COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

NOTE J – COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

[1]         Operating leases: The Company leases office and R&D/production facilities in New Jersey under long-term, non-cancellable operating leases. In December 2012, the Company extended the lease for the New Jersey facility for an additional 12 months, or through December 31, 2013. The future minimum rent due in 2013 under the lease extension is $90,000. The Company also leases office support equipment through September 2014. The future minimum rental payment due in 2013 and 2014 under the support equipment operating lease is $6,000 each year. At December 31, 2012, the future minimum rental payments under these operating leases are as follows:

2013	$	96,000
2014		6,000
	$	102,000

Rent expense was $122,000 in Fiscal 2012 and $126,000 in Fiscal 2011.

[2]          Employment agreements: The Company has entered into employment agreements with its Chief Executive Officer, Stan Cipkowski (“Cipkowski”). The agreement provides for a $206,000 annual salary and was originally for a term of one year and automatically renewed unless either party gave advance notice of 60 days, however, on July 1, 2009, as a condition to the Rosenthal Line of Credit closing, the Company entered into a new employment contract with the CEO that is coterminous with the Rosenthal Line of Credit, however, if the Agreement is not terminated for cause or as a result of the termination or expiration of the Company’s Line of Credit with Rosenthal, the Agreement automatically renews for successive one (1) year terms unless either side gives advance written notice of intent not to renew at least sixty (60) days prior to the end of any one (1) year renewal term. All other terms and provisions of the CEO’s former employment contract remained unchanged. Cipkowski’s employment agreement contains severance provisions; in the event the Company terminates Cipkowski’s employment for any reason other than cause (which is defined under the employment agreement), Cipkowski would receive severance pay equal to 12 months of his base salary at the time of termination, with continuation of all medical benefits during the twelve-month period at the Company’s expense. In addition, Cipkowski may tender his resignation and elect to exercise the severance provision if he is required to relocate more than 50 miles from the Company’s New York facility as a continued condition of employment, if there is a substantial change in the responsibilities normally assumed by his position, or if they are asked to commit or conceal an illegal act by any officer or member of the board of directors of the Company. In the case of a change in control of the Company, Cipkowski would be entitled to severance pay equal to two times his base salary under certain circumstances.

In April 2012, the Company entered into an employment agreement with Melissa A. Waterhouse, its Executive Vice President, Chief Compliance Officer and Corporate Secretary (“Waterhouse”). The agreement provides for a $100,000 annual salary, is for an initial term of one year and automatically renews unless either party gives advance notice of 60 days. Waterhouse’s employment agreement contains severance provisions; in the event the Company terminates Waterhouse’s employment for any reason other than cause (which is defined under the employment agreement), Waterhouse would receive severance pay equal to 12 months of her base salary at the time of termination, with continuation of all medical benefits during the twelve-month period at the Company’s expense. In addition, Waterhouse may tender her resignation and elect to exercise the severance provision if she is required to relocate more than 50 miles from the Company’s New York facility as a continued condition of employment, if there is a substantial change in the responsibilities normally assumed by her position, or if she is asked to commit or conceal an illegal act by any officer or member of the board of directors of the Company. In the case of a change in control of the Company, Waterhouse would be entitled to severance pay equal to two times her base salary under certain circumstances.

On March 25, 2011 the Company received letters of resignation from its EVP, Douglas Casterlin (“Casterlin”) and CFO, Stefan Parker (“Parker”). The Company’s CEO, Stan Cipkowski has assumed the position of CFO and Casterlin’s responsibilities were absorbed by other employees where appropriate (however, in July 2012, Casterlin returned to the Company as an employee and assumed many of the same responsibilities he had prior to his departure). Prior to their resignations, Casterlin and Parker both had employment agreements in place with the Company. The agreement with Parker originally provided for a $120,000 annual salary but was amended in August 2010 to provide for an annual salary of $135,000; the contract term remained one year and would automatically renew unless either party gives advance notice of 60 days. The agreement with Casterlin provided for a $149,000 annual salary, was for a term of one year and would automatically renew unless either party gives advance notice of 60 days. Casterlin’s and Parker’s employment agreements contained the same severance provisions as Cipkowski’s employment agreement.

[3]          Legal:

On December 16, 2010, we filed a complaint in the Supreme Court of the State of New York in Columbia County against Martin R. Gould (“Gould”), Jacqueline Gale (“Gale”), Advanced Diagnosticum Products, Inc. (“ADPI”) and Biosure, Inc. (“Biosure”), together the “Defendants”. The complaint alleges that Gould, our former Chief Science Officer and Executive Vice President of Technology, and Gale, our former Vice President of Manufacturing and Development, were performing illegal, competitive, employment-related services for ADPI and Biosure during their employment with the Company, were using Company resources to perform such services, and were doing so in their capacity as employees and/or officers of ADPI and Biosure. Because the Defendants continue to engage in illegal activity, in addition to the compensatory and punitive damages noted below, the complaint also seeks an injunction restraining the Defendants from engaging in further wrongdoing. The Defendants exercised their right to move the action to federal court, and proceedings are now pending in the United States District Court for the District of New Jersey.

In the Complaint, we assert claims of breach of duty of loyalty, breach of contract, violation of fiduciary duty and unfair competition and conversion specifically against Gould, and claims of breach of duty, violation of fiduciary duty and unfair competition and conversion specifically against Gale. In addition to these claims, we assert claims of conversion, tortious interference with contract, interference with prospective advantage and common law misappropriation of trade secret information against all Defendants. We are seeking judgment on nine (9) causes of action for compensatory damages against Defendants in such amount as may be established at trial, together with punitive damages in the amount of one million dollars ($1,000,000) for each cause of action in the Complaint (totaling $9,000,000).

On March 28, 2011, the Defendants filed an Answer to our Complaint and Defendant Gould filed a counter-claim against the Company in the amount of $150,000 alleging breach of contract related to an employment agreement between Gould and the Company. We filed a reply to Gould’s counterclaim on April 13, 2011. Our reply asserted that the Company did not breach the prior employment agreement in place with Gould, that the Company provided the required written notice of non-renewal of Gould’s employment agreement, and that Gould’s employment agreement expired on May 31, 2010; at which time Gould became an at-will employee of the Company. Gould was subsequently terminated for cause on July 28, 2010. A conference was held with the court on June 16, 2011, at which issues in dispute were discussed and a discovery schedule was set. The Company has responded to the Defendants discovery requests and as of the date of this report, the Company is awaiting complete responsive discovery items from Defendants. Depositions in the matter are ongoing. Depositions and discovery were expected to be completed by April 30, 2012, however, pretrial discovery was extended to September 28, 2012 due to an unexpected personal issue that occurred involving the Defendants attorney; this unexpected issue was unrelated to the case or the claims of the case. On September 11, 2012, pretrial discovery was extended again to December 14, 2012 and on January 18, 2013, another court conference was held that further extended factual discovery until February 28, 2013 and all depositions, including expert witness, are to be conducted by June 3, 2013.

As previously disclosed, we received a warning letter from the FDA in July 2009 that alleges we re marketing our point of collection oral fluid drug test, OralStat, in workplace settings without marketing clearance or approval. A warning letter is considered by FDA to be informal and advisory. While a warning letter communicates FDA’s position on a matter it does not commit the FDA to taking enforcement action. We communicated to the FDA our belief (based on legal opinion) that marketing clearance was not required in non-clinical markets. The FDA continued to disagree with our interpretation of FDA regulations related to medical devices, and the FDA continued to assert jurisdiction of drug testing performed in the workplace. We also advised FDA that we were willing to obtain marketing clearance but that specific technical and scientific issues existed when attempting to utilize FDA’s draft guidance for our OralStat (because the draft guidance was written for urine drug tests). Nevertheless, we were unable to reach a consensus with the FDA on neither the jurisdiction issue nor the technical issues.

On July 10, 2012, we announced in a press release and a Current Report on Form 8-K that we entered into a Consent Decree of Permanent Injunction (the “Consent Decree”) with FDA. Under the terms of the Consent Decree, we will be allowed to continue to market our OralStat drug test in the workplace market while we take action to obtain a 510(k) marketing clearance. More specifically, FDA will provide the Company with its most recent guidance on the clinical and analytical studies that need to be conducted to gather data in support of a 510(k) submission for OralStat. We will then have a total of 396 days to discuss protocols with FDA, complete our analytical and clinical studies and submit a substantially complete 510(k). We have agreed to withdraw the OralStat product from the workplace market if any of the following events occur: 1) we do not submit a substantially complete 510(k) within this specified time period, 2) we fail to submit additional information within time frames specified by FDA, 3) we withdraw our submission, or 4) our 510(k) submission results in FDA’s determination that the product is not substantially equivalent. On August 3, 2012 the Consent decree was approved and entered by the United States District Court for the Northern District of New York, and on August 3, 2012, we received guidance from FDA. We are currently taking actions that will enable us to submit a 510(k) marketing application to FDA within the time frame specified under the Consent Decree.

In addition to the previous disclosures, from time to time, the Company is named in legal proceedings in connection with matters that arose during the normal course of business. While the ultimate result of any such litigation cannot be predicted, if we are unsuccessful in defending any such litigation, the resulting financial losses could have an adverse effect on the financial position, results of operations and cash flows of the Company. We are aware of no significant litigation loss contingencies for which management believes it is both probable that a liability has been incurred and that the amount of the loss can be reasonably estimated.