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Note 4 - Contingencies
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9 Months Ended |
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Sep. 30, 2012
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| Commitments and Contingencies Disclosure [Text Block] |
4. CONTINGENCIES
Consumer
Indemnity
As
required by the Door-to-Door Sales Act in South Korea, the
Company maintains insurance for consumer indemnity claims
with a mutual aid cooperative by possessing a mutual aid
contract with Mutual Aid Cooperative & Consumer (the
“Cooperative”). The contract secures
payment to distributors in the event that the Company is
unable to provide refunds to
distributors. Typically, requests for refunds
are paid directly by the Company according to the
Company’s normal Korean refund policy, which requires
that refund requests be submitted within three
months. Accordingly, the Company estimates and
accrues a reserve for product returns based on this policy
and its historical experience. Depending on the
sales volume, the Company may be required to increase or
decrease the amount of the contract. The maximum
potential amount of future payments the Company could be
required to make to address actual distributor claims under
the contract is equivalent to three months of rolling
sales. At September 30, 2012, non-current other
assets include KRW 100 million (USD $90,000) underlying the
contract, which can be utilized by the Cooperative to fund
any outstanding distributor claims. The Company
believes that the likelihood of utilizing these funds to
provide for distributors claims is remote.
Registration
Payment Arrangements
Pursuant
to the agreement with the original investors and the
placement agent in the May 2007 financing for the sale
of 1,759,307 shares of Series A preferred stock and
warrants representing the right to purchase 1,759,307
shares of common stock, the Company is obligated for a
specified period of time to maintain the effectiveness of
the registration statement that was filed with the SEC
covering the resale of the shares of common stock issuable
upon the exercise of warrants issued in the
financing. On March 18, 2010, the Company filed a
post-effective amendment withdrawing unsold shares from
registration. If the Company fails to file a new
registration statement, and maintain its effectiveness,
then it may be liable for payment in cash of an amount
equal to 2% of the product of $1.70 times the number of
shares of Series A preferred stock sold in the
financing to the relevant purchasers, or up to
approximately $60,000, but only if the quoted closing price
of the Company’s common stock exceeds the warrant
exercise price of the warrants. The exercise
price of the warrants was $3.80 per share until May 3,
2010, $4.35 per share until November 3, 2011, and is
currently $5.00 per share until May 4, 2013, when the
warrants expire.
Pursuant
to the agreement with the investors in the Company’s
October 2007 financing of variable rate convertible
debentures having an aggregate face amount of $4,250,000,
seven-year warrants to purchase 1,495,952 shares of the
Company’s common stock, and one-year warrants to
purchase 1,495,952 shares of the Company’s common
stock, the Company was obligated to (I) file a
registration statement covering the resale of the maximum
number of Registrable Securities (as defined) that is
permitted by SEC Guidance (as defined) prior to
November 18, 2007, (ii) cause the registration
statement to be declared effective within certain specified
periods of time and (iii) maintain the effectiveness of the
registration statement until all Registrable Securities
have been sold, or may be sold without volume restrictions
pursuant to Rule 144(k) under the Securities Act. The
Company timely filed that registration statement covering
the shares of common stock underlying the debentures, which
have been redeemed, and the one-year warrants, which have
expired. At the time, the 1,495,952 shares of
common stock underlying the seven-year warrants, and
149,595 shares of common stock underlying certain five-year
warrants issued to the placement agent in the transaction,
were not deemed Registrable Securities and were not
included in the registration statement. If they
are subsequently deemed Registrable Securities and we fail
to file a new registration statement covering them, then
the warrants may be exercised by means of a cashless
exercise. The maximum number of shares that could be
required to be issued upon exercise of the warrants
(whether on a cashless basis or otherwise) is limited to
the number of shares indicated on the face of the
warrants.
As
of September 30, 2012, no contingent obligations have been
recognized under registration payment arrangements.
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