Quarterly report pursuant to Section 13 or 15(d)

Note 3 - Revenue From Contracts With Customers

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Note 3 - Revenue From Contracts With Customers
 3 Months Ended
Mar. 31, 2021
Notes to Financial Statements  
Revenue from Contract with Customer [Text Block]
3.
Revenue from Contracts with Customers
 
Navidea is focused on the development and commercialization of precision immunodiagnostic agents and immunotherapeutics. We manage our business based on
two
primary types of drug products: (i) diagnostic substances, including
Tc99m
tilmanocept and other diagnostic applications of our Manocept platform, and (ii) therapeutic development programs, including all therapeutic applications of our Manocept platform.
Tc99m
tilmanocept, which the Company has a license to distribute outside of Canada, Mexico and the United States, is the only
one
of the Company's drug product candidates that has been approved for sale in any market. The Company has license and distribution agreements in place in India and China, however
Tc99
tilmanocept has
not
been approved in either of those markets. On
May 11, 2020,
the Company terminated its license and distribution agreement in Europe and Australia.
 
The Company also has an agreement in place to provide Meilleur Technologies, Inc., (“Meilleur”), a wholly-owned subsidiary of Cerveau Technologies, Inc. (“Cerveau”), worldwide rights to conduct research using
NAV4694,
as well as an exclusive license for the development and commercialization of
NAV4694
in Australia, Canada, China, and Singapore. Meilleur also has an option to commercialize worldwide.
 
Currently, the Company recognizes revenue from up-front license fees and pre-market milestones after the cash has been received from its customers and the performance obligations have been met. Payments for sales-based royalties and milestones are generally received after the related revenue has been recognized and invoiced. Normal payment terms generally range from
15
to
90
days following milestone achievement or royalty invoice, in accordance with each contract.
 
Up-front and milestone payments received related to our license and distribution agreements in India and China are deferred until
Tc99m
tilmanocept has been approved by the regulatory authorities in each of those countries. It is
not
possible to determine with any degree of certainty whether or when regulatory approval for this product will be achieved in India or China, if at all. In addition, since sales of
Tc99m
tilmanocept have
not
yet begun in India or China, there is
no
basis for estimating whether, to what degree, or the rate at which the product will be accepted and utilized in these markets. Therefore, it is
not
possible to determine with any degree of certainty the expected sales in future periods in those countries. As such, the Company intends to recognize revenue from up-front and milestone payments on a straight-line basis beginning at the time of regulatory approval in each country through the end of the initial term of each agreement. The initial term of each agreement is
eight
years in India and
ten
years in China.
 
The transaction price of a contract is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. Transaction prices do
not
include amounts collected on behalf of
third
parties (e.g., sales taxes). To determine the transaction price of a contract, the Company considers the terms of the contract. For the purpose of determining transaction prices, the Company assumes that the goods or services will be transferred to the customer as promised in accordance with existing contracts and that the contracts will
not
be cancelled, renewed, or modified.
 
When estimating a contract's transaction price, the Company considers all the information (historical, current, and forecasted) that is reasonably available to it and identifies possible consideration amounts. Most of the Company's contracts with customers include both fixed and variable components of the transaction price. Under those contracts, some or all of the consideration for satisfied performance obligations is contingent on events over which the Company has
no
direct influence. For example, regulatory approval or product sales volume milestones are contingent upon the achievement of those milestones by the distributor. Additionally, the prices charged to end users of
Tc99m
tilmanocept, upon which royalty payments are based in India and China, are set by the distributor in each of those countries.
 
The milestone payments have a binary outcome (that is, the Company will either receive all or
none
of each milestone payment) and can be estimated using the most-likely-amount method. Taking into account the constraint on variable consideration, the Company has assessed the likelihood of achieving the non-sales-based milestone payments in our contracts and has determined that it is probable the milestones will be achieved and the Company will receive the consideration. Accordingly, it is probable that including those payments in the transaction price will
not
result in a significant revenue reversal when the contingency is resolved. Therefore, the amount of the non-sales-based milestone payments is included in the transaction price.
 
Royalties are estimated based on the expected value method because they are based on a variable amount of sales representing a range of possible outcomes. However, when taking into account the constraint on variable consideration, the estimate of future royalties included in the transaction price is generally
$0.
This conclusion is based on the fact that
Tc99m
tilmanocept is early in the commercial launch process in Europe and Australia, and sales have
not
yet begun in India or China, therefore there is currently
no
basis for estimating whether, to what degree, or the rate at which the product will be accepted and utilized in these markets. Similarly, we currently have
no
basis for estimating whether sales-based milestones will ever be achieved. Accordingly, the Company recognizes revenue from royalties when the related sales occur and from sales-based milestones when they are achieved.
 
The sublicense of
NAV4694
to Meilleur provides for payments to Navidea including up-front payments, milestones, an option for worldwide commercial rights, royalties on net sales, and reimbursement for product development assistance during the initial transition period. In accordance with Accounting Standards Codification
No.
606,
Revenue from Contracts with Customers
(“ASC
606”
), the upfront payments were recognized upon contract inception, and reimbursement for product development assistance will be recognized on a monthly basis. Should some or all of the variable consideration from milestones, the option and royalties meet the requirements of the revenue recognition standard to be included in the transaction price, those amounts will be recognized as revenue in future periods.
 
Up-front fees, milestones and royalties are generally non-refundable. Therefore, the Company does
not
estimate expected refunds nor do we adjust revenue downward. The Company will evaluate and update the estimated transaction prices of its contracts with customers at the end of each reporting period.
 
During the
three
-month periods ended
March 31, 2021
and
2020,
the Company recognized revenue from contracts with customers of approximately
$22,000
and
$15,000,
respectively. During the
three
-month periods ended
March 31, 2021
and
2020,
the Company did
not
recognize any related impairment losses, nor did the Company recognize any revenue from performance obligations associated with long-term contracts that were satisfied (or partially satisfied) in previous periods.
 
The following table disaggregates the Company's revenue from contracts with customers for the
three
-month periods ended
March 31, 2021
and
2020.
 
 
   
Three Months Ended
March 31,
  
   
2021
    
2020
  
Royalty revenue:
                
Tc99m tilmanocept - Europe
   $
—
     $
15,221
  
                 
License revenue:
                
Tc99m tilmanocept - Europe
   $
22,486
     $
—
  
 
The following economic factors affect the nature, amount, timing and uncertainty of the Company's revenue and cash flows as indicated:
 
Geographical Location of Customers:
Drug pricing models vary among different markets, which in turn
may
affect the royalty rates and milestones we are able to negotiate with our distributors in those markets. Royalty rates and milestone payments vary by contract but
may
be based in part on the potential market size in each territory. In the case of
Tc99m
tilmanocept, royalty rates for Europe were lower than rates in India but higher than in China.
 
Status of Regulatory Approval:
The majority of revenue from contracts with customers will generally be recognized after the product is approved for sale in each market. Each
Tc99m
tilmanocept customer operates in its own distinct regulatory environment, and the laws and pathways to drug product approval vary by market.
Tc99m
tilmanocept has been approved for sale in Europe, thus the Company recognized royalties from sales in Europe.
Tc99m
tilmanocept has
not
yet been approved for sale in India or China, and
may
never achieve approval in those markets. The regulatory pathways and timelines in those markets will impact whether and when the Company recognizes the related royalties and milestones. Similarly,
NAV4694
has
not
yet been approved for sale in any market, thus the timing of any revenue related to that product will be dependent on the regulatory pathways and timelines in each market in which Meilleur seeks regulatory approval.
 
Through
March 31, 2021,
the Company has
not
capitalized any contract-related costs as contract assets.
 
The following table summarizes the changes in contract liabilities, the current portion of which is included in accrued liabilities and other in the consolidated balance sheets, during the
three
-month periods ended
March 31, 2021
and
2020.
 
   
Three Months Ended March 31,
  
   
2021
    
2020
  
Total deferred revenue, beginning of period
   $
700,000
     $
700,000
  
Revenue recognized from satisfaction of performance obligations
    
—
      
—
  
Total deferred revenue, end of period
   $
700,000
     $
700,000
  
 
The Company had license revenue receivable of approximately
$82,000
and
$59,000
outstanding as of
March 31, 2021
and
December 31, 2020,
respectively.
 
In addition to revenue from contracts from customers, we also generate revenue from National Institutes of Health (“NIH”) grants to support various product development initiatives. The revenue recognition standard applies to revenue from contracts with customers. A customer is defined as a party that has contracted with an entity to obtain goods or services that are an output of the entity's ongoing major or central operations in exchange for consideration. The Company's ongoing major or central operations consist of the development and commercialization of precision immunodiagnostic agents and immunotherapeutics. The NIH and its various institutes are responsible for biomedical and public health research and provide major biomedical research funding to non-NIH research facilities and entities such as Navidea. While the Company will directly benefit from any knowledge gained from the project, there is also a public health benefit provided, which justifies the use of public funds in the form of the grants. Based on the nature of the Company's operations and the terms of the grant awards, Navidea does
not
have a vendor-customer relationship with the NIH and the grant awards are outside the scope of the revenue recognition standard. Accordingly, the revenue recognition standard need
not
be applied to the NIH grants. During the
three
-month periods ended
March 31, 2021
and
2020,
the Company recognized grant revenue of
$1,000
and
$141,000,
respectively.
 
On
May 11, 2020 (
the “Termination Date”), the Company entered into a Termination Agreement (the “Termination Agreement”) with SpePharm AG (“SpePharm”) and Norgine BV (“Norgine”) which terminated that certain Exclusive License Agreement dated
March 5, 2015 (
as amended to date, the “License Agreement”). Under the License Agreement, SpePharm had the exclusive right to develop, manufacture and commercialize the Company's products approved for radiolabeling with
Tc99m
and containing Lymphoseek® (collectively, the “Products”) in several jurisdictions abroad, including the United Kingdom, France, Germany, Australia and New Zealand (collectively, the “Licensed Territory”). In exchange for such rights, the Company was entitled to certain royalty payments.
 
Pursuant to the Termination Agreement, the parties agreed that neither owed the other any payments due under the License Agreement as of the Termination Date and that, among other things, SpePharm
no
longer has any right in, nor claim to, any intellectual property owned by the Company or its affiliates anywhere in the world. SpePharm also agreed to perform certain wind-down activities (the “Wind-Down Activities”) during the
six
-month period following the Termination Date (the “Transition Period”), which Transition Period was extended by
ninety
days. The Wind-Down Activities included, without limitation, SpePharm transferring to the Company or its designee(s) the regulatory approvals controlled by SpePharm or its affiliates for the purpose of marketing, distributing and selling the Products in the Licensed Territory. SpePharm also transferred to the Company certain tenders and other customer and sales contracts related to the Products. Subject to the terms of the Termination Agreement, Norgine, an affiliate of SpePharm, agreed to guarantee SpePharm's performance of its obligations under the Termination Agreement.