In February 2008, the Company and Nordic Biotech Advisors ApS through its investment fund Nordic Biotech Venture Fund II K/S (“Nordic”) entered into a joint venture agreement (the “Hedrin JV Agreement”) to develop and commercialize the Company's North American rights (under license) to its Hedrin product.

Pursuant to the Hedrin JV Agreement, Nordic formed a new Danish limited partnership, H Pharmaceuticals K/S, (the "Hedrin JV") and provided it with $5.5 million funding in several tranches through January of 2010 and the Company assigned and transferred its North American rights in Hedrin to the Hedrin JV in return for a $3.5 million cash payment from the Hedrin JV, paid in several tranches, and equity in the Hedrin JV representing 47.62% of the nominal equity interests in the Hedrin JV. Through January 2010 the Company recognized an investment in the Hedrin JV of $0.75 million and an exchange obligation of $3.95 million. The exchange obligation represents the Company’s obligation to Nordic to issue the Company’s common stock in exchange for all or a portion of Nordic’s equity interest in the Hedrin JV upon the exercise by Nordic of the put issued to Nordic in the Hedrin JV Agreement transaction. The put is described below.

Nordic had an option to put all or a portion of its equity interest in the Hedrin JV to the Company in exchange for the Company’s common stock (the “Nordic Put”). The Company had an option to, under certain conditions, call all or a portion of Nordic’s equity interest in the Hedrin JV in exchange for the Company’s common stock (the “Nordic Call”). The Nordic Put and the Nordic Call terminated upon the execution, on January 4, 2011, of a settlement and release agreement between Nordic and the Company. The settlement and release agreement is discussed below.

Nordic paid the Company a non-refundable fee of $150,000 in February 2008 for the right to receive a warrant covering shares of the Company’s commons stock. The warrant (the “Nordic Warrant”) was issued in 2008. The Nordic Warrant terminated upon the execution, on January 4, 2011, of a settlement and release agreement between Nordic and the Company. The settlement and release agreement is discussed below.

The Hedrin JV is responsible for the development and commercialization of Hedrin for the North American market and all associated costs including clinical trials, regulatory costs, patent costs, and future milestone payments owed to Thornton & Ross, Ltd., the licensor of Hedrin.

The Hedrin JV engaged the Company to provide management services to the Hedrin JV in exchange for a management fee. For the nine months ended September 30, 2011 and 2010, the Company has recognized $0 and $225,000, respectively, of management fees earned from the Hedrin JV which is included in the Company’s consolidated statements of operations as a component of interest and other income. The management services agreement terminated upon the execution, on January 4, 2011, of a settlement and release agreement between Nordic and the Company. The settlement and release agreement is discussed below.

As previously reported, the Company and Nordic have had various disputes relating to the Hedrin JV, to the Nordic Put and the Nordic Warrant. On January 4, 2011 the Company entered into a settlement and release agreement (the “Nordic Settlement”) with Nordic and the Hedrin JV that resolves all disputes between and among the Company, Nordic and the Hedrin JV.

The Nordic Put has been terminated. The Company believed the Nordic Put permitted Nordic to become the owner, upon exercise of the Nordic Put, of 1,428,571 shares of the Company’s common stock. Nordic asserted that the Nordic Put would have permitted Nordic to become the owner of 3,666,666 shares of the Company’s common stock.

The Nordic Warrant has been terminated. The Company believed the Nordic Warrant covered 285,714 shares of the Company’s common stock. Nordic asserted that the Nordic Warrant covered 666,666 shares of the Company’s common stock.

Nordic was required to make an additional, non-dilutive capital contribution to the Hedrin JV of $1,500,000, which includes $300,000 contributed to the Hedrin JV by Nordic on December 15, 2010.

The Hedrin JV has paid to the Company a settlement amount of $500,000, less any "Excess Payment" (defined below). An "Excess Payment" is the amount by which Nordic’s and the Hedrin JV’s reasonable out-of-pocket legal and other costs incurred with respect to the Settlement and Release Agreement exceed $70,000. To date there have been no Excess Payments.

Our equity interest in the Hedrin JV was reduced to 15%, and further reductions in our equity interest are possible if and when Nordic makes additional capital contributions to the Hedrin JV. In no event shall the capital contributions by Nordic reduce our ownership in the Hedrin JV below 5%.

The Hedrin JV Agreement, dated January 31, 2008, as amended on February 18, 2008, and as further amended by an Omnibus Amendment on June 9, 2008, between the Company and Nordic; the Shareholders’ Agreement, dated February 21, 2008, as amended by an Omnibus Amendment on June 9, 2008, with respect to the Hedrin JV, and the Registration Rights Agreement, dated February 25, 2009, are terminated.

At December 31, 2010 the Company had unrecognized equity in its share of the losses of the Hedrin JV of approximately $560,000. In conjunction with the Nordic Settlement the Company recognized this $560,000 of its share of the losses of the Hedrin JV during the nine months ended September 30, 2011. The Company also recognized a gain on the Nordic Settlement of approximately $4.5 million during the nine months ended September 30, 2011. The components of the gain on the Nordic Settlement are as follows:

	Total			Cash portion		Non cash portion
Exchange obligation, termination of the Nordic Put	$	3,949,176		$	-	$	3,949,176
Termination of the Nordic Warrant		71,429			-		71,429
Payment of settlement amount		500,000			500,000		-
Other		(3,117	)		-		(3,117	)
Totals	$	4,517,488		$	500,000	$	4,017,488

On April 19, 2011 H Pharmaceuticals K/S (the “Hedrin JV”), of which the Company was a 15% limited partner at the time, filed a demand for arbitration against Thornton & Ross, LTD. (“T&R”) with respect to alleged breaches by T&R of an Exclusive License Agreement (the “Hedrin License”) dated June 28, 2007, which was originally entered into between the Company and T&R, and which the Company assigned in 2008 to the Hedrin JV, with T&R’s consent. The Hedrin JV is seeking damages from T&R in the amount of approximately $7,000,000. The Company was not a party to the initial arbitration demand.

On May 20, 2011 T&R filed an answer to the arbitration demand in which T&R asserted counterclaims against the Hedrin JV for alleged breaches by the Hedrin JV of the Hedrin License and for declaratory relief that the Hedrin License was properly terminated by T&R. In addition, T&R has impleaded an individual (who is not associated with the Company), Nordic Biotech Venture Fund II K/S (an investment fund) and the Company, demanding arbitration against them based on alleged breaches of the Hedrin License and other related claims. T&R is seeking damages of approximately $20,000,000.

The Company has not yet responded to the arbitration demand against it, but believes that T&R’s claims against the Company are without merit. The arbitration has begun between the Hedrin JV and T&R without the Company being named as a participant. The Hedrin JV and T&R held a mediation session in order to avoid the arbitration process. The mediation process did not produce a result. Nordic has recently made an additional capital contribution to the Hedrin JV in order to fund the arbitration. As a result of that capital contribution the Company now owns an 11% interest in the Hedrin JV.