with Enslein for $75,000, and are amortizing its cost over 10 years after this date.

We also have a royalty agreement with Accelrys, Inc. (the original agreement was entered into with Symyx Technologies in March 2010; Symyx Technologies later merged with Accelrys, Inc.) for Metabolite Database access for developing our Metabolite module which was renamed as Metabolism module when we released ADMET Predictor version 6 on April 19, 2012. Under this agreement, we pay 25% of revenue derived from the sale of Metabolism/Metabolite module.

For the years ended August 31, 2014 and 2013, we incurred total royalty expense of approximately $222,000 and $646,000, respectively.

Litigation

Except as described below, we are not a party to any legal proceedings and are not aware of any pending legal proceedings of any kind.

In June 2014, the Company was served with a complaint in a civil action entitled Sherri Winslow v. Incredible Adventures, Inc., et al. (Los Angeles Superior Court Case No. BC545789) alleging wrongful death and seeking unspecified damages arising out of a May 18, 2012 plane crash in the State of Nevada. The Company’s Chief Executive Officer owns the subject aircraft and is also a named defendant. The complaint alleged that the Company was the owner of the subject aircraft.   The Company denies all material allegations against it, including that it owns or has ever owned any interest in the subject aircraft. On November 25, 2014, the plaintiff and the Company signed a stipulation of dismissal pursuant to which the plaintiff agreed to dismiss the Company without prejudice.  If the plaintiff does not discover evidence during a nine month period to and including August 31, 2015 that justifies bringing the Company back into the litigation, the Company will prepare a dismissal with prejudice to be signed on behalf of the plaintiff.