Sinotau Litigation

On August 31, 2015, Sinotau Pharmaceutical Group (Sinotau) filed a suit for damages, specific performance and injunctive relief against the Company in the United States District Court for the District of Massachusetts alleging breach of a letter of intent for licensing to Sinotau of the Company’s NAV4694 product candidate and technology.  The Company believed the suit was without merit and filed a motion to dismiss the action.  Since then, the Company has continued discussions with Sinotau in an effort to reach a mutually satisfactory agreement.  In July 2016, the Company executed a term sheet with Cerveau Technologies, Inc. (Cerveau) as a designated party for the rights resulting from the relationship between Navidea and Sinotau.  The term sheet outlines the terms of a potential agreement between the parties to sublicense NAV4694 to Cerveau in return for license fees, milestone payments and royalties.  The term sheet includes a standstill provision that halts the aforementioned litigation unless and until the parties execute a definitive agreement within 60 days.  With the exception of certain provisions, the term sheet is non-binding and is subject to the agreement of AstraZeneca, from whom the Company has licensed the NAV4694 technology.  At this time, it is not possible to determine whether the parties, including AstraZeneca, will reach a definitive agreement, and thus it is not possible to determine with any degree of certainty the ultimate outcome of this legal proceeding, including making a determination of liability.  A dismissal hearing is scheduled for September 2016.

CRG Litigation

On April 7, 2016, we received a notice (the First Notice) from CRG, pursuant to the CRG Loan Agreement.  The First Notice claims that Events of Default have occurred under Sections 11.01(m) (alleging that a Change of Control has occurred), 11.01(e) (alleging that the Company’s agreement with Platinum reported in the Company’s Current Report on Form 8-K filed on March 18, 2016 constituted an amendment, modification, waiver or supplement to the Loan Agreement, dated July 25, 2012, between the Company and Platinum that required the written consent of CRG and that a subsidiary of the Company opened a bank account without notifying CRG), and 11.01(d) (alleging that the failure by the Company to notify CRG of a Default itself constitutes an Event of Default) of the Loan Agreement.  The Company also learned that CRG filed an Original Petition (the Petition) in the District Court for Harris County, Texas alleging the same Events of Default as set forth in the Notice and seeking an undetermined amount of damages and a declaratory judgment that the Company is in default under the Loan Agreement and that CRG, as a result, is entitled to the remedies set forth in Section 11.02 of the Loan Agreement.  In the First Notice, CRG indicated that it elected not to require the amounts due under the CRG Loan Agreement to be immediately due and payable, but claimed that the Obligations under the CRG Loan Agreement shall accrue interest at the default rate of 18% until paid in full.

We did not achieve the 2015 annual Lymphoseek sales revenue target of $11 million as initially established under the CRG Loan Agreement, but in December 2015 CRG agreed to a reduction of that target to $10 million (Amendment 1) and we were able to meet that reduced target with Lymphoseek sales revenue of $10.3 million, thereby complying with the covenant.  On April 22, 2016 we received an additional notice (the Second Notice) from CRG, pursuant to the CRG Loan Agreement.  The Second Notice claims that Amendment 1 is invalid due to the existence of Events of Default at the time of its execution in December 2015 which were not disclosed to CRG at that time.  Consequently, CRG claimed that the Company failed to satisfy Section 3(b) of Amendment 1 in order for Amendment 1 to become effective and breached Section 4(a)(iii) of Amendment 1, and as such, Amendment 1 is of no effect and the Company is bound by the 2015 annual Lymphoseek sales revenue target of $11 million as originally set forth in the CRG Loan Agreement.  Since the Company’s 2015 Lymphoseek sales revenue was $10.3 million, the Second Notice claims that an additional Event of Default has occurred under Section 11.01(d) of the CRG Loan Agreement.

On April 28, 2016, the Company received a further notice (the Third Notice) from CRG informing the Company that CRG commenced exercising its remedies, including with respect to cash collateral.  In that regard, CRG informed the Company that it had delivered notices to exercise control of the Company’s accounts pursuant to the blocked account control and pledge collateral account control agreements with CRG.  On May 2, 2016, the Company successfully sought a temporary restraining order in Harris County Court, Texas, in which the court enjoined CRG from causing any further “freeze” of the Company’s accounts and required CRG to restore the accounts to the position they were in prior to CRG’s April 28, 2016 acts, pending a more complete review of the Company’s and CRG’s positions in the lawsuit. On May 19, 2016, a hearing was held and on May 24, 2016, the court denied the Company’s request for temporary injunctive relief.

On May 31, 2016, CRG declared all of the Company’s obligations under the Loan Agreement and all other loan documents to be immediately due and payable in the amount of $56,157,240.69.  The Company disputes the amounts claimed to be due and believes that CRG does not have the right to accelerate the loan.  On June 1, 2016, CRG filed a Verified Second Amended Petition and Application for Temporary Injunction in The District Court of Harris County, Texas, seeking to restrain the Company and its subsidiary guarantors from operating or using new accounts established by the Company without having first entered into the requisite blocked account control and pledge collateral account control agreements with CRG.

On June 22, 2016, CRG transferred all remaining funds in the Company’s primary bank account pursuant to the blocked account control and pledge collateral account control agreements with CRG to an account or accounts under CRG’s control.  CRG subsequently notified the Company that the $4.1 million was used to reimburse CRG for actual costs and expenses incurred by CRG related to the collection of the collateral of $778,000, pay the prepayment premium of $2.1 million and the backend facility fee of $1.0 million, and the remaining $189,000 was applied to the principal balance of the loan.

On July 13, 2016, a hearing was held in The District Court of Harris County, Texas with respect to the aforementioned Application for Temporary Injunction.  At the conclusion of the hearing, the Court ordered the parties to mediation and stayed any ruling on CRG’s request for injunctive relief until after a mediation has been completed.  On July 20, the parties participated in mediation but were not successful in reaching an agreement.  On July 29, 2016, the Harris County, Texas judge recused herself from the case, citing inability to be impartial.  A new judge was appointed on July 29, 2016.

Also in June 2016, CRG contacted our primary distribution partner, Cardinal Health, and demanded that Cardinal Health make all future payments for Lymphoseek sales directly to CRG, rather than to Navidea.  Cardinal Health filed an interpleader in Franklin County, Ohio court, requesting that the court make a determination as to whom Cardinal Health should make such payments.  On June 28, 2016, Navidea won a TRO from the Ohio court, allowing the Company to receive 50% of the receivables due from Cardinal Health, with the remaining 50% to be placed in a court-controlled escrow account until the Texas Court has ruled.  On August 1, 2016, Navidea successfully negotiated a revised TRO, allowing the Company to receive 75% of the receivables due from Cardinal Health, with the remaining 25% to be placed in escrow until the escrow account reaches $1 million, after which 100% of payments are to be made to Navidea.

The Company maintains that CRG’s allegations of multiple events of default under the CRG Loan Agreement are without merit and the Company believes it has defenses against these claims.  Furthermore, the Company believes that CRG’s actions constitute a material breach of the CRG Loan Agreement and therefore, the Company is no longer subject to certain provisions of the CRG Loan Agreement.  We are continuing to explore alternative financing arrangements in order to refinance the CRG debt.  We believe that our best course of action is to refinance the CRG debt and pursue claims for damages.  There can be no assurance that CRG will not prevail in exercising control over any additional banking arrangements that the Company creates, that the Company will be able to refinance the CRG debt or that the Company will be successful in its claims for damages.  In light of current circumstances, the ability of the Company to continue as a going concern is in substantial doubt and dependent upon its ability to generate sufficient cash flow to sustain its operations on a timely basis, to obtain additional financing as may be required, and to refinance the CRG debt.  See Notes 2 and 8.

Former CEO Arbitration

On May 12, 2016 the Company received a demand for arbitration through the American Arbitration Association, Columbus, Ohio, from Ricardo J. Gonzalez, the Company’s then Chief Executive Officer, claiming that he was terminated without cause and, alternatively, that he resigned in accordance with Section 4G of his Employment Agreement pursuant to a notice received by the Company on May 9, 2016.  On May 13, 2016, the Company notified Mr. Gonzalez that his failure to undertake responsibilities assigned to him by the Board of Directors and otherwise work after being ordered to do so on multiple occasions constituted an effective resignation, and the Company accepted that resignation.  The Company rejected the resignation of Mr. Gonzalez pursuant to Section 4G of his Employment Agreement.  Also, the Company notified Mr. Gonzalez that, alternatively, his failure to return to work after the expiration of the cure period provided in his Employment Agreement constituted cause for his termination under his Employment Agreement.  Mr. Gonzalez is seeking severance and other amounts claimed to be owed to him under his employment agreement.  The Company intends to vigorously defend its position.  In addition, the Company has filed counterclaims against Mr. Gonzalez.  We are currently in the process of choosing a three-person arbitration board.