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 believes the suit is without merit and has filed a motion to dismiss the action.  At this time, it is not possible to determine with any degree of certainty the ultimate outcome of this legal proceeding, including making a determination of liability.

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 in a hearing scheduled for May 19, 2016.

The Company is maintaining its position that the alleged claims do not constitute Events of Default under the Loan Agreement and intends to vigorously defend against these claims.  The Company continues to evaluate its options, including the possible assertion of counterclaims.  However, if the Company does not prevail in these legal proceedings, CRG may invoke any and all remedies available to it under the loan agreement and the related security agreement, including acceleration of the maturity of our indebtedness, which could materially adversely affect our ability to continue as a going concern.  See Notes 2 and 8.