Finance Receivables | 12 Months Ended |
Dec. 31, 2014 |
Disclosure Text Block [Abstract] | |
Finance Receivables | Note 2. Finance Receivables |
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Finance receivables are reported at their determined principal balances net of any unearned income, cumulative charge-offs and unamortized deferred fees and costs. Unearned income and deferred fees and costs are amortized to interest income based on all cash flows expected using the effective interest method. |
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The carrying value of finance receivables at December 31 are as follows (in thousands): |
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Portfolio | | 2014 | | 2013 |
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Term Loans | | $ | 80,450 | | | $ | 21,420 | |
Royalty Purchases | | | 12,897 | | | | 7,866 | |
Total | | | 93,347 | | | | 29,286 | |
Less: current portion | | | 10,561 | | | | 660 | |
Total noncurrent portion of finance receivables | | $ | 82,786 | | | $ | 28,626 | |
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Term Loans |
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Nautilus Neurosciences, Inc. |
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On December 5, 2012, the Company entered into a credit agreement pursuant to which the lenders party thereto provided to Nautilus Neurosciences, Inc., a neurology-focused specialty pharmaceutical company, a term loan in the principal amount of $22,500,000. The loan was repaid on December 17, 2013. The Company initially provided $19,000,000 and a client of the Company provided the remaining $3,500,000 of the loan. The Company subsequently assigned $12,500,000 of the loan to its clients and retained the remaining $6,500,000. The loan was managed by the Company on behalf of its clients pursuant to the terms of each client’s investment management agreement. |
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Prior to repayment, interest and principal under the loan was paid by a tiered revenue interest that is charged on quarterly net sales and royalties of the borrower applied in the following priority (i) first, to the payment of all accrued but unpaid interest until paid in full; and (ii) second to the payment of all principal of the loans. The loan accrued interest at either a base rate or the LIBOR rate, as determined by the borrower, plus an applicable margin; the base rate and LIBOR rate are subject to minimum floor values such that that minimum interest rate is 16%. In addition, the Company received its proportionate share of a $2,000,000 exit fee, which was accreted to interest income over the term of the loan. The Company recognized $1,591,000 in interest income, of which $578,000 related to the accretion of the exit fee, recorded as revenue in the consolidated statements of income for the year ended December 31, 2013. |
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Tribute |
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On August 8, 2013, the Company entered into a credit agreement pursuant to which the Company provided to Tribute Pharmaceuticals Canada Inc. (“Tribute”) a secured term loan in the principal amount of $8,000,000. The loan matures on August 8, 2018. The Company provided $6,000,000 at closing and an additional $2,000,000 on February 4, 2014. On October 1, 2014, the credit agreement was amended to increase the secured term loan total commitment to $17,000,000, with $6,000,000 funded at the time of the amendment. The unfunded commitment under the loan is currently $3,000,000. |
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Interest and principal under the loan will be paid by a tiered revenue interest that is charged on quarterly net sales and royalties of Tribute applied in the following priority first, to the payment of all accrued but unpaid interest until paid in full; second to the payment of all principal of the loans. |
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The loan shall accrue interest at the LIBOR rate, plus an applicable margin, subject to a 13.5% minimum. In addition, the Company earned an origination fee at closing, and the Company is entitled to an exit fee upon the maturity of the loan, both of which will be accreted to interest income over the term of the loan. The Company recognized $1,352,000 and $366,000 in interest income recorded as revenue in the consolidated statements of income for the years ended December 31, 2014 and 2013, respectively. |
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In connection with the loan and at closing, Tribute also issued the Company a warrant to purchase 755,794 common shares an exercise price of $0.60 per share that may be exercised at any time prior to August 8, 2020 with an initial fair value of $334,000. In conjunction with the additional draw on February 4, 2014, Tribute issued an additional warrant to purchase 347,222 common shares at an exercise price of $0.432 per share that may be exercised at any time prior to February 4, 2021, with an initial fair value of $99,000. In conjunction with the credit agreement amendment on October 1, 2014, Tribute issued an additional warrant to purchase 740,000 common shares at an exercise price of $0.70 per share that may be exercised at any time prior to October 1, 2019, with an initial fair value of $228,000. The fair market value of the warrants was $594,000 and $204,000 at December 31, 2014 and 2013, respectively, and is included in other assets in the consolidated balance sheet. A net unrealized holdings gain of $62,000 was included in interest and other expense, net, in the consolidated statements of income for the year ended December 31, 2014. An unrealized holdings loss of $131,000 was included in interest and other expense, net, in the consolidated statements of income for the year ended December 31, 2013. The Company determined the fair value of the warrants outstanding at December 31, 2014 and 2013, using the Black-Scholes option pricing model with the following assumptions: |
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| | 31-Dec-14 | | 31-Dec-13 |
Dividend rate | | | 0 | % | | | 0 | % |
Risk-free rate | | | 1.7 | % | | | 2.5 | % |
Expected life (years) | | | 5.4 | | | | 6.6 | |
Expected volatility | | | 95 | % | | | 97 | % |
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In the event of a change of control, a merger or a sale of all or substantially all of Tribute’s assets, the loan shall be due and payable. The Company will be entitled to certain additional payments in connection with repayments of the Loan, both on maturity and in connection with a prepayment or partial prepayment. Pursuant to the terms of the credit agreement, Tribute entered into a guaranty and collateral agreement granting the Company a security interest in substantially all of Tribute’s assets. The credit agreement contains certain affirmative and negative covenants. The obligations under the credit agreement to repay the loan may be accelerated upon the occurrence of an event of default under the credit agreement. |
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SynCardia Credit Agreement |
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First Lien Credit Agreement |
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On December 13, 2013, the Company entered into a credit agreement pursuant to which the Company provided to SynCardia Systems, Inc. (“SynCardia”), a privately-held manufacturer of the world’s first and only FDA, Health Canada and CE (Europe) approved Total Artificial Heart, a secured term loan in the principal amount of $4,000,000. The loan was an expansion of the SynCardia’s existing credit facility, resulting in a total outstanding amount under the existing credit facility of $16,000,000 at closing. At the lenders’ option, the lenders can increase the term loan to $22,000,000; the Company has the right but not the obligation to advance $1,500,000 of any potential increase. The Company funded the $4,000,000, net of an original issue discount of $60,000 and an arrangement fee of $40,000 at closing. |
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The loan matures on March 5, 2018, with principal due upon maturity. The loan bears interest at a rate of 13.5%. |
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Pursuant to the terms of the credit agreement and subject to a security agreement, SynCardia granted the lenders a first priority security interest in substantially all of its assets. The security agreement contains certain affirmative and negative covenants. |
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In the event of a change of control, a merger or a sale of all or substantially all of SynCardia’s assets, the loan shall be due and payable. The lenders will be entitled to certain additional payments in connection with repayments of the loan, both on maturity and in connection with a prepayment or partial prepayment. The obligations to repay the loan may be accelerated upon the occurrence of an event of default under the credit agreement. |
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In addition to the discount and arrangement fee, the Company is entitled to an exit fee upon the maturity of the loan, both of which will be accreted to interest income over the term of the loan. The Company recognized $672,000 and $32,000 in interest income recorded as revenue in the consolidated statements of income for the years ended December 31, 2014 and 2013, respectively. |
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Second Lien Credit Agreement |
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On December 13, 2013, the Company also entered into a second lien credit agreement, pursuant to which the Company and other lender parties thereto provided to SynCardia, a term loan in the principal amount of $10,000,000 (the “Second Lien Loan”). The Company provided $6,000,000 principal amount of the Second Lien Loan, funded at closing net of an origination fee of $90,000. The Second Lien Loan matured on December 13, 2021. The Second Lien Loan was contracted be repaid by a tiered revenue interest that is charged on quarterly net sales and royalties of, and any other income and revenue actually received by SynCardia. Pursuant to the terms of the Second Lien Loan, SynCardia granted the lenders a second priority security interest in its assets subject to a security agreement which contains certain affirmative and negative covenants. |
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On February 13, 2015 the Second Lien Loan was repaid for total consideration of $17,000,000 comprised of $3,000,000 of cash, $11,500,000 million of senior secured second lien convertible notes (the “Convertible Notes”) and 1,798,563 shares of Series F Preferred Stock. The Company received its pro-rata share of the repayment consideration which included $1,800,000 million of cash, $6,900,000 of Convertible Notes and 1,079,138 shares of Series F Preferred Stock. The Convertible Notes accrue interest at 10% per annum and interest paid in kind. The Convertible Notes are convertible into shares of SynCardia common stock at a 25% discount to the price of an initial public offering. |
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In the event of a Change of Control prior to conversion into shares of SynCardia common stock, the Convertible Notes shall be due, with the total amount payable to the lenders equal to a specified premium defined by the terms of the Convertible Notes. The obligations to repay the Convertible Notes may be accelerated upon the occurrence of an event of default under the terms of the Convertible Notes. |
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The Company recognized $4,601,000 and $79,000 in interest income recorded as revenue in the consolidated statement of income for the years ended December 31, 2014 and 2013, respectively. The Company was issued 165,374 shares of Series F Preferred Stock of SynCardia, Inc. in lieu of one cash payment of $230,000 during the year ended December 31, 2014. |
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Private Dental Products Company |
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On December 10, 2013, the Company entered into a credit agreement to provide a private dental products company (“Dental Products Company”) a senior secured term loan with a principal amount of $6,000,000 funded upon close net of an arrangement fee of $60,000. The Loan matures on December 10, 2018. |
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Interest and principal under the loan will be paid by a tiered revenue interest that is charged on quarterly net sales and royalties of the Dental Products Company. Pursuant to the terms of the agreement, the Company was granted a first priority security interest in substantially all of the Dental Products Company’s assets. The loan accrues interest at the Libor Rate, plus an applicable margin; the Libor Rate is subject to minimum floor values such that that minimum interest rate is 14%. |
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In the event of a change of control, a merger or a sale of all or substantially all of the Dental Products Company’s assets, the loan shall be due and payable. The Company will be entitled to certain additional payments in connection with repayments, both on maturity and in connection with prepayments. |
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The Company also received a warrant to purchase up to 225 shares of the Dental Products Company’s common stock, which if exercised, is equivalent to approximately four percent ownership on a fully diluted basis. The warrant expires December 10, 2020. The warrant is currently valued at zero at December 31, 2014 and 2013 in the consolidated balance sheets. |
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In addition to the arrangement fee, the Company is entitled to an exit fee upon the maturity of the loan, both of which will be accreted to interest income over the term of the loan. The Company recognized $618,000 and $51,000 in interest income recorded as revenue in the consolidated statements of income for the years ended December 31, 2014 and 2013, respectively. |
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The Dental Products Company is currently under default under the terms of the credit agreement and the loan has been classified as non-accrual. On January 8, 2015, the Company executed an amendment to the loan to advance an additional $650,000 to the Dental Products Company. For further discussion refer to “Non-Accrual Loan” later in this Note. |
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Parnell Pharmaceuticals Holdings Pty Ltd |
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On January 23, 2014, the Company entered into a credit agreement pursuant to which the lenders party thereto provided to Parnell Pharmaceuticals Holdings Pty Ltd, a leading global veterinary pharmaceutical business (“Parnell”), a term loan in the principal amount of $25,000,000. The Company provided $10,000,000 and the Company’s investment advisory clients provided the remaining $15,000,000 of the loan. The Company serves as the Agent, Sole Lead Arranger and Sole Bookrunner under the credit agreement. The loan was repaid on June 27, 2014. |
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Parnell was obligated to make payments calculated on its quarterly net sales and royalties until such time as the lenders received a 2.0x cash on cash return. The revenue based payment was subject to certain quarterly and annual caps. Pursuant to the terms of the credit agreement, Parnell granted the lenders a first priority security interest in substantially all of Parnell’s assets. |
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The Company recognized a syndication fee of $375,000 upon execution of the credit agreement and interest income of $834,000 as revenue in the consolidated statement of income for the year ended December 31, 2014, respectively. |
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Response Genetics |
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On July 30, 2014, the Company entered into a credit agreement pursuant to which the Company provided to Response Genetics, Inc. (“Response”) a term loan in the principal amount of $12,000,000. The loan matures on July 30, 2020. The Company provided $8,500,000 at closing and an additional $1,500,000 upon an amendment to the loan on February 2, 2015. Response can draw down the remaining $2,000,000 of the credit facility at any time until December 31, 2015, if Response achieves certain revenue thresholds, and as long as it is in compliance with all covenants under the credit agreement. |
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Interest and principal under the loan will be paid by a tiered revenue interest that is charged on quarterly net sales and royalties of Response applied in the following priority: first, to the payment of all accrued but unpaid interest until paid in full; and second to the payment of all principal of the loans. |
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In connection with the loan and at the time of close, Response also issued the Company a warrant to purchase 681,090 common shares at an exercise price of $0.94 per share, at any time prior to July 30, 2020 with an initial fair value of $379,000, which is included in other assets on the consolidated balance sheet as of December 31, 2014. |
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On September 9, 2014, the Company assigned to an investment management client approximately $3,500,000 of the total term loan commitment at par. The assignment included $2,500,000 previously funded to Response, and an unfunded commitment of approximately $1,000,000. In addition the Company assigned rights under the warrant to 200,321 common shares. The fair value of the transferred warrant rights at time of the assignment was $115,000. On February 2, 2015, to facilitate the amendment to the loan with Response, the Company purchased the previous syndication. |
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The loan shall accrue interest at the LIBOR rate, plus an applicable margin, subject to a 13.5% minimum. In addition, the Company earned an origination fee at closing, and the Company is entitled to an exit fee upon the maturity of the loan, both of which will be accreted to interest income over the term of the loan. The Company recognized approximately $421,000 in interest income recorded as revenue in the consolidated statement of income for the year ended December 31, 2014. |
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The fair market value of the warrant held by the Company at December 31, 2014 was $86,000, and is included in other assets in the consolidated balance sheet. An unrealized holding loss of $178,000 was included in interest and other expense, net in the consolidated statement of income for the year ended December 31, 2014. The Company determined the fair value of the warrant outstanding at December 31, 2014, using the Black-Scholes option pricing model with the following assumptions: |
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| | 31-Dec-14 | | | | |
Dividend rate | | | 0 | % | | | | |
Risk-free rate | | | 1.7 | % | | | | |
Expected life (years) | | | 5.6 | | | | | |
Expected volatility | | | 90 | % | | | | |
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ABT Molecular Imaging, Inc. |
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On October 10, 2014, the Company entered into a credit agreement pursuant to which the Company provided to ABT Molecular Imaging, Inc. (“ABT”) a second lien term loan in the principal amount of $10,000,000. The loan matures on October 8, 2021. |
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ABT is obligated to make payments calculated on its quarterly net sales and royalties until such time as the lenders receive a 2.0x cash on cash return. The revenue-based payment is subject to certain quarterly and annual caps. The total amount payable is subject to adjustment under certain events including qualified partial payments, a change of control or full prepayment of the loan. The revenue-based payment is made quarterly. The Company recognized $382,000 in interest income recorded as revenue in the consolidated statement of income for the year ended December, 31, 2014. |
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Pursuant to the terms of the credit agreement, ABT granted the lenders a second priority security interest in substantially all of its assets. The credit agreement contains certain affirmative and negative covenants. The obligations to repay the loan may be accelerated upon the occurrence of an event of default under the terms of the credit agreement. |
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In connection with the loan, ABT also issued the Company 5,000,000 common share purchase warrants with each warrant entitling the Company to acquire one common share in the capital of ABT at an exercise price of $0.20, at any time prior to October 10, 2034. The warrant is currently valued at zero at December 31, 2014 in the consolidated balance sheet. |
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PDI, Inc. |
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On October 31, 2014, the Company entered into a credit agreement among pursuant to which the Company provided to PDI, Inc. (“PDI”) a term loan in the principal amount of $20,000,000. The loan matures on October 31, 2020. |
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Interest and principal under the loan will be paid by a tiered revenue interest that is charged on quarterly net sales and royalties of PDI applied in the following priority first, to the payment of all accrued but unpaid interest until paid in full; second to the payment of all principal of the loans. Beginning in January 2017, PDI will be required to make principal payments on the loan. Additionally, beginning in January 2017 and ending on October 31, 2020, subject to a quarter cap, the Company will be entitled to receive quarterly revenue-based payments from PDI equal to 1.25% of revenue derived from net sales of molecular diagnostics products. |
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The loan shall accrue interest at the LIBOR rate, plus an applicable margin, subject to a 13.5% minimum. In addition, the Company earned a $300,000 origination fee at closing, and the Company is entitled to an exit fee upon the maturity of the loan, both of which will be accreted to interest income over the term of the loan. The Company recognized approximately $536,000 in interest income recorded as revenue in the consolidated statement of income for the year ended December 31, 2014. |
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Pursuant to the terms of the credit agreement, PDI entered into a guarantee granting the Company a senior security interest in substantially all of their respective assets. The credit agreement contains certain affirmative and negative covenants. The obligations under the credit agreement to repay the loan may be accelerated upon the occurrence of an event of default under the credit agreement. |
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Galil Medical, Inc. |
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On December 9, 2014, the Company entered into a credit agreement pursuant to which the Company provided to Galil Medical, Inc. (“Galil”) a term loan in the principal amount of $12,500,000. The loan matures on December 9, 2019. |
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Interest and principal under the loan will be paid by a tiered revenue interest that is charged on quarterly net sales of Galil, subject to certain quarterly and annual caps, applied in the following priority first, to the payment of all accrued but unpaid interest until paid in full; second to the payment of all principal of the loans. The first principal payment will occur February 17, 2015. |
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The loan shall accrue interest at the LIBOR rate, plus an applicable margin, subject to a 13.0% minimum. In addition, the Company earned a $156,000 origination fee at closing, and the Company is entitled to an exit fee upon the maturity of the loan, both of which will be accreted to interest income over the term of the loan. The Company recognized approximately $103,000 in interest income recorded as revenue in the consolidated statement of income for the year ended December 31, 2014. |
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Pursuant to the terms of the credit agreement, Galil granted the Company a senior security interest in substantially all of their respective assets. The credit agreement contains certain affirmative and negative covenants. The obligations under the credit agreement to repay the loan may be accelerated upon the occurrence of an event of default under the credit agreement. |
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Royalty Purchases |
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Bess Royalty Purchase |
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On April 2, 2013, the Company, along with Bess Royalty, LP (“Bess”), purchased a royalty stream paid on the net sales of Besivance®, an ophthalmic antibiotic, from InSite Vision, Inc. Besivance is marketed globally by Bausch & Lomb. The initial purchase price totaled $15,000,000; the Company funded $6,000,000 of the purchase price at closing to own 40.3125% of the royalty stream. Additional contingent consideration includes (i) $1,000,000 to be paid by Bess upon certain net sales milestones achieved by Bausch & Lomb and (ii) annual payments to be remitted to InSite Vision, Inc. once aggregate royalty payments received by the Company and Bess exceed certain thresholds. Bess paid the $1,000,000 contingent consideration in February 2014, which did not result in a change in the Company’s interest in the royalty. The purchased royalty stream does not include any further amounts once the aggregate royalty payments received by the Company and Bess reach a certain threshold as defined in the underlying agreement. As the purchased royalty stream has been capped by the defined threshold amount, in effect limiting the Company’s implicit rate of return, the Company’s share of the purchase price has been reflected as a Finance Receivable in the consolidated financial statements. The Company recognized approximately $1,032,000 and $795,000 in interest income in the consolidated statements of income for the years ended December 31, 2014 and 2013, respectively, representing our pro rata portion of royalties paid. |
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Tissue Regeneration Therapeutics Royalty Purchase |
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On June 12, 2013, the Company purchased from Tissue Regeneration Therapeutics, Inc. (“TRT”) two royalty streams derived from the licensed use of TRT’s technology in the family cord banking services sector. The initial purchase totaled $2,000,000 paid upon closing. On October 20, 2014, additional consideration of $1,250,000 was paid upon aggregate royalty payments reaching a certain threshold. Additional contingent consideration includes annual sharing payments due to TRT once aggregate royalty payments received by the Company exceed the purchase price paid by the Company. The purchased royalty stream does not include any further amounts once the aggregate royalty payments received by the Company reach a certain threshold as defined in the underlying agreement. The purchase has been reflected as a Finance Receivable in the unaudited condensed consolidated financial statements. The Company recognized approximately $362,000 and $176,000 in interest income recorded as revenue in the consolidated statements of income for the years ended December 31, 2014 and 2013, respectively. |
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Cambia® Royalty Purchase |
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On July 31, 2014, the Company purchased 25% of a royalty stream paid on the net sales of Cambia®, an NSAID pharmaceutical product indicated for the treatment of migraine. Cambia® is marketed in the United States by Depomed, Inc. and in Canada by Tribute. The initial purchase price totaled $4,000,000. Additional contingent consideration includes (i) $500,000 to be paid by the Company to the seller upon Cambia® reaching certain net sales and (ii) annual sharing payments to be remitted to the seller once aggregate royalty payments received by the Company exceed certain thresholds. The purchased royalty stream does not include any further amounts once the aggregate royalty payments received by the Company reach a certain threshold as defined in the purchase agreement. The Company recognized approximately $308,000 in interest income recorded as revenue in the consolidated statement of income for the year ended December 31, 2014. |
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Credit Quality of Finance Receivables |
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On a quarterly basis, the Company evaluates the carrying value of each finance receivable for impairment. Currently there are no finance receivables considered impaired and no corresponding allowance for credit losses for impaired loans. |
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A term loan is considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The Company would generally place term loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain and they are 90 days past due for interest or principal, unless the term loan is both well-secured and in the process of collection. When placed on nonaccrual, the Company would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the Company would return a term loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement and collectability of remaining principal and interest is no longer doubtful. In certain circumstances, the Company may place a finance receivable on nonaccrual status but conclude it is not impaired. |
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Receivables associated with royalty stream purchases would be considered to be impaired when it is probable that the Company will be unable to collect the book value of the remaining investment based upon adverse changes in the estimated underlying royalty stream. |
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When the Company identifies a finance receivable as impaired, it measures the impairment based on the present value of expected future cash flows, discounted at the receivable’s effective interest rate. If it is determined that the value of an impaired receivable is less than the recorded investment, the Company would recognize impairment with a charge to the allowance for credit losses. When the value of the impaired receivable is calculated by discounting expected cash flows, interest income would be recognized using the receivable’s effective interest rate over the remaining life of the receivable. |
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The Company would individually develop the allowance for credit losses for any identified impaired loans if any existed. In developing the allowance for credit losses, the Company would consider, among other things, the following credit quality indicators: |
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• business characteristics and financial conditions of obligors; |
• current economic conditions and trends; |
• actual charge-off experience; |
• current delinquency levels; |
• value of underlying collateral and guarantees; |
• regulatory environment; and |
• any other relevant factors predicting investment recovery. |
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Non-Accrual Loan |
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The Company had one non-accrual loan at December 31, 2014 for approximately $6,000,000. The Company measured the loan for impairment as of December 31, 2014 by comparing the outstanding loan balance to the fair market value of the collateral and determined that the fair value of the collateral exceeded the outstanding balance. As a result, the Company was not required to record any impairment charge on this loan as of December 31, 2014. As of December 31, 2013, the Company did not have any non-performing assets. |