ELEMENTS OF THE Transition Audit PROCESS

Background:

In most IP commercialisation programs, funding or sale of the IP is in tranches, with each tranche conditional upon agreed milestones. This is sometimes referred to as a transition audit and will generally be required before a project can receive external funding and/or before a project can transition into early-stage commercialisation

. Where funding is conditional upon completion of R&D, the process of settlement (exchange of consideration) is referred to as a Transition Audit.

Like any settlement, a list of items and requirements are provided by both sides and settlement of these requirements by both sides of the transaction is acknowledged as completion (or execution) of the Transition Audit.

This process is frequently used within a firm for inter-departmental completions and handovers of IP by R&D departments, to production departments. Despite the title of the event and the reference to parties as vendor or purchaser, it is not necessarily a sale transaction.

For most projects about to receive conditional funding, the Transition Audit is one of 3 core requirements. The others are the independent market validation and the technical proof of concept.??

Typical Requirements:

IP developers or departments would typically be required to provide the following at Transition Audit:?

• Sample of the finished product and variants
• Test results for Proof-of-Concept (also something about the testers)
• List of components suppliers, supply agreements, pricing – with alternates ? Instructions on how to assemble and operate/service the product
• Instruction manuals (could be videos) on installation, operation, service and support of the IP.
• All software, source-code and master-media
• Patents and other protected info (with assignment)
• Copyrights on all written material, including EPROMs, Software, Manuals, Logos, Websites, etc.
• Confidentiality and non disclosure deeds and agreements (internal and external) with statements from staff and collaborative partners of claim/no claim
• Assignment of all registrations, including names, websites and companies (in some cases).
• Packaging design and samples,
• Warranty conditions and statements.
• Might include resignation of directorships if this is a full trade sale…..??

The Production Department, Vendors or Equity Partners would be required to provide whatever their consideration is, upon independent validation that the above is provided and is complete. Some of the types of consideration could include:

- Equity or debt funding for the next stage

- Commitment to start production of the innovation.

- Purchase price for the IP, and/or

- Equity in their company?

The Process

Traditionally, the parties appoint an independent validation party (typically an IP Lawyer or Patent Attorney) to independently assess the contents of the transaction and determine that everything that is required to build and operate the innovation as a product, is present at the Transition Audit.

This consideration would generally include assignment or transfer of all permissions, rights, ownerships and licences to build and operate the product, going forward.

Post Transition Audit

In most cases, there is an ongoing role and commitment for both parties, which is designed to cover off issues like warranty, performance, product failure, commitment to perform (when buyers have specific performance milestones to achieve or IP is returned).?