Finance Receivables

12 Months Ended

Dec. 31, 2016

Receivables [Abstract]

Finance Receivables

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 December 31 are as follows (in thousands):

	As of December 31,
Portfolio	2016			2015
Term Loans	$	91,841		$	89,204
Royalty Purchases		36,184			17,224
Total before allowance for credit losses		128,025			106,428
Allowance for credit losses		(1,659	)		(7,082	)
Total carrying value	$	126,366		$	99,346

Credit Quality of Finance Receivables

The Company originates finance receivables to companies primarily in the life sciences sector. This concentration of credit exposes the Company to a higher degree of risk associated with this sector.

On a quarterly basis, the Company evaluates the carrying value of each finance receivable for impairment. 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 the 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. The Company may retain independent third-party valuations on such nonaccrual positions to support impairment decisions.

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, or the estimated fair value of the collateral, less estimated costs to sell. 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 individually develops the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the Company considers, 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 following tables present a summary of the activity in the allowance for credit losses by portfolio segment for the years ended December 31, 2016 and 2015 (in thousands):

	Term Loans			Royalty Purchases
Balance, December 31, 2014	$	—			—
Provisions charged to income		10,848			—
Charge-offs		(3,766	)		—
Recoveries		—			—
Balance, December 31, 2015	$	7,082		$	—
Provisions charged to income		—			1,659
Charge-offs		(7,082	)		—
Recoveries		—			—
Balance, December 31, 2016	$	—		$	1,659

The following table presents nonaccrual and performing loans by portfolio segment (in thousands):

	December 31, 2016						December 31, 2015
	Nonaccrual		Performing		Total		Nonaccrual		Performing		Total
Term Loans	$	19,040		72,801		91,841	$	20,093	$	62,029	$	82,122
Royalty Purchases		—		34,525		34,525		—		17,224		17,224
Total carrying value	$	19,040		107,326		126,366	$	20,093	$	79,253	$	99,346

As of December 31, 2016, the Company had two term loans associated with two portfolio companies in nonaccrual status with a carrying value, net of credit loss allowance, of $19.0 million. As of December 31, 2015, the Company had three term loans associated with one portfolio company in nonaccrual status with a carry value of $20.1 million. No cash on nonaccrual loans was collected during the year ended December 31, 2016. Of the two nonaccrual term loans at December 31, 2016, neither are deemed to be impaired. (Please see ABT Molecular Imaging, Inc. and B&D Dental below for further details regarding nonaccrual term loans.)

Of the three nonaccrual term loans at December 31, 2015, two loans, with a carrying value of $12.5 million, net of credit loss allowance, were identified as impaired by the Company, as the fair market value of the loans, less costs to sell, were lower than their respective recorded investments in the loans. During the year ended December 31, 2015, the Company recognized loan impairment expense of $10.8 million.

SynCardia Systems, Inc. (“SynCardia”)

On June 24, 2016, SWK Funding LLC, a wholly-owned subsidiary of SWK Holdings Corporation, sold 100 percent of its debt and equity interests in SynCardia to an affiliate of Versa Capital Management for upfront cash consideration of $7.2 million plus additional certain future contingent payments. The Company’s interests in SynCardia included $22.0 million of a senior secured first lien loan, $13.0 million of second lien convertible notes, 2,323,649 shares of Series F preferred stock, 4,000 shares of common stock and 34,551 common stock purchase warrants. The carrying value, as of the date of sale, of the debt and equity interests in SynCardia was approximately $12.5 million. During the year ended December 31, 2016, the Company recognized $5.3 million of impairment expense related to the sale of its SynCardia assets.

ABT Molecular Imaging, Inc. (“ABT”)

On October 10, 2014, the Company entered into a credit agreement pursuant to which the Company provided ABT a second lien term loan in the principal amount of $10.0 million. The loan matures on October 8, 2021. The synthetic royalty payment due to the Company on December 15, 2015 was blocked by ABT’s first lien lender pursuant to the terms of the intecreditor agreement by and between the Company and the first lien lender as a result of a forbearance agreement entered into between ABT and the first lien lender. Per the terms of the forbearance agreement, the first lien lender deferred principal payments until maturity of the first lien in March 2016 and ABT raised additional equity capital.

In February 2016, ABT violated the terms of the forbearance agreement with the first lien lender. In order to control the work out of the default under the first lien loan and prevent the equity sponsors from taking control of the first lien term loan, the Company purchased from an unrelated party the first lien term loan at par for a purchase price of $0.7 million. Since then the equity sponsors funded cash shortfalls into the second quarter of 2016. The Company continues to work with ABT’s equity sponsors to resolve the existing defaults.

During the year ended December 31, 2016, the Company entered into additional amendments to the first lien term loan, which provided for an additional $1.6 million of liquidity under the first lien credit agreement. ABT has drawn down the full $1.6 million as of March 17, 2017.

The collateral for the loan has been individually reviewed, and the Company believes that the fair market value of the loan, less costs to sell, was greater than the recorded investments in the loans as of December 31, 2016. Based on the impairment analysis, the Company has determined that recording a provision for credit losses as of December 31, 2016 is not required. The Company considered several factors in this determination, including an independent third-party valuation and developments in the portfolio company’s business and industry.

B&D Dental (“B&D”)

On December 10, 2013, the Company entered into a five-year credit agreement to provide B&D a senior secured term loan with a principal amount of $6.0 million funded upon close, net of an arrangement fee of $60 thousand. Subsequently, the terms of the loan have been amended, and the Company has funded additional amounts to B&D. As of December 31, 2016, the total amount funded was $8.1 million.

B&D is currently in default under the terms of the credit agreement, and as a result, the Company classified the loan to nonaccrual status as of September 30, 2015. During the first and fourth quarters of 2016, the Company executed two additional amendments to the loan to advance an additional $0.5 million in order to directly pay critical vendors and protect the value of the collateral. The Company believes its collateral position is greater than the unpaid balance; thus, accrued interest has not been reversed nor has an allowance been recorded as of December 31, 2016. The Company considered several factors in this determination, including an independent third-party valuation and developments in the portfolio company’s business and industry.

Besivance

On April 2, 2013, the Company purchased an effective 2.4 percent royalty on sales of Besivance® from InSite Vision for $6.0 million. Besivance is marketed by Bausch & Lomb, a unit of Valeant Pharmaceuticals. Recently the sales performance of Besivance has weakened due to substantial increases in sales chargebacks and various rebates (gross sales to net sales deductions) and lower sales volumes, which has resulted in material reductions in the product’s net sales and associated royalties’ payable to the Company. During the year ended December 31, 2016, the Company reduced its expectations for future royalty receipts and recognized an allowance for credit loss on the royalty purchase of $1.7 million.