Note 2 - Finance Receivables

9 Months Ended

Sep. 30, 2013

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 2. Finance Receivables

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.

The carrying value of finance receivables at September 30, 2013, is as follows (in thousands):

Portfolio	Class
Term Loans
	Life Science	$	12,270
Royalty Purchases
	Life Science		7,909
Total		$	20,179
Less: current portion			(667	)
Total noncurrent portion of finance receivables		$	19,512

Term Loans

Private Neurology-focused Specialty Pharmaceuticals Company

On December 5, 2012, the Company entered into a credit agreement pursuant to which the lenders party thereto provided to a neurology-focused specialty pharmaceutical company a term loan in the principal amount of $22,500,000. The loan matures on December 5, 2017. 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 is managed by the Company on behalf of its clients pursuant to the terms of each client’s investment management agreement.

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 borrower (the “Revenue Based Payment”) 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. All amounts applied under the Revenue Based Payment will be made to each lender according to its pro-rata share of the loan.

The loan shall accrue 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 is entitled to its proportionate share of an increasing exit fee, which is being accreted to interest income over the term of the loan.  As of September 30, 2013, the Company is entitled to its proportionate share which approximates $577,000 of a $2,000,000 exit fee. The Company recognized $335,000 in interest income, of which $70,000 related to the accretion of the exit fee, recorded as revenue in the unaudited condensed consolidated statement of income (loss) for the three months ended September 30, 2013. The Company recognized $1,002,000 in interest income, of which $214,000 related to the accretion of the exit fee, recorded as revenue in the unaudited condensed consolidated statement of income (loss) for the nine months ended September 30, 2013.

In the event of a change of control, a merger or a sale of all or substantially all of the borrower’s assets, the loan shall be immediately 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.

Pursuant to the terms of the credit agreement, the borrower entered into a guaranty and collateral agreement granting the lenders a security interest in substantially all of the borrower’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.  In connection with the loan, the borrower was required to provide for an interest reserve of $1,000,000.  Pursuant to the terms of the loan, $250,000 of this amount was returned to the borrower in March 2013, and $143,000 was drawn down during the nine months ended September 30, 2013 leaving a balance of $607,000, which is included as restricted cash on the unaudited condensed consolidated balance sheet.

Tribute

On August 8, 2013, the Company entered into a credit agreement pursuant to which the Company provided to Tribute Pharmaceuticals Canada Inc. ("Tribute") a 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. Tribute can draw down the remaining $2,000,000 of the credit facility at any time until December 31, 2014, as long as it is in compliance with all covenants under the credit agreement.

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.

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 $130,000 in interest income recorded as revenue in the unaudited condensed consolidated statement of income (loss) for the three and nine months ended September 30, 2013. In connection with the loan, Tribute also issued the Company a warrant to purchase 755,736 common shares an exercise price of $0.60 per share, at any time prior to August 8, 2020 with an initial fair value of $334,000.   The fair market value of the warrant was $265,000 at September 30, 2013, and is included in other assets in the unaudited condensed consolidated balance sheet. An unrealized holdings loss of $69,000 was included in interest and other income (expense) in the unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2013. . The Company determined the fair value using the Black-Scholes option pricing model with the following assumptions:

Dividend rate	0	%
Risk-free rate	1	%
Expected life (years)	6.9
Expected volatility	98	%

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.

Royalty Purchases

Bess Royalty Purchase

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 million; the Company funded $6 million of the purchase price at closing to own 40.3125% of the royalty stream. Additional contingent consideration includes (i) $1 million 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. The Company will have no obligation with respect to the milestone payment. In addition, such additional payment by Bess would 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 unaudited condensed consolidated financial statements. The Company recognized approximately $257,000 and $517,000 in interest income in the unaudited condensed consolidated statements of income (loss) for the three and nine month periods ended September 30, 2013, respectively, representing our pro rata portion of royalties paid.

Tissue Regeneration Therapeutics Royalty Purchase

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 million paid upon closing. Additional contingent consideration includes (i) $1.25 million payable upon aggregate royalty payments reaching a certain threshold and (ii) 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 $88,000 in interest income recorded as revenue in the unaudited condensed consolidated statement of income (loss) for the three and nine month periods ended September 30, 2013.

Credit Quality of Finance Receivables 

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.

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.

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.

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.

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:

• 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.

The Company monitors the credit quality indicators of performing and non-performing assets. The Company does not currently have any non-performing assets.