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 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.

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.