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 2013, the Company extended the lease for the New Jersey facility for an additional 12 months, or through December 31, 2014. The future minimum rent due in 2014 under the lease extension is $90,000. The Company also leases office support equipment through October 2014. The future minimum rental payment due in 2014 under the support equipment-operating lease is $5,000. At December 31, 2013, the future minimum rental payments under these operating leases are as follows:

2014	$	95,000


	$	95,000

Rent expense was $122,000 in both Fiscal 2013 and Fiscal 2012.

[2] Employment agreements: On October 30, 2013, Melissa A. Waterhouse was appointed as the Company’s Interim Chief Executive Officer and Chief Financial Officer after the Company was notified that Stan Cipkowski was unable to continue serving as the Company’s Chief Executive Officer/Chief Financial Officer for medical reasons (the Company was subsequently notified on November 1, 2013 that Mr. Cipkowski passed away). The Company entered into a new Employment Agreement with Waterhouse on November 6, 2013 (the Company previously entered into an Employment Agreement with Waterhouse in April 2012 as Executive Vice President of the Company). The agreement provides for a $140,000 annual salary and is for a term of one year. It automatically renews unless either party gave advance notice of 60 days. The 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 an 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.

Until November 1, 2013, there was an employment agreement in place between the Company and Stan Cipkowski (‘Cipkowski”) as Chief Executive Officer. The agreement provided for a $206,000 annual salary. And also has the same severance provisions as the Waterhouse employment agreement.

[3] Legal: On December 16, 2010, the Company 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 alleged that Gould, the Company’s former Chief Science Officer and Executive Vice President of Technology, and Gale, the Company’s 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 continued to engage in illegal activity, in addition to the compensatory and punitive damages noted below, the complaint also sought an injunction restraining the Defendants from engaging in further wrongdoing. The Defendants exercised their right to move the action to federal court in the United States District Court for the District of New Jersey. In March 2011, 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.

On August 8, 2013, court-ordered mediation was held resulting in settlement between all parties. All parties agreed that the matter was resolved in order to avoid the costs and uncertainties of litigation, with no admissions of guilt from any of the parties involved. All parties were released discharged from any and all claims, injuries, rights, liabilities and causes of action of every nature and description whatsoever, both statutory and common law, known or unknown, that spring from the facts alleged or that could have been alleged either as claims, cross claims, third party claims, or affirmative defenses in the litigation. Under the terms of the settlement, each party has agreed not to disclose to any third parties the terms and conditions of the settlement agreement.

As previously disclosed, the Company received a warning letter from the FDA in July 2009 that alleged the Company was marketing its 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. The Company communicated to the FDA its belief (based on legal opinion) that marketing clearance was not required in non-clinical markets. The FDA continued to disagree with the Company’s interpretation of FDA regulations related to medical devices, and the FDA continued to assert jurisdiction of drug testing performed in the workplace. The Company also advised FDA that the Company was 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, the Company was unable to reach a consensus with the FDA on neither the jurisdiction issue nor the technical issues.

On July 10, 2012, the Company entered into a Consent Decree of Permanent Injunction (the “Consent Decree”) with FDA. Under the terms of the Consent Decree, the Company was allowed to continue to market its OralStat drug test in the workplace market while the Company took 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. The Company then had a total of 396 days to discuss protocols with FDA, complete our analytical and clinical studies and submit a substantially complete 510(k). The Company agreed to withdraw the OralStat product from the workplace market if any of the following events occurred: 1) the Company did not submit a substantially complete 510(k) within the specified time period, 2) the Company failed to submit additional information within time frames specified by FDA, 3) the Company withdraw its submission, or 4) the Company’s 510(k) submission results in FDA’s determination that the product was 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, the Company received guidance from FDA. On September 3, 2013, the Company filed its application for 510(k) marketing clearance as required under the Consent Decree, and on September 18, 2013 the Company was notified that an administrative acceptance review was conducted, and the Company’s 510(k) marketing application was found to contain all of the necessary elements and information needed to proceed with the substantive review. In November 2013, the Company was informed that the FDA determined that the Company’s OralStat was not substantially equivalent to the predicate market device. In accordance with the Consent Decree, the Company ceased marketing and selling OralStat to the workplace (non-forensic) market.

In addition, 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 the Company is 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. The Company is not aware of any 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.