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 September 30, 2015

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: 155,699,665 shares of common stock, par value $.001 per share (as of the close of business on November 2, 2015).

 

 

 

 

 


NAVIDEA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I – Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

 

3

 

 

 

 

 

Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2015 and 2014 (unaudited)

 

4

 

 

 

 

 

Consolidated Statement of Stockholders’ Deficit for the Nine-Month Period Ended September 30, 2015
(unaudited)

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2015 and 2014 (unaudited)

 

6

 

 

 

 

 

Notes to the Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

Item 2.

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

 

19

 

 

 

 

 

Forward-Looking Statements

 

19

 

 

 

 

 

The Company

 

19

 

 

 

 

 

Product Line Overview

 

20

 

 

 

 

 

Outlook

 

26

 

 

 

 

 

Results of Operations

 

27

 

 

 

 

 

Liquidity and Capital Resources

 

29

 

 

 

 

 

Recent Accounting Pronouncements

 

32

 

 

 

 

 

Critical Accounting Policies

 

33

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

Item 4.

Controls and Procedures

 

35

 

 

 

 

PART II – Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

37

 

 

 

 

Item 1A.

Risk Factors

 

37

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

 

 

 

Item 6.

Exhibits

 

38

 

 

2


PART I – FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Balance Sheets

 

 

 

September 30,

2015

 

 

December 31,

2014

 

ASSETS

 

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

11,370,420

 

 

$

5,479,006

 

Accounts receivable, net

 

 

1,909,372

 

 

 

816,544

 

Inventory, net

 

 

877,183

 

 

 

932,385

 

Prepaid expenses and other

 

 

807,687

 

 

 

1,371,210

 

Total current assets

 

 

14,964,662

 

 

 

8,599,145

 

Property and equipment

 

 

3,862,440

 

 

 

4,124,028

 

Less accumulated depreciation and amortization

 

 

1,805,113

 

 

 

1,614,320

 

 

 

 

2,057,327

 

 

 

2,509,708

 

Patents and trademarks

 

 

233,596

 

 

 

219,558

 

Less accumulated amortization

 

 

45,701

 

 

 

38,725

 

 

 

 

187,895

 

 

 

180,833

 

Investment in R-NAV, LLC

 

 

 

 

 

241,575

 

Other assets

 

 

273,573

 

 

 

299,047

 

Total assets

 

$

17,483,457

 

 

$

11,830,308

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,298,879

 

 

$

1,477,499

 

Accrued liabilities and other

 

 

3,602,891

 

 

 

3,234,120

 

Deferred revenue, current

 

 

1,002,531

 

 

 

 

Notes payable, current, net of discounts of $0 and $863,813, respectively

 

 

333,333

 

 

 

4,348,678

 

Total current liabilities

 

 

6,237,634

 

 

 

9,060,297

 

Deferred revenue

 

 

416,667

 

 

 

 

Notes payable, net of discounts of $2,102,947 and $1,585,882, respectively

 

 

60,946,844

 

 

 

29,484,057

 

Other liabilities

 

 

1,701,939

 

 

 

3,089,420

 

Total liabilities

 

 

69,303,084

 

 

 

41,633,774

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock; $.001 par value; 5,000,000 shares authorized; 0 and 4,519 Series B

   shares issued and outstanding at September 30, 2015 and December 31, 2014,

   respectively

 

 

 

 

 

4

 

Common stock; $.001 par value; 200,000,000 shares authorized; 150,703,485 and

   150,200,259 shares issued and outstanding at September 30, 2015 and

   December 31, 2014,respectively

 

 

150,703

 

 

 

150,200

 

Additional paid-in capital

 

 

325,596,476

 

 

 

323,030,301

 

Accumulated deficit

 

 

(378,036,538

)

 

 

(352,983,971

)

Total Navidea stockholders' deficit

 

 

(52,289,359

)

 

 

(29,803,466

)

Noncontrolling interest

 

 

469,732

 

 

 

 

Total stockholders’ deficit

 

 

(51,819,627

)

 

 

(29,803,466

)

Total liabilities and stockholders’ deficit

 

$

17,483,457

 

 

$

11,830,308

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

3


Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lymphoseek sales revenue

 

$

2,952,522

 

 

$

1,101,071

 

 

$

6,751,492

 

 

$

2,773,959

 

Lymphoseek license revenue

 

 

550,000

 

 

 

300,000

 

 

 

883,333

 

 

 

300,000

 

Grant and other revenue

 

 

476,755

 

 

 

848,999

 

 

 

1,320,816

 

 

 

1,002,605

 

Total revenue

 

 

3,979,277

 

 

 

2,250,070

 

 

 

8,955,641

 

 

 

4,076,564

 

Cost of goods sold

 

 

457,590

 

 

 

807,880

 

 

 

1,239,377

 

 

 

1,271,598

 

Gross profit

 

 

3,521,687

 

 

 

1,442,190

 

 

 

7,716,264

 

 

 

2,804,966

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,902,155

 

 

 

4,158,085

 

 

 

10,180,517

 

 

 

14,496,977

 

Selling, general and administrative

 

 

3,942,609

 

 

 

2,646,591

 

 

 

13,485,576

 

 

 

11,465,076

 

Total operating expenses

 

 

7,844,764

 

 

 

6,804,676

 

 

 

23,666,093

 

 

 

25,962,053

 

Loss from operations

 

 

(4,323,077

)

 

 

(5,362,486

)

 

 

(15,949,829

)

 

 

(23,157,087

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2,148,369

)

 

 

(918,026

)

 

 

(4,690,686

)

 

 

(2,764,122

)

Equity in loss of R-NAV, LLC

 

 

(26,785

)

 

 

(262,198

)

 

 

(295,217

)

 

 

(262,198

)

Change in fair value of financial instruments

 

 

(1,577,275

)

 

 

(409,650

)

 

 

(1,702,902

)

 

 

(109,499

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

(2,440,714

)

 

 

(2,610,196

)

Other, net

 

 

4,402

 

 

 

53,464

 

 

 

26,100

 

 

 

41,419

 

Total other income (expense), net

 

 

(3,748,027

)

 

 

(1,536,410

)

 

 

(9,103,419

)

 

 

(5,704,596

)

Net loss

 

 

(8,071,104

)

 

 

(6,898,896

)

 

 

(25,053,248

)

 

 

(28,861,683

)

Less loss attributable to noncontrolling interest

 

 

(340

)

 

 

 

 

 

(681

)

 

 

 

Deemed dividend on beneficial conversion feature of

   MT Preferred Stock

 

 

 

 

 

 

 

 

(46,000

)

 

 

 

Net loss attributable to common stockholders

 

$

(8,070,764

)

 

$

(6,898,896

)

 

$

(25,098,567

)

 

$

(28,861,683

)

Loss per common share (basic and diluted)

 

$

(0.05

)

 

$

(0.05

)

 

$

(0.17

)

 

$

(0.19

)

Weighted average shares outstanding (basic and diluted)

 

 

150,186,131

 

 

 

150,169,712

 

 

 

150,030,638

 

 

 

148,344,064

 

 

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, 2014

 

 

4,519

 

 

$

4

 

 

 

150,200,259

 

 

$

150,200

 

 

$

323,030,301

 

 

$

(352,983,971

)

 

$

 

 

$

(29,803,466

)

Issued stock upon exercise of

   stock options, net

 

 

 

 

 

 

 

 

124,238

 

 

 

124

 

 

 

54,206

 

 

 

 

 

 

 

 

 

54,330

 

Issued restricted stock

 

 

 

 

 

 

 

 

354,000

 

 

 

354

 

 

 

 

 

 

 

 

 

 

 

 

354

 

Canceled forfeited restricted

   stock

 

 

 

 

 

 

 

 

(108,000

)

 

 

(108

)

 

 

108

 

 

 

 

 

 

 

 

 

 

Canceled stock to pay employee

   tax obligations

 

 

 

 

 

 

 

 

(7,645

)

 

 

(7

)

 

 

(12,607

)

 

 

 

 

 

 

 

 

(12,614

)

Issued stock in payment of

   Board retainers

 

 

 

 

 

 

 

 

72,476

 

 

 

72

 

 

 

131,189

 

 

 

 

 

 

 

 

 

131,261

 

Issued stock to 401(k) plan

 

 

 

 

 

 

 

 

68,157

 

 

 

68

 

 

 

117,031

 

 

 

 

 

 

 

 

 

117,099

 

Exchanged Series B Preferred

   Stock for warrants

 

 

(4,519

)

 

 

(4

)

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

Extension of warrant expiration

   date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

149,615

 

 

 

 

 

 

 

 

 

149,615

 

Issued warrants in connection

   with advisory services

   agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

256,450

 

 

 

 

 

 

 

 

 

256,450

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,916,179

 

 

 

 

 

 

 

 

 

1,916,179

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,052,567

)

 

 

(681

)

 

 

(25,053,248

)

Issuance of MT Preferred Stock,

   net of deemed dividend on

   beneficial conversion feature

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46,000

)

 

 

 

 

 

470,413

 

 

 

424,413

 

Balance, September 30, 2015

 

 

 

 

$

 

 

 

150,703,485

 

 

$

150,703

 

 

$

325,596,476

 

 

$

(378,036,538

)

 

$

469,732

 

 

$

(51,819,627

)

 

See accompanying notes to consolidated financial statements (unaudited).

 

5


Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(25,053,248

)

 

$

(28,861,683

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

431,368

 

 

 

360,702

 

Loss on disposal and abandonment of assets

 

 

33,184

 

 

 

31,794

 

Change in reserve for uncollectible accounts

 

 

16,000

 

 

 

 

Change in inventory reserve and other adjustments to inventory

 

 

138,914

 

 

 

539,027

 

Amortization of debt discount and issuance costs

 

 

423,522

 

 

 

637,565

 

Compounded interest on long term debt

 

 

1,231,125

 

 

 

 

Stock compensation expense

 

 

1,916,179

 

 

 

1,032,244

 

Equity in loss of R-NAV, LLC

 

 

295,217

 

 

 

262,198

 

Change in fair value of financial instruments

 

 

1,702,902

 

 

 

109,499

 

Loss on extinguishment of debt

 

 

2,440,714

 

 

 

2,610,196

 

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

 

 

117,099

 

 

 

100,044

 

Extension of warrant expiration date

 

 

149,615

 

 

 

 

Issued warrants in connection with advisory services agreement

 

 

256,450

 

 

 

 

Other

 

 

77,620

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,108,828

)

 

 

(314,800

)

Inventory

 

 

(83,712

)

 

 

573,191

 

Prepaid expenses and other assets

 

 

588,996

 

 

 

(109,116

)

Accounts payable

 

 

(178,620

)

 

 

(45,410

)

Accrued and other liabilities

 

 

305,170

 

 

 

(1,226,288

)

Deferred revenue

 

 

1,419,198

 

 

 

 

Net cash used in operating activities

 

 

(14,881,135

)

 

 

(24,300,837

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of equipment

 

 

(30,406

)

 

 

(1,111,418

)

Proceeds from sales of equipment

 

 

38,265

 

 

 

 

Patent and trademark costs

 

 

(27,092

)

 

 

(51,876

)

Investment in R-NAV, LLC

 

 

 

 

 

(333,334

)

Net cash used in investing activities

 

 

(19,233

)

 

 

(1,496,628

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of MT Preferred Stock and warrants

 

 

500,000

 

 

 

 

Payment of issuance costs related to MT Preferred Stock and warrants

 

 

(12,587

)

 

 

 

Proceeds from issuance of common stock and short swing profits

 

 

65,975

 

 

 

87,982

 

Payment of tax withholdings related to stock-based compensation

 

 

(23,906

)

 

 

(75,759

)

Proceeds from notes payable

 

 

54,500,000

 

 

 

30,000,000

 

Payment of debt-related costs

 

 

(3,902,487

)

 

 

(1,763,526

)

Principal payments on notes payable

 

 

(30,333,333

)

 

 

(25,000,000

)

Payments under capital leases

 

 

(1,880

)

 

 

(1,640

)

Net cash provided by financing activities

 

 

20,791,782

 

 

 

3,247,057

 

Net increase (decrease) in cash

 

 

5,891,414

 

 

 

(22,550,408

)

Cash, beginning of period

 

 

5,479,006

 

 

 

32,939,026

 

Cash, end of period

 

$

11,370,420

 

 

$

10,388,618

 

 

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 September 30, 2015 and for the three-month and nine-month periods ended September 30, 2015 and 2014 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 September 30, 2015 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, 2014, 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.  Navidea's investment in R-NAV, LLC (R-NAV) is being accounted for using the equity method of accounting and is therefore not consolidated.

 

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 2.

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

 

(1)

Cash, accounts receivable, accounts payable, and accrued liabilities:  The carrying amounts approximate fair value because of the short maturity of these instruments.

 

(2)

Notes payable:  The carrying value of our debt at September 30, 2015 and December 31, 2014 primarily consists of the face amount of the notes less unamortized discounts.  See Note 8.  At September 30, 2015 and December 31, 2014, 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.  For the debt recorded at fair value, 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 September 30, 2015, the fair value of our notes payable is approximately $64.2 million, compared to the carrying value of $61.3 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 September 30, 2015 were included in other liabilities on the consolidated balance sheets.  No derivative liabilities were outstanding as of December 31, 2014.  The assumptions used to calculate fair value as of September 30, 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 Notes 2 and 6.

 

c.

Revenue Recognition:  We currently generate revenue primarily from sales of Lymphoseek® (technetium Tc 99m tilmanocept) injection.  Our standard shipping terms are FOB shipping point, and title and risk of loss passes to the

7


 

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.

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 recognize revenues from the provision of services to R-NAV and its subsidiaries.  See Note 7.

 

d.

Change in Accounting Principle:  In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset.  The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03.  ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  Early adoption is permitted.  Entities must apply the amendments in ASU 2015-03 on a retrospective basis.

During the second quarter of 2015, the Company elected early adoption of ASU 2015-03.  The consolidated balance sheet as of December 31, 2014 has been adjusted to reflect retrospective application of the new method of presentation.  Deferred debt issuance costs totaling $90,000 that were included in other assets as of December 31, 2014 were reclassified as discounts on notes payable, current, of $35,000 and discounts on notes payable, long term, of $55,000.  We have reflected these unamortized costs as a reduction of the debt on the balance sheet as of September 30, 2015 and will continue to do so in future periods.  The adoption of ASU 2015-03 had no impact on the consolidated statements of operations, stockholders' deficit or cash flows.

 

e.

Recent Accounting Pronouncements:  In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis.  ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities.  All legal entities are subject to reevaluation under the revised consolidation model.  Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, and (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships.  ASU 2015-02 is effective for public entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.  The amendments may be applied using a modified retrospective approach or a full retrospective approach.  Early adoption is permitted, including adoption in an interim period.  We are currently evaluating the impact of our adoption of ASU 2015-02, however we do not expect the adoption of ASU 2015-02 to have a material effect on our consolidated financial statements upon adoption.

8


In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory.  ASU 2015-11 applies to all inventory that is measured using methods other than last-in, first-out or the retail inventory method, including inventory that is measured using first-in, first-out or average cost.  ASU 2015-11 requires entities to measure inventory at the lower of cost and net realizable value, defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  ASU 2015-11 is effective for public entities for fiscal years beginning after December 15, 2016, and interim periods with fiscal years beginning after December 15, 2017.  The amendments in ASU 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.  We do not expect the adoption of ASU 2015-11 to have a material effect on our consolidated financial statements upon adoption.

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers.  ASU 2015-14 defers the effective date of ASU No. 2014-09 for all entities by one year.  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 evaluating the potential impact of the adoption of ASU 2014-09, but we do not currently expect the adoption to have a material effect on our consolidated financial statements upon adoption.

 

 

2.

Fair Value

As discussed in Note 8, under the First and Second Amended Platinum Notes, Platinum-Montaur Life Sciences, LLC (Platinum) had the right to convert all or any portion of the unpaid principal or unpaid interest accrued on any draws subsequent to the second quarter of 2013 under the Platinum credit facility into Navidea common stock, under certain circumstances.  In May 2015, Navidea and Platinum executed a Third Amended Platinum Note, which extends Platinum's right to convert any portion of the unpaid principal or unpaid interest to all draws under the credit facility, including those made prior to the second quarter of 2013.  The Third Amended Platinum Note also changed other provisions of the Platinum Loan Agreement as discussed further in Note 8.  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 $12.3 million at September 30, 2015.

MT issued warrants to purchase 300 shares of MT Common Stock in connection with the sale of 10 shares of MT Preferred Stock in March 2015.  The warrants have certain characteristics including a net settlement provision that require the warrants to be accounted for as a derivative liability at fair value, with subsequent changes in fair value included in earnings.  The estimated fair value of the MT warrants is $63,000 at September 30, 2015, and will continue to be measured on a recurring basis.  See Notes 1(b)(3) and 6.

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 September 30, 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

 

$

 

 

$

 

 

$

12,280,513

 

 

$

12,280,513

 

Liability related to warrants

 

 

 

 

 

 

 

 

63,000

 

 

 

63,000

 

 

Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2014

 

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

 

$

 

 

$

 

 

$

5,615,764

 

 

$

5,615,764

 

 

 

a.

Valuation Processes-Level 3 Measurements:  Depending on the instrument, the Company utilizes discounted cash flows, option pricing models, or third-party valuation services to estimate the value of their financial assets and liabilities.  Valuations using discounted cash flow methods and certain option pricing models such as Black-Scholes are generally conducted by the Company or by third-party valuation experts.  Valuations using complex models such as a Monte Carlo simulation are generally provided to the Company by third-party valuation experts.  Each reporting period, the Company provides significant unobservable inputs to the third-party valuation experts based on current internal estimates and forecasts.

9


 

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.  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 three-month and nine-month periods ended September 30, 2015 and 2014.  There were no transfers in or out of our Level 2 liabilities during the three-month and nine-month periods ended September 30, 2015 or 2014.  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 September 30, 2015 and 2014 was $1.6 million and $410,000, respectively.  The change in the estimated fair value of our Level 3 liabilities during the nine-month periods ended September 30, 2015 and 2014 was $1.7 million and $109,000, respectively.

 

 

3.

Stock-Based Compensation

At September 30, 2015, we have instruments outstanding under two stock-based compensation plans; the Amended and Restated 2002 Stock Incentive Plan (the 2002 Plan) and the Amended and Restated 2014 Stock Incentive Plan (the 2014 Plan).  Total shares authorized under each plan are 12 million shares and 5 million shares, respectively.  In addition, we have stock options outstanding that were awarded as an employment inducement in connection with the appointment of our new CEO in October 2014.  Currently, under the 2014 Plan, we may grant incentive stock options, nonqualified stock options, and restricted stock awards to full-time employees and directors, and nonqualified stock options and restricted stock awards may be granted to our consultants and agents.  Although instruments are still outstanding under the 2002 Plan, the plan has expired and no new grants may be made from it.  Under both plans, the exercise price of each option is greater than or equal to the closing market price of our common stock on the date of the grant.

Stock options granted under the 2002 Plan and the 2014 Plan generally vest on an annual basis over one to four years.  The stock options that were awarded as an employment inducement in connection with the appointment of our CEO will vest in three tranches based on certain service and market conditions as defined in the agreement.  Outstanding stock options under the plans, if not exercised, generally expire ten years from their date of grant or up to 90 days following the date of an optionee’s separation from employment with the Company.  We issue new shares of our common stock upon exercise of stock options.

Stock-based payments to employees and directors, including grants of stock options, are recognized in the consolidated statements of operations based on their estimated fair values.  The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model.  Expected volatilities are based on the Company’s historical volatility, which management believes represents the most accurate basis for estimating expected future volatility under the current circumstances.  Navidea uses historical data to estimate forfeiture rates.  The expected term of stock options granted is based on the vesting period and the contractual life of the options.  The risk-free rate is based on the U.S. Treasury yield in effect at the time of the grant.

The portion of the fair value of stock-based awards that is ultimately expected to vest is recognized as compensation expense over either (1) the requisite service period or (2) the estimated performance period.  Restricted stock awards are valued based on the closing stock price on the date of grant and amortized ratably over the estimated life of the award.  Restricted stock may vest based on the passage of time, or upon occurrence of a specific event or achievement of goals as defined in the grant agreements.  In such cases, we record compensation expense related to grants of restricted stock based on management’s estimates of the probable dates of the vesting events.  Stock-based awards that do not vest because the requisite service period is not met prior to termination result in reversal of previously recognized compensation cost.

For the three-month periods ended September 30, 2015 and 2014, our total stock-based compensation expense, which includes reversals of expense for certain forfeited or cancelled awards, was approximately $397,000 and $(528,000), respectively.  For the nine-month periods ended September 30, 2015 and 2014, our total stock-based compensation expense was approximately $1.9 million and $1.0 million, respectively.  We have not recorded any income tax benefit related to stock-based compensation in either of the three-month and nine-month periods ended September 30, 2015 and 2014.

10


A summary of the status of our stock options as of September 30, 2015, and changes during the nine-month period then ended, is presented below:

 

 

 

Nine Months Ended September 30, 2015

 

 

 

Number of

Options

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Life

 

Aggregate

Intrinsic

Value

 

Outstanding at beginning of period

 

 

5,345,764

 

 

$

2.16

 

 

 

 

 

 

 

Granted

 

 

1,365,400

 

 

 

1.67

 

 

 

 

 

 

 

Exercised

 

 

(146,625

)

 

 

0.61

 

 

 

 

 

 

 

Canceled and Forfeited

 

 

(1,081,725

)

 

 

2.82

 

 

 

 

 

 

 

Expired

 

 

(5,750

)

 

 

1.26

 

 

 

 

 

 

 

Outstanding at end of period

 

 

5,477,064

 

 

$

1.95

 

 

7.4 years

 

$

3,058,790

 

Exercisable at end of period

 

 

2,222,049

 

 

$

2.21

 

 

5.3 years

 

$

1,012,990

 

 

A summary of the status of our unvested restricted stock as of September 30, 2015, and changes during the nine-month period then ended, is presented below:

 

 

 

Nine Months Ended

September 30, 2015

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant-Date

Fair Value

 

Unvested at beginning of period

 

 

498,250

 

 

$

1.91

 

Granted

 

 

354,000

 

 

 

1.73

 

Vested

 

 

(240,750

)

 

 

1.85

 

Forfeited

 

 

(108,000

)

 

 

2.71

 

Unvested at end of period

 

 

503,500

 

 

$

1.63

 

 

In February 2015, 120,000 shares of restricted stock held by non-employee directors with an aggregate fair value of $193,000 vested as scheduled according to the terms of the restricted stock agreements.  In March 2015, 20,000 shares of restricted stock held by an employee with an aggregate fair value of $33,000 vested as scheduled according to the terms of a restricted stock agreement.  In May 2015, 100,750 shares of restricted stock held by employees with an aggregate fair value of $130,000 vested as scheduled according to the terms of the restricted stock agreements.

As of September 30, 2015, there was approximately $1.5 million of total unrecognized compensation expense related to unvested stock-based awards, which we expect to recognize over the remaining weighted average vesting term of 1.7 years.

 

 

4.

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 three-month and nine-month periods ended September 30, 2015 and 2014 excludes the effects of 19.3 million and 17.7 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 continuing operations, 503,500 shares of unvested restricted stock for the three-month and nine-month periods ended September 30, 2015, and 563,500 shares of unvested restricted stock for the three-month and nine-month periods ended September 30, 2014, respectively, were excluded in determining basic and diluted loss per share because such inclusion would be anti-dilutive.

11


 

 

5.

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.

The components of inventory as of September 30, 2015 and December 31, 2014, net of reserves of $352,000 and $539,000, respectively, are as follows:

 

 

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(unaudited)

 

 

 

 

 

Materials

 

$

396,000

 

 

$

 

Work-in-process

 

 

236,422

 

 

 

1,034,476

 

Finished goods

 

 

596,450

 

 

 

436,936

 

Reserves

 

 

(351,689

)

 

 

(539,027

)

Total

 

$

877,183

 

 

$

932,385

 

 

During the nine-month period ended September 30, 2015, we capitalized $810,000 of inventory costs associated with our Lymphoseek product.  The Company capitalized no such costs during the same period in 2014.  During the nine-month period ended September 30, 2015, we wrote off $120,000 of materials related to production issues.  During the nine-month periods ended September 30, 2015 and 2014, we utilized $184,000 and $121,000, respectively, of previously capitalized Lymphoseek inventory due to the consumption of the Lymphoseek material for product testing and development purposes.

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.

 

 

6.

Investment in Macrophage Therapeutics, Inc.

In March 2015, MT, our previously wholly-owned subsidiary, entered into a Securities Purchase Agreement to sell up to 50 shares of its Series A Convertible Preferred Stock (MT Preferred Stock) and warrants to purchase up to 1,500 common shares of MT (MT Common Stock) to Platinum-Montaur Life Sciences, LLC (Platinum) and Dr. Michael Goldberg (collectively, the Investors) for a purchase price of $50,000 per unit.  A unit consists of one share of MT Preferred Stock and 30 warrants to purchase MT Common Stock.  Under the agreement, 40% of the MT Preferred Stock and warrants are committed to be purchased by Dr. Goldberg, and the balance by Platinum.  The full 50 shares of MT Preferred Stock and warrants that may be sold under the agreement are convertible into, and exercisable for, MT Common Stock representing an aggregate 1% interest on a fully converted and exercised basis.  Navidea owns the remainder of the MT Common Stock.  On March 11, 2015, definitive agreements with the Investors were signed for the sale of the first tranche of 10 shares of MT Preferred Stock and warrants to purchase 300 shares of MT Common Stock to the Investors, with gross proceeds to MT of $500,000.  The MT Common Stock held by parties other than Navidea is reflected on the consolidated balance sheets as a noncontrolling interest.

The warrants have certain characteristics including a net settlement provision that require the warrants to be accounted for as a derivative liability at fair value, with subsequent changes in fair value included in earnings.  The fair value of the warrants was estimated to be $63,000 at issuance and at September 30, 2015.  See Notes 1(b)(3) and 2.  In addition, the MT Preferred Stock includes a beneficial conversion feature.  The conversion option was immediately convertible upon issuance, resulting in a deemed dividend of $46,000 related to the beneficial conversion feature.  Finally, certain provisions of the Securities Purchase Agreement obligate the Investors to acquire the remaining MT Preferred Stock and related warrants for $2.0 million at the option of MT.  The estimated relative fair value of this put option was $113,000 at issuance based on the Black-Scholes option pricing model and is classified within stockholders' equity.

In addition, we entered into a Securities Exchange Agreement with the Investors providing them an option to exchange their MT Preferred Stock for our common stock in the event that MT has not completed a public offering with gross proceeds to MT of at least $50 million by the second anniversary of the closing of the initial sale of MT Preferred Stock, at an exchange rate per share obtained by dividing $50,000 by the greater of (i) 80% of the twenty-day volume weighted average price per share of our common stock on the second anniversary of the initial closing or (ii) $3.00.  To the extent that the Investors do not timely exercise their exchange right, MT has the right to redeem their MT Preferred Stock for a price equal to $58,320 per share.  We also granted MT an exclusive license for certain therapeutic applications of the Manocept technology.

 

12


 

7.

Investment in R-NAV, LLC

Navidea’s investment in R-NAV, LLC (R-NAV) of approximately 31% is being accounted for using the equity method of accounting.  Navidea’s equity in the loss of R-NAV was $27,000 and $262,000, respectively, for the three-month periods ended September 30, 2015 and 2014.  Navidea’s equity in the loss of R-NAV was $295,000 and $262,000, respectively, for the nine-month periods ended September 30, 2015 and 2014.

The Company’s obligation to provide $500,000 of in-kind services to R-NAV is being recognized as those services are provided.  The Company provided $27,000 and $21,000, respectively, of in-kind services during the three-month periods ended September 30, 2015 and 2014.  The Company provided $54,000 and $21,000, respectively, of in-kind services during the nine-month periods ended September 30, 2015 and 2014.  As of September 30, 2015, the Company has $408,000 of in-kind services remaining to provide under this obligation.

 

 

8.

Notes Payable

Capital Royalty Group Debt

In May 2015, Navidea and its subsidiary Macrophage Therapeutics, Inc., as guarantor, executed a Term Loan Agreement (the CRG Loan Agreement) with Capital Royalty Partners II L.P. 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.  Closing and funding of the CRG Term Loan occurred on May 15, 2015 (the Effective Date).  The principal balance of the CRG Term Loan will bear interest from the Effective Date at a per annum rate of interest equal to 14.0%.  Through March 31, 2019, the Company has the option of paying (i) 10.00% of the per annum interest in cash and (ii) 4.00% of the per annum interest as compounded interest which is added to the aggregate principal amount of the CRG Term Loan.  During the nine-month period ended September 30, 2015, $769,000 of interest was compounded and added to the balance of the CRG Term Loan.  In addition, the Company began paying the cash portion of the interest in arrears on June 30, 2015.  Principal is due in eight equal quarterly installments during the final two years of the term.  All unpaid principal, and accrued and unpaid interest, is due and payable in full on March 31, 2021.  As of September 30, 2015, the outstanding principal balance of the CRG Term Loan was $50.8 million.

The Company may voluntarily prepay the CRG Term Loan in full, upon fifteen business days’ prior written notice to the Lenders, with a prepayment premium beginning at 5% and declining by 1% annually thereafter, with no premium being payable if prepayment occurs after the fifth year of the term.  The CRG Term Loan required the payment on the borrowing date of a financing fee of $625,000 which was recorded as a discount to the debt.  In addition, a facility fee of $1.0 million is payable at the end of the term or when the loan is repaid in full.  A long-term liability has been recorded for the $1.0 million facility fee with a corresponding discount to the debt.  The CRG Term Loan is collateralized by a security interest in substantially all of the Company's assets.

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 $11 million in 2015, with the target minimum revenue increasing in each year thereafter until reaching $45 million in 2020.  The Company believes it is still possible to achieve the level of sales required to maintain compliance with the sales covenant.  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.  The Company is confident it has the ability to access the capital necessary to cure any potential shortfall for 2015.  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 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.  As of September 30, 2015, we were in compliance with all applicable covenants of the CRG Loan Agreement.

13


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.  The debt discount is being amortized as non-cash interest expense using the effective interest method over the term of the CRG Loan Agreement.  As of September 30, 2015, the balance of the debt discount was $2.1 million.

Oxford Debt

In March 2014, we executed a Loan and Security Agreement (the Oxford Loan Agreement) with Oxford Finance, LLC (Oxford), providing for a loan to the Company of $30 million.  Pursuant to the Oxford Loan Agreement, we issued Oxford: (1) Term Notes in the aggregate principal amount of $30 million, bearing interest at 8.5% (the Oxford Notes), and (2) Series KK warrants to purchase an aggregate of 391,032 shares of our common stock at an exercise price of $1.918 per share, expiring in March 2021 (the Series KK warrants).  We began making monthly payments of interest only on April 1, 2014, and monthly payments of principal and interest beginning April 1, 2015.  In May 2015, in connection with the consummation of the CRG Loan Agreement, the Company repaid all amounts outstanding under the Oxford Loan Agreement.  The payoff amount of $31.6 million included payments of $289,000 as a pre-payment fee and $2.4 million as an end-of-term final payment fee.  The carrying value of the Oxford Notes was $26.9 million prior to payoff.  We recorded a loss on extinguishment of the Oxford Notes of $2.4 million.

Platinum Credit Facility

In connection with the Company entering into the CRG Loan Agreement, the Company and Platinum entered into a Third Amendment (the Third Platinum Amendment) to the Loan Agreement between the Company and Platinum, dated July 25, 2012, as amended June 25, 2013 and March 4, 2014 (the Platinum Loan Agreement).  Platinum and the Lenders also entered into a Subordination Agreement (the Subordination Agreement), which the Company consented to and acknowledged, providing for the subordination of the Company’s indebtedness to Platinum under the Platinum Loan Agreement to the Company’s indebtedness under the CRG Loan Agreement, among other customary terms and conditions. Contemporaneously with the execution of the Third Platinum Amendment, the Company delivered a Third Amended and Restated Promissory Note, dated the Effective Date (the Third Amended Platinum Note), which amends and restates the Second Amended Promissory Note, dated March 4, 2014, made by the Company in favor of Platinum in the original principal amount of up to $35 million.  Among other things, the Third Platinum Amendment (i) extends the term of the Platinum Loan Agreement until September 30, 2021 or six months following an early repayment of the CRG Term Loan; (ii) changes the interest rate to the greater of (a) the United States prime rate as reported in The Wall Street Journal plus 6.75%, (b) 10.0% or (c) the highest rate of interest then payable pursuant to the CRG Term Loan plus 0.125% (the effective interest rate as of September 30, 2015 was 14.125%); (iii) requires such interest to compound monthly; and (iv) changes the provisions of the Platinum Loan Agreement governing Platinum’s right to convert advances into common stock of the Company.  The Third Platinum Amendment provides for the conversion of all principal and interest outstanding under the Platinum Loan Agreement, but not until such time as the average daily volume weighted average price of the Company’s common stock for the ten preceding trading days exceeds $2.53 per share.

The Platinum Loan Agreement provides us with a credit facility of up to $50 million.  The Company borrowed an additional $4.5 million under the Platinum Loan Agreement during the nine-month period ended September 30, 2015.  In addition, $462,000 of interest was compounded and added to the balance of the Third Amended Platinum Note during the nine-month period ended September 30, 2015.  The Third Amended 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 $4.1 million.  Changes in the estimated fair value of the Third Amended Platinum Note of $1.6 million and $402,000, respectively, were recorded as non-cash changes in fair value of financial instruments during the three-month periods ended September 30, 2015 and 2014.  Changes in the estimated fair value of the Third Amended Platinum Note of $1.7 million and $104,000, respectively, were recorded as non-cash changes in fair value of financial instruments during the nine-month periods ended September 30, 2015 and 2014.  The estimated fair value of the Third Amended Platinum Note was $12.3 million as of September 30, 2015.  As of September 30, 2015, the outstanding principal balance of the Third Amended Platinum Note was approximately $8.2 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.

R-NAV Debt

In July 2015, we made a principal payment on the note payable to R-NAV of $333,333.  As of September 30, 2015, the outstanding principal balance of the note payable to R-NAV was $333,333 which is due in July 2016.

14


Interest on our Debt

During the three-month periods ended September 30, 2015 and 2014, we recorded interest expense of $2.2 million and $921,000, respectively, related to our notes payable.  Of these amounts, $65,000 and $201,000, respectively, related to amortization of the debt discounts related to our notes payable.  An additional $802,000 of total interest expense was compounded and added to the balance of our notes payable during the three-month period ended September 30, 2015.  During the nine-month periods ended September 30, 2015 and 2014, we recorded interest expense of $4.7 million and $2.8 million, respectively, related to our notes payable.  Of these amounts, $424,000 and $638,000, respectively, related to amortization of the debt discounts related to our notes payable.  An additional $1.2 million of total interest expense was compounded and added to the balance of our notes payable during the nine-month period ended September 30, 2015.

 

 

9.

Equity

During the nine-month period ended September 30, 2015, we issued 72,476 shares of our common stock valued at $131,000 to certain members of our Board of Directors as payment in lieu of cash for a portion of their fourth quarter 2014 and second quarter 2015 compensation.

 

 

 

10.

Stock Warrants

In July 2015, we extended the expiration date of our outstanding Series BB warrants by three years to July 2018.  The modification of the Series BB warrant expiry resulted in recording a non-cash selling, general and administrative expense of approximately $150,000 during the three-month period ended September 30, 2015.

In August 2015, we entered into a Securities Exchange Agreement with two investment funds managed by Platinum Management (NY) LLC to exchange the 4,519 shares of Series B Convertible Preferred Stock (Preferred Stock) held by them for twenty-year warrants to purchase common stock of the Company (the Series LL warrants).  The Preferred Stock was convertible into common stock at a conversion rate of 3,270 shares of common stock per share of Preferred Stock resulting in an aggregate number of shares of common stock into which the Preferred Stock was convertible of 14,777,130 shares.  The exercise price of the Series LL warrants is $0.01 per share, and the total number of shares of common stock for which the Series LL warrants are exercisable is 14,777,130 shares.  The Series LL warrants contain cashless exercise provisions, and the other economic terms are comparable to those of the Preferred Stock, except that there is no liquidation preference associated with the Series LL warrants or shares issuable on the exercise thereof.  The Securities Exchange Agreement also contains certain provisions that prohibit the payment of dividends, distributions of common stock or issuances of common stock at effective prices less than $1.35.  There was no other consideration paid or received for the exchange.  No gain or loss was recognized in our consolidated financial statements as a result of the exchange.  The exchange transaction was entered into in connection with the filing of an application to list the Company’s common stock on the Tel Aviv Stock Exchange (TASE) in order to comply with a listing requirement of the TASE requiring that listed companies have only one class of equity securities issued and outstanding.  Following the exchange, the Company has no shares of preferred stock outstanding.

In September 2015, we issued four-year Series MM warrants to purchase 150,000 shares of our common stock at an exercise price of $2.50 per share pursuant to an advisory services agreement with Chardan Capital Markets, LLC (Chardan).  Warrants to purchase an additional 150,000 shares of our common stock on the same terms are issuable to Chardan if they meet certain performance goals as outlined in the agreement.  The fair value of the warrants issued and issuable to Chardan of $256,000 was recorded as a non-cash selling, general and administrative expense during the three-month period ended September 30, 2015.

At September 30, 2015, there are 16.6 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 $0.25 per share.  The warrants have remaining outstanding terms ranging from 0 to 20 years.

In addition, at September 30, 2015, there are 300 warrants outstanding to purchase MT Common Stock.  The warrants are exercisable at $2,000 per share.

 

 

11.

Reduction in Force

In March 2015, the Company initiated a reduction in force that included seven staff members and three executives.  The executives continued as employees during transition periods of varying lengths, depending upon the nature and extent of responsibilities transitioned or wound down.

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During the nine-month period ended September 30, 2015, the Company recognized approximately $1.3 million of net expense as a result of the reduction in force, which includes actual and estimated separation costs as well as the impact of accelerated vesting or forfeiture of certain equity awards resulting from the separation of $273,000.

A summary of changes in accrued separation costs during the nine-month period ended September 30, 2015 is presented below:

 

Accrued separation costs, December 31, 2014

 

$

449,351

 

Payments related to May 2014 reduction in force

 

 

(409,947

)

Charges incurred with March 2015 reduction in force

 

 

994,572

 

Payments related to March 2015 reduction in force

 

 

(994,572

)

Accrued separation costs, September 30, 2015

 

$

39,404

 

 

The remaining accrued separation costs related to the Company's reductions in force represent the estimated cost of continuing healthcare coverage, and are included in accrued liabilities and other on the consolidated balance sheet as of September 30, 2015.

 

 

12.

Termination of Sublicense

In April 2015, the Company entered into an agreement with Alseres Pharmaceuticals, Inc. (Alseres) to terminate the sub-license agreement dated July 31, 2012 for research, development and commercialization of NAV5001.  Under the terms of this agreement, Navidea will transfer all regulatory, clinical and manufacturing-related data related to NAV5001 to Alseres.  Alseres will reimburse Navidea for any incurred maintenance costs of the contract manufacturer retroactive to March 1, 2015.  In addition, as requested by Alseres, Navidea will supply clinical support services for NAV5001 on a cost-plus reimbursement basis.  In consideration for the rights granted to Alseres, Navidea will also receive a milestone payment upon clearance to market NAV5001 by the U.S. FDA and a royalty on subsequent net sales of NAV5001.

 

 

13.

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 September 30, 2015 and December 31, 2014.

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 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 September 30, 2015 or December 31, 2014 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 September 30, 2015, tax years 2011-2014 remained subject to examination by federal and state tax authorities.

 

 

14.

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 subsidiary, NAV4694 and NAV5001, and (ii) therapeutic

16


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 September 30, 2015

 

Diagnostics

 

 

Therapeutics

 

 

Corporate

 

 

Total

 

Lymphoseek sales revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States1

 

$

2,942,498

 

 

$

 

 

$

 

 

$

2,942,498

 

International

 

 

10,024

 

 

 

 

 

 

 

 

 

10,024

 

Lymphoseek license revenue

 

 

550,000

 

 

 

 

 

 

 

 

 

550,000

 

Grant and other revenue

 

 

476,755

 

 

 

 

 

 

 

 

 

476,755

 

Total revenue

 

 

3,979,277

 

 

 

 

 

 

 

 

 

3,979,277

 

Cost of goods sold, excluding depreciation and amortization

 

 

442,094

 

 

 

 

 

 

 

 

 

442,094

 

Research and development expenses,

   excluding depreciation and amortization

 

 

3,603,501

 

 

 

297,137

 

 

 

 

 

 

3,900,638

 

Selling, general and administrative expenses,

   excluding depreciation and amortization2