14.

Commitments and contingencies:

Operating leases:

Since November 2007, the Company has leased space for their corporate offices. The lease expired in January 2013 and was amended for an additional 24 months. Lease expense for the corporate office was $0.1 million for years ended December 31, 2013 and 2012, respectively.

The future minimum commitment on the remaining operating lease at December 31, 2013 is as follows:


Years ending December 31,
2014	$	118,665
2015		29,806

	$	148,471

Indemnifications:

The Company’s directors and officers are indemnified against costs and expenses related to stockholder and other claims (i.e., only actions taken in their capacity as officers and directors) that are not covered by the Company’s directors and officers insurance policy. This indemnification is ongoing and does not include a limit on the maximum potential future payments, nor are there any recourse provisions or collateral that may offset the cost. No events have occurred as of December 31, 2013 which would trigger any liability under the agreement.

Certain Rights of CDC

The Company and CDC are parties to a Clinical Development and License Agreement, dated July 15, 2005 (as amended, the “CDLA”) pursuant to which CDC has previously provided funds to the Company for the development of the Company’s ONSOLIS^® product. CDC is entitled to receive a mid-single digit royalty based on net sales of ONSOLIS^®, including minimum royalties of $375,000 per quarter beginning in the second full year following commercial launch. The royalty term expires upon the latter of expiration of the patent or generic entry into a particular country.

In September 2007, in connection with CDC’s consent to the North American Meda transaction, the Company, among other transactions with CDC, granted CDC a 1% royalty on sales of the next BEMA^® product, including an active pharmaceutical ingredient other than fentanyl, to receive FDA approval (the “Next BEMA^® Product”). In connection with the 1% royalty grant: (i) CDC shall have the option to exchange its royalty rights to the Next BEMA^® Product in favor of royalty rights to a substitute BEMA^® product, (ii) the Company shall have the right, no earlier than six (6) months prior to the initial commercial launch of the Next BEMA^® Product, to propose in writing and negotiate the key terms pursuant to which it would repurchase the royalty from CDC, (iii) CDC’s right to the royalty shall immediately terminate at any time if annual net sales of the Next BEMA^® Product equal less than $7.5 million in any calendar year following the third anniversary of initial launch of the product and CDC receives $18,750 in three (3) consecutive quarters as payment for CDC’s one percent (1%) royalty during such calendar year and (iv) CDC shall have certain information rights with respect to the Next BEMA^® Product.

The amount of royalties which the Company may be required to pay for the Next BEMA^® Product (including estimates of the minimum royalties) is not presently determinable because product sales estimates cannot be reasonably determined and the regulatory approvals of the product for sale is not possible to predict. As such, the Company expects to record such royalties, if any, as cost of sales when and if such sales occur.

On May 12, 2011, the Company entered into an Amendment to Clinical Development and License Agreement (the “CDLA Amendment”) by and among CDC V, LLC (“CDC”), NB Athyrium LLC (“Athyrium”). Athyrium holds certain rights, acquired from CDC, to receive royalties on sales of ONSOLIS^®.

Under the terms of the CDLA Amendment, among other matters, the parties agreed to increase the royalty rate to be received by CDC/Athyrium retroactively to the initial launch date of ONSOLIS^® and, accordingly, the Company recorded $0.3 million as additional cost of product royalties for year ended December 31, 2011. In addition, certain terms of the CLDA were amended and restated to clarify that royalty payments by the Company under the CDLA will be calculated based on Meda’s sales of ONSOLIS^®, whereas previous Company royalty payments to CDC were calculated based on Company sales of ONSOLIS^® to Meda.

The difference between these two calculations resulted in a $1.1 million overpayment by the Company which was recorded as a prepayment. As a result, the Company did not pay any of the quarterly royalty payments, including any 2011 payments due to CDC/Athyrium until the December 31, 2011 royalty calculation, which the Company paid during the first quarter of 2012.

Litigation Related To ONSOLIS^®

On November 2, 2010, MonoSol Rx, LLC (“MonoSol”) filed an action against the Company and its commercial partners for ONSOLIS^® in the Federal District Court of New Jersey (“DNJ”) for alleged patent infringement and false marking. The Company was formally served in this matter on January 19, 2011. MonoSol claims that the Company’s manufacturing process for ONSOLIS^®, which has never been disclosed publicly and which the Company and its partners maintain as a trade secret, infringes its patent (United States Patent No. 7,824,588) (the “ ‘588 Patent”). Of note, the BEMA^® technology itself is not at issue in the case, nor is BEMA^® Buprenorphine or BUNAVAIL™, but rather only the manner in which ONSOLIS^®, which incorporates the BEMA^® technology, is manufactured. Pursuant to its complaint, MonoSol is seeking an unspecified amount of damages, attorney’s fees and an injunction preventing future infringement of MonoSol’s patents.

The Company strongly refutes as without merit MonoSol’s assertion of patent infringement, which relates to its confidential, proprietary manufacturing process for ONSOLIS^®. On February 23, 2011, the Company filed its initial answer in this case. In the Company’s answer, the Company stated its position that their products, methods and/or components do not infringe MonoSol’s ‘588 Patent because they do not meet the limitations of any valid claim of such patent. Moreover, in the Company’s answer, the Company stated its position that MonoSol’s ‘588 Patent is actually invalid and unenforceable for failure to comply with one or more of the requirements of applicable U.S. patent law.

On September 12, 2011, the Company filed a request for inter partes reexamination in the United States Patent and Trademark Office (“USPTO”) of MonoSol’s ‘588 Patent demonstrating that all claims of such patent were anticipated by or obvious in the light of prior art references, including several prior art references not previously considered by the USPTO, and thus invalid. On September 16, 2011, the Company filed in court a motion for stay pending the outcome of the reexamination proceedings, which subsequently was granted due to the results of the USPTO proceedings as described below.

On November 28, 2011, the Company announced that it was informed by the USPTO that it had rejected all 191 claims of MonoSol’s ‘588 Patent. On January 20, 2012, the Company filed requests for reexamination before the USPTO of MonoSol’s US patent No 7,357,891 (the “‘891 Patent”), and No 7,425,292 (the “‘292 Patent”), the two additional patents asserted by MonoSol, demonstrating that all claims of those two patents were anticipated by or obvious in the light of prior art references, including prior art references not previously considered by the USPTO, and thus invalid.

In February and March 2012, respectively, the USPTO granted the requests for reexamination we filed with respect to MonoSol’s ‘292 and ‘891 Patents. In its initial office action in each, the USPTO rejected every claim in each patent. Based on the action of the USPTO on these three patent reexaminations, the court in the Company’s case with MonoSol conducted a status conference on March 7, 2012, at which it granted the Company’s motion to stay the case pending final outcome of the reexamination proceedings in the USPTO.

As expected, in the ‘891 Patent and ‘292 Patent Ex Parte Reexamination proceedings, MonoSol amended the claims several times and made multiple declarations and arguments in an attempt to overcome the rejections made by the USPTO. These amendments, declarations and other statements regarding the claim language significantly narrowed the scope of their claims in these two patents. In the case of the ‘891 Patent, not one of the original claims survived reexamination and five separate amendments were filed confirming the Company’s position that the patent was invalid. Additionally, the Company believes that arguments and admissions made by MonoSol prevent it from seeking a broader construction during any subsequent litigation by employing arguments or taking positions that contradict those made during prosecution.

A Reexamination Certificate for MonoSol’s ‘891 Patent in its amended form was issued August 21, 2012 (Reexamined Patent No. 7,357,891C1 or the ‘891C1 Patent). A Reexamination Certificate for MonoSol’s ‘292 Patent in its amended form was issued on July 3, 2012 (Reexamined Patent No. 7,425,292C1 or the ‘292C1 Patent). These actions by the USPTO confirm the invalidity of the original patents and through the narrowing of the claims in the reissued patents strengthens the Company’s original assertion that its products and technologies do not infringe on MonoSol’s original patents.

Inter partes reviews, a new USPTO process to review the patentability of one or more claims of patents, was enacted in September, 2012. As such, on June 12, 2013, despite the Company’s previously noted success in the prior ex parte reexaminations for the ’292 and ’891 Patents, the Company availed ourselves of this new process and filed requests for inter partes reviews on the narrowed yet reexamined patents, the ‘292C1 and ‘891C1 Patents, to challenge their validity and continue to strengthen its position. This inter partes review process allows the Company to actively participate in the reviews and address any of MonoSol’s arguments and representations made during the review process, which heightens the Company’s ability to invalidate these patents. On November 13, 2013, the USPTO decided not to institute the two inter partes reviews for the ‘891C1 and ‘292C1 Patents. The USPTO’s decision was purely on statutory grounds and based on a technicality (in that the IPRs were not filed within what the UPSTO determined to be the statutory period) rather than substantive grounds. Thus, even though the inter partes reviews were not instituted, the USPTO decision preserves the Company’s right to raise the same arguments at a later time (e.g., during litigation). Regardless, the Company’s assertion that its products and technologies do not infringe the original ‘292 and ‘891 Patents and, now, the reexamined ‘891C1 and ‘292C1 Patents remains the same.

Importantly, in the case of MonoSol’s ‘588 Patent, the USPTO on July 20, 2012 issued a second Office Action closing prosecution and rejecting for a second time all claims as anticipated or obvious. It also rejected the amended claims proposed by MonoSol as unclear and lacking support. Then, on January 23, 2013, the USPTO issued a Right of Appeal Notice, rejecting all claims of the ‘588 Patent and closing reexamination proceedings. This action confirms that all claims of this patent are also invalid, but unlike ‘292 and ‘891, the USPTO has not found that any amended or narrower claims should be granted. On February 22, 2013, MonoSol filed both a Notice of Appeal to the Board of Patent Appeals and Interferences and a Request for Continuing Examination of the ‘588 Patent. On March 12, 2013, the Company filed a petition requesting the USPTO to deny MonoSol’s February 22, 2013 Request to Continue Examination and to allow the proceedings to go to an appeal. Subsequently, on July 3, 2013, the USPTO denied MonoSol’s February 22, 2013 Request to Continue Examination. After reviewing MonoSol’s Appeal Brief (filed June 24, 2013) and the Company’s Respondent’s Brief (filed July 24, 2013), the USPTO formally initiated the appeals process with the Examiner’s Answer on August 8, 2013, which affirmed the rejection of all the claims in the ‘588 Patent. An oral hearing for the appeal, in which both parties will have an opportunity to make arguments before the Patent Trial & Appeal Board (“PTAB”) has been scheduled for March 26, 2014.

Based on the Company’s original assertion that our proprietary manufacturing process for ONSOLIS^® does not infringe on patents held by MonoSol, and the denial and subsequent narrowing of the claims on the two reissued patents MonoSol has asserted against the Company while the third has had all claims rejected by the USPTO, the Company remains very confident in its original stated position regarding this matter. Thus far, the Company has proven that the “original” ‘292 and ‘891 patents in light of their reissuance with fewer and narrower claims were indeed invalid and the third and final patent, ‘588, has had all claims rejected and appears to have had a similar fate. Importantly, the Company will continue to defend this case vigorously, and anticipates that MonoSol’s claims against the Company will ultimately be rejected.

Litigation Related To BUNAVAIL™

On October 29, 2013, Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and MonoSol (collectively, the “RB Plaintiffs”) filed an action against the Company relating to its BUNAVAIL™ product in the United States District Court for the Eastern District of North Carolina for alleged patent infringement. BUNAVAIL™ is a proposed treatment for opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL™, which has never been disclosed publicly, infringes its patent (United States Patent No. 8,475,832) (the “‘832 Patent”). The Company believes this is another anticompetitive attempt by the RB Plaintiffs to distract the Company’s efforts from commercializing BUNAVAIL™.

The Company believes that this action is in response to a 2013 decision wherein the FDA recently ruled in favor of the Company’s position in two Citizen Petitions filed by the RB Plaintiffs that sought to prevent the FDA from accepting and filing the Company’s NDA for BUNAVAIL™. The two Citizen Petitions, filed on December 2, 2011 and August 13, 2013, respectively, included requests that the FDA refuse to accept for filing any NDAs submitted using the 505 (b)(2) regulatory pathway for buprenorphine/naloxone products consisting of a polymer film for application to the buccal mucosal membranes (such as BUNAVAIL™), unless such application references the NDA for Suboxone^® (buprenorphine/naloxone) sublingual film (and not the Suboxone^® sublingual tablet NDA). Suboxone^® is an approved product for opioid dependence. The requirement to reference the Suboxone^® film formulation, which is under patent exclusivity with Orange Book-listed patents, including the ‘832 Patent, was aimed at delaying the eventual approval of BUNAVAIL™. FDA did not agree with these arguments and in its decision on September 18, 2013, it denied the requests and subsequently, accepted and filed the BUNAVAIL™ NDA.

The Company believes that the RB Plaintiff’s claim of patent infringement has no more validity than the recently rejected Citizen Petitions, but is being used as another anticompetitive attempt to distract the Company in our efforts toward commercializing BUNAVAIL™. We look forward to the FDA’s review of the BUNAVAIL™ NDA as it moves toward the June 7, 2014 Prescription Drug User Fee Act (“PDUFA”) date when we expect a response from FDA on our NDA for BUNAVAIL™. In the meantime, the Company strongly refutes as without merit the RB Plaintiffs’ assertion of patent infringement and will vigorously defend the lawsuit.

On December 13, 2013, the Company filed a motion to dismiss RB Plaintiff’s suit based on insufficient pleadings and lack of standing. In response, RB Plaintiffs filed its opposition to the Company’s motion to dismiss on January 22, 2014. The Company filed its reply to RB’s opposition to the Company’s motion to dismiss on February 10, 2014.

On January 15, 2014, the Company filed a request for inter partes review in the USPTO of the ‘832 Patent demonstrating that certain claims of such patent were anticipated by or obvious in the light of prior art references, including prior art references not previously considered by the USPTO, and thus, invalid. On January 31, 2014, the Company filed in Court a motion for stay pending the outcome of the inter partes review proceedings.