From time to time, we are a party to, or otherwise involved in, legal proceedings arising in the normal course of business.  As of the date of this report, except as described below, we are not aware of any proceedings, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.

The Company is named in two legal proceedings involving Daniel Fisher.

The first proceeding is an action filed in Contra Costa County, California  by the landlord, which is an entity managed by Mr. Fisher, to evict MusclePharm as a tenant from real property our now inactive subsidiary, Biozone Laboratories, Inc. (“Biozone Labs”) previously leased. MusclePharm purchased our operating assets from us on January 2, 2014, and we immediately merged with Cocrystal Discovery, Inc. (“Cocrystal Discovery”).  Prior to our sale of our operating assets to MusclePharm, we gave notice of the assignment of the lease to MusclePharm and requested that the founder/landlord approve the assignment.  The lease requires landlord approval, said approval not to be unreasonably denied.  The landlord failed to respond to our request, but gave notice to the lender that held a mortgage note on the property of the asset sale and assignment of the lease to MusclePharm. Prior notice and consent of a lease assignment or change of control was also required under the terms of the loan documents related to the property, although no notice was given when we acquired Biozone Labs in 2011.

On March 27, 2014, the landlord filed suit in the Contra Costa County Court against us and Biozone Labs, as well as MusclePharm, alleging the assignment of the lease to MusclePharm was a violation of the lease and its provision requiring the landlord’s consent for a change of control.  As indicated above, the landlord failed to either approve or reject the proposed assignment when requested in December 2013.  Further, the landlord has continued to cash the rent checks from MusclePharm (from January 2014 through November 2014), without objection or reservation of its rights. Only upon the lender’s default and acceleration of the note did the landlord express any objection to the assignment.  The Company’s position in the litigation will include that by engaging in the foregoing conduct, the landlord waived its right to assert a default due to the change in control.  

We agreed to indemnify MusclePharm for its expenses if it were evicted as the result of any action taken by the landlord. The costs of any move would be substantial.   As described in Note 7, MusclePharm has made a claim in the amount of $3,037,000 and the Company has agreed to a Memo of Understanding in which it is agreed that the Company will continue to escrow 260,000 shares of MusclePharm stock shares pending such time as MusclePharm and the Company can reach a mutually agreeable arrangement.  There have been no material recent developments, and the proceeding is not presently being actively litigated. We intend to vigorously defend the action to prevent MusclePharm’s eviction.

In the second proceeding, the Company has been named as a party to a lawsuit filed on April 15, 2014 in Contra Costa County, California by the same entity managed by Mr. Fisher. Also named in this action are two of the Company’s subsidiaries – BioZone Labs and Cocrystal Discovery.   The action seeks recovery on a promissory note purportedly executed by BioZone Labs in the principal amount of $295,000 in 2007, well before our January 2, 2014 merger with Cocrystal Discovery.   Motions challenging the sufficiency of the allegations in the Complaint were filed in the third quarter, 2014, the motions were granted and plaintiff was given an opportunity to amend the complaint, and plaintiff has filed an amended complaint. The Company intends to vigorously defend the action.

Previously the lender to the Fisher entity which owns the Contra Costa County property had threatened to foreclose, based upon, among other things, the change of control. Mr. Fisher was one of the founders of Biozone Labs and financed the purchase of the property from which Biozone Labs’ principal operations were then conducted.  Biozone Labs was required to guarantee the note and performance under the deed of trust securing repayment of the note (together with the founder, his wife and the other founder). As indicated in Note 10 to the Consolidated Financial Statements, the note and deed of trust was purchased by the Company in June 2014. This removed the threat of a lawsuit against Biozone Labs and us for the principal of the note and related charges including legal fees.