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EX-32.1 - EX-32.1 - NAVIDEA BIOPHARMACEUTICALS, INC.navb-ex321_6.htm
EX-31.1 - EX-31.1 - NAVIDEA BIOPHARMACEUTICALS, INC.navb-ex311_7.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to                 to

Commission File Number: 001-35076

 

NAVIDEA BIOPHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

31-1080091

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

5600 Blazer Parkway, Suite 200, Dublin, Ohio

 

43017-7550

(Address of principal executive offices)

 

(Zip Code)

(614) 793-7500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

x

Non-accelerated filer

¨

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Act.) Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 155,751,316 shares of common stock, par value $.001 per share (as of the close of business on July 29, 2016).

 

 

 

 


NAVIDEA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I – Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015

 

3

 

 

 

 

 

Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2016 and 2015 (unaudited)

 

4

 

 

 

 

 

Consolidated Statement of Stockholders’ Deficit for the Six Months Ended June 30, 2016 (unaudited)

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)

 

6

 

 

 

 

 

Notes to the Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

 

Forward-Looking Statements

 

23

 

 

 

 

 

The Company

 

23

 

 

 

 

 

Product Line Overview

 

24

 

 

 

 

 

Outlook

 

31

 

 

 

 

 

Results of Operations

 

32

 

 

 

 

 

Liquidity and Capital Resources

 

34

 

 

 

 

 

Recent Accounting Pronouncements

 

39

 

 

 

 

 

Critical Accounting Policies

 

40

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

Item 4.

Controls and Procedures

 

42

 

 

 

 

PART II – Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

43

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

 

Item 6.

Exhibits

 

46

 

 

2


PART I – FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Balance Sheets

 

 

 

June 30,

2016

 

 

December 31,

2015

 

ASSETS

 

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

1,155,641

 

 

$

7,166,260

 

Restricted cash

 

 

500,997

 

 

 

 

Accounts and other receivables

 

 

3,503,055

 

 

 

3,703,186

 

Inventory, net

 

 

769,820

 

 

 

652,906

 

Prepaid expenses and other

 

 

927,269

 

 

 

1,054,822

 

Total current assets

 

 

6,856,782

 

 

 

12,577,174

 

Property and equipment

 

 

3,799,763

 

 

 

3,871,035

 

Less accumulated depreciation and amortization

 

 

2,165,380

 

 

 

1,943,427

 

 

 

 

1,634,383

 

 

 

1,927,608

 

Patents and trademarks

 

 

222,590

 

 

 

233,596

 

Less accumulated amortization

 

 

39,867

 

 

 

47,438

 

 

 

 

182,723

 

 

 

186,158

 

Other assets

 

 

8,261

 

 

 

273,573

 

Total assets

 

$

8,682,149

 

 

$

14,964,513

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,134,635

 

 

$

1,767,523

 

Accrued liabilities and other

 

 

4,923,824

 

 

 

3,038,713

 

Deferred revenue, current

 

 

681,704

 

 

 

1,044,281

 

Notes payable, current

 

 

51,652,209

 

 

 

333,333

 

Total current liabilities

 

 

62,392,372

 

 

 

6,183,850

 

Deferred revenue

 

 

26,061

 

 

 

192,728

 

Notes payable, net of discounts of $0 and $2,033,506, respectively

 

 

9,519,779

 

 

 

60,746,002

 

Other liabilities

 

 

650,931

 

 

 

1,677,633

 

Total liabilities

 

 

72,589,143

 

 

 

68,800,213

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock; $.001 par value; 5,000,000 shares authorized; no shares issued

   or outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

 

Common stock; $.001 par value; 200,000,000 shares authorized; 155,640,734

   and 155,649,665 shares issued and outstanding at June 30, 2016 and

   December 31, 2015, respectively

 

 

155,641

 

 

 

155,650

 

Additional paid-in capital

 

 

326,382,014

 

 

 

326,085,743

 

Accumulated deficit

 

 

(390,913,850

)

 

 

(380,546,651

)

Total Navidea stockholders' deficit

 

 

(64,376,195

)

 

 

(54,305,258

)

Noncontrolling interest

 

 

469,201

 

 

 

469,558

 

Total stockholders’ deficit

 

 

(63,906,994

)

 

 

(53,835,700

)

Total liabilities and stockholders’ deficit

 

$

8,682,149

 

 

$

14,964,513

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

3


Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lymphoseek sales revenue

 

$

4,231,719

 

 

$

1,963,548

 

 

$

8,014,399

 

 

$

3,798,970

 

Lymphoseek license revenue

 

 

245,950

 

 

 

250,000

 

 

 

500,000

 

 

 

333,333

 

Grant and other revenue

 

 

916,811

 

 

 

654,360

 

 

 

1,602,636

 

 

 

844,061

 

Total revenue

 

 

5,394,480

 

 

 

2,867,908

 

 

 

10,117,035

 

 

 

4,976,364

 

Cost of goods sold

 

 

560,740

 

 

 

332,730

 

 

 

1,095,669

 

 

 

781,787

 

Gross profit

 

 

4,833,740

 

 

 

2,535,178

 

 

 

9,021,366

 

 

 

4,194,577

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,525,581

 

 

 

2,297,074

 

 

 

5,185,101

 

 

 

6,278,362

 

Selling, general and administrative

 

 

2,888,141

 

 

 

4,048,799

 

 

 

6,984,801

 

 

 

9,542,967

 

Total operating expenses

 

 

5,413,722

 

 

 

6,345,873

 

 

 

12,169,902

 

 

 

15,821,329

 

Loss from operations

 

 

(579,982

)

 

 

(3,810,695

)

 

 

(3,148,536

)

 

 

(11,626,752

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(7,528,475

)

 

 

(1,575,741

)

 

 

(9,721,998

)

 

 

(2,542,317

)

Equity in loss of R-NAV, LLC

 

 

(2,920

)

 

 

(6,205

)

 

 

(15,159

)

 

 

(268,432

)

Loss on disposal of investment in R-NAV, LLC

 

 

(39,732

)

 

 

 

 

 

(39,732

)

 

 

 

Change in fair value of financial instruments

 

 

1,469,928

 

 

 

(1,852,730

)

 

 

2,595,287

 

 

 

(125,627

)

Loss on extinguishment of debt

 

 

 

 

 

(2,440,714

)

 

 

 

 

 

(2,440,714

)

Other, net

 

 

(126

)

 

 

(4,834

)

 

 

(37,418

)

 

 

21,698

 

Total other expense, net

 

 

(6,101,325

)

 

 

(5,880,224

)

 

 

(7,219,020

)

 

 

(5,355,392

)

Net loss

 

 

(6,681,307

)

 

 

(9,690,919

)

 

 

(10,367,556

)

 

 

(16,982,144

)

Less loss attributable to noncontrolling interest

 

 

(116

)

 

 

(241

)

 

 

(357

)

 

 

(341

)

Deemed dividend on beneficial conversion feature of

   MT Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

(46,000

)

Net loss attributable to common stockholders

 

$

(6,681,191

)

 

$

(9,690,678

)

 

$

(10,367,199

)

 

$

(17,027,803

)

Loss per common share (basic and diluted)

 

$

(0.04

)

 

$

(0.06

)

 

$

(0.07

)

 

$

(0.11

)

Weighted average shares outstanding (basic and diluted)

 

 

155,382,368

 

 

 

150,107,148

 

 

 

155,345,231

 

 

 

149,951,603

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

4


Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Deficit

(unaudited)

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Non-controlling

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Deficit

 

Balance, December 31, 2015

 

 

 

 

$

 

 

 

155,649,665

 

 

$

155,650

 

 

$

326,085,743

 

 

$

(380,546,651

)

 

$

469,558

 

 

$

(53,835,700

)

Issued restricted stock

 

 

 

 

 

 

 

 

168,000

 

 

 

168

 

 

 

 

 

 

 

 

 

 

 

 

168

 

Canceled forfeited restricted

   stock

 

 

 

 

 

 

 

 

(206,000

)

 

 

(206

)

 

 

178

 

 

 

 

 

 

 

 

 

(28

)

Issued stock in payment of

   Board retainers

 

 

 

 

 

 

 

 

29,069

 

 

 

29

 

 

 

34,791

 

 

 

 

 

 

 

 

 

34,820

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

261,302

 

 

 

 

 

 

 

 

 

261,302

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,367,199

)

 

 

(357

)

 

 

(10,367,556

)

Balance, June 30, 2016

 

 

 

 

$

 

 

 

155,640,734

 

 

$

155,641

 

 

$

326,382,014

 

 

$

(390,913,850

)

 

$

469,201

 

 

$

(63,906,994

)

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

5


Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,367,556

)

 

$

(16,982,144

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

267,368

 

 

 

299,139

 

(Gain) loss on disposal and abandonment of assets

 

 

(13,861

)

 

 

14,749

 

Change in inventory reserve

 

 

 

 

 

92,751

 

Amortization of debt discount and issuance costs

 

 

77,964

 

 

 

358,924

 

Debt discount and issuance costs written off

 

 

1,955,541

 

 

 

 

Prepayment premium and debt collection fees related to long term debt

 

 

2,923,271

 

 

 

 

Compounded interest on long term debt

 

 

1,176,931

 

 

 

429,074

 

Stock compensation expense

 

 

261,302

 

 

 

1,519,020

 

Equity in loss of R-NAV, LLC

 

 

 

 

 

241,574

 

Loss on disposal of investment in R-NAV, LLC

 

 

39,732

 

 

 

 

Change in fair value of financial instruments

 

 

(2,595,287

)

 

 

125,627

 

Loss on extinguishment of debt

 

 

 

 

 

2,440,714

 

Issued stock to 401(k) plan for employer matching contributions

 

 

 

 

 

117,099

 

Value of restricted stock issued to directors

 

 

34,820

 

 

 

69,623

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

181,810

 

 

 

(1,013,046

)

Inventory

 

 

(116,914

)

 

 

(355,475

)

Prepaid expenses and other assets

 

 

119,592

 

 

 

680,566

 

Accounts payable

 

 

3,367,112

 

 

 

(119,838

)

Accrued and other liabilities

 

 

1,860,726

 

 

 

(377,132

)

Deferred revenue

 

 

(529,244

)

 

 

1,666,667

 

Net cash used in operating activities

 

 

(1,356,693

)

 

 

(10,792,108

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of equipment

 

 

(1,847

)

 

 

(27,618

)

Proceeds from sales of equipment

 

 

45,000

 

 

 

20,300

 

Patent and trademark costs

 

 

 

 

 

(9,993

)

Payments on disposal of investment in R-NAV, LLC

 

 

(110,000

)

 

 

 

Proceeds from disposal of investment in R-NAV, LLC

 

 

27,623

 

 

 

 

Net cash used in investing activities

 

 

(39,224

)

 

 

(17,311

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of MT Preferred Stock and warrants

 

 

 

 

 

500,000

 

Payment of preferred stock issuance costs

 

 

 

 

 

(12,587

)

Proceeds from issuance of common stock

 

 

140

 

 

 

60,422

 

Payment of tax withholdings related to stock-based compensation

 

 

 

 

 

(23,468

)

Proceeds from notes payable

 

 

 

 

 

54,500,000

 

Payment of debt-related costs

 

 

(3,923,271

)

 

 

(3,902,487

)

Principal payments on notes payable

 

 

(189,163

)

 

 

(30,000,000

)

Restricted cash held for payment against debt

 

 

(500,997

)

 

 

 

Payments under capital leases

 

 

(1,411

)

 

 

(1,232

)

Net cash (used in) provided by financing activities

 

 

(4,614,702

)

 

 

21,120,648

 

Net (decrease) increase in cash

 

 

(6,010,619

)

 

 

10,311,229

 

Cash, beginning of period

 

 

7,166,260

 

 

 

5,479,006

 

Cash, end of period

 

$

1,155,641

 

 

$

15,790,235

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

6


Notes to the Consolidated Financial Statements (unaudited)

 

 

1.

Summary of Significant Accounting Policies

 

a.

Basis of Presentation:  The information presented as of June 30, 2016 and for the three-month and six-month periods ended June 30, 2016 and 2015 is unaudited, but includes all adjustments (which consist only of normal recurring adjustments) that the management of Navidea Biopharmaceuticals, Inc. (Navidea, the Company, or we) believes to be necessary for the fair presentation of results for the periods presented.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission.  The balances as of June 30, 2016 and the results for the interim periods are not necessarily indicative of results to be expected for the year.  The consolidated financial statements should be read in conjunction with Navidea’s audited consolidated financial statements for the year ended December 31, 2015, which were included as part of our Annual Report on Form 10-K.

Our consolidated financial statements include the accounts of Navidea and our wholly owned subsidiaries, Navidea Biopharmaceuticals Limited and Cardiosonix Ltd, as well as those of our majority-owned subsidiary, Macrophage Therapeutics, Inc. (MT).  All significant inter-company accounts were eliminated in consolidation.  Prior to termination of Navidea’s joint venture with R-NAV, LLC (R-NAV), Navidea's investment in R-NAV was being accounted for using the equity method of accounting and was therefore not consolidated.  See Note 7.

 

b.

Financial Instruments and Fair Value:  In accordance with current accounting standards, the fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  In determining the appropriate levels, we perform a detailed analysis of the assets and liabilities whose fair value is measured on a recurring basis.  At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.  See Note 3.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

(1)

Cash, restricted cash, accounts and other receivables, accounts payable, and accrued liabilities:  The carrying amounts approximate fair value because of the short maturity of these instruments.  At June 30, 2016, restricted cash represents the balance in an account that is under the control of Capital Royalty Partners II L.P. (CRG).  See Note 9.  At June 30, 2016, approximately $894,000 of accounts payable was being disputed by the Company related to unauthorized expenditures by a former executive.

 

(2)

Notes payable:  The carrying value of our debt at June 30, 2016 and December 31, 2015 primarily consists of the face amount of the notes less unamortized discounts.  See Note 8.  At June 30, 2016 and December 31, 2015, certain notes payable were also required to be recorded at fair value.  The estimated fair value of our debt was calculated using a discounted cash flow analysis as well as a Monte Carlo simulation.  These valuation methods include Level 3 inputs such as the estimated current market interest rate for similar instruments with similar creditworthiness.  Unrealized gains and losses on the fair value of the debt are classified in other expenses as a change in the fair value of financial instruments in the consolidated statements of operations.  At June 30, 2016, the fair value of our notes payable is approximately $61.2 million, equal to the carrying value of $61.2 million.

 

(3)

Derivative liabilities:  Derivative liabilities are related to certain outstanding warrants which are recorded at fair value.  Derivative liabilities totaling $63,000 as of June 30, 2016 and December 31, 2015 were included in other liabilities on the consolidated balance sheets.  The assumptions used to calculate fair value as of June 30, 2016 and December 31, 2015 included volatility, a risk-free rate and expected dividends.  In addition, we considered non-performance risk and determined that such risk is minimal.  Unrealized gains and losses on the derivatives are classified in other expenses as a change in the fair value of financial instruments in the statements of operations.  See Note 3.

7


 

c.

Revenue Recognition:  We currently generate revenue primarily from sales of Lymphoseek® (technetium Tc 99m tilmanocept) injection.  Our standard shipping terms are free on board (FOB) shipping point, and title and risk of loss passes to the customer upon delivery to a carrier for shipment.  We generally recognize sales revenue related to sales of our products when the products are shipped.  Our customers have no right to return products purchased in the ordinary course of business, however, we may allow returns in certain circumstances based on specific agreements.

We earn additional revenues based on a percentage of the actual net revenues achieved by Cardinal Health on sales to end customers made during each fiscal year.  The amount we charge Cardinal Health related to end customer sales of Lymphoseek are subject to a retroactive annual adjustment.  To the extent that we can reasonably estimate the end-customer prices received by Cardinal Health, we record sales based upon these estimates at the time of sale.  If we are unable to reasonably estimate end customer sales prices related to products sold, we record revenue related to these product sales at the minimum (i.e., floor) price provided for under our distribution agreement with Cardinal Health.

During the six-month periods ended June 30, 2016 and 2015, over 99% of Lymphoseek sales were made to Cardinal Health.  As of June 30, 2016, approximately 98% of accounts and other receivables were due from Cardinal Health.

We also earn revenues related to our licensing and distribution agreements.  The terms of these agreements may include payment to us of non-refundable upfront license fees, funding or reimbursement of research and development efforts, milestone payments if specified objectives are achieved, and/or royalties on product sales.  We evaluate all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis.  We recognize a contingent milestone payment as revenue in its entirety upon our achievement of a substantive milestone if the consideration earned from the achievement of the milestone (i) is consistent with performance required to achieve the milestone or the increase in value to the delivered item, (ii) relates solely to past performance and (iii) is reasonable relative to all of the other deliverables and payments within the arrangement.  We received a non-refundable upfront cash payment of $2.0 million from SpePharm AG upon execution of the SpePharm License Agreement in March 2015.  We have determined that the license and other non-contingent deliverables do not have stand-alone value because the license could not be deemed to be fully delivered for its intended purpose unless we perform our other obligations, including specified development work.  Accordingly, they do not meet the separation criteria, resulting in these deliverables being considered a single unit of account.  As a result, revenue relating to the upfront cash payment was deferred and is being recognized on a straight-line basis over the estimated obligation period of two years.

We generate additional revenue from grants to support various product development initiatives.  We generally recognize grant revenue when expenses reimbursable under the grants have been paid and payments under the grants become contractually due.  Lastly, we recognized revenues from the provision of services to R-NAV and its subsidiaries through the termination of the R-NAV joint venture on May 31, 2016.  See Note 7.

 

d.

Recent Accounting Pronouncements:  In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements-Going Concern.  ASU 2014-15 defines when and how companies are required to disclose going concern uncertainties, which must be evaluated each interim and annual period.  ASU 2014-15 requires management to determine whether substantial doubt exists regarding the entity's going concern presumption.  Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued).  If substantial doubt exists, certain disclosures are required; the extent of those disclosures depends on an evaluation of management's plans (if any) to mitigate the going concern uncertainty.  ASU 2014-15 is effective prospectively for annual periods ending after December 15, 2016, and to annual and interim periods thereafter.  Early adoption is permitted. We do not expect the adoption of ASU 2014-15 to have a material effect on our consolidated financial statements, however it may affect our disclosures.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers – Principal versus Agent Considerations (Reporting Revenue Gross versus Net).  ASU 2016-08 does not change the core principle of the guidance, rather it clarifies the implementation guidance on principal versus agent considerations.  ASU 2016-08 clarifies the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective.  The effective date and transition requirements for ASU 2016-08 are the same as for ASU 2014-09, which was deferred by one year by ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date.  Public business entities should adopt the new revenue recognition standard for annual reporting periods beginning after December 15, 2017, including interim periods within that year.  Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.  We are currently evaluating the potential impact that the adoption of ASU 2014-09 may have on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation.  ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  Some of the

8


simplified areas apply only to nonpublic entities.  ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted in any interim or annual period.  If an entity early adopts ASU 2016-09 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  Methods of adoption vary according to each of the amendment provisions.  We are currently evaluating the potential impact that the adoption of ASU 2016-09 may have on our consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing.  ASU 2016-10 does not change the core principle of the guidance, rather it clarifies the identification of performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.  ASU 2016-10 clarifies the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective.  The effective date and transition requirements for ASU 2016-10 are the same as for ASU 2014-09, which was deferred by one year by ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date.  Public business entities should adopt the new revenue recognition standard for annual reporting periods beginning after December 15, 2017, including interim periods within that year.  Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.  We are currently evaluating the potential impact that the adoption of ASU 2014-09 may have on our consolidated financial statements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients.  ASU 2016-12 does not change the core principle of the guidance, rather it affects only certain narrow aspects of Topic 606, including assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition.  ASU 2016-12 affects the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective.  The effective date and transition requirements for ASU 2016-12 are the same as for ASU 2014-09, which was deferred by one year by ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date.  Public business entities should adopt the new revenue recognition standard for annual reporting periods beginning after December 15, 2017, including interim periods within that year.  Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.  We are currently evaluating the potential impact that the adoption of ASU 2014-09 may have on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses – Measurement of Credit Losses on Financial Instruments.  ASU 2016-13 requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  ASU 2016-13 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted in any interim or annual period for fiscal years beginning after December 15, 2018.  An entity should apply the amendments in ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective approach).  We are currently evaluating the potential impact that the adoption of ASU 2016-13 may have on our consolidated financial statements, however, we do not expect it to have a material effect.

 

e.

Reclassifications:  Certain reclassifications have been made to the prior year’s financial statements to conform to the 2016 presentation.  The reclassifications relate to the presentation of the consolidated statements of cash flows and do not change the consolidated balance sheets, statements of operations, or net cash used in operating activities.

 

 

2.

Liquidity

All of our material assets, except our intellectual property, have been pledged as collateral for our borrowings under the Term Loan Agreement (the CRG Loan Agreement) with CRG.  In addition to the security interest in our assets, the CRG Loan Agreement carries covenants that impose significant requirements on us, including, among others, requirements that we (1) pay all principal, interest and other charges on the outstanding balance of the borrowed funds when due; (2) maintain liquidity of at least $5 million during the term of the CRG Loan Agreement; and (3) meet certain annual EBITDA or revenue targets ($22.5 million of Lymphoseek sales revenue in 2016) as defined in the CRG Loan Agreement.  The events of default under the CRG Loan Agreement also include a failure of Platinum-Montaur Life Sciences LLC, an affiliate of Platinum Management (NY) LLC, Platinum Partners Value Arbitrage Fund L.P., Platinum Partners Liquid Opportunity Master Fund L.P., Platinum Liquid Opportunity Management (NY) LLC, and Montsant Partners LLC (collectively, Platinum) to perform its funding obligations under the Platinum Loan Agreement (as defined below) at any time as to which the Company had negative EBITDA for the most recent fiscal quarter, as a result either of Platinum’s repudiation of its obligations under the Platinum Loan Agreement, or the occurrence of an insolvency event with respect to Platinum.

Our ability to comply with the covenants of the CRG Loan Agreement may be affected by changes in our business condition or results of our operations, or other events beyond our control.  An event of default would entitle CRG to accelerate the maturity

9


of our indebtedness, increase the interest rate from 14% to the default rate of 18% per annum, and invoke other remedies available to it under the loan agreement and the related security agreement.

During the second quarter of 2016, CRG alleged multiple claims of default on the CRG Loan Agreement, and filed suit in The District Court of Harris County, Texas.  On June 22, 2016, CRG exercised control over one of the Company’s primary bank accounts, withdrawing $4.1 million and applying $3.9 million of the cash to various fees, including collection fees, a prepayment premium and an end-of-term fee.  The remaining $189,000 was applied to the principal balance of the debt.  As of June 30, 2016, the Company’s unrestricted cash balance was $1.2 million.  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 temporary restraining order (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 8 and 9.

In addition, our Loan Agreement with Platinum (the Platinum Loan Agreement) carries standard non-financial covenants typical for commercial loan agreements, many of which are similar to those contained in the CRG Loan Agreement, that impose significant requirements on us.  Our ability to comply with these provisions may be affected by changes in our business condition or results of our operations, or other events beyond our control.  The breach of any of these covenants would result in a default under the Platinum Loan Agreement, permitting Platinum to terminate our ability to obtain additional draws under the Platinum Loan Agreement and accelerate the maturity of the debt, subject to the limitations of the Subordination Agreement with CRG.  Such actions by Platinum could materially adversely affect our operations, results of operations and financial condition, including causing us to substantially curtail our product development activities.

The Platinum Loan Agreement includes a covenant that results in an event of default on the Platinum Loan Agreement upon default on the CRG Loan Agreement.  As discussed above, the Company is maintaining its position that CRG’s alleged claims do not constitute events of default under the CRG Loan Agreement and believes it has defenses against such claims.  The Company has obtained a waiver from Platinum confirming that we are not in default under the Platinum Loan Agreement as a result of the alleged default on the CRG Loan Agreement and as such, we are currently in compliance with all covenants under the Platinum Loan Agreement.

As of June 30, 2016, the outstanding principal balance of the Platinum Note was approximately $9.1 million, with $27.3 million currently available under the credit facility.  An additional $15 million is potentially available under the credit facility on terms to be negotiated.  However, based on Platinum’s recently stated intent to liquidate their funds, Navidea has substantial doubt about Platinum’s ability to fund future draw requests under the credit facility.  The inability to access credit under the Platinum Loan Agreement or other potentially available arrangements could materially adversely affect our operations and financial condition and our ability to continue as a going concern.  See Note 8.

 

 

3.

Fair Value

Platinum has the right to convert all or any portion of the unpaid principal or unpaid interest accrued on all draws under the Platinum credit facility, under certain circumstances.  Platinum’s debt instrument, including the embedded option to convert such debt into common stock, is recorded at fair value on the consolidated balance sheets.  The estimated fair value of the Platinum notes payable is $9.5 million at June 30, 2016.

MT issued warrants to purchase MT Common Stock with certain characteristics including a net settlement provision that require the warrants to be accounted for as a derivative liability at fair value on the consolidated balance sheets.  The estimated fair value of the MT warrants is $63,000 at June 30, 2016, and will continue to be measured on a recurring basis.  See Note 1(b)(3).

10


The following tables set forth, by level, financial liabilities measured at fair value on a recurring basis:

 

Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2016

 

Description

 

Quoted Prices in

Active Markets

for Identical Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

 

 

Total

 

Platinum notes payable conversion option

 

$

 

 

$

 

 

$

416,593

 

 

$

416,593

 

Liability related to MT warrants

 

 

 

 

 

 

 

 

63,000

 

 

 

63,000

 

 

Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2015

 

Description

 

Quoted Prices in

Active Markets for Identical

Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

 

 

Total

 

Platinum notes payable conversion option

 

$

 

 

$

 

 

$

3,011,880

 

 

$

3,011,880

 

Liability related to MT warrants

 

 

 

 

 

 

 

 

63,000

 

 

 

63,000

 

 

 

a.

Valuation Processes-Level 3 Measurements:  The Company utilizes third-party valuation services that use complex models such as Monte Carlo simulation to estimate the value of our financial liabilities.  Each reporting period, the Company provides significant unobservable inputs to the third-party valuation experts based on current internal estimates and forecasts.

 

b.

Sensitivity Analysis-Level 3 Measurements:  Changes in the Company’s current internal estimates and forecasts are likely to cause material changes in the fair value of certain liabilities.  The significant unobservable inputs used in the fair value measurement of the liabilities include the amount and timing of future draws expected to be taken under the Platinum Loan Agreement based on current internal forecasts and management’s estimate of the likelihood of actually making those draws as opposed to obtaining other sources of financing.  Significant increases (decreases) in any of the significant unobservable inputs would result in a higher (lower) fair value measurement.  A change in one of the inputs would not necessarily result in a directionally similar change in the others.

There were no Level 1 liabilities outstanding at any time during the six-month periods ended June 30, 2016 and 2015.  There were no transfers in or out of our Level 2 liabilities during the six-month periods ended June 30, 2016 and 2015.  Changes in the estimated fair value of our Level 3 liabilities relating to unrealized gains (losses) are recorded as changes in fair value of financial instruments in the consolidated statements of operations.  The change in the estimated fair value of our Level 3 liabilities during the three-month periods ended June 30, 2016 and 2015 was a decrease of $1.5 million and an increase of $1.9 million, respectively.  The change in the estimated fair value of our Level 3 liabilities during the six-month periods ended June 30, 2016 and 2015 was a decrease of $2.6 million and an increase of $126,000, respectively.

 

 

4.

Stock-Based Compensation

For the three-month periods ended June 30, 2016 and 2015, our total stock-based compensation expense, which includes reversals of expense for certain forfeited or cancelled awards, was approximately $(79,000) and $412,000, respectively.  For the six-month periods ended June 30, 2016 and 2015, our total stock-based compensation expense, which includes reversals of expense for certain forfeited or cancelled awards, was approximately $261,000 and $1.5 million, respectively.  We have not recorded any income tax benefit related to stock-based compensation in any of the three-month or six-month periods ended June 30, 2016 and 2015.

11


A summary of the status of our stock options as of June 30, 2016, and changes during the six-month period then ended, is presented below:

 

 

 

Six Months Ended June 30, 2016

 

 

 

Number of

Options

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Life

 

Aggregate

Intrinsic

Value

 

Outstanding at beginning of period

 

 

5,437,064

 

 

$

1.96

 

 

 

 

 

 

 

Granted

 

 

459,457

 

 

 

1.05

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Canceled and Forfeited

 

 

(1,504,550

)

 

 

1.58

 

 

 

 

 

 

 

Expired

 

 

(299,000

)

 

 

2.42

 

 

 

 

 

 

 

Outstanding at end of period

 

 

4,092,971

 

 

$

1.97

 

 

7.0 years

 

$

21,450

 

Exercisable at end of period

 

 

2,808,491

 

 

$

2.05

 

 

6.5 years

 

$

21,450

 

 

A summary of the status of our unvested restricted stock as of June 30, 2016, and changes during the six-month period then ended, is presented below:

 

 

 

Six Months Ended

June 30, 2016

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant-Date

Fair Value

 

Unvested at beginning of period

 

 

361,000

 

 

$

1.69

 

Granted

 

 

168,000

 

 

 

1.20

 

Vested

 

 

(66,000

)

 

 

1.65

 

Forfeited

 

 

(206,000

)

 

 

1.77

 

Unvested at end of period

 

 

257,000

 

 

$

1.32

 

 

During the six-month period ended June 30, 2016, 66,000 shares of restricted stock held by non-employee directors with an aggregate fair value of $63,360 vested as scheduled according to the terms of the restricted stock agreements.  Also during the six-month period ended June 30, 2016, 206,000 shares of unvested restricted stock were forfeited upon resignation of certain directors and an officer.

As of June 30, 2016, there was approximately $527,000 of total unrecognized compensation expense related to unvested stock-based awards, which we expect to recognize over the remaining weighted average vesting term of 1.3 years.

 

 

5.

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares and, except for periods with a loss from operations, participating securities outstanding during the period.  Diluted earnings (loss) per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by the Company include convertible debt, convertible preferred stock, options and warrants.

Diluted earnings (loss) per common share for the six-month periods ended June 30, 2016 and 2015 excludes the effects of 14.7 million and 20.3 million common share equivalents, respectively, since such inclusion would be anti-dilutive.  The excluded shares consist of common shares issuable upon exercise of outstanding stock options and warrants, and upon the conversion of convertible debt and convertible preferred stock.

The Company’s unvested stock awards contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid (referred to as “participating securities”).  Therefore, the unvested stock awards are required to be included in the number of shares outstanding for both basic and diluted earnings per share calculations.  However, due to our loss from operations, 257,000 shares of unvested restricted stock for the three-month and six-month periods ended June 30, 2016, and 550,750 shares of unvested restricted stock for the three-month and six-month periods ended June 30, 2015, respectively, were excluded in determining basic and diluted loss per share because such inclusion would be anti-dilutive.

 

 

12


6.

Inventory

All components of inventory are valued at the lower of cost (first-in, first-out) or market.  We adjust inventory to market value when the net realizable value is lower than the carrying cost of the inventory.  Market value is determined based on estimated sales activity and margins.  We estimate a reserve for obsolete inventory based on management’s judgment of probable future commercial use, which is based on an analysis of current inventory levels, estimated future sales and production rates, and estimated shelf lives.

The components of inventory as of June 30, 2016 and December 31, 2015 are as follows:

 

 

 

June 30,

2016

 

 

December 31,

2015

 

 

 

(unaudited)

 

 

 

 

 

Materials

 

$

 

 

$

330,000

 

Work-in-process

 

 

65,611

 

 

 

392,457

 

Finished goods

 

 

882,115

 

 

 

275,168

 

Reserves

 

 

(177,906

)

 

 

(344,719

)

Total

 

$

769,820

 

 

$

652,906

 

 

During the six month-period ended June 30, 2015, we wrote off $120,000 of materials related to production issues.  During the six-month periods ended June 30, 2016 and 2015, the Company used $36,000 and $123,000, respectively, of Lymphoseek inventory for clinical study and product development purposes.

 

 

7.

Investment in R-NAV, LLC

Effective May 31, 2016, Navidea terminated its joint venture with R-NAV.  Under the terms of the agreement, Navidea (1) transferred all of its shares of R-NAV, consisting of 1,500,000 Series A Preferred Units and 3,500,000 Common Units, to R-NAV; and (2) paid $110,000 in cash to R-NAV.  In exchange, R-NAV (1) transferred all of its shares of TcRA Imaging, Inc. (TcRA) to Navidea, thereby returning the technology licensed to TcRA to Navidea; and (2) forgave the $333,333 remaining on the promissory note.  Neither Navidea nor R-NAV has any further obligations of any kind to either party.  As a result of this transaction, the Company recognized a loss on disposal of the investment in R-NAV of $39,732 during the second quarter of 2016.

Navidea’s investment in R-NAV was being accounted for using the equity method of accounting.  Navidea’s equity in the loss of R-NAV was $15,159 and $268,432, respectively, for the six-month periods ended June 30, 2016 and 2015.  Navidea’s equity in the loss of R-NAV exceeded our initial investment in R-NAV.  As such, the carrying value of the Company’s investment in R-NAV was $0 as of the date of termination.

The Company’s obligation to provide $500,000 of in-kind services to R-NAV was being recognized as those services were provided.  The Company provided $15,000 and $27,000, respectively, of in-kind services during the six-month periods ended June 30, 2016 and 2015.  As of the date of termination, the Company had $383,000 of in-kind services remaining to provide under this obligation.  This obligation ceased on May 31, 2016 under the terms of the agreement.

Navidea provided additional services to R-NAV in support of its development activities.  Such services were immaterial to Navidea’s overall operations.

 

 

13


8.

Notes Payable

Platinum

In July 2012, we entered into an agreement with Platinum to provide us with a credit facility of up to $50 million.  Following the approval of Lymphoseek, Platinum was committed under the terms of the agreement to extend up to $35 million in debt financing to the Company.  During the six-month period ended June 30, 2016, $624,000 of interest was compounded and added to the balance of the Platinum Note.  In accordance with the terms of the Section 16(b) Settlement Agreement discussed in Note 15(c), Platinum agreed to forgive interest owed on the credit facility in an amount equal to 6%, effective July 1, 2016.  As of June 30, 2016, the outstanding principal balance of the Platinum Note was approximately $9.1 million, with $27.3 million currently available under the credit facility.  An additional $15 million is potentially available under the credit facility on terms to be negotiated.  However, based on Platinum’s recently stated intent to liquidate their funds, Navidea has substantial doubt about Platinum’s ability to fund future draw requests under the credit facility.

The Platinum Note is reflected on the consolidated balance sheets at its estimated fair value, which includes the estimated fair value of the embedded conversion option of $417,000.  During the three-month periods ended June 30, 2016 and 2015, changes in the estimated fair value of the Platinum Note were a decrease of $1.5 million and an increase of $1.9 million, respectively, and were recorded as non-cash changes in the fair value of the conversion option.  During the six-month periods ended June 30, 2016 and 2015, changes in the estimated fair value of the Platinum Note were a decrease of $2.6 million and an increase of $126,000, respectively, and were recorded as non-cash changes in the fair value of the conversion option.  The estimated fair value of the Platinum Note was $9.5 million as of June 30, 2016.

The Platinum Loan Agreement includes a covenant that results in an event of default on the Platinum Loan Agreement upon default on the CRG Loan Agreement.  As discussed above, the Company is maintaining its position that CRG’s alleged claims do not constitute events of default under the CRG Loan Agreement and believes it has defenses against such claims.  The Company has obtained a waiver from Platinum confirming that we are not in default under the Platinum Loan Agreement as a result of the alleged default on the CRG Loan Agreement and as such, we are currently in compliance with all covenants under the Platinum Loan Agreement.

Capital Royalty Partners II, L.P.

In May 2015, Navidea and its subsidiary Macrophage Therapeutics, Inc., as guarantor, executed a Term Loan Agreement with CRG in its capacity as a lender and as control agent for other affiliated lenders party to the CRG Loan Agreement (collectively, the Lenders) in which the Lenders agreed to make a term loan to the Company in the aggregate principal amount of $50 million (the CRG Term Loan), with an additional $10 million in loans to be made available upon the satisfaction of certain conditions stated in the CRG Loan Agreement.  During the six-month period ended June 30, 2016, $553,000 of interest was compounded and added to the balance of the CRG Term Loan.  Pursuant to a notice of default letter sent to Navidea by CRG, the Company stopped compounding interest in the second quarter of 2016 and began recording accrued interest.  As of June 30, 2016, $2.3 million of accrued interest is included in accrued liabilities and other on the consolidated balance sheets.  As of June 30, 2016, the outstanding principal balance of the CRG Term Loan was $51.7 million.

In connection with the CRG Loan Agreement, the Company recorded a debt discount related to lender fees and other costs directly attributable to the CRG Loan Agreement totaling $2.2 million, including a $1.0 million facility fee which is payable at the end of the term or when the loan is repaid in full.  A long-term liability was recorded for the $1.0 million facility fee.  The debt discount was being amortized as non-cash interest expense using the effective interest method over the term of the CRG Loan Agreement.  As further described below, the facility fee was fully paid off and the debt discount was accelerated and fully amortized in the second quarter of 2016.

The CRG Term Loan is collateralized by a security interest in substantially all of the Company's assets.  In addition, the CRG Loan Agreement requires that the Company adhere to certain affirmative and negative covenants, including financial reporting requirements and a prohibition against the incurrence of indebtedness, or creation of additional liens, other than as specifically permitted by the terms of the CRG Loan Agreement.  The Lenders may accelerate the payment terms of the CRG Loan Agreement upon the occurrence of certain events of default set forth therein, which include the failure of the Company to make timely payments of amounts due under the CRG Loan Agreement, the failure of the Company to adhere to the covenants set forth in the CRG Loan Agreement, and the insolvency of the Company.  The covenants of the CRG Loan Agreement include a covenant that the Company shall have EBITDA of no less than $5 million in each calendar year during the term or revenues from sales of Lymphoseek in each calendar year during the term of at least $22.5 million in 2016, with the target minimum revenue increasing in each year thereafter until reaching $45 million in 2020.  However, if the Company were to fail to meet the applicable minimum EBITDA or revenue target in any calendar year, the CRG Loan Agreement provides the Company a cure right if it raises 2.5 times the EBITDA or revenue shortfall in equity or subordinated debt and deposits such funds in a separate blocked account.  Additionally, the Company must maintain liquidity, defined as the balance of unencumbered cash and permitted cash equivalent investments, of at least $5 million during the term of the CRG Term Loan.  The events of default under the CRG Loan Agreement also include a failure of Platinum to perform its funding obligations under the Platinum Loan

14


Agreement at any time as to which the Company had negative EBITDA for the most recent fiscal quarter, as a result either of Platinum’s repudiation of its obligations under the Platinum Loan Agreement, or the occurrence of an insolvency event with respect to Platinum.

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% per annum 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’ 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.  The collection fees and prepayment premium were recorded as interest expense, the backend facility fee reduced the liability that was recorded for that purpose at inception, and the principal payment reduced the balance of the debt during the second quarter of 2016.  In addition, the remaining unamortized balance of the debt discount of $2.0 million was recorded as interest expense during the second quarter of 2016.  Although we have conservatively categorized these expenses according to the manner in which CRG applied them, we believe the $4.1 million should be applied entirely to the outstanding 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.

15


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 9.

Based on CRG’s claims that the Company is in default under the terms of the CRG Loan Agreement, and in accordance with current accounting guidance, the Company has classified the balance of the CRG Term Loan as a current liability as of June 30, 2016.

R-NAV, LLC

Effective May 31, 2016, Navidea terminated its joint venture with R-NAV.  In accordance with the terms of the agreement, R-NAV forgave the $333,333 remaining on the promissory note.  See Note 7.

Summary

During the three-month periods ended June 30, 2016 and 2015, we recorded net interest expense of $7.5 million and $1.6 million, respectively, primarily related to our notes payable.  Of these amounts, $5,000 and $146,000, respectively, related to amortization of the debt discounts related to our notes payable.  An additional $352,000 and $429,000, respectively, of total interest expense was compounded and added to the balance of our notes payable during the three-month periods ended June 30, 2016 and 2015.  During the six-month periods ended June 30, 2016 and 2015, we recorded net interest expense of $9.7 million and $2.5 million, respectively, primarily related to our notes payable.  Of these amounts, $78,000 and $359,000, respectively, related to amortization of the debt discounts related to our notes payable.  An additional $1.2 million and $429,000, respectively, of total interest expense was compounded and added to the balance of our notes payable during the six-month periods ended June 30, 2016 and 2015.  The collection fees of $778,000, prepayment premium of $2.1 million, and the remaining unamortized balance of the CRG debt discount of $2.0 million were also recorded as interest expense during the three-month period ended June 30, 2016.

 

 

9.

Commitments and Contingencies

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.

16


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.

17


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.

 

 

10.

Equity Instruments

During the six-month period ended June 30, 2016, we issued 29,069 shares of our common stock valued at $34,820 to certain members of our Board of Directors who elected to receive stock in lieu of cash compensation.

 

 

11.

Stock Warrants

At June 30, 2016, there are 11.7 million warrants outstanding to purchase Navidea's common stock.  The warrants are exercisable at prices ranging from $0.01 to $3.04 per share with a weighted average exercise price of $0.38 per share.  The warrants have remaining outstanding terms ranging from 1 to 19 years.

In addition, at June 30, 2016, there are 300 warrants outstanding to purchase MT Common Stock.  The warrants are exercisable at $2,000 per share.

 

 

12.

Income Taxes

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Due to the uncertainty surrounding the realization of the deferred tax assets in future tax returns, all of the deferred tax assets have been fully offset by a valuation allowance at June 30, 2016 and December 31, 2015.

Current accounting standards include guidance on the accounting for uncertainty in income taxes recognized in the financial statements.  Such standards also prescribe a recognition threshold and measurement model for the financial statement

18


recognition of a tax position taken, or expected to be taken, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company believes that the ultimate deductibility of all tax positions is highly certain, although there is uncertainty about the timing of such deductibility.  As a result, no liability for uncertain tax positions was recorded as of June 30, 2016 or December 31, 2015 and we do not expect any significant changes in the next twelve months.  Should we need to accrue interest or penalties on uncertain tax positions, we would recognize the interest as interest expense and the penalties as a selling, general and administrative expense.  As of June 30, 2016, tax years 2012-2015 remained subject to examination by federal and state tax authorities.

 

 

13.

Segments

We report information about our operating segments using the “management approach” in accordance with current accounting standards.  This information is based on the way management organizes and reports the segments within the enterprise for making operating decisions and assessing performance.  Our reportable segments are identified based on differences in products, services and markets served.  There were no inter-segment sales.  Prior to 2015, our products and development programs were all related to diagnostic substances.  Our majority-owned subsidiary, Macrophage Therapeutics, Inc., was formed and received initial funding during the first quarter of 2015, which resulted in a re-evaluation of the Company's segment determination.  We now manage our business based on two primary types of drug products: (i) diagnostic substances, including Lymphoseek and other diagnostic applications of our Manocept platform, our R-NAV joint venture (terminated on May 31, 2016), NAV4694 and NAV5001 (license terminated in April 2015), and (ii) therapeutic development programs, including therapeutic applications of our Manocept platform and all development programs undertaken by Macrophage Therapeutics, Inc.

The information in the following tables is derived directly from each reportable segment’s financial reporting.

 

Three Months Ended June 30, 2016

 

Diagnostics

 

 

Therapeutics

 

 

Corporate

 

 

Total

 

Lymphoseek sales revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States (1)

 

$

4,218,606

 

 

$

 

 

$

 

 

$

4,218,606

 

International

 

 

13,113

 

 

 

 

 

 

 

 

 

13,113

 

Lymphoseek license revenue

 

 

245,950

 

 

 

 

 

 

 

 

 

245,950

 

Grant and other revenue

 

 

865,359

 

 

 

51,452

 

 

 

 

 

 

916,811

 

Total revenue

 

 

5,343,028

 

 

 

51,452

 

 

 

 

 

 

5,394,480

 

Cost of goods sold, excluding depreciation and amortization

 

 

546,466

 

 

 

 

 

 

 

 

 

546,466

 

Research and development expenses,

   excluding depreciation and amortization

 

 

2,414,255

 

 

 

111,326

 

 

 

 

 

 

2,525,581

 

Selling, general and administrative expenses,

   excluding depreciation and amortization (2)

 

 

1,135,558

 

 

 

4,430

 

 

 

1,644,649

 

 

 

2,784,637

 

Depreciation and amortization (3)

 

 

14,274

 

 

 

 

 

 

103,504

 

 

 

117,778

 

Income (loss) from operations (4)

 

 

1,232,475

 

 

 

(64,304

)

 

 

(1,748,153

)