Stout was engaged by a biotech company to perform a royalty audit and contract compliance examination of its relationship with a foreign manufacturer and seller of products that contained its licensed technology. Both the licensor and licensee were publicly traded companies, and our work was a necessary component of the licensor’s ability to complete its SEC filings in a timely manner.
Our analysis consisted of analyzing detailed sales records of the licensor’s subsidiary entities across different countries and continents – recorded in multiple currencies, containing both royalty-bearing and non-royalty-bearing products, and existing in various formats – and using that information to reperform the corresponding royalty calculations. Adding to the complexity of our procedures were intercompany sales and distribution relationships among the licensor’s subsidiary entities as well as disagreements between the licensor and licensee regarding what products and/or sales territories should be included in the royalty calculations.
To verify the completeness of the licensor’s supporting documentation, we performed detailed reconciliations of the affiliated entities’ records up to the parent company’s audited and reported financial statements. We performed extensive, random invoice sampling for each of the licensee’s subsidiary entities to test the licensor’s reporting. Our work identified numerous incidences of under- and over-reporting, errors, and areas for negotiation between the two parties.
Our engagement culminated in our drafting and presenting a memorandum that detailed our procedures, findings, and recommendations.