Edgar Filing: NAVIDEA BIOPHARMACEUTICALS, INC.

navb-10q_20160930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

☐	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 ☒ No ☐

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 ☒ No ☐

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	☒
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 ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 155,762,729 shares of common stock, par value $.001 per share (as of the close of business on November 1, 2016).

NAVIDEA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	3

	Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2016 and 2015 (unaudited)	4

	Consolidated Statement of Stockholders’ Deficit for the Nine Months Ended September 30, 2016 (unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	6

	Notes to the Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

	Forward-Looking Statements	24

	The Company	24

	Product Line Overview	25

	Outlook	33

	Results of Operations	34

	Liquidity and Capital Resources	36

	Recent Accounting Standards	42

	Critical Accounting Policies	43

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	45

PART II – Other Information

Item 1.	Legal Proceedings	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 6.	Exhibits	49

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Balance Sheets

	September 30, 2016			December 31, 2015
ASSETS	(unaudited)
Current assets:
Cash	$	810,425		$	7,166,260
Restricted cash		3,501,247			—
Accounts and other receivables		3,474,329			3,703,186
Inventory, net		804,882			652,906
Prepaid expenses and other		839,978			1,054,822
Total current assets		9,430,861			12,577,174
Property and equipment		3,584,628			3,871,035
Less accumulated depreciation and amortization		2,210,554			1,943,427
		1,374,074			1,927,608
Patents and trademarks		222,590			233,596
Less accumulated amortization		41,604			47,438
		180,986			186,158
Other assets		203,679			273,573
Total assets	$	11,189,600		$	14,964,513
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	4,894,800		$	1,767,523
Accrued liabilities and other		7,201,793			3,038,713
Deferred revenue, current		15,037			1,044,281
Notes payable, current		51,652,209			333,333
Total current liabilities		63,763,839			6,183,850
Deferred revenue		26,061			192,728
Notes payable, net of discounts of $0 and $2,033,506, respectively		10,549,405			60,746,002
Other liabilities		624,896			1,677,633
Total liabilities		74,964,201			68,800,213
Commitments and contingencies
Stockholders’ deficit:
Preferred stock; $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding at September 30, 2016 and December 31, 2015, respectively		—			—
Common stock; $.001 par value; 300,000,000 shares authorized, 155,751,316 issued and outstanding at September 30, 2016; 200,000,000 shares authorized, 155,649,665 shares issued and outstanding at December 31, 2015, respectively		155,751			155,650
Additional paid-in capital		326,573,833			326,085,743
Accumulated deficit		(390,973,227	)		(380,546,651	)
Total Navidea stockholders' deficit		(64,243,643	)		(54,305,258	)
Noncontrolling interest		469,042			469,558
Total stockholders’ deficit		(63,774,601	)		(53,835,700	)
Total liabilities and stockholders’ deficit	$	11,189,600		$	14,964,513

See accompanying notes to consolidated financial statements (unaudited).

Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue:
Lymphoseek sales revenue	$	6,690,090		$	2,952,522		$	14,704,489		$	6,751,492
Lymphoseek license revenue		1,295,625			550,000			1,795,625			883,333
Grant and other revenue		511,359			476,755			2,113,995			1,320,816
Total revenue		8,497,074			3,979,277			18,614,109			8,955,641
Cost of goods sold		921,817			457,590			2,017,486			1,239,377
Gross profit		7,575,257			3,521,687			16,596,623			7,716,264
Operating expenses:
Research and development		1,276,053			3,902,155			6,461,154			10,180,517
Selling, general and administrative		2,940,773			3,942,609			9,925,574			13,485,576
Total operating expenses		4,216,826			7,844,764			16,386,728			23,666,093
Income (loss) from operations		3,358,431			(4,323,077	)		209,895			(15,949,829	)
Other income (expense):
Interest expense, net		(2,566,171	)		(2,148,369	)		(12,288,169	)		(4,690,686	)
Equity in loss of R-NAV, LLC		—			(26,785	)		(15,159	)		(295,217	)
Loss on disposal of investment in R-NAV, LLC		—			—			(39,732	)		—
Change in fair value of financial instruments		(839,298	)		(1,577,275	)		1,755,989			(1,702,902	)
Loss on extinguishment of debt		—			—			—			(2,440,714	)
Other, net		(12,498	)		4,402			(49,916	)		26,100
Total other expense, net		(3,417,967	)		(3,748,027	)		(10,636,987	)		(9,103,419	)
Net loss		(59,536	)		(8,071,104	)		(10,427,092	)		(25,053,248	)
Less loss attributable to noncontrolling interest		(159	)		(340	)		(516	)		(681	)
Deemed dividend on beneficial conversion feature of MT Preferred Stock		—			—			—			(46,000	)
Net loss attributable to common stockholders	$	(59,377	)	$	(8,070,764	)	$	(10,426,576	)	$	(25,098,567	)
Loss per common share (basic and diluted)	$	(0.00	)	$	(0.05	)	$	(0.07	)	$	(0.17	)
Weighted average shares outstanding (basic and diluted)		155,481,278			150,186,131			155,390,911			150,030,638

See accompanying notes to consolidated financial statements (unaudited).

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, 2015		—	$	—		155,649,665		$	155,650		$	326,085,743	$	(380,546,651	)	$	469,558		$	(53,835,700	)
Issued restricted stock		—		—		168,000			168			—		—			—			168
Canceled forfeited restricted stock		—		—		(206,000	)		(206	)		178		—			—			(28	)
Issued stock in payment of Board retainers		—		—		72,649			72			56,537		—			—			56,609
Issued stock to 401(k) plan		—		—		67,002			67			120,733		—			—			120,800
Stock compensation expense		—		—		—			—			310,642		—			—			310,642
Net loss		—		—		—			—			—		(10,426,576	)		(516	)		(10,427,092	)
Balance, September 30, 2016		—	$	—		155,751,316		$	155,751		$	326,573,833	$	(390,973,227	)	$	469,042		$	(63,774,601	)

See accompanying notes to consolidated financial statements (unaudited).

Navidea Biopharmaceuticals, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net loss	$	(10,427,092	)	$	(25,053,248	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		378,834			431,368
Loss on disposal and abandonment of assets		136,719			33,184
Gain on forgiveness of accounts payable		(85,355	)		—
Change in reserve for uncollectable accounts		—			16,000
Change in inventory reserve		43,354			138,914
Amortization of debt discount and issuance costs		77,964			423,522
Debt discount and issuance costs written off		1,955,541			—
Prepayment premium and debt collection fees related to long term debt		2,923,271			—
Compounded interest on long term debt		1,367,259			1,231,125
Stock compensation expense		310,642			1,916,179
Equity in loss of R-NAV, LLC		15,159			295,217
Loss on disposal of investment in R-NAV, LLC		39,732			—
Change in fair value of financial instruments		(1,755,989	)		1,702,902
Loss on extinguishment of debt		—			2,440,714
Issued stock to 401(k) plan for employer matching contributions		120,800			117,099
Extension of warrant expiration date		—			149,615
Issued warrants in connection with advisory services agreement		—			256,450
Value of restricted stock issued to directors		56,609			131,262
Other		(15,159	)		(53,642	)
Changes in operating assets and liabilities:
Accounts receivable		210,536			(1,108,828	)
Inventory		(195,330	)		(83,712	)
Prepaid expenses and other assets		11,465			588,996
Accounts payable		3,212,632			(178,620	)
Accrued and other liabilities		4,113,403			305,170
Deferred revenue		(1,195,911	)		1,419,198
Net cash provided by (used in) operating activities		1,299,084			(14,881,135	)
Cash flows from investing activities:
Purchases of equipment		(1,847	)		(30,406	)
Proceeds from sales of equipment		45,000			38,265
Patent and trademark costs		—			(27,092	)
Payments on disposal of investment in R-NAV, LLC		(110,000	)		—
Proceeds from disposal of investment in R-NAV, LLC		27,623			—
Net cash used in investing activities		(39,224	)		(19,233	)
Cash flows from financing activities:
Proceeds from issuance of MT Preferred Stock and warrants		—			500,000
Payment of preferred stock issuance costs		—			(12,587	)
Proceeds from issuance of common stock, net		140			65,975
Payment of tax withholdings related to stock-based compensation		—			(23,906	)
Proceeds from notes payable		—			54,500,000
Payment of debt-related costs		(3,923,271	)		(3,902,487	)
Principal payments on notes payable		(189,163	)		(30,333,333	)
Restricted cash held for payment against debt		(3,501,247	)		—
Payments under capital leases		(2,154	)		(1,880	)
Net cash (used in) provided by financing activities		(7,615,695	)		20,791,782
Net (decrease) increase in cash		(6,355,835	)		5,891,414
Cash, beginning of period		7,166,260			5,479,006
Cash, end of period	$	810,425		$	11,370,420

See accompanying notes to consolidated financial statements (unaudited).

Notes to the Consolidated Financial Statements (unaudited)

1.	Summary of Significant Accounting Policies

Basis of Presentation: The information presented as of September 30, 2016 and for the three-month and nine-month periods ended September 30, 2016 and 2015 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, 2016 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, 2015, 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. Prior to termination of Navidea’s joint venture with R-NAV, LLC (R-NAV), Navidea's investment in R-NAV was being accounted for using the equity method of accounting and was therefore not consolidated. See Note 8.

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 3.

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

(1)

Cash, restricted cash, accounts and other receivables, accounts payable, and accrued liabilities: The carrying amounts approximate fair value because of the short maturity of these instruments. At September 30, 2016, restricted cash represents the balance in an account that is under the control of Capital Royalty Partners II L.P. (CRG). See Note 10. At September 30, 2016, approximately $894,000 of accounts payable was being disputed by the Company related to unauthorized expenditures by a former executive.

(2)

Notes payable: The carrying value of our debt at September 30, 2016 and December 31, 2015 primarily consists of the face amount of the notes less unamortized discounts. See Note 9. At September 30, 2016 and December 31, 2015, 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. 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, 2016, the fair value of our notes payable is approximately $62.2 million, equal to the carrying value of $62.2 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, 2016 and December 31, 2015 were included in other liabilities on the consolidated balance sheets. The assumptions used to calculate fair value as of September 30, 2016 and December 31, 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 Note 3.

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

During the nine-month periods ended September 30, 2016 and 2015, over 99% of Lymphoseek sales were made to Cardinal Health. As of September 30, 2016, approximately 81% of accounts and other receivables were due from 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 was being recognized on a straight-line basis over the estimated obligation period of two years. However, the remaining deferred revenue of $417,000 was recognized upon obtaining European approval of a reduced-mass vial in September 2016, several months earlier than originally anticipated.

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 recognized revenues from the provision of services to R-NAV and its subsidiaries through the termination of the R-NAV joint venture on May 31, 2016. See Note 8.

Recent Accounting Standards: In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements-Going Concern. ASU 2014-15 defines when and how companies are required to disclose going concern uncertainties, which must be evaluated each interim and annual period. ASU 2014-15 requires management to determine whether substantial doubt exists regarding the entity's going concern presumption. Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). If substantial doubt exists, certain disclosures are required; the extent of those disclosures depends on an evaluation of management's plans (if any) to mitigate the going concern uncertainty. ASU 2014-15 is effective prospectively for annual periods ending after December 15, 2016, and to annual and interim periods thereafter. Early adoption is permitted. We do not expect the adoption of ASU 2014-15 to have a material effect on our consolidated financial statements, however it may affect our disclosures.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers – Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 does not change the core principle of the guidance, rather it clarifies the implementation guidance on principal versus agent considerations. ASU 2016-08 clarifies the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for ASU 2016-08 are the same as for ASU 2014-09, which was deferred by one year by ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date. 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 currently evaluating the potential impact that the adoption of ASU 2014-09 may have on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the simplified areas apply only to nonpublic entities. ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts ASU 2016-09 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Methods of adoption vary according to each of the amendment provisions. We are currently evaluating the potential impact that the adoption of ASU 2016-09 may have on our consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing. ASU 2016-10 does not change the core principle of the guidance, rather it clarifies the identification of performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. ASU 2016-10 clarifies the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for ASU 2016-10 are the same as for ASU 2014-09, which was deferred by one year by ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date. 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 currently evaluating the potential impact that the adoption of ASU 2014-09 may have on our consolidated financial statements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 does not change the core principle of the guidance, rather it affects only certain narrow aspects of Topic 606, including assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. ASU 2016-12 affects the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for ASU 2016-12 are the same as for ASU 2014-09, which was deferred by one year by ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date. 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 currently evaluating the potential impact that the adoption of ASU 2014-09 may have on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses certain specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement cash flows. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. If an entity early adopts ASU 2016-15 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. ASU 2016-15 should be applied using a retrospective transition method to each period presented, with certain exceptions. We adopted ASU 2016-15 upon issuance, which resulted in debt prepayment costs being classified as financing costs rather than operating costs on the statement of cash flows.

Reclassifications: Certain reclassifications have been made to the prior year’s financial statements to conform to the 2016 presentation. The reclassifications relate to the presentation of the consolidated statements of cash flows and do not change the consolidated balance sheets, statements of operations, or net cash used in operating activities.

Liquidity

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.

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.

3.	Fair Value

Platinum has the right to convert all or any portion of the unpaid principal or unpaid interest accrued on all draws under the Platinum credit facility, under certain circumstances. 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 $10.5 million at September 30, 2016.

MT issued warrants to purchase MT Common Stock with certain characteristics including a net settlement provision that require the warrants to be accounted for as a derivative liability at fair value on the consolidated balance sheets. The estimated fair value of the MT warrants is $63,000 at September 30, 2016, and will continue to be measured on a recurring basis. See Note 1(b)(3).

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, 2016
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 conversion option	$	—	$	—	$	1,255,891	$	1,255,891
Liability related to MT warrants		—		—		63,000		63,000

Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 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 conversion option	$	—	$	—	$	3,011,880	$	3,011,880
Liability related to MT warrants		—		—		63,000		63,000

Valuation Processes-Level 3 Measurements: The Company utilizes third-party valuation services that use complex models such as Monte Carlo simulation to estimate the value of our financial liabilities. Each reporting period, the Company provides significant unobservable inputs to the third-party valuation experts based on current internal estimates and forecasts.

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 and management’s estimate of the likelihood of actually making those draws as opposed to obtaining other sources of financing. 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 or Level 2 liabilities outstanding at any time during the nine-month periods ended September 30, 2016 and 2015. There were no transfers in or out of Level 1 or Level 2 liabilities during the nine-month periods ended September 30, 2016 and 2015. 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, 2016 and 2015 was increases of $839,000 and $1.6 million, respectively. The change in the estimated fair value of our Level 3 liabilities during the nine-month periods ended September 30, 2016 and 2015 was a decrease of $1.8 million and an increase of $1.7 million, respectively.

4.	Stock-Based Compensation

For the three-month periods ended September 30, 2016 and 2015, our total stock-based compensation expense, which includes reversals of expense for certain forfeited or cancelled awards, was approximately $50,000 and $397,000, respectively. For the nine-month periods ended September 30, 2016 and 2015, our total stock-based compensation expense, which includes reversals of expense for certain forfeited or cancelled awards, was approximately $311,000 and $1.9 million, respectively. We have not recorded any income tax benefit related to stock-based compensation in any of the three-month or nine-month periods ended September 30, 2016 and 2015.

A summary of the status of our stock options as of September 30, 2016, and changes during the nine-month period then ended, is presented below:

	Nine Months Ended September 30, 2016
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at beginning of period		5,437,064		$	1.96
Granted		459,457			1.05
Exercised		—			—
Canceled and Forfeited		(1,900,790	)		1.66
Expired		(299,000	)		2.42
Outstanding at end of period		3,696,731		$	1.97	6.7 years	$	90,039
Exercisable at end of period		2,602,167		$	2.04	6.2 years	$	88,815

A summary of the status of our unvested restricted stock as of September 30, 2016, and changes during the nine-month period then ended, is presented below:

	Nine Months Ended September 30, 2016
	Number of Shares			Weighted Average Grant-Date Fair Value
Unvested at beginning of period		361,000		$	1.69
Granted		168,000			1.20
Vested		(66,000	)		1.65
Forfeited		(206,000	)		1.77
Unvested at end of period		257,000		$	1.32

During the nine-month period ended September 30, 2016, 66,000 shares of restricted stock held by non-employee directors with an aggregate fair value of $63,360 vested as scheduled according to the terms of the restricted stock agreements. Also during the nine-month period ended September 30, 2016, 206,000 shares of unvested restricted stock were forfeited upon resignation of certain directors and an officer.

As of September 30, 2016, there was approximately $374,000 of total unrecognized compensation expense related to unvested stock-based awards, which we expect to recognize over the remaining weighted average vesting term of 1.2 years.

5.	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 nine-month periods ended September 30, 2016 and 2015 excludes the effects of 14.5 million and 19.3 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 operations, 257,000 shares of unvested restricted stock for the three-month and nine-month periods ended September 30, 2016, and 503,500 shares of unvested restricted stock for the three-month and nine-month periods ended September 30, 2015, respectively, were excluded in determining basic and diluted loss per share because such inclusion would be anti-dilutive.

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. 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.

The components of inventory as of September 30, 2016 and December 31, 2015 are as follows:

	September 30, 2016			December 31, 2015
	(unaudited)
Materials	$	517,650		$	330,000
Work-in-process		65,611			392,457
Finished goods		442,881			275,168
Reserves		(221,260	)		(344,719	)
Total	$	804,882		$	652,906

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, 2016 and 2015, the Company used $45,000 and $184,000, respectively, of Lymphoseek inventory for clinical study and product development purposes.

7.	Investment in Macrophage Therapeutics, Inc.

In December 2015 and May 2016, Platinum contributed a total of $200,000 to MT. MT was not obligated to provide anything in return, although it was considered likely that the MT Board would ultimately authorize some form of compensation to Platinum. As such, the Company recorded the $200,000 as a current liability pending determination of the form of compensation.

In July 2016, MT’s Board of Directors authorized modification of the original investments of $300,000 by Platinum and $200,000 by Dr. Goldberg to a convertible preferred stock with a 10% paid-in-kind (PIK) coupon retroactive to the time the initial investments were made. The conversion price of the preferred will remain at the $500 million initial market cap but a full ratchet will be added to enable the adjustment of conversion price, warrant number and exercise price based on the valuation of the first institutional investment round. In addition, the MT Board authorized issuance of additional convertible preferred stock with the same terms to Platinum as compensation for the additional $200,000 of investments made in December 2015 and May 2016. As of the date of filing of this Form 10-Q, final documents related to the above transactions authorized by the MT Board have not been completed.

8.	Investment in R-NAV, LLC

Effective May 31, 2016, Navidea terminated its joint venture with R-NAV. Under the terms of the agreement, Navidea (1) transferred all of its shares of R-NAV, consisting of 1,500,000 Series A Preferred Units and 3,500,000 Common Units, to R-NAV; and (2) paid $110,000 in cash to R-NAV. In exchange, R-NAV (1) transferred all of its shares of TcRA Imaging, Inc. (TcRA) to Navidea, thereby returning the technology licensed to TcRA to Navidea; and (2) forgave the $333,333 remaining on the promissory note. Neither Navidea nor R-NAV has any further obligations of any kind to either party. As a result of this transaction, the Company recognized a loss on disposal of the investment in R-NAV of $39,732 during the second quarter of 2016.

Navidea’s investment in R-NAV was being accounted for using the equity method of accounting. Navidea’s equity in the loss of R-NAV was $15,159 and $268,432, respectively, for the nine-month periods ended September 30, 2016 and 2015. Navidea’s equity in the loss of R-NAV exceeded our initial investment in R-NAV. As such, the carrying value of the Company’s investment in R-NAV was $0 as of the date of termination.

The Company’s obligation to provide $500,000 of in-kind services to R-NAV was being recognized as those services were provided. The Company provided $15,000 and $27,000, respectively, of in-kind services during the nine-month periods ended September 30, 2016 and 2015. As of the date of termination, the Company had $383,000 of in-kind services remaining to provide under this obligation. This obligation ceased on May 31, 2016 under the terms of the agreement.

Navidea provided additional services to R-NAV in support of its development activities. Such services were immaterial to Navidea’s overall operations.

9.	Notes Payable

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.

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.

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.

10.	Commitments and Contingencies

Sinotau Litigation

On August 31, 2015, Sinotau Pharmaceutical Group (Sinotau) filed a suit for damages, specific performance and injunctive relief against the Company in the United States District Court for the District of Massachusetts alleging breach of a letter of intent for licensing to Sinotau of the Company’s NAV4694 product candidate and technology. The Company believed the suit was without merit and filed a motion to dismiss the action. In September 2016, the court determined that there was enough evidence to proceed with the case and denied Navidea’s motion to dismiss. Navidea is currently preparing for a trial which is expected to take place within the next twelve months. At this time it is not possible to determine with any degree of certainty the ultimate outcome of this legal proceeding, including making a determination of liability.

In July 2016, the Company executed a term sheet with Cerveau Technologies, Inc. (Cerveau) as a designated party for the rights resulting from the relationship between Navidea and Sinotau. The term sheet outlined the terms of a potential agreement between the parties to sublicense NAV4694 to Cerveau in return for license fees, milestone payments and royalties. With the exception of certain provisions, the term sheet was non-binding and was subject to the agreement of AstraZeneca, from whom the Company has licensed the NAV4694 technology. The Company had 60 days to execute a definitive agreement, however no definitive agreement was reached. Discussions related to the potential partnering or divestiture of NAV4694 are ongoing.

CRG Litigation

In October 2016, a revised TRO was issued, allowing the Company to receive 100% of the receivables due from Cardinal Health, with an additional $1.0 million deposited in a pledged collateral account by the Company as a bond. The $1.0 million previously deposited by the Company 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. See Notes 2 and 9.

Former CEO Arbitration

On May 12, 2016 the Company received a demand for arbitration through the American Arbitration Association, Columbus, Ohio, from Ricardo J. Gonzalez, the Company’s then Chief Executive Officer, claiming that he was terminated without cause and, alternatively, that he resigned in accordance with Section 4G of his Employment Agreement pursuant to a notice received by the Company on May 9, 2016. On May 13, 2016, the Company notified Mr. Gonzalez that his failure to undertake responsibilities assigned to him by the Board of Directors and otherwise work after being ordered to do so on multiple occasions constituted an effective resignation, and the Company accepted that resignation. The Company rejected the resignation of Mr. Gonzalez pursuant to Section 4G of his Employment Agreement. Also, the Company notified Mr. Gonzalez that, alternatively, his failure to return to work after the expiration of the cure period provided in his Employment Agreement constituted cause for his termination under his Employment Agreement. Mr. Gonzalez is seeking severance and other amounts claimed to be owed to him under his employment agreement. The Company intends to vigorously defend its position. In addition, the Company has filed counterclaims against Mr. Gonzalez. A three-person arbitration board has been chosen and a hearing is set for April 3-7, 2017 in Columbus, Ohio.

Former Director Litigation

On August 12, 2016, the Company commenced an action in the Superior Court of California for damages and injunctive relief against former Navidea Chairman and Macrophage Board Member Anton Gueth. The Complaint alleges, in part, that Mr. Gueth intentionally failed to disclose his prior existing relationship with CRG, in addition to multiple breaches including duty, loyalty and contract, interference and misappropriation. Litigation is currently stayed while the parties attempt to negotiate a settlement.

FTI Consulting, Inc. Litigation

On October 11, 2016, the Company was served with a Complaint filed in the Supreme Court of the State of New York, County of New York, alleging damages of at least $782,601.51 arising from investigative and consulting services that Plaintiff alleges it was retained by the Company to perform. The Company disputes the amount claimed to be due, as well as whether the services performed were properly authorized, and intends to vigorously defend the action.

11.	Equity Instruments

During the nine-month period ended September 30, 2016, we issued 72,649 shares of our common stock valued at $56,609 to certain members of our Board of Directors who elected to receive stock in lieu of cash compensation.

12.	Stock Warrants

At September 30, 2016, there are 11.7 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 $0.38 per share. The warrants have remaining outstanding terms ranging from 0.2 to 19 years.

In addition, at September 30, 2016, there are 300 warrants outstanding to purchase MT’s Common Stock. The warrants are exercisable at $2,000 per share.

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, 2016 and December 31, 2015.

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, 2016 or December 31, 2015 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, 2016, tax years 2012-2015 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 joint venture (terminated on May 31, 2016), NAV4694 and NAV5001 (license terminated in April 2015), and (ii) therapeutic 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, 2016	Diagnostics		Therapeutics				Corporate		Total
Lymphoseek sales revenue:
United States ⁽¹⁾	$	6,670,644	$	—			$	—	$	6,670,644
International		19,446		—				—		19,446
Lymphoseek license revenue		1,295,625		—				—		1,295,625
Grant and other revenue		501,013		10,346				—		511,359
Total revenue		8,486,728		10,346				—		8,497,074
Cost of goods sold, excluding depreciation and amortization		909,539		—				—		909,539
Research and development expenses, excluding depreciation and amortization		1,028,389		247,664				—		1,276,053
Selling, general and administrative expenses, excluding depreciation and amortization ⁽²⁾		839,410		27,758				1,974,419		2,841,587
Depreciation and amortization ⁽³⁾		12,278		—				99,186		111,464
Income (loss) from operations ⁽⁴⁾		5,697,112		(265,076	)	&