COMMITMENTS AND CONTINGENCIES

Leases and Sublease Agreements

California Offices

San Diego Office

On September 15, 2016 the Company signed a lease for the second floor of 3721 Valley Centre Drive in San Diego, California. This location will become the Company's headquarters in December 2016, when renovations are expected to be completed. Lease commencement is based upon occupation of the premises which is estimated to be December 16, 2016. For GAAP, lease commencement is the day the Company takes control of the premises, which was September 15, 2016. The Company rents this office space for approximately $1.1 million per annum plus escalations. The lease is expected to expire 91 months from the first full month of occupation, or July 31, 2024. The Company negotiated a tenant allowance of $1.5 million paid by the landlord to help with the renovations of the facility.

On September 8, 2014, the Company entered into a lease agreement for its current corporate headquarters located in San Diego, California. The Company rents this office space for approximately $0.5 million per annum plus escalations. The lease commenced on October 1, 2014 and expires on December 31, 2017.

Carlsbad Office - Vacated

In October 2014, the Company ceased use of this facility and all employees moved into the current headquarters facility in San Diego, California. As a result of vacating this location, the Company recorded a loss of $0.2 million in the year ended December 31, 2014. The Company's lease for the two suites which encompass this facility expires on June 30, 2017. The Company has sublet the two suites through the expiration of the lease.

Massachusetts Office

On July 31, 2014, the Company entered into a sublease agreement for office space located in Cambridge, Massachusetts. The Company rents this office space for approximately $0.8 million per annum. The sublease expires on December 31, 2016.

New York Office

On December 30, 2015, the Company amended the lease agreement for its offices in New York, New York to extend the lease term through November 2018. The Company rents this office space for approximately $0.5 million per annum plus escalations.

Research Collaboration and Licensing Agreements

As part of the Company's research and development efforts, the Company enters into research collaboration and licensing agreements with unrelated companies, scientific collaborators, universities, and consultants. These agreements contain varying terms and provisions which include fees and milestones to be paid by the Company, services to be provided, and ownership rights to certain proprietary technology developed under the agreements. Some of these agreements contain provisions which require the Company to pay royalties, in the event the Company sells or licenses any proprietary products developed under the respective agreements.

Contractual Commitments

The following table summarizes our principal contractual commitments, excluding open orders that support normal operations, as of September 30, 2016 (in thousands):



	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating leases	$	10,663	$	1,288	$	3,138	$	1,218	$	5,019
Note payable, including contractual interest	52,037		2,070		49,967		—		—
Sales support services	3,158		416		833		1,909		—
Product supply contracts	1,117		867		250		—		—
	$	66,975	$	4,641	$	54,188	$	3,127	$	5,019

Legal Proceedings

On September 19, 2014, purported shareholders of the Company sued Martin Shkreli, the Company’s former Chief Executive Officer, in federal court in the Southern District of New York (Donoghue v. Retrophin, Inc., Case No. 14-cv-7640). The Company is a nominal defendant in this action. The plaintiffs sought, on behalf of the Company, disgorgement of short-swing profits from Mr. Shkreli under section 16(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78(p)(b)). The Court has approved a settlement between the parties, under which Mr. Shkreli is obligated to pay $2.025 million to the Company and an additional $0.6 million to Plaintiffs to compensate them for their legal fees. Mr. Shkreli defaulted on the judgment and the Company and the Plaintiffs took steps to collect it. The Company did not record anything related to the judgment on its financial statements for 2015. Any related amounts received will be recorded against equity when collected. On February 18, 2016, Mr. Shkreli sought leave from the Court to move for a protective order to block the enforcement of the judgment. The Company and Plaintiffs’ counsel also sought leave to file motions in connection with their enforcement efforts. On March 16, 2016, the Court granted the parties leave to file their respective motions and ordered that all enforcement efforts be stayed for thirty days. On May 24, 2016, Plaintiffs’ counsel informed the Court that the parties had entered into an agreement under which Plaintiffs’ counsel were to be paid in full, and that pursuant to that agreement they had no further stake in the matter and would not participate in future case events. Under that agreement, the Company paid $8,249 to Plaintiffs’ counsel to compensate them for certain disbursements which Plaintiffs’ counsel had made in connection with their efforts to enforce the judgment, and the Company also assumed control over all restraining notices and subpoenas previously served by Plaintiffs’ counsel. At a status conference on June 10, 2016, the Court ordered Mr. Shkreli and the Company to keep the Court updated on the progress of their settlement negotiations. To date, none of the parties have filed any of the motions which they previously sought leave to file. The Company and Mr. Shkreli have entered into a binding term sheet with respect to a settlement, under which the $2.025 million judgment against Mr. Shkreli would offset and satisfy certain existing legal fees that Mr. Shkreli claimed should be advanced to him by the Company, as described more fully below.

In January 2015, the Company received a subpoena relating to a criminal investigation by the U.S. Attorney for the Eastern District of New York. The subpoena requested information regarding, among other things, the Company’s relationship with Mr. Shkreli and individuals or entities that had been investors in investment funds previously managed by Mr. Shkreli. The Company has been informed that it is not a target of the U.S. Attorney’s investigation, and is cooperating with the investigation. On December 17, 2015, an indictment against the Company’s former Chief Executive Officer, Martin Shkreli, and its former outside counsel, Evan Greebel, was unsealed in the United States District Court for the Eastern District of New York. A superseding indictment reflecting additional charges was filed on June 3, 2016. The Company has also been cooperating with a parallel investigation by the U.S. Securities and Exchange Commission (the “SEC”). On December 17, 2015, the SEC filed a civil complaint against Mr. Shkreli, Mr. Greebel, MSMB Capital Management LLC, and MSMB Healthcare Management LLC in the United States District Court for the Eastern District of New York. In connection with these proceedings, Mr. Shkreli, as well as a number of other current and former directors, officers and employees, have sought advancement of their legal fees from the Company. Mr. Shkreli, in particular, claims that the Company owes him in excess of $5 million in legal fees that he has incurred defending these actions. The Company disputed its obligation to pay the amount in full. The Company and Mr. Shkreli have entered into a binding term sheet with respect to a settlement under which the Company will advance $2.8 million in legal fees to Mr. Shkreli’s counsel, representing a portion of the existing legal fees related to these proceedings that Mr. Shkreli claims should be advanced. The Company will also undertake an obligation to advance an additional $2 million in future legal fees in the event the matter proceeds to trial. The Company expects to receive payment from its directors’ and officers’ insurance carriers for a portion of the legal fees it advances, although the amount it will receive from the insurance carriers is not currently estimable. In addition, the legal fees the Company advances will be subject to reimbursement by Mr. Shkreli under Delaware law in the event it is ultimately determined that Mr. Shkreli is not entitled to be indemnified by the Company in these proceedings.

On August 17, 2015, the Company filed a lawsuit in federal district court for the Southern District of New York against Martin Shkreli, asserting that he breached his fiduciary duty of loyalty during his tenure as the Company’s Chief Executive Officer and a member of its Board of Directors (Retrophin, Inc. v. Shkreli, 15-CV-06451(NRB)). On August 19, 2015, Mr. Shkreli served a demand for JAMS arbitration on Retrophin, claiming that Retrophin had breached his December 2013 employment agreement. In response to Mr. Shkreli’s arbitration demand, the Company has asserted counterclaims in the arbitration that are substantially similar to the claims it previously asserted in the federal lawsuit against Mr. Shkreli. The parties have selected an arbitration panel. On Mr. Shkreli’s application, and with the Company’s consent, the federal Court has granted a stay of the federal lawsuit pending a determination by the arbitration panel whether the Company’s counterclaims will be litigated in the arbitration, as the Company is seeking. On April 22, 2016, the arbitration panel granted the parties’ request for a stay of the proceedings pending settlement discussions. In connection with these proceedings, Mr. Shkreli has sought advancement of his legal fees from the Company relating to his defense of the Company’s claims against him. Mr. Shkreli claims that he has to date incurred in excess of $2.8 million in fees, including fees incurred in negotiating with the Company over advancement. The Company disputed its obligation to pay the amount in full. The Company and Mr. Shkreli have entered into a binding term sheet with respect to a settlement under which the significant majority of the existing legal fees related to these proceedings that Mr. Shkreli claims should be advanced will be offset and satisfied by the $2.025 million judgment against Mr. Shkreli in the Donoghue v. Retrophin, Inc. case described above. The Company will advance $0.4 million in legal fees to Mr. Shkreli’s counsel, representing a portion of the remaining existing legal fees related to these proceedings that Mr. Shkreli claims should be advanced. The legal fees the Company advances will be subject to reimbursement by Mr. Shkreli under Delaware law in the event it is ultimately determined that Mr. Shkreli is not entitled to be indemnified by the Company in these proceedings.

In July 2016, the Company received a demand for payment from the United States Internal Revenue Service (“IRS”) regarding a levy issued by the IRS in March 2016 with respect to unpaid federal income taxes personally owed by Mr. Shkreli for the year ended December 31, 2014, for approximately $4.0 million, which has since been reduced to $2.4 million. The levy sought to collect any property or rights to property (such as money, credits and bank deposits) in the Company’s possession that belong to or are owed to Mr. Shkreli. The Company believes that it is uncertain, as a matter of law, whether and how the tax levy applies to the Company’s advancement obligations to Mr. Shkreli. The Company currently believes the IRS will not enforce the tax levy against the Company once the IRS receives certain payments from Mr. Shkreli. The Company’s settlement with Mr. Shkreli enables the delivery of these payments to the IRS. Once these payments are received and the IRS has confirmed the tax levy has been satisfied, the remaining terms of the settlement will become effective. The settlement will satisfy the Company’s obligation in full to provide advancement or indemnification for existing legal fees in the proceedings described above.

As of September 30, 2016, the Company has recorded expenses related to the settlement of approximately $5.2 million on its Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), of which approximately $3.2 million consists of cash payments. The remainder consists of the $2.025 million offset judgment against Mr. Shkreli in the Donoghue v. Retrophin, Inc. case described above. The expense does not include the additional $2 million in future legal fees that the Company will be obligated to advance in the event the criminal and SEC actions involving Mr. Shkreli proceed to trial. Although the Company expects to receive payment from its directors’ and officers’ insurance carriers for a portion of the legal fees it will advance as part of the contemplated settlement, the Company has not yet recorded any gain contingency for such payments as the amount it will receive from the insurance carriers is not currently estimable. While the Company believes the contemplated settlement is probable, it has not yet been finalized, and therefore the settlement may not be consummated on the currently anticipated terms, if at all.

From time to time the Company is involved in legal proceedings arising in the ordinary course of business. The Company believes there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on its results of operations or financial condition.