18.

Commitments and contingencies:

Operating leases

Since November 2007, the Company has leased space for their corporate offices. Lease expense for the corporate office was $0.3 million, $0.3 million and $0.3 million for each of the years ended December 31, 2017, 2016 and 2015, respectively. The Company leased new space for their corporate offices, which began March 2015 for 89 months.

The future minimum commitment on the new operating lease at December 31, 2017 is as follows:


Years ending December 31,
2018	$	341
2019		351
2020		360
2021		370
2022		219

	$	1,641

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.

On February 5, 2018, the Company entered into indemnification agreements (the “Indemnification Agreements”) with each member of its board of directors (each, an “Indemnitee”). The form of Indemnification Agreement was approved by the board of directors.

The Indemnification Agreements are intended to clarify and supplement the indemnification rights and obligations of the Indemnitees and Company already included in the Company’s Certificate of Incorporation, as amended, and Second Amended and Restated Bylaws, and generally provide that, subject to certain exceptions specified in the Indemnification Agreements, the Company will indemnify the Indemnitee to the fullest extent permitted by Delaware law in the event the Indemnitee becomes subject to or a participant in certain claims or proceedings as a result of the Indemnitee’s service as a director or officer. The Company will also, subject to certain exceptions and repayment conditions, be obligated to advance to the Indemnitee specified indemnifiable expenses incurred in connection with such claims or proceedings. No events have occurred as of the date of this report which would trigger any liability under the agreements.

Post marketing requirements

On October 5, 2017, the Company entered a subsequent party acknowledgement relating to its participation in the Opioid PMR Consortium (the “OPC”). The participants are member companies, collectively undertaking various observational and clinical studies to satisfy certain post-marketing requirements by the FDA as holders of a NDA for extended-release and long-acting opioid analgesics. As a requirement of joining the OPC, the Company was required to pay its share of the previous expenses incurred and funded by the existing member companies. The Company’s pro-rata share of such expenses totaled approximately

$4.3 million, which was paid during the fourth quarter of 2017. Ongoing expenses will be shared equally by the member companies and paid monthly from 2018 through 2020.

Certain rights of CDC IV

The Company and CDC IV are parties to the CDLA pursuant to which CDC IV has previously provided funds to the Company for the development of the Company’s ONSOLIS^® product. CDC IV 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 IV’s consent to the North American Meda transaction, the Company, among other transactions with CDC IV, granted CDC IV a 1% royalty on net sales of the next BEMA^® product, which was BUNAVAIL^®. CDC IV’s right to the royalty shall immediately terminate at any time if annual net sales of BUNAVAIL^® equal less than $7.5 million in any calendar year following the third anniversary of initial launch of the product and CDC IV receives $0.02 million in three (3) consecutive quarters as payment for CDC IV’s one percent (1%) royalty during such calendar year.

The Company records such royalties as costs of sales occur.

In April 2016, CDC IV exercised its right pursuant to the Royalty Purchase and Amendment Agreement to exchange its royalty rights to the next BEMA^® product which was BUNAVAIL^®, in favor of royalty rights to the Substitute BEMA^® product which is BELBUCA^® (the CDC IV Option).

Litigation related to ONSOLIS^®

On November 2, 2010, Aquestive filed an action against the Company and its commercial partners for ONSOLIS^® in the Federal District Court of New Jersey (the DNJ) for alleged patent infringement and false marking. The Company was formally served in this matter on January 19, 2011. Aquestive claimed 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 on its’588 Patent. Of note, the BEMA^® technology itself was not at issue in the case, nor is BELBUCA^® or BUNAVAIL^®, but rather only the manner in which ONSOLIS^®, which incorporates the BEMA^® technology, is manufactured. Pursuant to its complaint, Aquestive was seeking an unspecified amount of damages, attorney’s fees and an injunction preventing future infringement of Aquestive’s patents.

The Company strongly refuted as without merit Aquestive’s assertion of patent infringement, which relates to the Company’s confidential, proprietary manufacturing process for ONSOLIS^®. On September 12, 2011, the Company filed a request for inter partes reexamination in the United States Patent and Trademark Office (USPTO) of Aquestive’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 a motion for stay pending the outcome of the reexamination proceedings, which subsequently was granted.

In November 2011, the USPTO rejected all 191 claims of Aquestive’s ’588 Patent. On January 20, 2012, the Company filed requests for reexamination before the USPTO of Aquestive’s ’891 Patent, and’292 Patent, the two additional patents asserted by Aquestive, 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. The USPTO granted the requests for reexamination with respect to Aquestive’s ’292 and ’891 Patents. In its initial office action in each, the USPTO rejected every claim in each patent.

As expected, in the ’891 Patent and ’292 Patent Ex Parte Reexamination proceedings, Aquestive 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 Aquestive 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 Aquestive’s ’891 Patent in its amended form was issued August 21, 2012 (the ’891C1 Patent). A Reexamination Certificate for Aquestive’s ’292 Patent in its amended form was issued on July 3, 2012 (t’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 Aquestive’s original patents.

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 filed requests for inter partes reviews (“IPRs”) on the narrowed yet reexamined patents, the ’292 C1 and ’891 C1 Patents, to challenge their validity and continue to strengthen its position. On November 13, 2013, the USPTO decided not to institute the two IPRs for the ’891 C1 and ’292 C1 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 IPRs were not instituted, the USPTO decision preserves the Company rights 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 ’891 C1 and ’292 C1 Patents remains the same.

Importantly, in the case of Aquestive’s ’588 Patent, after the reexamination proceedings (and its appeals process), on April 17, 2014, the PTAB issued a Decision on Appeal affirming the Examiner’s rejection (and confirming the invalidity) of all the claims of the ’588 Patent. Aquestive did not request a rehearing by the May 17, 2014 due date for making such a request and did not further appeal the Decision to the Federal Court of Appeals by the June 17, 2014 due date for making such an appeal. Subsequently, on August 5, 2014, the USPTO issued a Certificate of Reexamination cancelling the ‘588 Patent claims.

Based on the Company’s original assertion that its proprietary manufacturing process for ONSOLIS^® does not infringe on patents held by Aquestive, and the denial and subsequent narrowing of the claims on the two reissued patents Aquestive has asserted against us while the third has had all claims rejected by the USPTO, the Company remains 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, the ’588 patent, was invalid as well with all its claims cancelled. Given the outcomes of the ‘292, ‘891 and ‘588 reexamination proceedings, at a January 22, 2015 status meeting, the Court decided to lift the stay and grant the Company’s request for the case to proceed on an expedited basis with a Motion for Summary Judgment to dismiss the action. On September 25, 2015, the Company’s motion for summary judgment was ordered and the case was subsequently closed. The Company was found to be entitled to absolute intervening rights as to both patents in suit, the ‘292 and ‘891 patents and its ONSOLIS^® product is not liable for infringing the patents prior to July 3, 2012 and August 21, 2012, respectively. In October 2015, Aquestive appealed the decision of the court to the Federal Circuit. The Company had no reason to believe the outcome would be different and was prepared to vigorously defend the appeal. Aquestive, however, subsequently decided to withdraw the appeal. On February 25, 2016, Aquestive filed an Unopposed Motion For Voluntary Dismissal Of Appeal, which was granted by the court on February 26, 2016 and the case dismissed. Thus, the district court’s grant of the Summary Judgement of Intervening Rights stands. The possibility exists that Aquestive could file another suit alleging infringement of the ‘292 and ’891 patents. The Company continues to believe, however, that ONSOLIS^® and its other products relying on the BEMA^® technology, including BUNAVAIL^® and BELBUCA^®, do not infringe any amended, reexamined claim from either patent.

Litigation related to BUNAVAIL^®

RB and Aquestive

On October 29, 2013, Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and Aquestive (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 drug approved for the maintenance treatment of opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL^®, which has never been disclosed publicly, infringes its patent ’832 Patent.

On May 21, 2014, the Court granted the Company’s motion to dismiss. In doing so, the Court dismissed the case in its entirety. The RB Plaintiffs did not appeal the Court Decision by the June 21, 2014 due date and therefore, the dismissal will stand and the RB Plaintiffs lose the ability to challenge the Court Decision in the future. The possibility exists, however, that the RB Plaintiffs could file another suit alleging infringement of the ‘832 Patent. If this occurs, based on the Company’s original position that its BUNAVAIL^® product does not infringe the ‘832 Patent, the Company would defend the case vigorously (as the Company has done so previously), and the Company anticipates that such claims against them ultimately would be rejected.

On September 20, 2014, based upon the Company’s position and belief that its BUNAVAIL^® product does not infringe any patents owned by the RB Plaintiffs, the Company proactively filed a declaratory judgment action in the United States District Court for the Eastern District of North (EDNC) Carolina, requesting the Court to make a determination that its BUNAVAIL^® product does not infringe the RB Plaintiffs’ ‘080 Patent and the ‘378 Patent. With the declaratory judgment, there is an automatic stay in proceedings. The RB Plaintiffs may request that the stay be lifted, but they have the burden of showing that the stay should be lifted. For the ‘832 Patent, the January 15, 2014 IPR was instituted and in June 2015, all challenged claims were rejected for both anticipation and obviousness. In August 2015, the RB Plaintiffs filed an appeal to the Federal Circuit. The Federal Circuit affirmed the USPTO’s decision, and the RB Plaintiffs then filed a Petition for Panel Rehearing and for Rehearing En Banc, which was denied. A mandate issued on October 25, 2016, pursuant to Rule 41(a) of the Federal Rules of Appellate Procedure, meaning that a petition for certiorari to the Supreme Court is no longer possible for the RB Plaintiffs. The ‘832 IPR was finally resolved with the invalidation of claims 15-19. For the ‘080 Patent, all claims have been rejected in an inter partes reexamination and the rejection of all claims as invalid over the prior art has been affirmed on appeal by the PTAB in a decision dated March 27, 2015. In May 2015, the RB Plaintiffs filed a response after the decision to which the Company filed comments. In December 2015, the PTAB denied Aquestive’s request to reopen prosecution, but provided Aquestive an opportunity to file a corrected response. Aquestive filed the request in December 2015 and the Company subsequently filed comments on December 23, 2015. The PTAB issued a communication on July 7, 2016 denying Aquestive’s request to reopen prosecution of the rejections of all claims over the prior art. On January 31, 2017, the PTAB issued a final decision maintaining an additional new ground of rejection in addition to the previous grounds of invalidity. As such, all claims remain finally rejected on multiple grounds. If a request for rehearing is not filed within 30 days, the decision will become final as to the PTAB. Thereafter, if Aquestive does not appeal to the Federal Circuit, the decision will be final and all claims will be cancelled. For the ‘378 Patent, an IPR was filed on June 1, 2014, but an IPR was not instituted.

However, in issuing its November 5, 2014 decision not to institute the IPR, the PTAB construed the claims of the ‘378 Patent narrowly. As in prior litigation proceedings, the Company believes these IPR and the reexamination filings will provide support for maintaining the stay until the IPR and reexamination proceedings conclude. Indeed, given the PTAB’s narrow construction of the claims of the ‘378 Patent, the Company filed a motion to withdraw the ‘378 Patent from the case on December 12, 2014. In addition, the Company also filed a joint motion to continue the stay (with RB Plaintiffs) in the proceedings on the same day. Both the motion to withdraw the ‘378 Patent from the proceedings and motion to continue the stay were granted.

On September 22, 2014, the RB Plaintiffs filed an action against the Company (and its commercial partner) relating to the Company’s BUNAVAIL^® product in the United States District Court for the District of New Jersey for alleged patent infringement. The RB Plaintiffs claim that BUNAVAIL^®, whose formulation and manufacturing processes have never been disclosed publicly, infringes its ‘167 Patent. As with prior actions by the RB Plaintiffs, the Company believes this is another anticompetitive attempt by the RB Plaintiffs to distract the Company’s efforts from commercializing BUNAVAIL^®. The Company strongly refutes as without merit the RB Plaintiffs’ assertion of patent infringement and will vigorously defend the lawsuit. On December 12, 2014, the Company filed a motion to transfer the case from New Jersey to North Carolina and a motion to dismiss the case against our commercial partner. The Court issued an opinion on July 21, 2015 granting the Company motion to transfer the venue to the Eastern District of North Carolina (“ENDC”) but denying its motion to dismiss the case against the Company’s commercial partner as moot. The Company has also filed a Joint Motion to Stay the case in North Carolina at the end of April 2016, which was granted by the court on May 5, 2016. Thus, the case is now stayed until a final resolution of the ‘167 IPRs in the USPTO. The Company will continue to vigorously defend this case in the EDNC.

In a related matter, on October 28, 2014, the Company filed multiple IPR requests on the ’167 Patent demonstrating that certain claims of such patent were anticipated by or obvious in light of prior art references, including prior art references not previously considered by the USPTO, and thus, invalid. The USPTO instituted three of the four IPR requests and we filed a request for rehearing for the non-instituted IPR. The final decisions finding all claims patentable were issued in March 2016 and the Company filed a Request for Reconsideration in the USPTO in April 2016, which was denied in September 2016 and appealed to Court of Appeals for the Federal Circuit (Fed. Cir.) in November 2016. The appeal is currently proceeding in the Federal Circuit with final briefing completed August 7, 2017 and oral argument held February 7, 2018. The Company anticipates receiving a final decision from the Federal Circuit sometime in 2018. Regardless of the outcome of the appeal, the Company believes that BUNAVAIL^® will be found not to infringe the claims of the ‘167 patent.

On January 22, 2014, Aquestive filed a Petition for IPR on US Patent No. 7,579,019 (the ‘019 Patent). The Petition asserted that the claims of the ‘019 Patent are alleged to be unpatentable over certain prior art references. The IPR was instituted on August 6, 2014. An oral hearing was held in April 2015 and a decision upholding all seven claims was issued August 5, 2015. In September 2015, Aquestive requested that the PTAB rehear the IPR. On December 19, 2016, the PTAB issued a final decision denying Aquestive’s request for rehearing. Aquestive did not file a notice of appeal to the Federal Circuit by February 20, 2017, and therefore, the PTAB’s decision upholding all claims of the Company’s ‘019 patent are final and unappealable.

On January 13, 2017, Aquestive filed a complaint in the United States District Court for the District of New Jersey alleging BELBUCA^® infringes the ‘167 patent. In lieu of answering the complaint, the Company filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. Briefing on the motions was completed on June 21, 2017. On July 25, 2017, the Court administratively terminated the case pending the parties submission of a joint stipulation of transfer because the District of New Jersey was an inappropriate venue. This case has been transferred to Delaware District Court. On October 31, 2017 the Company filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. Briefing on the motions was completed on December 1, 2017. The Company anticipates receiving a final decision from the District Court in the 2nd quarter of 2018. The Company strongly refutes as without merit Aquestive’s assertion of patent infringement and will vigorously defend the lawsuit.

Teva Pharmaceuticals (formerly Actavis)

On February 8, 2016, the Company received a notice relating to a Paragraph IV certification from Teva Pharmaceuticals (“Teva”) (formerly Actavis Laboratories UT, Inc.) seeking to find invalid three Orange Book listed patents (the “Patents”) relating specifically to BUNAVAIL^®. The Paragraph IV certification relates to an Abbreviated New Drug Application (the “ANDA”) filed by Actavis with the FDA for a generic formulation of BUNAVAIL^®. The Patents subject to Teva’s certification are U.S. Patent Nos. 7,579,019 (“the ’019 Patent”), the ’866 Patent and the ’177 Patent. Under the Food Drug and Cosmetic Act, as amended by the Drug Price Competition and Patent Term Restoration Act of 1984, as amended (the “Hatch-Waxman Amendments”), after receipt of a valid Paragraph IV notice, the Company may, and in this case did, bring a patent infringement suit in federal district court against Teva within 45 days from the date of receipt of the certification notice. On March 18, 2016, the Company filed a complaint in Delaware against Teva, thus the Company is entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference BUNAVAIL^®. The 30-month stay is expected to preempt any final approval by the FDA on Teva’s ANDA until at least August of 2018.

The Company has asserted three different patents against Teva, the ’019 patent, the ‘866 patent, and the ’177 patent. Teva did not raise non-infringement positions with regard to the ’019 and the ’866 patents in its Paragraph IV certification. Teva did raise a non-infringement position on the ’177 patent due to its assertion that the backing layer for its generic product does not have a pH within the claimed range claimed in the patent. The Company asserted in its complaint that Teva infringed the ‘177 patent either literally or under the doctrine of equivalents.

The Company believes that Teva is unlikely to prevail on its claims that the ’019, ’866, and ’177 Patents are invalid, and, as the Company has done in the past, intends to vigorously defend its intellectual property. Each of the three patents carry the presumption of validity and, the ‘019 Patent has already been the subject of an unrelated IPR before the USPTO under which the Company, and all claims of the ‘019 Patent survived. Aquestive’s request for rehearing of the final IPR decision regarding the ‘019 Patent was denied by the USPTO on December 19, 2016. Aquestive did not file a timely appeal at the Federal Circuit.

On December 20, 2016 the USPTO issued U.S. Patent No. 9,522,188 (“the ’188 patent”), and this patent was properly listed in the Orange Book as covering the BUNAVAIL^® product. On February 23, 2017 Teva sent a Paragraph IV certification adding the 9,522,188 to its ANDA. An amended Complaint will be filed, adding the ’188 patent to the current litigation.

On January 31, 2017, the Company received a notice relating to a Paragraph IV certification from Teva relating to Teva’s ANDA on additional strengths of BUNAVAIL^®. On March 16, 2017, the Company brought suit against Teva and its parent company on these additional strengths within 45 days from the receipt of the notice in Delaware. As in the original case brought by Actavis, the Company is again entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference the additional strengths of BUNAVAIL^®. The 30-month stay is expected to extend until at least August of 2019. On June 20, 2017, the Court entered orders staying both BUNAVAIL^® suits at the request of the parties.

On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “’843 Patent”), and this patent was properly listed in the Orange Book as covering the BUNAVAIL^® product.

Finally, on October 12, 2017, the Company announced that it had entered into a settlement agreement with Teva that resolved the Company’s BUNAVAIL^® patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the Settlement Agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, the Company has entered into a non-exclusive license agreement with Teva that permits Teva to first begin selling its generic version of BUNAVAIL^® in the U.S. on July 23, 2028 or earlier under certain circumstances. Other terms of the agreement are confidential.

Litigation related to BELBUCA^®

The Company received notices regarding Paragraph IV certifications from Teva on November 8, 2016, November 10, 2016, and December 22, 2016, seeking to find invalid two Orange Book listed patents (the “Patents”) relating specifically to BELBUCA^®. The Paragraph IV certifications relate to three ANDAs filed by Teva with the FDA for a generic formulation of BELBUCA^®. The Patents subject to Teva’s certification were U.S. Patent Nos. 7,579,019 (“the ’019 Patent”) and 8,147,866 (“the ’866 Patent”). Under the Hatch-Waxman Amendments, after receipt of a valid Paragraph IV notice, the Company may, and in this case did, bring a patent infringement suit in federal district court against Teva within 45 days from the date of receipt of the certification notice. The Company filed complaints in Delaware against Teva on December 22, 2016 and February 3, 2017, thus the Company was entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference BELBUCA^®. The 30-month stay was expected to preempt any final approval by the FDA on Teva’s ANDA Nos. 209704 and 209772 until at least May of 2019 and for Teva’s ANDA No. 209807 until at least June of 2019.

The Company asserted two different patents against Teva, the ’019 Patent and the ’866 Patent. Teva did not contest infringement of the claims of the ’019 Patent and also did not contest infringement of the claims of the ’866 Patent that cover BELBUCA^® in its Paragraph IV certifications.

The Company believed that Teva was unlikely to prevail on its claims that the ’019 and ’866 Patents are invalid, and, as the Company has done in the past, vigorously defended its intellectual property. Both of the patents carry the presumption of validity, and the ’019 Patent has already been the subject of an unrelated IPR before the USPTO under which the Company prevailed, and all claims of the ‘019 Patent survived. Aquestive’s request for rehearing of the final IPR decision regarding the ’019 Patent was denied by the USPTO on December 19, 2016. Aquestive did not file a timely appeal at the Federal Circuit.

On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “’843 Patent”), and this patent was properly listed in the Orange Book as covering the BELBUCA^® product.

On August 28, 2017, the Court entered orders staying both BELBUCA^® suits at the request of the parties. On October 18, 2017, the Court entered orders continuing the stay in both BELBUCA^® suits at the request of the parties. On December 19, 2017, the Court entered orders continuing the stay in both BELBUCA^® suits at the request of the parties.

Finally, on February 6, 2018, the Company announced that it had entered into a settlement agreement with Teva that resolved the Company’s BELBUCA^® patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the settlement agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, the Company granted Teva a non-exclusive license (for which the Company will receive no current or future payments) that permits Teva to first begin selling the generic version of the Company’s BELBUCA^® product in the U.S. on January 23, 2027 or earlier under certain circumstances (including, for example, upon (i) the delisting of the patents-in-suit from the U.S. FDA Orange Book, (ii) the granting of a license by the Company to a third party to launch another generic form of BELBUCA^® at a date prior to January 23, 2027, or (iii) the occurrence of certain conditions regarding BELBUCA^® market share).