7. NET DEFERRED REVENUES

The following table sets forth as of June 30, 2011 the deferred royalty revenue balances for the Company’s sale of future Abreva^® royalty rights to Drug Royalty USA and NUEDEXTA product shipments:


	NUEDEXTA
	Product			Drug Royalty
	Shipments, Net			USA Agreement			Total
Net deferred revenues as of October 1, 2010	$	—		$	8,476,831		$	8,476,831
Changes during the period:
Shipments, net.		4,065,512			—			4,065,512
Recognized as revenues during the period		(2,481,622	)		(1,662,392	)		(4,144,014	)

Net deferred revenues as of June 30, 2011 (1)	$	1,583,890		$	6,814,439		$	8,398,329


Classified and reported as:
Current portion of deferred revenues	$	1,583,890		$	2,087,226		$	3,671,116
Deferred revenues, net of current portion		—			4,727,213			4,727,213

Total net deferred revenues	$	1,583,890		$	6,814,439		$	8,398,329


(1)		The amount that ultimately will be recognized as net product sales may be different due to other discounts and allowances, including, but not limited to, wholesaler fees based on wholesaler shipments, rebates, chargebacks and co-pay assistance.

NUEDEXTA Product — The amount of deferred revenue from NUEDEXTA product shipments is shown net of estimated prompt-pay discounts and wholesaler fees based on wholesaler purchases. The amount that ultimately will be recognized as net product sales in the Company’s consolidated financial statements may be different due to other discounts and allowances, including, but not limited to, wholesaler fees based on wholesaler shipments, rebates, chargebacks and co-pay assistance. See Note 2, “Significant Accounting Policies — Revenue recognition — Product Sales — NUEDEXTA” for further discussion.

Drug Royalty Agreement — In November 2002, the Company sold to Drug Royalty USA an undivided interest in the Company’s rights to receive future Abreva royalties under the license agreement with GlaxoSmithKline for $24.1 million (the “Drug Royalty Agreement” and the “GSK License Agreement,” respectively). Under the Drug Royalty Agreement, Drug Royalty USA has the right to receive royalties from GlaxoSmithKline on sales of Abreva until December 2013. The Company retained the right to receive 50% of all royalties (a net of 4%) under the GSK License Agreement for annual net sales of Abreva in the U.S. and Canada in excess of $62 million.

Revenues are recognized when earned, collection is reasonably assured and no additional performance of services is required. The Company classified the proceeds received from Drug Royalty USA as deferred revenue, to be recognized as revenue over the life of the license agreement, because of the Company’s continuing involvement over the term of the Drug Royalty Agreement. Such continuing involvement includes overseeing the performance of GlaxoSmithKline and its compliance with the covenants in the GSK License Agreement, monitoring patent infringement, adverse claims or litigation involving Abreva, and undertaking to find a new license partner in the event that GlaxoSmithKline terminates the agreement. The Drug Royalty Agreement contains both covenants and events of default that require such performance on the Company’s part. Therefore, nonperformance on the Company’s part could result in default of the arrangement, and could give rise to additional rights in favor of Drug Royalty USA under a separate security agreement with Drug Royalty USA, which could result in loss of the Company’s rights to share in future Abreva royalties if wholesale sales by GlaxoSmithKline exceed $62 million a year. Because of the Company’s continuing involvement, the Company recorded the net proceeds of the transaction as deferred revenue, which is being recognized as revenue using the “units-of-revenue method” over the life of the license agreement. Based on a review of the Company’s continuing involvement, the Company concluded that the sale proceeds did not meet any of the rebuttable presumptions that would require classification of the proceeds as debt.