Net Deferred Revenues

6 Months Ended

Mar. 31, 2013

Net Deferred Revenues [Abstract]

NET DEFERRED REVENUES

5. NET DEFERRED REVENUES

The following table sets forth as of March 31, 2013, the deferred royalty revenue balance for the Company’s sale of future Abreva® royalty rights to Drug Royalty USA:

	Drug Royalty USA Agreement
Net deferred revenues as of September 30, 2012	$	4,049,318
Changes during the period:
Recognized as revenues during period		(1,374,832	)
Net deferred revenues as of March 31, 2013	$	2,674,486
Classified and reported as:
Current portion of deferred revenues	$	2,557,464
Deferred revenues, net of current portion		117,022
Total deferred revenues	$	2,674,486

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 the later of December 2013, or the expiration of the patent for Abreva on April 14, 2014. 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 and is recognizing the 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. The deferred revenue 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.