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 nine-month period ended September 30, 2016, $814,000 of interest was compounded and added to the balance of the Platinum Note.  In accordance with the terms of a Section 16(b) Settlement Agreement, Platinum agreed to forgive interest owed on the credit facility in an amount equal to 6%, effective July 1, 2016.  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 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 $1.3 million.  During the three-month periods ended September 30, 2016 and 2015, changes in the estimated fair value of the Platinum conversion option were increases of $839,000 and $1.6 million, respectively, and were recorded as non-cash changes in the fair value of the conversion option.  During the nine-month periods ended September 30, 2016 and 2015, changes in the estimated fair value of the Platinum conversion option were a decrease of $1.8 million and an increase of $1.7 million, 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 $10.5 million as of September 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 nine-month period ended September 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 September 30, 2016, $4.7 million of accrued interest is included in accrued liabilities and other on the consolidated balance sheets.  As of September 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.  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.  CRG subsequently notified the Company that the cash 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 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 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 Cardinal Health 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 interpleader action.  The Company is in the process of responding to CRG’s motion to dismiss.

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 claims for damages.  The Company is continuing to explore alternative financing arrangements, including the Proposed Transaction with Cardinal Health, 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 pay off or refinance the CRG debt.  See Notes 2 and 10.

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 September 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 8.

Summary

During the three-month periods ended September 30, 2016 and 2015, we recorded net interest expense of $2.6 million and $2.1 million, respectively, primarily related to our notes payable.  Of these amounts, $0 and $65,000, respectively, related to amortization of the debt discounts related to our notes payable.  An additional $190,000 and $802,000, respectively, of total interest expense was compounded and added to the balance of our notes payable during the three-month periods ended September 30, 2016 and 2015.  During the nine-month periods ended September 30, 2016 and 2015, we recorded net interest expense of $12.3 million and $4.7 million, respectively, primarily related to our notes payable.  Of these amounts, $78,000 and $424,000, respectively, related to amortization of the debt discounts related to our notes payable.  An additional $1.4 million and $1.2 million, respectively, of total interest expense was compounded and added to the balance of our notes payable during the nine-month periods ended September 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 nine-month period ended September 30, 2016.