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Finance Receivables

12 Months Ended

Dec. 31, 2021

Note 3. 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.

As of December 31, 2021, the Company had a credit loss allowance of $8.4 million. Of the total $8.4 million, $1.2 million is associated with the Company’s Cambia® royalty, and $0.6 million is associated with the Company’s Besivance® royalty. The remaining $6.6 million is related to the Best ABT, Inc. (“Best”), second lien term loan that was recognized in order to reflect the Best royalty at its estimated fair value. The carrying values of finance receivables are as follows (in thousands):


	December 31,
	2021			2020
Term loans	$	136,312		$	164,032
Royalty purchases		53,629			48,847
Total before allowance for credit losses		189,941			212,879
Allowance for credit losses		(8,388	)		(8,388	)
Total carrying value	$	181,553		$	204,491

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 collectibility 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 table presents nonaccrual and performing loans by portfolio financing structure: (in thousands):


	December 31, 2021						December 31, 2020
	Nonaccrual		Performing		Total		Nonaccrual		Performing		Total
Term loans	$	18,288	$	118,024	$	136,312	$	8,334	$	155,698	$	164,032
Royalty purchases		3,362		41,879		45,241		3,863		36,596		40,459
Total carrying value	$	21,650	$	159,903	$	181,553	$	12,197	$	192,294	$	204,491

As of December 31, 2021, the Company had three finance receivables in nonaccrual status: (1) the term loan to B&D Dental Corporation (“B&D”), with a net carrying value of $8.3 million, (2) the term loan to Flowonix Medical, Inc. (“Flowonix”), with a net carrying value of $10.0 million, and (3) the Best royalty, with a net carrying value of $3.4 million. Although in nonaccrual status, the B&D and Flowonix term loans were not considered impaired as of December 31, 2021 and 2020. The Company collected $1.2 million on two of its nonaccrual finance receivables during the year ended December 31, 2021, of which $0.7 million was collected from Flowonix prior to being placed on non-accrual.

In March 2022, SWK Funding negotiated to terminate the B&D term loan upon receiving payment of $10.4 million, which was received on March 17, 2022. The carrying value of the term loan was $8.3 million as of December 31, 2021. Following this payment, B&D has no remaining payment obligations to the Company.