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.  An event of default would entitle CRG to accelerate the maturity 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 and took possession of $4.1 million that was on deposit, 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.  

On July 13, 2016, a hearing was held in the District Court of Harris County, Texas with respect to an application for temporary injunction (ATI) filed by CRG in June 2016.  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.  

On August 30, 2016, the District Court of Harris County, Texas granted CRG’s ATI.  The Court provided the Company with 21 days to enter into the requisite account control agreements with CRG.  In September 2016, the ATI was superseded by the requirement to maintain $2.5 million in a pledged collateral account that is subject to an account control agreement.  The Order granting the ATI is currently on appeal to the Fourteenth Court of Appeals.  Briefing is expected to be completed by early December 2016, after which a date will be set for oral arguments.

Discovery is ongoing in the Texas court action; the discovery period ends June 23, 2017.  CRG filed an objection to the supersedeas that was heard on October 31, 2016, during which the court ruled that an additional $500,000 should be placed in the pledged collateral account within ten days of the ruling.  In addition, CRG has filed a motion for partial summary judgment that currently is set for hearing on December 12, 2016.  The Company is preparing responses to the motion for partial summary judgment.  The trial date is currently set for July 3, 2017.

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 the Franklin County, Ohio Court of Common Pleas, requesting that the court make a determination as to whom Cardinal Health should make such payments.  Rulings on June 28, 2016 and August 1, 2016 resulted in $1.0 million of Cardinal Health payments being placed in escrow with the court, with the remaining Cardinal Health payments going directly to the Company.

In October 2016, a revised temporary restraining order was issued, allowing the Company to receive 100% of the receivables due from Cardinal Health, with an additional $1.0 million deposited in the pledged collateral account by the Company as a bond.  Further, the court ruled that the Company remain current on its quarterly interest payments to CRG.  On October 7, 2016 the Company paid $1.3 million to CRG to cover the third quarter 2016 interest payment.  The $1.0 million previously deposited by Navidea in the Court’s registry as a bond will also be transferred to the pledged collateral account.  CRG has filed a motion to dismiss the Company’s cross-claims in Cardinal Health’s Franklin County, Ohio interpleader action.  The Company is in the process of responding to CRG’s motion to dismiss.

As of September 30, 2016, the Company’s unrestricted cash balance was $810,000, with $3.5 million restricted cash in the pledged collateral and court escrow accounts.  

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.  The Company believes that its best course of action is to pay off or refinance the CRG debt and pursue its claims for damages.  The Company is continuing to explore alternative financing arrangements, including the Proposed Transaction with Cardinal Health discussed below, in order to pay off or refinance the CRG debt.  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 pay off or 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 9 and 10.

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 September 30, 2016, the outstanding principal balance of the Platinum Note was approximately $9.3 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 recent filing for Chapter 15 bankruptcy protection, 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 9.

On September 5, 2016, the Company entered into a non-binding letter of intent (LOI) with Cardinal Health pursuant to which Cardinal Health intends to acquire the Company’s Lymphoseek product (the Product) and certain intellectual property rights and other assets related to the Product (the Acquired Assets) and assume certain liabilities associated with the Acquired Assets (the Proposed Transaction).  The purchase price for the Proposed Transaction shall consist of (i) $80 million in cash payable at closing (reduced to the extent the amount of transferred Product inventory is less than $6 million), plus (ii) annual earn-out and milestone payments based upon the volume of Product sales.  For the first three years, the earn-out payments shall be no less than $6.7 million per year.  In no event will the entire purchase price, including all earn-out payments, exceed $310 million.

As part of the Proposed Transaction, the parties have agreed that simultaneous with the closing, subject to certain conditions, Cardinal Health will license to the Company (License Back), on a perpetual royalty free basis, certain rights to the Acquired Assets necessary for the Company to (i) develop, manufacture, market, sell and distribute new pharmaceutical and other products on an exclusive basis so long as such products do not compete with the Product, and (ii) manufacture, market, sell and distribute the Product throughout the world other than in North America on a non-exclusive basis.

Also as part of the Proposed Transaction, the Company shall grant to Cardinal Health five (5) year warrants to purchase up to 10 million shares of the Company’s common stock, par value $.001 per share, at an exercise price of $1.50 per share and provide Cardinal Health with a right of first offer related to the assets covered by the License Back and new products developed by the Company in certain circumstances during the life of the Product’s patents.  

The parties intend to negotiate and execute definitive agreements for the Proposed Transaction with customary provisions for a transaction of this size and scope, including representations and warranties regarding the Company, its business, and the Acquired Assets, indemnification of Cardinal Health by the Company, covenants and closing conditions.  The closing of the Proposed Transaction is subject to, among other things, the satisfactory completion of due diligence by Cardinal Health and approval of the Company’s stockholders.

Unless written notice is given to the Company that Cardinal Health is ceasing further discussions related to the Proposed Transaction, the Company has agreed not to initiate or enter into any discussions with any third party regarding a possible sale of any equity or material assets of the Company or its subsidiaries for a period of thirty days from the date of the LOI.  If the Company does not consummate a transaction with Cardinal Health as contemplated by the LOI and at any time within 180 days of the date of the LOI consummates one or more transactions that, directly or indirectly, result in a sale, license or other transfer of the Product, or all or substantially all of the Company’s assets, then a certain Supply and Distribution Agreement between the Company and Cardinal Health shall automatically be extended for an additional three-year period.  The parties have agreed that the provisions described in this paragraph shall be binding.

The Company intends to use the majority of the initial proceeds from the Proposed Transaction to pay off the loans to CRG and Platinum, and use the remainder to fund operations in the near term.  If the Proposed Transaction closes, it will significantly improve our financial condition and our ability to continue as a going concern.