XML 20 R9.htm IDEA: XBRL DOCUMENT v3.24.1.1.u2
Finance Receivables
3 Months Ended
Mar. 31, 2024
Receivables [Abstract]  
Finance Receivables

Note 3. Finance Receivables

 

Finance receivables are reported at their determined principal balances net of any unearned income, cumulative write offs charged against the allowance for credit losses, 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 values of finance receivables were as follows (in thousands):

 

   March 31, 2024   December 31, 2023 
Term loans  $210,875   $221,145 
Royalty purchases   63,634    67,260 
Total before allowance for credit losses   274,509    288,405 
Allowance for credit losses   (13,224)   (13,901)
Total carrying value  $261,285   $274,504 

 

Allowance for Credit Losses

The ACL is management’s estimate of the amount of expected credit losses over the life of the loan portfolio, or the amount of amortized cost basis not expected to be collected, at the balance sheet date. This estimate encompasses information about historical events, current conditions and reasonable and supportable economic forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Given the current level of economic uncertainty, the complexity of the ACL estimate and level of management judgment required, we believe it is possible that the ACL estimate could change, potentially materially, in future periods. Changes in the ACL may result from changes in current economic conditions, our economic forecast, and circumstances not currently known to us that may impact the financial condition and operations of our borrowers, among other factors.

 

Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. For finance receivables that do not share similar risk characteristics with other finance receivables, expected credit losses are estimated on an individual basis. Expected credit losses are estimated over the contractual terms of the finance receivables, adjusted for expected prepayments and unfunded commitments, generally excluding extensions and modifications. The loan portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. As part of the Company’s quarterly assessment of the allowance, the finance receivables portfolio included two portfolio pools: Term Loans and Royalties.

 

The Company adopted Accounting Standard Update (“ASU”) 2016-13, as amended, on January 1, 2023 using the modified retrospective approach method. The implementation of ASU 2016-13 also impacted the Company’s ACL on unfunded loan commitments, as the ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The reserve for unfunded commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment. The funding rate represents management’s estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $0.4 million for the adoption of ASU 2016-13. As of March 31, 2024 and December 31, 2023, the Company has recorded a $0.2 million liability for credit losses on off-balance-sheet credit exposures related to unfunded commitments, with this liability included in accounts payable and accrued liabilities on the condensed consolidated balance sheets. Please refer to Note 6 for further information on the Company’s unfunded commitments.

The following table details the changes in the allowance for credit losses by portfolio pool for each of the three-months ended March 31 (in thousands):

 

 

   March 31, 2024   March 31, 2023 
   Term
Loans
   Royalties   Total  

Term

Loans

   Royalties   Total 
Allowance at beginning of period  $9,731   $4,170   $13,901   $   $11,846   $11,846 
Effect of adoption of ASU 2016-13               8,900    2,886    11,786 
Provision (benefit) for credit losses   5,547    (224)   5,323             
Write offs(1)   (6,000)       (6,000)       (11,846)   (11,846)
Allowance at end of period  $9,278   $3,946   $13,224   $8,900   $2,886   $11,786 

 

(1)Reversal of finance receivable-specific ACL recognized in prior periods and the effect of the impairment recorded on the Trio loan during the three months ended March 31, 2024.

 

Non-Accrual 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 its finance receivables. Recognition of income is suspended, and the finance receivable is placed on non-accrual status when management determines that collection of future income is not probable. 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 suspended 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.

 

The following table presents nonaccrual and performing finance receivables by portfolio pool, net of allowance for credit loss (in thousands) as of:

   March 31, 2024   December 31, 2023 
   Nonaccrual   Performing   Total   Nonaccrual   Performing   Total 
Term loans  $10,338   $200,537   $210,875   $9,128   $212,017   $221,145 
Royalty purchases   16,496    47,138    63,634    16,854    50,406    67,260 
Total before allowance for credit losses  $26,834   $247,675   $274,509   $25,982   $262,423   $288,405 
Allowance for credit losses  $(1,470)  $(11,754)  $(13,224)  $(1,447)  $(12,454)  $(13,901)
Total carrying value  $25,364   $235,921   $261,285   $24,535   $249,969   $274,504 

 

As of March 31, 2024, the Company had five finance receivables in nonaccrual status: (1) the term loan to Trio Healthcare Ltd. (“Trio”), with a carrying value of $3.6 million; (2) the term loan to Exeevo, Inc (“Exeevo”), with a carrying value of $6.8 million; (3) the Flowonix Medical, Inc. (“Flowonix”) royalty, with a carrying value of $10.4 million (see Loan Modifications Made to Borrowers Experiencing Financial Difficulty below for further details); (4) the Best ABT, Inc. (“Best”) royalty, with a carrying value of $2.5 million; and (5) the Ideal Implant, Inc. (“Ideal”) royalty, with a carrying value of $3.6 million. As of March 31, 2024 Trio was considered impaired by $6.0 million, with the $6.0 million impairment recognized in provision for credit losses on the unaudited condensed consolidated statements of income for the three months ended March 31, 2024. The Company collected $0.7 million and $0.1 million on its nonaccrual finance receivables during the three months ended March 31, 2024 and 2023, respectively.

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

 

Effective January 1, 2023, the Company adopted the provisions of ASU 2022-02, which eliminated the accounting for TDRs while expanding loan modification and vintage disclosure requirements. The update specifically required additional disclosures on loan modifications to borrowers experiencing financial difficulties that involved an interest rate reduction, other-than-insignificant payment delay, a term extension, principal forgiveness or a combination thereof.

 

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. On an ongoing basis, the Company monitors the performance of modified loans to their restructured terms.

 

Credit Quality of Finance Receivables

 

The Company evaluates all finance receivables on a quarterly basis and assigns a risk rating based upon management’s assessment of the borrower’s ability and likelihood of repayment. The assessment is subjective and based on multiple factors, including but not limited to, financial strength of borrowers and operating results of the underlying business. The credit risk analysis and rating assignment is performed quarterly in conjunction with the Company’s assessment of its allowance for credit losses. The Company uses the following definitions for its risk ratings for Term Loans:

 

1: Borrower performing well below Company expectations, and the borrower’s ability to raise sufficient capital to operate its business or repay debt is highly in question. Finance receivables rated a 1 are on non-accrual and are at an elevated risk for principal impairment.

2: Borrower performing below plan, and the loan-to-value is generally worse than at the time of underwriting. Borrower has limited access to additional capital to operate its business. Finance receivables rated a 2 are generally on non-accrual, and while no loss of impairment is anticipated, there is potential for future principal impairment.

3: Borrower performing in-line-to-modestly below Company expectations, and loan-to-value is similar to slightly worse than at the time of underwriting. Borrower has demonstrated access to capital markets.

4: Borrower performing in-line-to-modestly above Company expectations and loan-to-value similar or modestly better than underwriting case. Borrower has demonstrated access to capital markets.

5: Borrower performing in excess of Company expectations, and loan-to-value is better than at time of origination.

The Company uses an internal credit rating system which rates each Royalty on a color scale of Green to Red, with Green typically indicative of a Royalty that is exceeding base underwritten case and Red reflective of underperformance relative to plan.

The following table summarizes the carrying value of Finance Receivables by origination year, grouped by risk rating as of March 31, 2024 and December 31, 2023 (in thousands):

   March 31, 2024 
   2023   2022   2021   2020   2019   Prior   Total 
Term Loans                                   
5  $   $   $13,785   $   $5,344   $   $19,129 
4   25,951    55,507                9,787    91,245 
3   24,440        10,271        28,998        63,709 
2       6,765    12,508            13,946    33,219 
1           3,573                3,573 
Subtotal - Term Loans  50,391   62,272   40,137      34,342   23,733   210,875 
                                    
Royalties                                   
Green  $12,445   $12,390   $   $14,363   $   $1,317   $40,515 
Yellow               3,184        3,439    6,623 
Red           3,566    10,433        2,497    16,496 
Subtotal - Royalties  12,445   12,390   3,566   27,980      7,253   63,634 
                                    
Total Finance Receivables, gross  $62,836   $74,662   $43,703   $27,980   $34,342   $30,986   $274,509 

 

   December 31, 2023 
   2023   2022   2021   2020   2019   Prior   Total 
Term Loans                                   
5  $   $   $13,734   $   $5,696   $   $19,430 
4   25,799    32,211                10,485    68,495 
3   24,341    24,285    10,227        31,807        90,660 
2       6,924    12,493            14,015    33,432 
1           9,128                9,128 
Subtotal - Term Loans  $50,140   $63,420   $45,582   $   $37,503   $24,500   $221,145 
                                    
Royalties                                   
Green  $27,785   $   $   $14,650   $   $1,340   $43,775 
Yellow               3,212        3,419    6,631 
Red           3,834    10,433        2,587    16,854 
Subtotal - Royalties  $27,785   $   $3,834   $28,295   $   $7,346   $67,260 
Total Finance Receivables, gross  $77,925   $63,420   $49,416   $28,295   $37,503   $31,846   $288,405