Note D – Litigation/Legal Matters

We received a warning letter from the U.S. Food and Drug Administration in July 2009 that alleged we were 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 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obtain marketing clearance but that specific technical and scientific issues existed when attempting to utilize FDA’s draft guidance for our OralStat (because the draft guidance was written for urine drug tests).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, we entered into a Consent Decree of Permanent Injunction (the “Consent Decree”) with the U.S. Food and Drug Administration (FDA) related to a July 2009 warning letter we received from FDA. The warning letter was related to our marketing OralStat® in the workplace market without 510(k) marketing clearance. We disagreed (based on a legal opinion) that FDA had legal jurisdiction over the workplace drug testing market but FDA continued to disagree with the Company and continued to assert jurisdiction. Under the terms of the Consent Decree, we were allowed to continue to market OralStat in the workplace market while we took action to obtain a 510(k) marketing clearance. On September 3, 2013, we filed our application for 510(k) marketing clearance as required under the Consent Decree, and on September 18, 2013 we were notified that an administrative acceptance review was conducted, and our application was found to contain all of the necessary elements and information needed to proceed with the substantive review. In November 2013, we were informed that the FDA determined that our OralStat was not substantially equivalent to the predicate market device. In accordance with the Consent Decree, we ceased marketing and selling OralStat to the workplace (non-forensic) market. We are currently evaluating our options related to sale of the OralStat in the (U.S.) Workplace market.