Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - EMERGENT CAPITAL, INC.a20171231-ex322.htm
EX-32.1 - EXHIBIT 32.1 - EMERGENT CAPITAL, INC.a20171231-ex321.htm
EX-31.2 - EXHIBIT 31.2 - EMERGENT CAPITAL, INC.a20171231-ex312.htm
EX-31.1 - EXHIBIT 31.1 - EMERGENT CAPITAL, INC.a20171231-ex311.htm
EX-23.1 - EXHIBIT 23.1 - EMERGENT CAPITAL, INC.a2017exhibit231-consentofg.htm
EX-21.1 - EXHIBIT 21.1 - EMERGENT CAPITAL, INC.a2017exhibit211-emergentsu.htm
EX-10.5.1 - EXHIBIT 10.5.1 - EMERGENT CAPITAL, INC.emergentcapital-mmartineze.htm
EX-10.3.4 - EXHIBIT 10.3.4 - EMERGENT CAPITAL, INC.amendmenttolsa-finalexecut.htm
EX-10.2.4 - EXHIBIT 10.2.4 - EMERGENT CAPITAL, INC.rsugrantletter.htm
EX-10.28 - EXHIBIT 10.28 - EMERGENT CAPITAL, INC.commiittmentletter.htm
EX-10.27 - EXHIBIT 10.27 - EMERGENT CAPITAL, INC.emergentcapital-hwerblowsk.htm
EX-10.26 - EXHIBIT 10.26 - EMERGENT CAPITAL, INC.emergentcapital-jsimonyexe.htm
EX-3.2 - EXHIBIT 3.2 - EMERGENT CAPITAL, INC.emergent-amendedandrestate.htm
EX-3.1 - EXHIBIT 3.1 - EMERGENT CAPITAL, INC.emergent-articlesofincorpo.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
(Mark One)
þ    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-35064
 
EMERGENT CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Florida
 
30-0663473
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
5355 Town Center Road—Suite 701
Boca Raton, Florida 33486
(Address of principal executive offices, including zip code)
(561) 995-4200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None 
Securities registered pursuant to Section 12(g) of the Act:


Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
OTCQB


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
þ
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes  ¨    No ¨
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on June 30, 2017 was $9,577,209.
The number of shares of the registrant’s common stock outstanding as of March 12, 2018 was 158,475,399. 
 
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for the 2018 annual meeting are incorporated by reference in this Annual Report on Form 10-K in response to Part III— Items 10, 11, 12, 13 and 14.




EMERGENT CAPITAL, INC.
2017 Annual Report on Form 10-K
Table of Contents
Item
 
Page No.
PART I
1.
1A.
1B.
2.
3.
4.
PART II
5.
6.
7.
7A.
8.
9.
9A.
9B.
PART III
10.
11.
12.
13.
14.
PART IV
15.
 
 
 
 
 
 



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company and the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable as of the date made, results may prove to be materially different. Unless otherwise required by law, the Company disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this report.
Factors that could cause our actual results to differ materially from those indicated in our forward-looking statements include, but are not limited to, the following:
our ability to maintain our rights in the policies that serve as the primary assets of the Company and are the collateral under various debt instruments to which we are a party;
our ability to obtain future financings on favorable terms, or at all;
We may not improve our solvency in a manner acceptable to the lender of the White Eagle Revolving Credit Facility which may impact our ability to receive distributions from policy proceeds from life insurance policies pledged as collateral under the facility;
our ability to meet our debt service obligations;
delays in the receipt of death benefits from our portfolio of life insurance policies;
costs related to obtaining death benefits from our portfolio of life insurance policies;
our ability to continue to comply with the covenants and other obligations, including the conditions precedent for additional fundings under our revolving credit facility;
increases in premiums on, or the cost of insurance of, life insurance policies that we own;
changes to actuarial life expectancy tables;
changes in general economic conditions, including inflation, changes in interest or tax rates;
our results of operations;
our ability to continue to make premium payments on the life insurance policies that we own;
adverse developments, including financial ones, associated with other litigation and judicial actions;
inaccurate estimates regarding the likelihood and magnitude of death benefits related to life insurance policies that we own;
lack of mortalities of insureds of the life insurance policies that we own;
increases to the discount rates used to value the life insurance policies that we own;
changes in mortality rates and inaccurate assumptions about life expectancies;
changes in life expectancy calculation methodologies by third party medical underwriters;
the effect on our financial condition as a result of any lapse of life insurance policies;
our ability to sell the life insurance policies we own at favorable prices, if at all;
adverse developments in capital markets;
deterioration of the market for life insurance policies and life settlements;



increased carrier challenges to the validity of our life insurance policies;
adverse court decisions regarding insurable interest and the obligation of a life insurance carrier to pay death benefits or return premiums upon a successful rescission or contest;
challenges to the ownership of the policies in our portfolio;
changes in laws and regulations;
deterioration in the credit worthiness of the life insurance companies that issue the policies included in our portfolio;
regulation of life settlement transactions as securities;
liabilities associated with our legacy structured settlement business;
our failure to maintain the security of personally identifiable information pertaining to insureds and counterparties;
disruption of our information technology systems;
our ability to avoid defaulting under the various credit documents to which we are a party;
our ability to maintain a listing or quotation on a national securities exchange or other trading platform for our common stock;
cyber security risks and the threat of data breaches;
loss of the services of any of our executive officers; and
the effects of United States involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts.
See Item 1A,"Risk Factors" for more information. All written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Annual Report on Form 10-K in the context of these risks and uncertainties. The Company cautions you that the important factors referenced above may not contain all of the factors that are important to you.
All statements in this Annual Report on Form 10-K to "Emergent Capital," "Company," "we," "us," or "our" refer to Emergent Capital, Inc. and its consolidated subsidiaries unless the context suggests otherwise.



PART I
Item 1. Business
Overview
Emergent Capital, Inc. was founded in December 2006 as a Florida limited liability company, Imperial Holdings, LLC, and converted into Imperial Holdings, Inc. on February 3, 2011, in connection with the Company’s initial public offering. Effective September 1, 2015, the name was changed to Emergent Capital, Inc. (with its subsidiary companies, the "Company" or "Emergent Capital").
Emergent Capital, through its subsidiary companies, owns a portfolio of 608 life insurance policies, also referred to as life settlements, with a fair value of $567.5 million and an aggregate death benefit of approximately $2.9 billion at December 31, 2017. The Company primarily earns income on these policies from changes in their fair value and through death benefits.
Life Settlements Portfolio & Portfolio Management
The life insurance policies in Emergent Capital’s portfolio were acquired through a combination of direct policy purchases from the original policy owners (the secondary market), purchases of policies owned by other institutional investors (the tertiary market) and from policy surrenders or foreclosures in satisfaction of loans issued under the Company’s legacy premium finance business. Emergent Capital uses a probabilistic method of valuing life insurance policies, meaning the insured individual’s probability of survival and probability of death are applied to the required premiums and net death benefit of the policy to extrapolate the likely cash flows over the life expectancy of the insured. These likely cash flows are then discounted using a net present value formula. Management believes this to be the preferred valuation method in the industry at the present time.
Until a policy matures, the Company must pay ongoing premiums to keep that policy in force and to prevent it from lapsing. Upon a policy lapse, the Company would suffer a complete loss on its investment in that policy. Accordingly, the Company must proactively manage its cash in order to effectively run its business, maintain liquidity and continue to pay premiums in order to maintain the policies in its portfolio. 606 of these policies, with an aggregate death benefit of approximately $2.9 billion and a fair value of approximately $566.7 million at December 31, 2017, are pledged under a $370.0 million, revolving credit agreement (the "White Eagle Revolving Credit Facility") entered into by the Company’s indirect subsidiary, White Eagle Asset Portfolio, LP ("White Eagle"). At December 31, 2017, 2 policies owned by the Company, with an aggregate death benefit of approximately $12.0 million and a fair value of $750,000 were not pledged as collateral under the White Eagle Revolving Credit Facility.
Regulation
The sale and solicitation of life insurance policies in the secondary market is highly regulated by the laws and regulations of individual states and other applicable jurisdictions. The purchase of a policy directly from a policy owner is referred to as a life settlement and is regulated on a state-by-state basis.
At December 31, 2017, the Company, through its subsidiary Imperial Life Settlements, LLC, maintained licenses to transact life settlements as a provider in 28 of the states that currently require a license and was qualified to conduct business in 37 states and the District of Columbia.
The primary regulator for Imperial Life Settlements, LLC when purchasing life settlements in the secondary market is the Florida Office of Insurance Regulation. A majority of the state laws and regulations concerning life settlements relate to: (i) provider and broker licensing requirements; (ii) reporting requirements; (iii) required contract provisions and disclosures; (iv) privacy requirements; (v) fraud prevention measures; (vi) criminal and civil remedies; (vii) marketing requirements; (viii) the time period in which policies cannot be sold in life settlement transactions; and (ix) other rules governing the relationship between policy owners, insured persons, insurers, and others.
Competition
Competition is primarily through two channels: life settlement providers and institutional investors. In order to be a life settlement provider and transact with the original holder of a life insurance policy, in most instances, a license on a state-by-state basis is required. The life settlement business is highly fragmented and, therefore, competition is diverse. Often, life settlement providers are originating life settlements on behalf of institutional investors who do not maintain the necessary

1



licenses to transact in the secondary market for life insurance. These investors may have significantly more resources than the Company and can generally also transact directly in the tertiary market.
Employees
At December 31, 2017, we employed 13 full-time employees and no part-time employees. None of our employees are subject to any collective bargaining agreements. We believe that our employee relations are good.
Company Website Access and SEC Filings
Our website may be accessed at www.emergentcapital.com. All of our filings with the Securities and Exchange Commission ("SEC") can be accessed free of charge through our website promptly after filing; however, in the event that the website is inaccessible, we will provide paper copies of our most recent annual report on Form 10-K, the most recent quarterly report on Form 10-Q, current reports filed or furnished on Form 8-K, and all related amendments, excluding exhibits, free of charge upon request. These filings are also accessible on the SEC’s website at www.sec.gov. Information on our website is not incorporated by reference into this Annual Report on Form 10-K.
General Information
Our registrar and stock transfer agent is American Stock Transfer & Trust Company, LLC. Our transfer agent is responsible for maintaining all records of shareholders, canceling or issuing stock certificates and resolving problems related to lost, destroyed or stolen certificates. For more information, please contact: American Stock Transfer & Trust Company at 6201 15th Avenue, Brooklyn, NY 11219 Phone: 800-937-5449.
Item 1A. Risk Factors
Risks Related to Our Indebtedness & Organizational Structure

We may not have sufficient funds to pay our debt and other obligations.

Our cash, cash equivalents, short-term investments and operating cash flows may be inadequate to meet our obligations under our outstanding indebtedness and our other obligations. At December 31, 2017, 606 of the policies we owned were pledged as collateral under our White Eagle Revolving Credit Facility. When those policies mature, distributions will be made pursuant to a "waterfall" payment structure and any amounts available to us will vary based on the respective then current loan to value ratio under the facility. The White Eagle Revolving Credit Facility contemplates that proceeds will be directed to pay fees to service providers and premiums, with any remaining proceeds directed to pay outstanding interest. To the extent there is not sufficient remaining proceeds in the waterfall to satisfy the amount of required interest, White Eagle will be obligated to pay any such shortfall amount.

Under the White Eagle Revolving Credit Facility, proceeds from the maturity of the policies pledged as collateral are distributed pursuant to a waterfall. After distributions for payments of premiums, fees to service providers, and interest, a percentage of the collections from policy proceeds are to be paid to the lenders, which will vary depending on the then loan-to-value ratio ("LTV") as illustrated below where the valuation is determined by the lenders:

LTV
 
Premiums, Interest & Other Fees
 
Principal
 
Distribution to White Eagle - 55%
 
Lender Participation - 45%
N/A
 
100%
 
—%
 
—%
 
—%
>65%
 
N/A
 
100%
 
—%
 
—%
50-65%
 
N/A
 
70%
 
16.5%
 
13.5%
35-50%
 
N/A
 
55%
 
24.8%
 
20.3%
0-35%
 
N/A
 
45%
 
30.3%
 
24.8%

Provided that (i) if (a) the Company failed to maintain a cash interest coverage ratio of at least 2.0:1 at any time during the immediately preceding calendar quarter or (b) the Company fails to take steps to improve its solvency in a manner acceptable to the required lenders (as determined in their sole and absolute discretion), then the cash flow sweep percentage to the lenders shall equal one-hundred percent (100%) and (ii) if such distribution date occurs on or after December 29, 2025, then

2


the cash flow sweep percentage shall equal one-hundred percent (100%). See Note 8, "White Eagle Revolving Credit Facility" to our accompanying consolidated financial statements.

Accordingly, there can be no assurance as to when proceeds or the amounts from maturities of the policies pledged as collateral under the White Eagle Revolving Credit Facility will be distributed to us. In addition, we are not able to borrow money under our White Eagle Revolving Credit Facility to pay interest or principal under the facility or any other indebtedness. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on any of our indebtedness, we will be in default, which could cause defaults under any other of our indebtedness then outstanding. Any such default would have a material adverse effect on our business, prospects, financial condition and operating results. Additionally, upon an event of default of the White Eagle Revolving Credit Facility, absent a waiver, in addition to principal and interest, the lenders’ rights to proceeds from collections under the White Eagle Revolving Credit Facility will become due. If these obligations cannot be satisfied, the lenders, or their agent, may dispose of, release, or foreclose on (including by means of strict foreclosure on all or any of the policies or on our interests in White Eagle, which might be exercised in a manner intended to impair our rights to excess proceeds of any liquidation of foreclosed assets), or take other actions with respect to the policies pledged as collateral under the White Eagle Revolving Credit Facility that we or our shareholders may disagree with or that may be contrary to the interests of our shareholders.

Our substantial leverage and significant debt service obligations could adversely affect our ability to fulfill our obligations and make it more difficult for us to fund our operations.
As of December 31, 2017, we had $441.1 million in outstanding long-term debt (without giving effect to the fair value of such indebtedness) consisting of borrowings under the White Eagle Revolving Credit Facility, our 8.50% senior unsecured convertible notes (the "Convertible Notes"); 5.0% senior unsecured convertible notes (the "New Convertible Notes") and the 8.5% senior secured notes (the "8.5% Senior Secured Notes"). Our substantial level of indebtedness could have important negative consequences to you and us, including:
we may have difficulty satisfying our debt obligations, including payment of current interest obligations;
we may have difficulty refinancing our existing indebtedness or obtaining financing in the future for working capital, premium payments, portfolio lending, acquisitions or other purposes;
we will need to use a substantial portion of our available cash flow to pay interest and principal on our debt, which will reduce the amount of money available to finance our operations and other business activities;
our debt level increases our vulnerability to general economic downturns and adverse industry conditions;
our debt level could limit our flexibility in planning for, or reacting to, changes in our business and in our industry in general; and
our leverage could place us at a competitive disadvantage compared to our competitors that have less debt.
While the terms of the financing arrangements governing our debt contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Accordingly, we could incur significant additional indebtedness in the future; the more we increase our leverage, the more we become exposed to the risks described above.
We may require additional capital and there can be no assurance that we will be able to raise additional capital in a timely manner, at the level sought, on favorable terms or at all.
Subject to borrowing base limitations and other conditions to funding, White Eagle may borrow proceeds to pay premiums on all of the life insurance policies pledged as collateral under the White Eagle Revolving Credit Facility at December 31, 2017. However, we estimate that, in addition to general overhead expenses, we will need to pay approximately $140,000 in premiums to keep our remaining 2 life insurance policies that have not been pledged as collateral under the White Eagle Revolving Credit Facility in force through December 31, 2018. As of December 31, 2017, we had approximately $31.3 million of cash and cash equivalents and certificates of deposit of $1.0 million; of this amount, approximately $18.1 million is available to pay premiums on the 2 unencumbered policies and other overhead expenses, with approximately $13.1 million being restricted by the White Eagle Revolving Credit Facility. Accordingly, we must proactively manage our cash and may need to raise additional capital in order to effectively run our businesses, maintain the policies that have not been pledged under the White Eagle Revolving Credit Facility, pay interest expense on our debt and opportunistically grow our assets. There can be no assurance, however, that we will, if needed, be able to raise additional or sufficient capital on favorable terms or at all.

3


As part of our cash management and business strategy, we may, subject to the covenants in our debt arrangements, determine to sell all or a portion of our portfolio, but there can be no assurance that we can consummate any sales or that, if consummated, sales of policies will be at or above their carrying values. We may also, subject to the covenants in our debt arrangements and lender approval, determine to lapse certain of these policies that have a low return profile or as our portfolio management needs dictate. The lapsing of policies, if any, could result in an event of default under our debt arrangements and would create losses as the policies would be written down to zero.
We may have exposure to greater than anticipated tax liabilities.
Our income tax obligations are based in part on our corporate operating structure and intercompany arrangements, including the manner that we own our life settlements and the valuations of our intercompany transactions. The tax laws applicable to our business, including the laws of the United States, Ireland and other jurisdictions, are subject to interpretation and certain jurisdictions are aggressively interpreting their laws in new ways in an effort to raise additional tax proceeds from companies. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for intercompany arrangements and ownership of life settlements, which could increase our effective tax rate and harm our financial position and results of operations. We are subject to regular review and audit by U.S. federal and state authorities and from 2014 on, foreign tax authorities. Tax authorities may disagree with certain positions we have taken and any adverse outcome of such a review or audit could have a material negative effect on our financial position and results of operations. In addition, the determination of our provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. In addition, our future income taxes could be adversely affected by changes in tax laws, regulations, or accounting principles.
Changes in tax laws or tax rulings could materially affect our financial position and results of operations.
The U.S., Ireland and many countries in the European Union, are actively considering changes to existing tax laws. Certain proposals, including proposals with retroactive effects, could include recommendations that would significantly increase our tax obligations where we do business or where our subsidiaries own life insurance policies. Any changes in the taxation of either international business activities or ownership of life settlements may increase our effective tax rate and harm our financial position and results of operations and, under certain circumstances, may constitute an event of default under the White Eagle Revolving Credit Facility.
We may not be able to refinance the White Eagle Revolving Credit Facility.
The White Eagle Revolving Credit Facility contains covenants that may significantly limit our ability to refinance the facility. In addition, the lender under the White Eagle Revolving Credit Facility has a substantial interest in and priority rights to distributions of certain proceeds from policies pledged by White Eagle. Such covenants and such interests in and rights to distributions may significantly reduce our ability to attract replacement financing were we to seek to refinance the credit facility as a means of limiting adverse actions by the lenders in the exercise of their remedies in relation to any event of default.
We may be unable to deduct interest payments on debt that is attributed to policies that we own, which would reduce any future income and cash flows.
Generally, under the Internal Revenue Code of 1986, as amended (the "Code"), interest paid or accrued on debt obligations is deductible in computing a taxpayer’s federal income tax liability. However, when the proceeds of indebtedness are used to pay premiums on life insurance policies that are owned by the entity incurring the debt or otherwise used to support the purchase or ownership of life insurance policies, the interest in respect of such proceeds may not be deductible. Accordingly, so long as we use a portion of debt financing to pay the premiums on policies owned by us or to support the continued ownership of life insurance policies by us, the interest paid or accrued on that portion of the debt may not be currently deductible by us for federal income tax purposes. We may have net operating losses that we may be able to use to reduce a portion of our future taxable income, but the inability to currently deduct interest accrued on debt could have a material adverse effect on our future earnings and cash flows available for the payment of interest.
In addition, under Section 382 of the Code a corporation that undergoes an "ownership change" (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period) is subject to limitation on its ability to utilize its pre-change net operating loss carry-forwards, or net operating losses, to offset future taxable income. Recent changes in our stock ownership triggered an ownership change, and as a result, our ability to utilize our net operating losses to offset income has been substantially limited.

4



New U.S. tax legislation could adversely affect our business.

On December 22, 2017, Congress enacted the "Tax Cuts and Jobs Act" (the "TCJA"). The TCJA is complex and includes significant amendments to the Code, including amendments that drastically change the taxation of offshore earnings and the deductibility of interest. The Company is currently assessing the impact of the TCJA on its business and consolidated financial statements. In connection with that ongoing assessment, the Company has identified at least five provisions that may have a material and adverse effect on its business.

First, the TCJA generally will require the Company to include in income with respect to its 2017 taxable year any undistributed and previously untaxed earnings of its foreign subsidiaries, subject to adjustments.

Second, going forward, the TCJA generally will subject the Company to a current U.S. tax on any undistributed earnings of its foreign subsidiaries to the extent such earnings are considered to be "global intangible low-taxed income" ("GILTI"), subject to certain deductions and adjustments.

Third, the TCJA generally will disallow the Company's U.S. interest deductions going forward to the extent such deductions exceed 30% of its U.S. "adjusted taxable income" (which will be roughly equivalent to earnings before interest, tax, depreciation and amortization ("EBITDA") through 2022 and to earnings before interest and tax ("EBIT") thereafter).

Fourth, any net operating loss incurred by the Company in taxable years beginning after December 31, 2017 cannot offset more than 80% of the Company’s taxable income in any tax year.

Finally, the TCJA significantly amends Section 162(m) of the Code. Pursuant to Section 162(m) of the Code, the Company may not deduct compensation of more than $1.0 million paid to the Company’s "covered employees," which includes (i) any individual who at any time during the taxable year is a chief executive officer, chief financial officer, or an employee whose total compensation for the tax year is required to be reported to stockholders because he or she is among the three highest compensated officers for the tax year, other than the chief executive officer or chief financial officer, and (ii) any person who was a covered employee at any time after December 31, 2016.

Prior to January 1, 2018, certain grants may have qualified as "performance-based compensation" and, as such, would be exempt from the $1.0 million limitation on deductible compensation. The TCJA eliminated the performance-based compensation exception with respect to tax years beginning on or after January 1, 2018. However, the TCJA provides a transition rule with respect to remuneration which is provided pursuant to a written binding contract which was in effect on November 2, 2017 and which was not materially modified after that date. These, and other provisions of the TCJA, may have a material and adverse impact on the Company's business and financial condition and the value of the Company's common shares. The Company is continuing to assess the impact of the TCJA. Holders should consult their tax advisors about the TCJA and its potential impact on their ownership of its common stock.
We may not have the cash necessary to repurchase the 5.0% Convertible Notes and the 8.50% Senior Secured Notes.
We have issued $75.8 million in aggregate principal amount of 5.0% Convertible Notes (the "New Convertible Notes") and $35.0 million in 8.5% Senior Secured Notes. The New Convertible Note Indenture provides for customary events of default, which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the New Convertible Note Indenture; defaults or failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the New Convertible Note Indenture, the trustee or the holders of at least 25% in aggregate principal amount of the New Convertible Notes then outstanding may declare all unpaid principal plus accrued interest on the New Convertible Notes immediately due and payable, subject to certain conditions set forth in the New Convertible Note Indenture. In addition, holders of the New Convertible Notes may require the Company to repurchase the New Convertible Notes upon the occurrence of certain designated events at a repurchase price of 100% of the principal amount of the New Convertible Notes, plus accrued and unpaid interest.
The 8.5% Senior Secured Notes must be redeemed in full upon additional issuances of debt by the Company in each case, at a price equal to 100% of the principal amount redeemed plus (i) accrued and unpaid interest on the 8.5% Senior Secured Notes redeemed up to the date of redemption, and (ii) the Applicable Premium, if any, as defined in the Amended and Restated Senior Secured Indenture. Upon a change of control, the Company will be required to make an offer to holders of the 8.5% Senior Secured Notes to repurchase the 8.5% Senior Secured Notes at a price equal to 107.5% of their principal amount, plus accrued and unpaid interest up to the date of redemption.

5


The Amended and Restated Senior Secured Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the Amended and Restated Senior Secured Indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the Amended and Restated Senior Secured Indenture, the trustee or the holders of at least 25% in aggregate principal amount of the 8.5% Senior Secured Notes then outstanding may declare the principal of and accrued but unpaid interest, plus a premium, if any, on all the 8.5% Senior Secured Notes immediately due and payable, subject to certain conditions set forth in the Amended and Restated Senior Secured Indenture.
However, we may not have enough available cash to make a required repurchase of the New Convertible Notes or the 8.5% Senior Secured Notes at the applicable time, and may not be able to obtain the necessary financing on favorable terms. In addition, our ability to repurchase the New Convertible Notes or the 8.5% Senior Secured Notes may be limited by law or by the agreements governing our other indebtedness that exist at the time of the repurchase, as the case may be. Our failure to repurchase the New Convertible Notes or the 8.5% Senior Secured Notes when required by their indenture would constitute a default, which could also lead to a default under the agreements governing our other indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and to repurchase the New Convertible Notes or the 8.5% Senior Secured Notes. Any such default would have a material adverse effect on our business, prospects, financial condition and operating results.
Interest on the New Convertible Notes and on the 8.5% Senior Secured Notes is due semi-annually and quarterly, respectively.
Risks Related to Our Business

We have been experiencing net losses and expect that net losses could continue for an uncertain period. If we continue to operate at a loss, our business may not be financially viable.
For the year ended December 31, 2017, our net loss from continuing operations was $3.2 million. We have now reported 3 consecutive loss years with an accumulated deficit of $136.0 million. As of December 31, 2017, our cash balance was $31.3 million and certificates of deposit were $1.0 million. We had net working capital of $55.3 million, outstanding debt of $441.1 million and we had life settlement assets of $567.5 million. If we do not succeed in our business plan’s objectives to achieve profitability, our business might continue to experience losses and may not be sustainable in the future.

Our success in operating our life finance business is dependent on making accurate assumptions about life expectancies and maintaining adequate cash balances to pay premiums.
We are responsible for paying all premiums necessary to keep the policies in our portfolio in force and prevent them from lapsing. We estimate that we will need to pay $140,000 in premiums to keep our current portfolio of life insurance policies that are not pledged as collateral under the White Eagle Revolving Credit Facility in force through 2019. As of December 31, 2017, we had approximately $31.3 million of cash and cash equivalents and certificates of deposit of $1.0 million; of this amount, approximately $18.1 million is available to pay premiums on the 2 unencumbered policies and general expenses, with approximately $13.1 million being restricted by the White Eagle Revolving Credit Facility. By using cash reserves to pay premiums for retained life insurance policies, we will have less cash available for other business purposes. Therefore, our cash flows and the required amount of our cash reserves to pay premiums is dependent on our assumptions about life expectancies being accurate.
Life expectancies are estimates of the expected longevity or mortality of an insured and are inherently uncertain. A life expectancy obtained on an insured for a life insurance policy may not be predictive of the future longevity or mortality of the insured. Inaccurate forecasting of an insured’s life expectancy could result from, among other things: (i) advances in medical treatment (e.g., new cancer treatments) resulting in deaths occurring later than forecasted; (ii) inaccurate diagnosis or prognosis; (iii) changes to life style habits or the individual’s ability to fight disease, resulting in improved health; (iv) reliance on outdated or incomplete age or health information about the insured, or on information that is inaccurate (whether or not due to fraud or misrepresentation by the insured); or (v) improper or flawed methodology or assumptions in terms of modeling or crediting of medical conditions.
In forecasting estimated life expectancies, we utilize third party medical underwriters to evaluate the medical condition and life expectancy of each insured. The firms that provide health assessments and life expectancy information may depend on, among other things, actuarial tables and model inputs for insureds and third-party information from independent physicians who, in turn, may not have personally performed a physical examination of any of the insureds and may have relied solely on

6


reports provided to them by attending physicians or other health care providers with whom they were authorized to communicate. The accuracy of this information has not been and will not be independently verified by us or our service providers.
If life expectancy valuations underestimate the longevity of the insureds, the actual maturity date of the life insurance policies may be farther in the future than projected. Consequently, we may not have sufficient cash for payment of insurance premiums or to service our indebtedness. The extension of time to receive a return on our policies could have a material adverse effect on our business, financial condition and results of operations.
The use of third party service providers may have an adverse effect on the operations of the Company.
Our business relies significantly on the use of third party service providers to support our day to day business operations.  Any significant changes in prices these providers charge may have a material impact on our financial results. In addition, any reduction in service levels among our third party service providers, including delays or disruption of services may have an adverse effect on the operations of the Company.
Recent and future increases to the premiums due on life insurance policies that we own have adversely affected and will adversely affect the fair value and our returns on such life insurance policies.
To keep the life insurance policies that we own in force, insurance premiums must be paid in a timely manner. Projected premium payments are a critical component of our fair value estimates, and any increase in expected premiums will likely decrease the fair value of a given life insurance policy and adversely affect the return on that policy. Commencing in the third quarter of 2015, 24 of our policies became subject to a cost of insurance increase, there was no cost of insurance increase during the year ended December 31, 2017. Further cost of insurance increases may cause our projected premium payments to significantly increase, adversely affect the loan to value ratios under the White Eagle Revolving Credit Facility and otherwise could have an adverse, material effect on our business, results of operations and the value of any affected policies.

The premiums necessary to maintain our life finance assets are expected to increase if we were to acquire additional policies.
The premiums necessary to keep our policies in force may increase. Assuming no maturities in 2018, we would need to pay $141,000 in premiums in 2018 to maintain the policies owned as of December 31, 2017 that are not pledged under the White Eagle Revolving Credit Facility. For the 606 policies pledged as collateral under the White Eagle Revolving Credit Facility, White Eagle is eligible to borrow under the White Eagle Revolving Credit Facility to pay the estimated $94.2 million in premiums for 2018 (assuming no maturities), so long as the applicable borrower maintains compliance with the borrowing base formula determined by the lender. If White Eagle is unable to draw under the White Eagle Revolving Credit Facility, it may not be able to sustain the policies it owns, which could lead to lapses or an event of default under the White Eagle Revolving Credit Facility. See "Liquidity and Capital Resources" under Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
Contractions in the market for life insurance policies could make it more difficult for us to opportunistically sell policies that we own and may make it more difficult to borrow under the White Eagle Revolving Credit Facility.
A potential sale of a life insurance policy owned by us depends significantly on the market for life insurance, which may contract or disappear depending on the impact of potential government regulation, future economic conditions and/or other market variables. For example, the secondary and tertiary markets for life insurance policies incurred a significant slowdown in 2008, which lasted several years. Historically, many investors who invest in life insurance policies are foreign investors who are attracted by potential investment returns from life insurance policies issued by United States life insurers with high ratings and financial strength, as well as by the view that such investments are non-correlated assets—meaning changes in the equity or debt markets should not affect returns on such investments. Changes in the value of the United States dollar and corresponding exchange rates, as well as changes to the ratings of United States life insurers can cause foreign investors to suffer a reduction in the value of their United States dollar denominated investments and reduce their demand for such products, which could make it more difficult for us to opportunistically sell our life insurance policies.
The ability of White Eagle to continue to draw borrowings under the White Eagle Revolving Credit Facility is controlled by a borrowing base formula. To the extent the above noted and other factors result in market contractions, they will likely also negatively impact the value of the policies owned by White Eagle, which could decrease the borrowing base under the facility.

7


If White Eagle is unable to draw under the White Eagle Revolving Credit Facility, it may not be able to sustain the policies it owns, which could lead to lapses or an event of default under the White Eagle Revolving Credit Facility.
Our fair value assumptions are inherently subjective and, if the fair value of our life insurance policies decreases, we will report losses with respect to these policies.
When we obtain ownership of a life insurance policy, we record the policy as an investment in life settlements at the transaction price as of the date of acquisition. At the end of each reporting period, we re-value the life insurance policies we own. To the extent that the calculation results in an adjustment to the fair value of the policy, we record this as a change in fair value of our life insurance policies. This evaluation of the fair value of life insurance policies is inherently subjective as it requires estimates and assumptions that are susceptible to significant revision as more information becomes available. Using our valuation model, we determine the fair value of life insurance policies on a discounted cash flow basis. The most significant assumptions that we estimate are the life expectancy of the insured, expected premium payments and the discount rate. The discount rate is based upon current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk margin an investor in the policy would require. Third party life expectancy providers review and analyze the medical records of an insured and provide us with a life expectancy estimate based on the insured’s health. We then calculate a mortality impairment factor for the insured as that factor which, when applied to our mortality table, reproduces the same life expectancy provided for that insured. We use the resulting mortality impairment factor to generate a series of probabilistic future cash flows for the policy, which we then discount and aggregate to arrive at the fair value of the policy. If we are unable to accurately estimate any of these factors, we may have to write down the fair value of our life settlements, which could materially and adversely affect our results of operations and our financial condition. See, "Our success in operating our life finance business is dependent on making accurate assumptions about life expectancies and maintaining adequate cash balances to pay premiums," under Item 1A, "Risk Factors."
Insurable interest concerns regarding a life insurance policy can also adversely impact its fair value. A claim or the perceived potential for a claim for rescission or a challenge to insurable interest by an insurance company or by persons with an insurable interest in the insured of a portion of or all of the policy death benefit can negatively impact the fair value of a life insurance policy.
If the calculation of fair value results in a decrease in value, we record this reduction as a loss. If we determine that it is appropriate to increase the discount rate or adjust other inputs to our fair value model, if we are otherwise unable to accurately estimate the assumptions in our valuation model, or if other factors cause the fair value of our life insurance policies to decrease, the carrying value of our assets may be materially adversely affected and may materially and adversely affect our business, financial condition and results of operations.
The life insurance policies that we own may be subject to contest, rescission and/or non-cooperation by the issuing life insurance company, which may have a material adverse effect on our business, financial condition and results of operations.
All states require that the initial purchaser of a new life insurance policy insuring the life of an individual have an "insurable interest," meaning a stake in the insured’s health and wellbeing, rather than the insured’s death, in such individual’s life at the time of original issuance of the policy. Whether an insurable interest exists in the context of the purchase of a life insurance policy is critical because, in the absence of a valid insurable interest, life insurance policies are unenforceable under most states’ laws. Where a life insurance policy has been issued to a policyholder without an insurable interest in the life of the individual who is insured, the life insurance company may be able to void or rescind the policy. Even if the insurance company cannot void or rescind the policy, the insurable interest laws of a number of states provide that persons with an insurable interest on the life of the insured may have the right to recover a portion or all of the death benefit payable under a policy from a person who has no insurable interest on the life of the insured. These claims can generally only be brought if the policy was originally issued to a person without an insurable interest in the life of the insured.
Many states have enacted statutes prohibiting stranger-originated life insurance, or STOLI, in which an individual purchases a life insurance policy with the intention of selling it to a third-party investor, who lacks an insurable interest in the insured’s life. Some insurance carriers have contested policies as STOLI arrangements, specifically citing the existence of certain nonrecourse premium financing arrangements as a basis to challenge the validity of the policies used to collateralize the financing. Additionally, if an insurance carrier alleges that there were misrepresentations or fraud in the application process for an insurance policy, they may sue us or others to contest or rescind that policy. Decisions in Florida have increased the risk that challenges to premium financed policies may be decided in favor of the issuing insurance company. Moreover, because life insurance policies we own were originated in the same or a similar manner and in a limited number of states, there is a heightened risk that an adverse court decision or other challenge or determination by a regulatory or other interested party with

8


respect to a policy could have a material adverse effect on a significant number of other policies. If a policy that we own is subject to a successful contest or rescission, the fair value of the policy could be reduced to zero, negatively impacting the discount rates used to value our portfolio generally and our ability to sell policies. Generally, life insurance policies may only be rescinded by the issuing life insurance company within the contestability period, which, in most states is two years. Lack of insurable interest can in some instances form the basis of loss of right to payment under a life insurance policy for many years beyond the contestability period and insurance carriers have been known to challenge claims for death benefits for more than five years from issuance of the policy.
From time to time, insurance carriers have challenged the validity of policies owned by us or that once served as the underlying collateral for a premium finance loan made by us. See "Litigation" under Note 17, "Commitments and Contingencies" to our consolidated financial statements. We believe the USAO Investigation (as defined below) and the SEC Investigation (as defined below) have caused us to experience more challenges to policies by insurers attempting to use such investigations and the Non-Prosecution Agreement (as defined below) as grounds for rescinding or contesting a policy. Any such future challenges may result in uncertainty over title and collectability, increased costs, delays in payment of life insurance proceeds or even the voiding of a policy, and could have a material adverse effect on the ability of the Company to comply with the covenants in the agreements governing our indebtedness, our business, financial condition and results of operations.
Additionally, if an insurance company successfully rescinds or contests a policy, the insurance company may not be required to refund all or, in some cases, any of the insurance premiums paid for the policy. While defending an action to contest or rescind a policy, premium payments may have to continue to be made to the life insurance company. Hence, in the case of a contest or rescission, premiums paid to the carrier (including those paid during the pendency of a contest or rescission action) may not be refunded. If they are not, we may suffer a complete loss with respect to a policy, which may adversely affect our business, financial condition and results of operations.
Premium financed life insurance policies are susceptible to a higher risk of fraud and misrepresentation on life insurance applications, which increases the risk of contest, rescission or non-cooperation by issuing life insurance carriers.
While fraud and misrepresentation by applicants and potential insureds in completing life insurance applications exist generally in the life insurance industry (especially with respect to the health and medical history and condition of the potential insured as well as the applicant’s net worth), such risk of fraud and misrepresentation may be heightened in connection with life insurance policies for which the premiums are financed through premium finance loans. In particular, there is a risk that applicants and potential insureds may not have truthfully or completely answered questions related to whether the life insurance policy premiums would be financed through a premium finance loan or otherwise, the applicants’ purpose for purchasing the policy, or the applicants’ intention regarding the future sale or transfer of life insurance policies. Such risk may be further increased to the extent life insurance agents communicated to applicants and potential insureds regarding potential premium finance arrangements or transfers of life insurance policies through payment defaults under premium finance loans. In the ordinary course of our legacy premium finance business, our sales team received inquiries from life insurance agents and brokers regarding the availability of premium finance loans for their clients. However, any communication between the life insurance agent and the potential policyholder or insured is beyond our control and we may not know whether a life insurance agent discussed with the potential policyholder or the insured the possibility of a premium finance loan by us or the subsequent transfer of the life insurance policy. Consequently, notwithstanding the representations and certifications obtained from the policyholders, insureds and the life insurance agents, there is a risk that insurance carriers, the estates or heirs of insureds, or others could contest policies we acquired through foreclosures of premium finance loans based on fraud or misrepresentation as to any information provided to the life insurance company, including the life insurance application. See "Litigation" under Note 17, "Commitments and Contingencies" to the accompanying consolidated financial statements.
Misrepresentations, fraud, omissions or lack of insurable interest can also, in some instances, form the basis of loss of right to payment under a life insurance policy. Based on statements made in the Non-Prosecution Agreement, there is a risk that policies that we own may increasingly be challenged by insurance carriers and the estates or heirs of insureds. Any such challenges to the policies may result in increased costs, delays in payment of life insurance proceeds or even the voiding of a policy, a reduction in the fair value of a policy and could have a material adverse effect on our business, financial condition and results of operations.
As of December 31, 2017, of the 608 policies in our life settlement portfolio, 530 policies were previously premium financed.
Delays in payment and non-payment of life insurance policy proceeds can occur for many reasons and any such delays may have a material adverse effect on our business, financial condition and results of operations.

9


A number of arguments may be made by former beneficiaries (including but not limited to spouses, ex-spouses and descendants of the insured) under a life insurance policy, by the beneficiaries of the trust that once held the policy, by the estate or legal heirs of the insured or by the insurance company issuing such policy, to deny or delay payment of proceeds following the death of an insured, including arguments related to lack of mental capacity of the insured, usury, contestability or suicide provisions in a policy. The statements in the Non-Prosecution Agreement may make such delays more likely and may increase challenges by carriers to paying out death claims or challenges by families of insureds to policy proceeds. Furthermore, if the death of an insured cannot be verified and no death certificate can be produced, the related insurance company may not pay the proceeds of the life insurance policy until the passage of a statutory period (usually five to seven years) for the presumption of death without proof. Such delays in payment or non-payment of policy proceeds may have a material adverse effect on our business, financial condition and results of operations.

We compete with a number of other finance companies and investors and may encounter additional competition.
There are a number of finance companies and investors that compete with us in the life finance industry. Many are significantly larger and possess considerably greater financial, marketing, management and other resources than we do. The life finance business could also prove attractive to new entrants. As a consequence, competition in this sector may increase. Increased competition could result in increased acquisition costs, changes to discount rates, margin compression and/or less favorable financing terms, each of which could materially adversely affect our income, which would have a material adverse effect on our business, financial condition and results of operations.

If a regulator or court decides that trusts that were formed to own the life insurance policies that once served as collateral for our premium finance loans do not have an insurable interest in the life of the insured, such determination could have a material adverse effect on our business, financial condition and results of operations.
Generally, there are two forms of insurable interests in the life of an individual, familial and financial. Additionally, an individual is deemed to have an insurable interest in his or her own life. It is also a common practice for an individual, such as a grantor or settlor, to form an irrevocable trust to purchase and own a life insurance policy insuring the life of the grantor or settlor, where the beneficiaries of the trust are persons who themselves, by virtue of certain familial relationships with the grantor or settlor, also have an insurable interest in the life of the insured. In the event of a payment default on our premium finance loan, we generally acquired life insurance policies owned by trusts (or the beneficial interests in the trust itself) that we believe had an insurable interest in the life of the related insureds. However, a state insurance regulatory authority or a court may determine that the trust or policy owner did not have an insurable interest in the life of the insured or that we, as lender, only have a limited insurable interest. Any such determination could result in our being unable to receive the proceeds of the life insurance policy, which could lead to a total loss on our investment in life settlements. Any such loss or losses could have a material adverse effect on our business, financial condition and results of operations.

We are dependent on the creditworthiness of the life insurance companies that issued the policies in comprising our portfolio. If a life insurance company defaults on its obligation to pay death benefits on a policy we own, we would experience a loss of our investment, which could have a material adverse effect on our business, financial condition and results of operations.

We are dependent on the creditworthiness of the life insurance companies that issued the policies that we own. We assume the credit risk associated with life insurance policies issued by various life insurance companies. The failure or bankruptcy of any such life insurance or annuity company could have a material adverse impact on our financial condition and results of operation. A life insurance company’s business tends to track general economic and market conditions that are beyond its control, including extended economic recessions or interest rate changes. Changes in investor perceptions regarding the strength of insurers generally and the policies or annuities they offer can adversely affect our ability to sell or finance our assets. Adverse economic factors and volatility in the financial markets may have a material adverse effect on a life insurance company’s business and credit rating, financial condition and operating results, and an issuing life insurance company may default on its obligation to pay death benefits on the life insurance policies that we own. In such event, we would experience a loss of our investment in such life insurance policies, which could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our common stock may be negatively affected.
We are subject to Section 404 of the Sarbanes-Oxley Act (SOX), which requires us to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. We have consumed and will continue to consume management resources and incur expenses for SOX compliance on an ongoing basis. In addition, as we have reduced

10


the number of our employees and moved certain of our operations to foreign subsidiaries, we have increased our reliance on third parties for various aspects of our internal controls. If we identify material weaknesses in our internal control over financial reporting, or if we are unable to comply with the requirements of Section 404 in a timely manner or are unable to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our common stock could be negatively affected, and we could become subject to investigations by the SEC, or other regulatory authorities, which could require additional financial and management resources.

Changes to statutory, licensing and regulatory regimes governing life settlements could have a material adverse effect on our activities and income.
Changes to statutory, licensing and regulatory regimes could result in the enforcement of stricter compliance measures or adoption of additional measures on us or on the insurance companies that stand behind the insurance policies that we own, which could have a material adverse impact on our business activities and income. The SEC issued a task force report in July 2010 recommending that sales of life insurance policies in life settlement transactions be regulated as securities for purposes of the federal securities laws. To date, the SEC has not made such a recommendation to Congress. However, if the statutory definitions of "security" were amended to encompass life settlements, we could become subject to additional extensive regulatory requirements under the federal securities laws, including the obligation to register sales and offerings of life settlements with the SEC as public offerings under the Securities Act of 1933 and, potentially, the obligation to register as an "investment company" pursuant to the Investment Company Act of 1940. Any legislation implementing such regulatory change or a change in the transactions that are characterized as life settlement transactions could lead to significantly increased compliance costs, increased liability risk and adversely affect our ability to acquire or sell life insurance policies in the future, which could have a material adverse effect on our business, financial condition and results of operations.
Under the current Presidential administration and U.S. Congress, we expect that there may be many changes to existing U.S. laws, regulations, and standards that may affect our business. Because of the uncertainty regarding existing law, we cannot quantify or predict with any certainty the likely impact of such change on our business model, prospects, financial condition or results of operations. We cannot assure you as to the ultimate content, timing, or effect of changes, nor is it possible at this time to estimate the impact of any such potential legislation.

Our former structured settlements business may expose us to future claims or contingent liabilities.
Pursuant to the terms of the asset purchase agreement we entered into in connection with the sale of our structured settlements business, we sold substantially all of that business’ operating assets in 2013 while retaining substantially all of its liabilities. In addition, we agreed to indemnify the purchaser for certain breaches of representations and warranties regarding us and various aspects of that business. Many of our indemnification obligations are subject to time and maximum liability limitations, however, in some instances our indemnification obligations are not subject to any limitations. Significant indemnification claims by the purchaser or other claims or contingent liability related to our former structured settlement business could materially and adversely affect our business, financial condition and results of operations.
Failure to maintain the security of personally identifiable and other information, non-compliance with our contractual or other legal obligations regarding such information, or a violation of our privacy and security policies with respect to such information, could adversely affect us.
In connection with our business, we collect and retain significant volumes of certain types of personally identifiable and other information pertaining to insureds and counterparties. The legal, regulatory and contractual environment surrounding information security and privacy is constantly evolving. A significant actual or potential theft, loss, fraudulent use or misuse of customer, counterparty, employee or our data by cybercrime or otherwise, non-compliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could adversely impact our reputation and could result in significant costs, fines, penalties, litigation or regulatory action.
Disasters, disruptions and other impairment of our information technologies and systems could adversely affect our business.
Our businesses depend upon the use of sophisticated information technologies and systems, including third party hosted services and data facilities that we do not control. While we have developed certain disaster recovery plans and backup systems, these plans and systems are not fully redundant. A system disruption caused by a natural disaster, cybercrime or other impairment could have a material adverse effect on our results of operations and may cause delays, loss of critical data and reputational harm, and could otherwise prevent us from servicing our portfolio of life insurance policies.

11


Risks Related to Our Common Stock
Provisions in our executive officers’ employment agreements could impede an attempt to replace or remove our directors or otherwise effect a change of control, which could diminish the price of our common stock.
We have entered into employment agreements with certain of our executive officers. These agreements provide for substantial payments upon the occurrence of certain triggering events, including a material diminution of base salaries or responsibilities. These payments may deter any transaction that would result in a change in control, which could diminish the price of our common stock.
These provisions could delay or prevent a change of control that a shareholder might consider favorable. For example, these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our common stock offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging changes in management and takeover attempts in the future. Furthermore, our articles of incorporation and our bylaws provide that the number of directors shall be fixed from time to time by our board of directors, provided that the board shall consist of at least three and no more than fifteen members.
The market price of our stock has been highly volatile.
The market price of our common stock has fluctuated and could fluctuate substantially in the future. This volatility may subject our stock price to material fluctuations due to the factors discussed in this Risk Factors section, and other factors including market reaction to the estimated fair value of our portfolio; our capital structure; cash position; our ability to service our debt; rumors or dissemination of false information; changes in coverage or earnings estimates by analysts; our ability to meet analysts’ or market expectations; and sales of common stock by existing shareholders. A decline in the market price of our common stock could adversely affect our ability to raise capital by issuing additional securities.

The conversion rate for the Convertible Notes will be adjusted in connection with a make-whole fundamental change.
The provisions of the New Convertible Note Indenture include a make-whole provision to compensate the Company’s debt holders for the lost option time value and forgone interest payments upon the Company experiencing a Fundamental Change (as defined in the New Convertible Note Indenture). These Fundamental Changes revolve around change in beneficial ownership, the consummation of specified transactions which result in the conversion of common stock into other assets or the sale, transfer or lease of all or substantially all of the Company’s assets, a majority change in the composition of the Company’s Board of Directors, the Company’s stockholders' approval of any plan for liquidation of dissolution of the Company, and the Common Stock ceasing to be listed or quoted on a Trading Market (as defined under the New Convertible Notes). The number of incremental additional shares to be issued as a result of a Fundamental Change is based on a table which calculates the adjustment based on the inputs of time and share value. Such increase in the conversion rate will dilute the ownership interest of our common stock shareholders.

Provisions in our articles of incorporation and bylaws, as well as the Board Rights agreements entered into as part of our recent recapitalization, could impede an attempt to replace or remove our directors or otherwise effect a change of control, which could diminish the price of our common stock.

Our articles of incorporation and bylaws contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In particular, shareholders are required to provide us with advance notice of shareholder nominations and proposals to be brought before any annual meeting of shareholders, which could discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or to introduce a proposal. In addition, our articles of incorporation eliminate our shareholders’ ability to act without a meeting and require the holders of not less than 50% of the voting power of our common stock to call a special meeting of shareholders. In addition, our bylaws require that in order to be eligible to nominate or propose for nomination a candidate for election as a director, a shareholder must own at least one percent of the Company's outstanding shares of common stock for no less than twelve months.
Certain laws of the State of Florida could impede a change of control, which could diminish the price of our common stock.
As a Florida corporation, we are subject to the Florida Business Corporation Act, which provides that a person who acquires shares in an "issuing public corporation," as defined in the statute, in excess of certain specified thresholds generally

12


will not have any voting rights with respect to such shares, unless such voting rights are approved by the holders of a majority of the votes of each class of securities entitled to vote separately, excluding shares held or controlled by the acquiring person. The Florida Business Corporation Act also contains a statute which provides that an affiliated transaction with an interested shareholder generally must be approved by (i) the affirmative vote of the holders of two thirds of our voting shares, other than the shares beneficially owned by the interested shareholder, or (ii) a majority of the disinterested directors.
One of our subsidiaries, Imperial Life Settlements, LLC, a Delaware limited liability company, is licensed as a viatical settlement provider and is regulated by the Florida Office of Insurance Regulation. As a Florida viatical settlement provider, Imperial Life Settlements, LLC is subject to regulation as a specialty insurer under certain provisions of the Florida Insurance Code. Under applicable Florida law, no person can finally acquire, directly or indirectly, 10% or more of the voting securities of a viatical settlement provider or its controlling company without the written approval of the Florida Office of Insurance Regulation. Accordingly, any person who acquires beneficial ownership of 10% or more of our voting securities will be required by law to notify the Florida Office of Insurance Regulation no later than five days after any form of tender offer or exchange offer is proposed, or no later than five days after the acquisition of securities or ownership interest if no tender offer or exchange offer is involved. Such person will also be required to file with the Florida Office of Insurance Regulation an application for approval of the acquisition no later than 30 days after the same date that triggers the 5-day notice requirement.
The Florida Office of Insurance Regulation may disapprove the acquisition of 10% or more of our voting securities by any person who refuses to apply for and obtain regulatory approval of such acquisition. In addition, if the Florida Office of Insurance Regulation determines that any person has acquired 10% or more of our voting securities without obtaining its regulatory approval, it may order that person to cease the acquisition and divest itself of any shares of our voting securities that may have been acquired in violation of the applicable Florida law. Due to the requirement to file an application with and obtain approval from the Florida Office of Insurance Regulation, purchasers of 10% or more of our voting securities may incur additional expenses in connection with preparing, filing and obtaining approval of the application, and the effectiveness of the acquisition will be delayed pending receipt of approval from the Florida Office of Insurance Regulation.
The Florida Office of Insurance Regulation may also take disciplinary action against Imperial Life Settlements, LLC’s license if it finds that an acquisition of our voting securities is made in violation of the applicable Florida law and would render the further transaction of business hazardous to our counterparties, creditors, shareholders or the public.

Due to delisting our common stock from the New York Stock Exchange ("NYSE"), you may find it difficult to dispose of your shares and our share price may be adversely affected.
On January 23, 2017, we voluntarily delisted our common stock from the NYSE, and on February 3, 2017, the trading of our common stock began on the over-the-counter market, OTCQB. Such trading could reduce the market liquidity of our common stock. As a result, investors may find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock, and our ability to raise future capital through the sale of the shares of our common stock or other securities convertible into or exercisable for our common stock could be severely limited.
Trading in our common stock might also become subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a "penny stock" (generally, any equity security not listed on a national securities exchange or quoted on The NASDAQ Stock Market that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of stockholders to borrow against or "margin" low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual stockholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade our common stock, thereby negatively impacting the share price of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties

13



Our offices are located at 5355 Town Center Road, Suite 701, Boca Raton, Florida 33486 and consist of approximately 11,000 square feet of leased office space. We consider our facilities to be adequate for our current operations.
Item 3. Legal Proceedings
For a description of legal proceedings, see "Litigation” under Note 17, "Commitments and Contingencies" to the accompanying consolidated financial statements.
Item 4. Mine Safety Disclosures.
Not applicable.

14


PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
During the year ended December 31, 2017, shares of our common stock were traded on the OTC Market Group’s OTCQB marketplace under the trading symbol "EMGC."
The following table shows the high and low sales prices for our common stock for the periods indicated, as reported by the OTC:
 
2017
 
High
 
Low
1st Quarter
$
1.41

 
$
0.20

2nd Quarter
$
0.35

 
$
0.27

3rd Quarter
$
0.54

 
$
0.27

4th Quarter
$
0.49

 
$
0.32

 
2016
 
High
 
Low
1st Quarter
$
4.54

 
$
3.49

2nd Quarter
$
4.59

 
$
3.10

3rd Quarter
$
4.42

 
$
2.85

4th Quarter
$
3.15

 
$
1.11

As of March 12, 2018, we had 8 holders of record of our common stock and the closing stock price was $0.41.
Dividend Policy
We have never paid any cash dividends on our common stock and do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any future earnings to finance our operations. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual, regulatory and other restrictions on the payment of dividends by us or by our subsidiaries to us, and other factors that our board of directors deems relevant.
We are a holding company and have no direct operations. Our ability to pay dividends in the future depends on the ability of our operating subsidiaries to pay dividends to us. Certain of our debt arrangements, including the White Eagle Revolving Credit Facility, restrict the ability of certain of our special purpose subsidiaries to pay dividends. In addition, future debt arrangements may contain prohibitions or limitations on the payment of dividends.
Equity Compensation Plans

On June 27, 2017, the shareholders of the Company voted to amend, and the Company amended, the Amended and Restated 2010 Omnibus Incentive Plan (as amended, the "Omnibus Plan") to increase the number of shares authorized for issuance thereunder by 9,900,000 shares. Awards under the Omnibus Plan may consist of incentive awards, stock options, stock appreciation rights, performance shares, performance units, and shares of common stock, restricted stock, restricted stock units or other stock-based awards as determined by the compensation committee of the Company's board of directors. The Omnibus Plan provides for an aggregate of 12,600,000 shares of common stock to be reserved for issuance under the Omnibus Plan, subject to adjustment as provided in the Omnibus Plan. See Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" for additional information.
Recent Sales of Unregistered Securities
There are no recent sales of unregistered securities that have not been previously included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

15



Purchases of Equity Securities
There were no purchases during the year ended December 31, 2017.

Item 6. Selected Financial Data
The following table sets forth our selected historical consolidated financial and operating data as of such dates and for such periods indicated below. These selected historical consolidated results are not necessarily indicative of results to be expected in any future period. You should read the following financial information together with the other information contained in this Annual Report on Form 10-K, including Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes.
The selected historical statement of operations data and balance sheet data for the last five years were derived from our audited consolidated financial statements and reflect the retroactive revision to reflect the classification of our structured settlement business as discontinued operations.

16


 
Historical
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in thousands, except share and per share data)
Income
 
 
 
 
 
 
 
 
 
(Loss) gain on life settlements, net

 

 
(41
)
 
(426
)
 
(1,990
)
Change in fair value of life settlements
51,551

 
864

 
46,717

 
44,128

 
88,686

Servicing fee income

 

 

 

 
310

Other income
322

 
251

 
215

 
114

 
2,072

Total income
51,873

 
1,115

 
46,891

 
43,816

 
89,078

Expenses
 
 
 
 
 
 
 
 
 
Interest expense
32,797

 
29,439

 
27,286

 
16,245

 
13,657

Change in fair value of Revolving Credit Facilities
4,501

 
(1,898
)
 
12,197

 
(5,472
)
 
(9,373
)
Loss on extinguishment of debt
2,018

 
554

 
8,782

 

 
3,991

Change in fair value of conversion derivative liability

 

 

 
6,759

 

(Gain) loss on loan payoffs and settlements, net

 

 

 

 
(65
)
Amortization of deferred costs

 

 

 

 
7

Personnel costs
5,069

 
6,070

 
6,384

 
8,763

 
8,177

Legal fees
3,721

 
6,427

 
20,739

 
13,620

 
11,701

Professional fees
4,445

 
7,081

 
7,133

 
5,254

 
5,281

Insurance
783

 
835

 
1,275

 
1,667

 
1,953

Other selling, general and administrative expenses
1,777

 
2,036

 
2,194

 
2,006

 
1,887

Total expenses
55,111

 
50,544

 
85,990

 
48,842

 
37,216

(Loss) income from continuing operations before income taxes
(3,238
)
 
(49,429
)
 
(39,099
)
 
(5,026
)
 
51,862

(Benefit) provision for income taxes

 

 
(8,719
)
 
125

 
39

Net (loss) income from continuing operations
$
(3,238
)
 
$
(49,429
)
 
$
(30,380
)
 
$
(5,151
)
 
$
51,823

Discontinued Operations:
 
 
 
 
 
 
 
 
 
(Loss) Income from discontinued operations, net of income taxes
(271
)
 
(260
)
 
(644
)
 
(601
)
 
2,198

Gain on disposal of discontinued operations, net of income taxes

 

 

 

 
11,311

Benefit for income taxes

 

 

 
232

 

Net (loss) income from discontinued operations
(271
)
 
(260
)
 
(644
)
 
(369
)
 
13,509

Net (loss) income
$
(3,509
)
 
$
(49,689
)
 
$
(31,024
)
 
$
(5,520
)
 
$
65,332

(Loss) earnings per share:
 
 
 
 
 
 
 
 
 
Basic and diluted (loss) earnings per common share
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.04
)
 
$
(1.79
)
 
$
(1.22
)
 
$
(0.24
)
 
$
2.44

Discontinued operations
$

 
$
(0.01
)
 
$
(0.03
)
 
$
(0.02
)
 
$
0.64

Net (loss) income
$
(0.04
)
 
$
(1.80
)
 
$
(1.25
)
 
$
(0.26
)
 
$
3.08

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic and diluted (1)
82,323,050

 
27,660,711

 
24,851,178

 
21,354,567

 
21,216,487

(1)
As of December 31, 2017, there were 158,495,399 and 157,887,399 shares of common stock issued and outstanding, respectively, and 608,000 shares of treasury stock.




17



 
Historical
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands except share data)
ASSETS
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
18,131

 
$
2,246

 
$
12,946

 
$
51,166

 
$
14,722

Cash and cash equivalents (VIE)
13,136

 
9,072

 
7,395

 
3,751

 
7,977

Restricted cash

 

 

 

 
13,506

Certificate of deposit
1,010

 
6,025

 
2,501

 

 

Prepaid expenses and other assets
617

 
1,112

 
1,017

 
1,502

 
1,331

Prepaid expenses and other assets (VIE)
53

 

 

 

 

Deposits—other
1,377

 
1,347

 
1,347

 
1,340

 
1,597

Deposits on purchases of life settlements

 

 

 
1,630

 

Structured settlement receivables at estimated fair value, net

 

 

 
384

 
660

Structured settlement receivables at cost, net

 

 

 
597

 
797

Investment in life settlements, at estimated fair value
750

 
680

 
11,946

 
82,575

 
48,442

Investment in life settlements, at estimated fair value (VIE)
566,742

 
497,720

 
449,979

 
306,311

 
254,519

Receivable for maturity of life settlements (VIE)
30,045

 
5,000

 
18,223

 
4,000

 
2,100

Fixed assets, net
145

 
232

 
322

 
355

 
74

Investment in affiliates (VIE)
2,384

 
2,384

 
2,384

 
2,384

 
2,378

Total assets
$
634,390

 
$
525,818

 
$
508,060

 
$
455,995

 
$
348,103

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
2,015

 
$
2,590

 
3,051

 
6,140

 
2,977

Accounts payable and accrued expenses (VIE)
753

 
593

 
419

 
423

 
341

Other liabilities
451

 
359

 
360

 
1,256

 
21,221

Interest payable—8.5% Convertible Notes (Note 10)
46

 
2,272

 
2,272

 
2,272

 

8.5% Convertible Notes, net of discount and deferred debt costs (Note 10)
1,098

 
60,535

 
56,812

 
51,945

 

Interest payable - 5.0% Convertible Notes (Note 11)
1,432

 

 

 

 

5.0% Convertible Notes, net of discount and deferred debt costs (Note 11)
68,654

 

 

 

 

Interest payable—15.0% Senior Secured Notes (Note 12)

 
213

 

 
261

 

15.0% Senior Secured Notes, net of deferred debt costs (Note 12)

 
29,297







Interest payable - 8.5% Senior Secured Notes (Note 13)
132

 

 

 

 

8.5% Senior Secured Notes, net of deferred debt costs (Note 13)
33,927

 

 

 

 

12.875% Secured Notes, net of discount and deferred debt costs

 

 

 
24,036

 

White Eagle Revolving Credit Facility, at estimated fair value (VIE)
329,240

 
257,085

 
169,131

 
145,831

 
123,847

Red Falcon Revolving Credit Facility, at estimated fair value (VIE)

 

 
55,658

 

 

Income taxes payable

 

 

 

 
6,295

Deferred tax liability

 

 

 
8,728

 

Total liabilities
437,748

 
352,944

 
287,703

 
240,892

 
154,681

Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Common stock (par value $0.01 per share, 415,000,000 and 80,000,000 authorized at December 31, 2017 and 2016; 158,495,399 issued and 157,887,399 outstanding at December 31, 2017; 29,021,844 issued and 28,413,844 outstanding as of December 31, 2016, 28,130,508 issued and 27,522,508 outstanding as of December 31, 2015, 21,402,990, 21,237,166, and 21,206,121 issued and outstanding as of December 31, 2014 and 2013 respectively)
1,585

 
290

 
281

 
214

 
212

Preferred stock, $0.01 par value (40,000,000 authorized; 0 issued and outstanding as of December 31, 2017,2016, 2015, 2014 and 2013)

 

 

 

 

Treasury stock (608,000 shares as of December 31, 2017 and 2016 and 2015, and 0 shares as of December 31, 2014, 2013)
(2,534
)
 
(2,534
)
 
(2,534
)
 

 

Additional paid-in-capital
333,629

 
307,647

 
305,450

 
266,705

 
239,506

Accumulated deficit
(136,038
)
 
(132,529
)
 
(82,840
)
 
(51,816
)
 
(46,296
)
Total stockholders’ equity
196,642

 
172,874

 
220,357

 
215,103

 
193,422

Total liabilities and stockholders’ equity
$
634,390

 
$
525,818

 
$
508,060

 
$
455,995

 
$
348,103


18


Selected Operating Data (dollars in thousands):
 
For the Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
Period Acquisitions—Policies Owned
 
 
 
 
 
 
 
Number of policies acquired

 
1

 
43

 
16

Average age of insured at acquisition

 
90.3

 
85.0

 
85.2

Average life expectancy—Calculated LE (Years)

 
2.3

 
5.4

 
5.9

Average death benefit
$

 
$
690

 
$
2,811

 
$
4,444

Aggregate purchase price
$

 
$
16

 
$
30,695

 
$
16,296

 
 
 
 
 
 
 
 
End of Period—Policies Owned
 
 
 
 
 
 
 
Number of policies owned
608

 
621

 
632

 
607

Average age of insured
83.4

 
82.4

 
81.4

 
80.4

Average death benefit per policy
$
4,738

 
$
4,745

 
$
4,714

 
$
4,829

Average life expectancy—Calculated LE (Years)
8.3

 
9.0

 
9.9

 
10.7

Aggregate death benefit
$
2,880,487

 
$
2,946,511

 
$
2,979,352

 
$
2,931,066

Aggregate fair value
$
567,492

 
$
498,400

 
$
461,925

 
$
388,886

Monthly premium—average per policy
$
12.3

 
$
11.0

 
$
9.1

 
$
7.8

 
 
 
 
 
 
 
 
Period Maturities
 
 
 
 
 
 
 
Number of policies matured
13

 
12

2

17
 
7

Average age of insured at maturity
82.8

85.2

85.7

86.8

85.0

 
80.1

Average life expectancy - Calculated LE (Years)
4.5

1.8

3.4

5.4

6.4

 
7.1

Aggregate death benefit
$
67,177

 
$
37,460

 
$
67,403

 
$
25,500

Gains on maturity
$
35,891

 
$
17,876

 
$
47,940

 
$
16,413

Proceeds collected
$
42,131

 
$
50,460

 
$
53,454

 
$
23,600


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this Annual Report on Form 10-K, particularly under the headings “Risk Factors,” “Selected Financial Data” and “Business.” This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.” These forward-looking statements are subject to numerous risks and uncertainties, including those described under “Risk Factors.” Our actual results could differ materially from those suggested or implied by any forward-looking statements.
Business Overview

Incorporated in Florida, Emergent Capital owns a portfolio of 608 life insurance policies, also referred to as life settlements, with a fair value of $567.5 million and an aggregate death benefit of approximately $2.9 billion at December 31, 2017. The Company primarily earns income on these policies from changes in their fair value and through death benefits.

Going Concern


19


Historically, the Company had incurred substantial losses and reported negative cash flows from operating activities of $34.9 million for the year ended December 31, 2017 and $45.6 million for the year ended December 31, 2016. As of December 31, 2017, we had approximately $31.3 million of cash and cash equivalents and certificates of deposit of $1.0 million; of this amount, approximately $18.1 million is available to pay premiums on the two unencumbered policies and other overhead expenses, with approximately $13.1 million being restricted by the White Eagle Revolving Credit Facility.

The Company’s ability to continue as a going concern is dependent on its ability to meet its liquidity needs through a combination of the receipt of death benefits from life insurance policy maturities, borrowings under the White Eagle Revolving Credit Facility, strategic capital market raises, policy sales (subject to certain asset sale restrictions) and cash on hand. During the year ended December 31, 2017, the Company entered into certain agreements for the purpose of recapitalizing the Company (as described below), and on July 28, 2017 and August 11, 2017, the Company consummated the Transactions (as described below). See Note 10, "8.5% Senior Unsecured Convertible Notes", Note 11 "5.0% Senior Unsecured Convertible Notes", Note 12, "15% Senior Secured Notes", Note 13, "8.5% Senior Secured Notes" and Note 18, "Stockholders' Equity" for further information. In considering the cash on hand at December 31, 2017 and management's projections for receipts of death benefits from policy maturities, we estimate that our liquidity and capital resources are sufficient for our current and projected financial needs for the next twelve months, at a minimum, from the date of filing this Form 10-K.

The accompanying consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about our ability to continue as a going concern.

Recapitalization Transaction

On March 15, 2017 and May 12, 2017, the Company entered into a series of separate Master Transaction Agreements (together, the "Master Transaction Agreements") by and between the Company, PJC Investments, LLC, a Texas limited liability company ("PJC"), and each Consenting Convertible Note Holder that is a party to one or more Master Transaction Agreements ("Consenting Convertible Note Holders") regarding a series of integrated transactions with the intent to effect a recapitalization of the Company (the "Transaction"), which included an Amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of the Company's common stock, $0.01 par value (the "Common Stock"), a Common Stock Purchase Agreement, a Convertible Note Exchange Offer, a New Convertible Note Indenture providing for the issuance of New Convertible Notes, a Senior Note Exchange Offer, a New Senior Note Indenture providing for the issuance of New Senior Notes, a Senior Note Purchase Agreement, Warrants and certain other agreements and documents delivered in connection with the Transaction (each as defined in the Master Transaction Agreements). The Master Transaction Agreements and the transactions contemplated under the Master Transaction Agreements were unanimously approved by the Board of Directors of the Company on March 13, 2017.

On April 7, 2017, the Company entered into a series of amendments to the Master Transaction Agreements (the "MTA Amendments"), which amended each Master Transaction Agreement made as of March 15, 2017, as amended to date and from time to time, by and among the Company, PJC and the Consenting Convertible Note Holders party to each Agreement. The modifications as a result of the MTA Amendments are specified below.

On June 19, 2017, the Company entered into a series of amendments to the Master Transaction Agreements, as amended (the "Additional MTA Amendments"), which amended each Master Transaction Agreement made as of March 15, 2017 and May 12, 2017. The purpose of the Additional MTA Amendments was to modify the definition of "Investor" and amend the form of warrant attached as Exhibit E to the Master Transaction Agreements (the "Warrant") to, among other things, contemplate vesting of the Warrant to holders on a pro rata basis. The Additional MTA Amendments also extended the period by which Consenting Convertible Note Holders could tender into the Convertible Note Exchange Offer.

Under the Master Transaction Agreements, PJC and other parties agreed to certain undertakings, including: (i) PJC or its designees (the "Investors") purchasing up to 100% of the Company’s 15.0% Senior Secured Notes from the Consenting Senior Note Holders (as defined herein) pursuant to a Senior Note Purchase Agreement, (ii) PJC and/or the Investors purchasing $15.0 million in shares of Common Stock, pursuant to a Common Stock Purchase Agreement, and (iii) issuance to PJC and/or the Investors of warrants, as amended, to purchase up to 42,500,000 shares of Common Stock at an exercise price of $0.20 per share, for an aggregate purchase price of up to $8.5 million. Upon the closing of the proposed transactions, the Company’s Board of Directors would include four members representing PJC and/or the Investors and one member representing the Consenting Convertible Note Holders.


20


On or about April 7, 2017, the Company entered into an Exchange Participation Agreement (the "Participation Agreement") with holders (the "Consenting Senior Note Holders") representing 100% of the aggregate outstanding principal amount of the Company's 15.0% Senior Secured Notes due 2018 (the "15.0% Senior Secured Notes").

On April 18, 2017, the Company launched an exchange offer (the "Convertible Note Exchange Offer") to the existing holders of its outstanding 8.5% Senior Unsecured Convertible Notes due 2019 (the "Convertible Notes" or "8.5% Convertible Notes") to exchange their Convertible Notes for 5% Senior Unsecured Convertible Notes due 2023 (the "New Convertible Notes" or "5% Convertible Notes").

On May 15, 2017, the Company entered into a $1.5 million Promissory Note with PJC (the "Bridge Note"), to provide financing to fund the Company's continued operations with a maturity date of July 3, 2017. The Bridge Note was amended on June 28, 2017 (the "Amended and Restated Bridge Note") to (i) increase the principal amount thereunder to $3.3 million and (ii) extend the maturity date from July 3, 2017 to the earlier of (a) July 28, 2017 and (b) the date on which the Master Transaction Agreements are consummated. Approximately $2.8 million was drawn on the Amended and Restated Bridge Note during the year ended December 31, 2017, respectively. All outstanding principal and interest amounts due under the Amended and Restated Bridge Note were repaid on July 28, 2017 in connection with the consummation of the recapitalization transactions as described below.

On July 28, 2017, the Company consummated a series of integrated transactions to effect a recapitalization of the Company (the "Transaction Closing") pursuant to the Master Transaction Agreements.

As of December 31, 2017, the Company has incurred approximately $4.6 million in costs related to the recapitalization transactions, and of this amount, $1.2 million is included in 8.5% Senior Secured Notes, $2.5 million is recognized as interest expense for 8.5% Convertible Notes and $937,000 is recorded in Additional paid-in-capital on the consolidated balance sheet.

Common Stock Purchase Agreement

In connection with the Transaction Closing, the Company entered into a Common Stock Purchase Agreement (the "Stock Purchase Agreement") by and among the Company, PJC, certain investors jointly designated by PJC and Triax Capital Advisors LLC, a New York limited liability company ("Triax"), to be party to the Stock Purchase Agreement (collectively, the "Common Stock Investors"), and certain Convertible Note Holders that were a party to the Stock Purchase Agreement (collectively, the "Convertible Note Holder Purchasers," and together with PJC and the Common Stock Investors, the "Purchasers"). Pursuant to the Stock Purchase Agreement, the Company issued and sold to the Purchasers 115,000,000 shares (the "Stock Purchase Agreement Shares") of the Company’s common stock, $0.01 par value, at a price of $0.20 per share for an aggregate purchase price of $23.0 million, of which PJC and the Common Stock Investors purchased 75,000,000 Stock Purchase Agreement Shares for an aggregate purchase price of $15.0 million and the Convertible Note Holder Purchasers, pursuant to the previously announced rights offering which expired on July 26, 2017, purchased 40,000,000 Stock Purchase Agreement Shares for an aggregate purchase price of $8.0 million, of which PJC purchased 19,320,038 shares in connection with the exercise of rights assigned to it by certain Convertible Note Holder Purchasers. The Stock Purchase Agreement contained customary representations, warranties, and covenants.

Common Stock Purchase Warrants

In connection with the Transaction Closing, the Company issued Common Stock Purchase Warrants (the "Warrants") to certain investors jointly designated by PJC and Triax (collectively, the "Warrant Investors") to purchase up to an aggregate of 42,500,000 shares of the Common Stock at an exercise price of $0.20 per share (the "Warrant Shares").

The Warrants shall vest and become exercisable as follows: (i) with respect to 17,500,000 Warrant Shares, immediately upon the issuance of the Warrants, and (ii) with respect to the remaining 25,000,000 Warrant Shares, at later times tied to the conversion of Convertible Notes (as defined below) and New Convertible Notes (as defined below) outstanding upon the Transaction Closing into shares of Common Stock or, if earlier, upon the date that all Convertible Notes or New Convertible Notes are no longer outstanding. The Warrants have an eight year term. The Warrants are subject to anti-dilution adjustment provisions.

Convertible Note Exchange Offer

On July 26, 2017, the Company’s Convertible Note Exchange Offer to exchange its outstanding $74.2 million aggregate principal amount of Convertible Notes for its New Convertible Notes expired. At least 98% of the outstanding

21


Convertible Notes were tendered in the Convertible Note Exchange Offer. The amount of Convertible Notes exchanged included approximately $73.0 million of principal outstanding prior to the exchange and approximately $2.8 million of interest paid in kind at the exchange date. The outstanding principal of the Convertible Notes after the exchange was approximately $1.2 million.

Second Supplemental Indenture for Convertible Notes

In connection with the Transaction Closing, the Company entered into a supplemental indenture (the "Supplemental Indenture") to that certain Indenture dated February 21, 2014 between the Company and U.S. Bank, National Association, as indenture trustee (as amended and supplemented or otherwise modified from time to time, the "Convertible Note Indenture") governing the Convertible Notes. The purpose of the Supplemental Indenture was to eliminate substantially all of the restrictive covenants, eliminate certain events of default, eliminate the covenant restricting mergers and consolidations and modify certain provisions relating to defeasance contained in the Convertible Note Indenture and the Convertible Notes (collectively, the "Proposed Amendments") promptly after the receipt of the requisite consents for the Proposed Amendments.

New Convertible Note Indenture and New Convertible Notes

In connection with the Transaction Closing, the Company caused to be issued the New Convertible Notes in an aggregate amount of approximately $75.8 million pursuant to an Indenture (the "New Convertible Note Indenture") between the Company and U.S. Bank, National Association, as indenture trustee. The terms of the New Convertible Notes are governed by the New Convertible Note Indenture, which provides, among other things, that the New Convertible Notes are unsecured senior obligations of the Company and will mature on February 15, 2023. The New Convertible Notes bear interest at a rate of 5% per annum from the issue date, payable semi-annually on August 15 and February 15 of each year, beginning on August 15, 2017.

Senior Secured Note Purchase Agreement

In connection with the Transaction Closing, PJC, certain investors jointly designated by PJC and Triax (the "Note Purchase Investors") and holders (the "Senior Secured Note Holders") representing 100% of the aggregate outstanding principal amount of the Company’s 15.0% Senior Secured Notes entered into a Note Purchase Agreement (the "Note Purchase Agreement"). Pursuant to the Note Purchase Agreement, the Note Purchase Investors purchased 100% of the 15.0% Senior Secured Notes held by each Senior Secured Note Holder for an aggregate purchase price equal to the face amount of such purchased 15.0% Senior Secured Notes. The Note Purchase Agreement contained customary representations, warranties, and covenants.

In connection with the Transaction Closing, the Company paid each Senior Secured Note Holder 5% of the face amount of the 15.0% Senior Secured Notes held by such Senior Secured Note Holder as of immediately prior to the Transaction Closing, plus all accrued but unpaid interest on such 15.0% Senior Secured Notes through the date of the Transaction Closing, pursuant to that certain Exchange Participation Agreement dated April 7, 2017 among the Company and Senior Secured Note Holders representing 100% of the aggregate outstanding principal amount of the 15.0% Senior Secured Notes.

Amended and Restated Senior Secured Note Indenture and 8.5% Senior Secured Notes

In connection with the Transaction Closing, the Company and Wilmington Trust, National Association, as indenture trustee (the "Senior Secured Note Trustee") entered into an Amended and Restated Senior Secured Note Indenture (the "Amended and Restated Senior Secured Indenture") to amend and restate the Indenture dated as of March 11, 2016 (as amended and supplemented or otherwise modified from time to time, the "Senior Secured Indenture") between the Company and the Senior Secured Note Trustee following the Company’s receipt of requisite consents of the holders of the 15.0% Senior Secured Notes. Pursuant to the terms of the Amended and Restated Senior Secured Indenture, the Company caused the cancellation of all outstanding 15.0% Senior Secured Notes and the issuance of 8.5% Senior Secured Notes due 2021 (the "8.5% Senior Secured Notes") in an aggregate amount of $30.0 million. The Amended and Restated Senior Secured Indenture provides, among other things, that the 8.5% Senior Secured Notes will be secured senior obligations of the Company and will mature on July 15, 2021. The 8.5% Senior Secured Notes will bear interest at a rate of 8.5% per annum, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning on September 15, 2017.


22


Special Dividend Note

Prior to the Transaction Closing, Lamington Road Designated Activity Company, an Irish section 110 company and an indirect subsidiary of the Company ("Lamington"), issued a promissory note to Markley Asset Portfolio, LLC, a Delaware limited liability company and an indirect subsidiary of the Company ("Markley"), in a principal amount of $57.0 million. The amount represents distributions of earnings from Lamington's share of profits of White Eagle, to satisfy the Profit Participation Note issued by Markley to Lamington (the "Special Dividend Note"). The Special Dividend Note matures on July 28, 2027 and bears interest at an annual rate of 5.0%. The Company has the opportunity to repatriate funds through repayment of principal and interest on this note without a U.S. federal or state income tax liability. The Special Dividend Note between the two entities will eliminate in consolidation.

See Note 21, "Income Tax", to the accompanying consolidated financial statements for further information.

Securities Purchase Agreement

On August 11, 2017, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") by and between the Company and Brennan Opportunities Fund I LP ("Brennan"). Pursuant to the Securities Purchase Agreement, Brennan purchased from the Company (i) 12,500,000 shares (the "Brennan Shares") of Common Stock at a price of $0.40 per share for an aggregate purchase price of $5.0 million and (ii) $5.0 million principal amount of the Company’s 8.5% Senior Secured Notes (the "Brennan Notes," and together with the Brennan Shares, the "Brennan Securities"). The Securities Purchase Agreement contained customary representations, warranties, and covenants.

The sale of the Brennan Securities was consummated on August 11, 2017, as to 8,750,000 shares of Common Stock and $3.5 million principal amount of 8.5% Senior Secured Notes, and on August 14, 2017, as to 3,750,000 shares of Common Stock and $1.5 million principal amount of 8.5% Senior Secured Notes.

Other Events
 
Our indirect subsidiary, White Eagle, is the owner of 606 life insurance policies with an aggregate death benefit of approximately $2.9 billion and an estimated fair value of approximately $566.7 million at December 31, 2017. White Eagle pledged its policies as collateral to secure borrowings made under the White Eagle Revolving Credit Facility, which is used, among other things, to pay premiums on the life insurance policies owned by White Eagle. Borrowings under the White Eagle Revolving Credit Facility fund the payment of premiums on the life insurance policies that have been pledged as collateral for the respective facilities. See "Liquidity and Capital Resources" under Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

During the year ended December 31, 2017, 13 life insurance policies with face amounts totaling $67.2 million matured. The net gain on these maturities was $35.9 million. The gains related to maturities are included in income from changes in fair value of life settlement in the consolidated statement of operations for the year ended December 31, 2017. All 13 policies had served as collateral under the White Eagle Revolving Credit Facility. Proceeds from maturities totaling $42.1 million were received during the year ended December 31, 2017. Of this amount, approximately $37.1 million, inclusive of approximately $2.5 million collected during the year ended December 31, 2016, were utilized to repay borrowings, interest and expenses under the White Eagle Revolving Credit Facility during the year ended December 31, 2017, with approximately $7.8 million on account for White Eagle awaiting distribution through the waterfall. We continue to believe that there are accretive opportunities to grow our existing portfolio of life settlements and intend, subject to our liquidity needs and available cash, to selectively deploy capital in both the secondary and tertiary life settlement markets. Assuming we recognize no policy maturities, our estimated premiums for 2018 would be $94.4 million. White Eagle would be eligible to borrow approximately $94.2 million of this amount under the White Eagle Revolving Credit Facility to pay premiums on policies secured by the White Eagle Revolving Credit Facility to the extent that is does not exceed the facility limit of $370.0 million. Approximately $141,000 in estimated premiums required to maintain the policies not pledged as collateral under the White Eagle Revolving Credit Facility as of December 31, 2017.

Reduction in Force

On August 3, 2017 and August 11, 2017, as a reduction in force, the Company reduced its headcount from 20 employees to 12 employees which included two of the Company’s executive officers. During the year ended December 31, 2017, the Company recognized a onetime severance cost of approximately $1.0 million related to this reduction, and the amounts are being paid over a period of twelve months.


23



Critical Accounting Policies
Critical Accounting Estimates
The preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. We base our judgments, estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and conditions. We evaluate our judgments, estimates and assumptions on a regular basis and make changes accordingly. We believe that the judgments, estimates and assumptions involved in the accounting for income taxes, the valuation of life settlements, the valuation of the debt owing under the White Eagle Revolving Credit Facility and the valuation of our conversion derivative liability formerly embedded within the Convertible Notes have the greatest potential impact on our financial statements and accordingly believe these to be our critical accounting estimates.

Fair Value Measurement Guidance

We follow ASC 820, Fair Value Measurements and Disclosures, which defines fair value as an exit price representing the amount that would be received if an asset were sold or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. Level 1 relates to quoted prices in active markets for identical assets or liabilities. Level 2 relates to observable inputs other than quoted prices included in Level 1. Level 3 relates to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Our investments in life insurance policies and White Eagle Revolving Credit Facility debt are considered Level 3 as there is currently no active market where we are able to observe quoted prices for identical assets/liabilities and our valuation model incorporates significant inputs that are not observable. See Note 15, "Fair Value Measurements" to the accompanying consolidated financial statements for a discussion of our fair value measurement.

Fair Value Option

We have elected to account for life settlements using the fair value method. The fair value of the asset is the estimated amount that would be received to sell an asset in an orderly transaction between market participants at the measurement date. We calculate the fair value of the asset using a present value technique to estimate the fair value of its life settlements. The Company currently uses a probabilistic method of valuing life insurance policies, which the Company believes to be the preferred valuation method in the industry. The most significant assumptions are the estimates of life expectancy of the insured and the discount rate. See Note 7, "Life Settlements (Life Insurance Policies)" and Note 15, "Fair Value Measurements" for further information.
We have elected to account for the debt under the White Eagle Revolving Credit Facility, which includes the interest in policy proceeds to the lender, using the fair value method. The fair value of the debt is the estimated amount that would have to be paid to transfer the debt to a market participant in an orderly transaction. We calculated the fair value of the debt using a discounted cash flow model taking into account the stated interest rate of the credit facility and probabilistic cash flows from the pledged policies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the instruments, could realize in a current market exchange. The most significant assumptions are the estimates of life expectancy of the insured and the discount rate. The use of assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
Income Recognition
Our primary sources of income are in the form of changes in fair value of life settlements and gains on life settlements, net. Our income recognition policies for these sources of income are as follows:
Changes in Fair Value of Life Settlements—When the Company acquires certain life insurance policies we initially record these investments at the transaction price, which is the fair value of the policy for those acquired upon relinquishment or the amount paid for those policies acquired for cash. The fair value of the investment in insurance policies is evaluated at the end of each reporting period. Changes in the fair value of the investment based on

24



evaluations are recorded as changes in fair value of life settlements in our consolidated statement of operations. The fair value is determined on a discounted cash flow basis that incorporates current life expectancy assumptions. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. The Company recognizes income from life settlement maturities on the date we are in receipt of death notice or verified obituary of the insured. This income is the difference between the death benefits and fair values of the policy at the time of maturity.
Gain/Loss on Life Settlements, Net—The Company recognizes gains or losses from life settlement contracts that the Company owns upon the signed sale agreement and/or filing of ownership forms and funds transferred to escrow.
Deferred Debt Costs

Deferred debt costs include costs incurred in connection with acquiring and maintaining debt arrangements. These costs are directly deducted from the carrying amount of the liability in the consolidated balance sheets, are amortized over the life of the related debt using the effective interest method and are classified as interest expense in the accompanying consolidated statement of operations. These deferred costs are related to the Company's 8.5% Convertible Notes, 5% Convertible Notes and 8.5% Senior Secured Notes. The Company did not recognize any deferred debt costs on the Revolving Credit Facilities given all costs were expensed due to electing the fair value option in valuing the Revolving Credit Facilities.

Income Taxes

We account for income taxes in accordance with ASC 740, Income Taxes. Under ASC 740, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies varies, adjustments to the carrying value of the deferred tax assets and liabilities may be required. Valuation allowances are based on the "more likely than not" criteria of ASC 740.

Our provision for income taxes results in an annual effective tax rate of 0% in 2017 compared to 0% in 2016. The accounting for uncertain tax positions guidance under ASC 740 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties (if any) on uncertain tax positions as a component of income tax expense.

The Company recorded a liability for the conversion derivative liability attributed to the issuance of the Convertible Notes, a deferred tax asset of $6.5 million for the conversion derivative liability and a deferred tax liability of $6.5 million for the corresponding debt discount. As the changes in the fair value of the conversion derivative liability were included in earnings, the Company recorded additions to the deferred tax asset. At June 5, 2014, when the Company received shareholder approval to issue shares of common stock upon conversion of the Convertible Notes, the deferred tax asset attributed to the conversion derivative liability (net of allocated unamortized transaction costs) was $8.8 million. In accordance with ASC 815, the Company reclassified the deferred tax asset attributed to the conversion derivative liability (net of allocated unamortized transaction costs) to shareholders’ equity. See Note 10, "8.50% Senior Unsecured Convertible Notes" to the accompanying consolidated financial statements.

On December 22, 2017 the United States enacted the Tax Cuts and Jobs Act ("TCJA"). Effective for 2018, under certain circumstances, Section 245A enacted by the TCJA eliminates U.S. federal income tax on dividends received from foreign subsidiaries of domestic corporations under a new participation exemption. However, the TCJA also creates a new tax on certain taxed foreign income under new Section 951A. Specifically, income earned in excess of a deemed return on tangible assets held by a controlled foreign corporation (such excess called Global Intangible Low-Taxed Income ("GILTI") must now generally be included as U.S. taxable income on a current basis by its U.S. shareholders. Based on the Company’s life settlement assets held within Ireland, management expects the net income generated from these activities to qualify entirely as GILTI. On January 10, 2018, the FASB provided guidance on how to account for deferred tax assets and liabilities expected to reverse in future years as GILTI. The FASB provided that a company may either (1) elect to treat taxes due on future U.S. inclusions of GILTI as a current-period expense when incurred or (2) factor such amounts into the Company’s measurement of its deferred taxes. For ASC 740 purposes, the Company intends to adopt an accounting policy to treat any future GILTI

25



inclusion as a current-period expense instead of providing for U.S. deferred taxes on all temporary differences related to future GILTI items.
Stock-Based Compensation
We have adopted ASC 718, Compensation—Stock Compensation. ASC 718 addresses accounting for share-based awards, including stock options, restricted stock, performance shares and warrants, with compensation expense measured using fair value and recorded over the requisite service or performance period of the award. The fair value of equity instruments will be determined based on a valuation using an option pricing model that takes into account various assumptions that are subjective. Key assumptions used in the valuation will include the expected term of the equity award taking into account both the contractual term of the award, the effects of expected exercise and post-vesting termination behavior, expected volatility, expected dividends and the risk-free interest rate for the expected term of the award. Compensation expense associated with performance shares is only recognized to the extent that it is probable the performance measurement will be met.
Held-for-sale and discontinued operations
The Company reports a business as held-for-sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the ensuing year and certain other specified criteria are met. A business classified as held-for-sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Depreciation is not recorded on assets of a business classified as held-for-sale. Assets and liabilities related to a business classified as held-for-sale are segregated in the Consolidated Balance Sheet and major classes are separately disclosed in the notes to the Consolidated Financial Statements commencing in the period in which the business is classified as held-for-sale. The Company reports the results of operations of a business as discontinued operations if the business is classified as held-for-sale, the operations and cash flows of the business have been or will be eliminated from the ongoing operations of the Company as a result of a disposal transaction and the Company will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations are reported in Discontinued Operations in the Consolidated Statement of Operations for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell. During the fourth quarter of 2013, the Company sold substantially all of its structured settlements business. As a result, the Company has classified its structured settlement operating results as discontinued operations.
Foreign Currency
The Company owns certain foreign subsidiaries formed under the laws of Ireland and Bermuda. These foreign subsidiaries utilize the U.S. dollar as their functional currency. The foreign subsidiaries’ financial statements are denominated in U.S. dollars and therefore, there are no translation gains and losses resulting from converting the financial statements at exchange rates other than the functional currency. Any gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the subsidiaries’ functional currency) are included in income. These gains and losses are immaterial to the Company’s financial statements.
Accounting Changes
Note 2, "Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements discusses accounting standards adopted in 2017, as well as accounting standards recently issued but not yet required to be adopted and the expected impact of these changes in accounting standards. Any material impact of adoption is discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements.


Consolidated Results of Operations

Results of Continuing Operations
2017 Compared to 2016
Net loss from continuing operations for the year ended December 31, 2017 was $3.2 million as compared to a loss of $49.4 million for the year ended December 31, 2016. There was no tax benefit for the year ended December 31, 2017. The following is our analysis of net loss for the year (in thousands).

26



 
 
Year Ended December 31,
 
 
2017
 
2016
 
Change
 
% Change
 
 
Income
 
$
51,873

 
$
1,115

 
$
50,758

 
4,552
 %
 
increase
Expenses
 
55,111

 
50,544

 
4,567

 
9
 %
 
increase
Net loss
 
$
(3,238
)
 
$
(49,429
)
 
$
46,191

 
(93
)%
 
decrease
 
 
 
 
 
 
 
 
 
 
 

Income for the year ended December 31, 2017 was comprised mainly of a gain on maturity of 13 life settlements of $35.9 million compared to a net gain of $17.9 million on maturity of 12 life settlements during the same period in 2016.

Our income for the year ended December 31, 2016 was significantly impacted by the adoption of the 2015 VBT, which resulted in a reduction in fair value of life settlements of approximately $17.6 million.

Total expenses from continuing operations for the year ended December 31, 2017 were mainly comprised of interest expense of $16.8 million on the White Eagle Revolving Credit Facility; $9.2 million on the 8.5% Convertible Notes; $2.1 million on the 5% Convertible Notes; $2.8 million on the 15% Senior Secured Notes; $1.4 million on the 8.5% Senior Secured Notes, $2.0 million loss on extinguishment of debt, and a change in the fair value of the White Eagle Revolving Credit Facility of $4.5 million.

Total expenses for the year ended December 31, 2016 were also significantly impacted by a $15.7 million gain for the change in fair value of the Revolving Credit Facilities which is associated with the adoption of the 2015 VBT.

Change in fair value of life settlements (in thousands)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
Change
 
% Change
 
 
Change in fair value of life settlements
 
$
51,551

 
$
864

 
$
50,687

 
5,867
%
 
increase
 
 
 
 
 
 
 
 
 
 
 

During the year ended December 31, 2017, 13 life insurance policies with face amounts totaling $67.2 million matured, compared to 12 policies with face amounts of $37.5 million for the same period in 2016. The net gain of these maturities was $35.9 million and $17.9 million for 2017 and 2016, respectively, and is recorded as a change in fair value of life settlements in the consolidated statements of operations for the years ended December 31, 2017 and 2016. All 13 of the maturities served as collateral under the White Eagle Revolving Credit Facility. Proceeds from maturities totaling $42.1 million were received during the year ended December 31, 2017. Of this amount, approximately $37.1 million inclusive of approximately $2.5 million collected during the year ended December 31, 2016 were utilized to repay borrowings, interest and credit facility expenses under the White Eagle Revolving Credit Facility. The Company also recorded a $30.0 million receivable for maturity of life settlements at December 31, 2017 relating to policies pledged to the White Eagle Revolving Credit Facility.

During the year ended December 31, 2016, the Company changed its valuation technique when it decided to adopt the 2015 VBT, smoker and gender distinct tables, to determine the value of the policies. The resulting impact was a reduction in the fair value of the life settlements of approximately $17.6 million for the year ended December 31, 2016.

Other items impacting the change in fair value include updated life expectancies procured by the Company in respect of the insureds' lives and maturities. The updated life expectancy reports implied that, in the aggregate, the insureds’ health improved, therefore lengthening their life expectancies relative to the prior life expectancies, which resulted in a decrease in fair value.

The Company re-evaluates its discount rates at the end of each reporting period in order to reflect the estimated discount rates that could reasonably be used in a market transaction involving the Company's portfolio of life settlements. In doing so, consideration is given to the various factors influencing the rates, including credit exposure of the insurance company that issued the life insurance policy, and the estimated risk premium an investor in the policy would require, among other factors. At December 31, 2017, the Company determined that the weighted average discount rate calculated based on death benefit was 15.95% compared to 16.37% at December 31, 2016. This resulted in a positive impact for the change in fair value of our life settlement for the year ended December 31, 2017.

27




As of December 31, 2017, we owned 608 policies with an estimated fair value of $567.5 million compared to 621 policies with a fair value of $498.4 million at December 31, 2016, an increase of $69.1 million or 14%. Of the 608 policies, 606 policies were pledged to the White Eagle Revolving Credit Facility. During the year ended December 31, 2016, the Company purchased $3.1 million in additional death benefit by acquiring retained portions of policy benefits from 20 policies for approximately $1.4 million. In addition, we acquired one life insurance policy for the same period ended 2016, which resulted in a gain of approximately $262,000. As of December 31, 2017, the aggregate death benefit of our life settlements was $2.9 billion.

Of these 608 policies owned as of December 31, 2017, 530 were previously premium financed and are valued using discount rates that range from 15.50%21.00%. The remaining 78 policies are valued using discount rates that range from 14.50%17.50%. See Note 15, "Fair Value Measurements," to the accompanying consolidated financial statements.


Expenses (in thousands)

 
 
Year Ended December 31,
 
 
2017
 
2016
 
Change
 
% Change
 
 
Interest expense
 
$
32,797

 
$
29,439

 
$
3,358

 
11
 %
 
increase
Loss on extinguishment of debt
 
2,018

 
554

 
1,464

 
264
 %
 
increase
Change in fair value of Revolving Credit Facilities
 
4,501

 
(1,898
)
 
6,399

 
(337
)%
 
increase
SG&A expenses
 
15,795

 
22,449

 
(6,654
)
 
(30
)%
 
decrease
Total Expense
 
$
55,111

 
$
50,544

 
$
4,567

 
9
 %
 
increase
 
 
 
 
 
 
 
 
 
 
 


Interest expense (in thousands)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
Change
 
% Change
 
 
White Eagle Revolving Credit Facility
 
$
16,819

 
$
11,422

 
$
5,397

 
47
 %
 
increase
Red Falcon Revolving Credit Facility
 

 
4,260

 
(4,260
)
 
(100
)%
 
decrease
8.5% Convertible Notes
 
9,206

 
9,737

 
(531
)
 
(5
)%
 
decrease
15% Senior Secured Notes
 
2,784

 
4,008

 
(1,224
)
 
(31
)%
 
decrease
5% Convertible Notes
 
2,107

 

 
2,107

 
100
 %
 
increase
8.5% Senior Secured Notes
 
1,370

 

 
1,370

 
100
 %
 
increase
Participation Interest - White Eagle Revolving Credit Facility
 
467

 
$

 
467

 
100
 %
 
increase
Other
 
44

 
12

 
32

 
267
 %
 
increase
Total Interest Expense
 
$
32,797

 
$
29,439

 
$
3,358

 
11
 %
 
increase
 
 
 
 
 
 
 
 
 
 
 

Outstanding debt for the year ended December 31, 2017 included $329.0 million of outstanding principal on the White Eagle Revolving Credit Facility, $1.2 million of 8.5% Convertible Notes, $75.8 million of 5% Convertible Notes and $35.0 million of 8.5% Senior Secured Notes.
 
The Company's outstanding debt increased by $78.9 million from $362.1 million at December 31, 2016 to $441.1 million at December 31, 2017. The increase is mainly attributable to a net increase in principal of $67.7 million on the White Eagle Revolving Credit Facility, a $75.8 million increase in the 5% Convertible Notes, a $35.0 million increase in the 8.5% Senior Secured Notes, offset by a repayment of $30.0 million on the 15% Senior Secured Notes and a $69.5 million decrease in the 8.5% Convertible Notes.

28



 
Of the interest expense of $32.8 million for the year ended December 31, 2017, approximately $16.8 million represents interest paid on the White Eagle Revolving Credit Facility. The increase in interest expense resulted from an increase in the principal balance of the facility and an increase in the LIBOR floor from 1.69% to 2.11% at December 31, 2017. Interest expense also includes approximately $467,000 for participation interest on the Facility paid during the year ended December 31, 2017.

The Red Falcon Revolving Credit Facility (as defined below) which was held by one of our subsidiaries, Red Falcon Trust, was terminated in December 2016 and the policies were acquired by White Eagle, shows a decrease of approximately $4.3 million when compared to the year ended December 31, 2016. There was no interest expense for this facility during 2017 given the debt was fully repaid during the year ended December 31, 2016.
Interest expense on the 8.5% Convertible Notes totaled $9.2 million, including $4.2 million, $2.5 million,$2.1 million and $314,000 from interest, one time debt modification cost, amortizing debt discounts and originations costs, respectively, during the year ended December 31, 2017. Interest for the year ended December 31, 2017 included approximately $522,000 of additional interest paid in kind to note holders.

The Company recorded $2.1 million of interest expense on the 5.0% Convertible Notes, including $1.6 million, $432,000 and $64,000 from interest, amortization of debt discount and origination costs, respectively. The 5% Convertible Notes originated in 2017 and, therefore, there was no related interest expense during the year ended December 31, 2016.
The Company recorded $2.8 million of interest expense on the 15% Senior Secured Notes, including $2.6 million and $184,000 from interest and amortizing debt discounts, respectively, during the year ended December 31, 2017.
The Company recorded approximately $1.4 million of interest expense on the 8.5% Senior Secured Notes, which includes $1.3 million of interest and $98,000 of amortizing debt issuance costs. The 8.5% Senior Secured Notes originated in 2017 and, therefore, there was no related interest expense during the year ended December 31, 2017.
Of the interest expense of $29.4 million for the year ended December 31, 2016, approximately $11.4 million represents interest paid on the White Eagle Revolving Credit Facility and approximately $4.3 million was attributable to the Red Falcon Revolving Credit Facility. Interest included $388,000 and $297,000 of debt issuance costs for the White Eagle Revolving Credit Facility and the Red Falcon Revolving Credit Facility, respectively, which were not capitalized as a result of electing the fair value option for valuing these debt facilities, and $11.0 million and $4.0 million related to interest payments paid during the year ended December 31, 2016, respectively. The Red Falcon Revolving Credit Facility was fully repaid on December 29, 2016.
Interest expense on the Convertible Notes totaled $9.7 million of interest expense on the Convertible Notes, including $6.0 million, $3.2 million and $480,000 from interest, amortizing debt discounts and origination costs, respectively.
The Company recorded approximately $4.0 million of interest expense on the 15% Senior Secured Notes, which includes $3.7 million of interest and $356,000 of amortizing debt issuance costs, during the year ended December 31, 2016.

See Notes 8, "White Eagle Revolving Credit Facility," 9, "Red Falcon Revolving Credit Facility," 10, "8.50% Senior Unsecured Convertible Notes," 11, "5% Senior Unsecured Convertible Notes," 12, "15.0% Senior Secured Notes," and 13, "8.5% Senior Secured Notes," to the accompanying consolidated financial statements for further information.

Extinguishment of debt (in thousands)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
Change
 
% Change
 
 
Loss on extinguishment of debt
 
$
2,018

 
$
554

 
$
1,464

 
264
%
 
increase
 
 
$
2,018

 
$
554

 
$
1,464

 
264
%
 
increase
 
 
 
 
 
 
 
 
 
 
 

During the year ended December 31, 2017, approximately $2.0 million was recorded in loss on the extinguishment of debt for the 15.0% Senior Secured Notes, including $1.5 million and $518,000 related to prepayment penalty and write off of origination cost, respectively.


29



During the year ended December 31, 2016, the Company terminated the Red Falcon Revolving Credit Facility. The outstanding principal balance and unpaid interest due was paid upon termination of the facility on December 29, 2016 was $65.1 million. Approximately $554,000 was recorded as a loss on extinguishment of debt related to the early repayment of the facility. This includes the debt valuation allowance of $239,000 and costs incurred related to the facility termination of $315,000 at December 31, 2016.

See Notes 9 "Red Falcon Revolving Credit Facility," and 12 "15% Senior Secured Notes" of the accompanying consolidated financial statements.

Change in fair value of the Revolving Credit Facilities (in thousands)

 
 
Year Ended December 31,
 
 
2017
 
2016
 
Change
 
% Change
 
 
White Eagle Revolving Credit Facility
 
$
4,501

 
$
(1,389
)
 
$
5,890

 
(424
)%
 
increase
Red Falcon Revolving Credit Facility
 

 
(509
)
 
509

 
(100
)%
 
decrease
Total Change in Fair Value of Revolving Credit Facilities
 
$
4,501

 
$
(1,898
)
 
$
6,399

 
(337
)%
 
increase
 
 
 
 
 
 
 
 
 
 
 

At December 31, 2017, the White Eagle Revolving Credit Facility shows a loss of approximately $4.5 million compared to a gain of $1.4 million or the year ended December 31, 2016. This loss in 2017 is attributable to a combination of offsetting factors as discussed below:
    
During the year ended December 31, 2017, the fair value of the White Eagle Revolving Credit Facility was impacted by increased borrowings, the lengthening of life expectancies of certain insureds' underlying policies pledged under the White Eagle Revolving Credit Facility and a slight increase in the discount rate used to value the facility.

During the year ended December 31, 2016, the Company changed its valuation technique by adopting the 2015 VBT, smoker and gender distinct tables, to determine the value of the life insurance policies pledged as collateral in the facility. The resulting impact was a positive change in fair value of the White Eagle Revolving Credit Facility of approximately $14.7 million. This amount is shown as a reduction to our expenses on the statement of operations for the year ended December 31, 2016.

Change in fair value of Revolving Credit Facilities also includes a gain of $509,000 attributable to the Red Falcon Revolving Credit Facility for the year ended December 31, 2016.

The change resulting from the Company's adoption of the 2015 VBT resulted in a positive change in fair value of the Red Falcon Revolving Credit Facility of approximately $1.0 million. This amount is shown as a reduction to our expenses on the statement of operations for the year ended December 31, 2016. The Red Falcon Revolving Credit Facility was fully repaid on December 29, 2016.

The White Eagle Revolving Credit Facility is valued at December 31, 2017 using discount rates of 18.57% compared to 18.50% for the year ended December 31, 2016.

See Note 15, "Fair Value Measurements," to the accompanying consolidated financial statements.

Selling, general and administrative expenses (in thousands)

30



 
 
Year Ended December 31,
 
 
2017
 
2016
 
Change
 
% Change
 
 
Personnel costs
 
$
5,069

 
$
6,070

 
$
(1,001
)
 
(16
)%
 
decrease
Legal fees
 
3,721

 
6,427

 
(2,706
)
 
(42
)%
 
decrease
Professional fees
 
4,445

 
7,081

 
(2,636
)
 
(37
)%
 
decrease
Insurance
 
783

 
835

 
(52
)
 
(6
)%
 
decrease
Other SG&A
 
1,777

 
2,036

 
(259
)
 
(13
)%
 
decrease
Total SG&A Expense
 
$
15,795

 
$
22,449

 
$
(6,654
)
 
(30
)%
 
decrease
 
 
 
 
 
 
 
 
 
 
 

The decrease in SG&A expense was primarily the result of a decrease in legal expense of $2.7 million, a decrease in professional fees of $2.6 million, a decrease in personnel costs of $1.0 million, a decrease other SG &A of $259,000 and a decrease in insurance costs of $52,000.

On August 3, 2017 and August 11, 2017, as a reduction in force, the Company reduced its headcount from 20 employees to 12 employees, included in this reduction in force were two of the Company’s executive officers. During the year ended December 31, 2017, the Company recognized a onetime severance cost of approximately $1.0 million related to this reduction, which amounts are being paid over a period of twelve months.
2016 Compared to 2015
Net loss from continuing operations for the year ended December 31, 2016 was $49.4 million as compared to $30.4 million for the year ended December 31, 2015. Our net loss for the year ended December 31, 2015 included approximately $8.7 million in income tax benefit. There was no tax benefit for the year ended December 31, 2016. The following is our analysis of net loss for the period (in thousands).
 
 
Year Ended December 31,
 
 
2016
 
2015
 
Change
 
% Change
 
 
Income
 
$
1,115

 
$
46,891

 
$
(45,776
)
 
(98
)%
 
decrease
Expenses
 
50,544

 
85,990

 
(35,446
)
 
(41
)%
 
decrease
Income tax (benefit)
 

 
(8,719
)
 
8,719

 
(100
)%
 
decrease
Net loss
 
$
(49,429
)
 
$
(30,380
)
 
$
(19,049
)
 
63
 %
 
increase
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations for the year ended December 31, 2015 was significantly higher due to the maturity of 17 policies with a net gain of approximately $47.9 million compared to 12 policies with a net gain of approximately $17.9 million for the year ended December 31, 2016. Our income for the year ended December 31, 2016 was also significantly impacted by the adoption of the 2015 VBT, which resulted in a reduction in fair value of life settlements of $17.6 million.

Our expenses from continuing operations for the year ended December 31, 2015 were significantly higher than 2016 due to legal expenses of $20.7 million compared to $6.4 million, change in fair value of the Revolving Credit Facilities of $12.2 million compared to a gain of $1.9 million and a loss on extinguishment of Secured Notes of $8.8 million compared to a loss on extinguishment of the Red Falcon Revolving Credit Facility of $554,000 for the years ended December 31, 2015 and December 31, 2016, respectively. Legal expenses for the year ended December 31, 2015 included approximately $6.5 million in payments relating to the Company's indemnification obligations for the conclusion of the USAO Investigation.

Our net loss for the year ended December 31, 2015 includes an income tax benefit of approximately $8.7 million.
There was no income tax benefit recognized during the year ended December 31, 2016.
See Notes 21, "Income Taxes," to the accompanying consolidated financial statements.


31



Change in Fair Value of Life Settlements (in thousands)
 
 
Year Ended December 31,
 
 
2016
 
2015
 
Change
 
% Change
 
 
Change in fair value of life settlements
 
$
864

 
$
46,717

 
$
(45,853
)
 
(98
)%
 
decrease
 
 
 
 
 
 
 
 
 
 
 

During the year ended December 31, 2016, 12 life insurance policies with face amounts totaling $37.5 million matured, compared to 17 policies with face amounts of $67.4 million for the same period in 2015. The net gain of these maturities was $17.9 million and $47.9 million for 2016 and 2015, respectively, and is recorded as a change in fair value of life settlements in the consolidated statements of operations for the years ended December 31, 2016 and 2015. Of these maturities, four served as collateral under the Red Falcon Revolving Credit Facility and eight served as collateral under the White Eagle Revolving Credit Facility. Proceeds from maturities totaling $50.5 million were received during the year ended December 31, 2016. Of this amount, approximately $40.5 million and $7.6 million were utilized to repay borrowings, interest and credit facility expenses under the White Eagle Revolving Credit Facility and the Red Falcon Revolving Credit facility, respectively, during the year ended December 31, 2016, and $2.5 million was used to repay interest and credit facility expenses under the White Eagle Revolving Credit Facility during 2017. Approximately $5.0 million in policy proceeds received at the end of 2015 were used to repay borrowings, interest, and expenses for White Eagle during 2016. The Company also recorded a $5.0 million receivable for maturity of life settlements at December 31, 2016 relating to a policy pledged to the White Eagle Revolving Credit Facility.

During the second quarter ended June 30, 2016, the Company changed its valuation technique and decided to adopt the 2015 VBT, smoker and gender distinct tables, to determine the value of the policies. The resulting impact was a reduction in the fair value of the life settlements of approximately $17.6 million for the year ended December 31, 2016.

Other items impacting the change in fair value include updated life expectancies procured by the Company in respect of the insured lives and maturities. The updated life expectancy reports implied that in aggregate, the insureds’ health improved, therefore lengthening their life expectancies relative to the prior life expectancies, which resulted in a decrease in fair value.

The change in fair value was further impacted by a reduction in estimated risk premium which drives our discount rate. The Company re-evaluates its discount rates at the end of each reporting period in order to reflect the estimated discount rates that could reasonably be used in a market transaction involving the Company's portfolio of life settlements. In doing so, consideration is given to the various factors influencing the rates, including credit exposure of the insurance company that issued the life insurance policy, and the estimated risk premium an investor in the policy would require, among other factors. In considering these factors, at December 31, 2016, the Company determined that the weighted average discount rate calculated based on death benefit was 16.37% compared to 17.02% at December 31, 2015. This resulted in a positive impact for the change in fair value of our life settlement for the year ended December 31, 2016.

As of December 31, 2016, the Company owned 621 policies with an estimated fair value of $498.4 million compared to 632 policies with a fair value of $461.9 million at December 31, 2015, an increase of $36.5 million or 8%. Of the 621 policies, 619 policies were pledged to the White Eagle Revolving Credit Facility. During the year ended December 31, 2016, the Company purchased $3.1 million in additional death benefit by acquiring retained portions of policy benefits from 20 policies for approximately $1.4 million. During the year ended December 31, 2016, the Company acquired one life insurance policy that resulted in a gain of approximately $262,000 compared to 43 policies during the same period in 2015 for a gain of $6.0 million. The gain related to acquisitions is included in income from changes in fair value of life settlement in the consolidated statements of operations for the year ended December 31, 2016. As of December 31, 2016, the aggregate death benefit of our life settlements was $2.9 billion.

Of these 621 policies owned as of December 31, 2016, 539 were previously premium financed and are valued using discount rates that range from 16.00% - 21.00%. The remaining 82 policies are valued using discount rates that range from 15.00% - 18.00%. See Note 15, "Fair Value Measurements," to the accompanying consolidated financial statements.



32



Loss on life settlements, net (in thousands)
 
 
Year Ended December 31,
 
 
2016
 
2015
 
Change
 
% Change
 
 
Loss on life settlements, net
 
$

 
$
(41
)
 
$
41

 
(100
)%
 
decrease
 
 
 
 
 
 
 
 
 
 
 

There were no policy sales during the year ended December 31, 2016. The loss in 2015 is related to one policy sale on net proceeds of $2.2 million.

Expenses (in thousands)
 
 
Year Ended December 31,
 
 
2016
 
2015
 
Change
 
% Change
 
 
Interest expense
 
$
29,439

 
$
27,286

 
$
2,153

 
8
 %
 
increase
Loss on extinguishment debt
 
554

 
8,782

 
(8,228
)
 
(94
)%
 
decrease
Change in fair value of Revolving Credit Facilities
 
(1,898
)
 
12,197

 
(14,095
)
 
(116
)%
 
decrease
SG&A expenses
 
22,449

 
37,725

 
(15,276
)
 
(40
)%
 
decrease
Total Expense
 
$
50,544

 
$
85,990

 
$
(35,446
)
 
(41
)%
 
decrease
 
 
 
 
 
 
 
 
 
 
 

Interest expense (in thousands)
 
 
Year Ended December 31,
 
 
2016
 
2015
 
Change
 
% Change
 
 
White Eagle Revolving Credit Facility
 
$
11,422

 
$
9,239

 
$
2,183

 
24
 %
 
increase
Red Falcon Revolving Credit Facility
 
4,260

 
4,860

 
(600
)
 
(12
)%
 
decrease
Convertible Notes
 
9,737

 
9,145

 
592

 
6
 %
 
increase
15.0% Senior Secured Notes
 
4,008

 

 
4,008

 
100
 %
 
increase
12.875% Senior Secured Notes
 

 
4,019

 
(4,019
)
 
(100
)%
 
decrease
Other
 
12

 
23

 
(11
)
 
(48
)%
 
decrease
Total Interest Expense
 
$
29,439

 
$
27,286

 
$
2,153

 
8
 %
 
increase
 
 
 
 
 
 
 
 
 
 
 

Outstanding debt for the year ended December 31, 2016 includes $261.4 million of outstanding principal on the White Eagle Revolving Credit Facility, $70.7 million of Convertible Notes and $30.0 million of 15% Senior Secured Notes.

The Company's outstanding debt increased by $64.0 million from $298.2 million at December 31, 2015 to $362.1 million at December 31, 2016. The increase is mainly attributable to a net increase in principal of $89.3 million on the White Eagle Revolving Credit Facility and a $30.0 million increase in the 15% Senior Secured Notes, offset by a $55.4 million decrease in the principal balance of the Red Falcon Revolving Credit Facility debt which was terminated on December 29, 2016. During the year ended December 31, 2015, the Company redeemed the outstanding 12.875% Senior Secured Notes.
Of the interest expense of $29.4 million for the year ended December 31, 2016, approximately $11.4 million represents interest paid on the White Eagle Revolving Credit Facility and approximately $4.3 million was attributable to the Red Falcon Revolving Credit Facility. Interest included $388,000 and $297,000 of debt issuance costs for the White Eagle Revolving Credit Facility and the Red Falcon Revolving Credit Facility, respectively, which were not capitalized as a result of electing the fair value option for valuing these debt facilities, and $11.0 million and $4.0 million related to interest payments paid during the year ended December 31, 2016, respectively.

33




Interest expense on the Convertible Notes totaled $9.7 million, including $6.0 million, $3.2 million and $480,000 representing interest, amortization of debt discount and issuance costs, respectively. We recorded $4.0 million of interest expense on the 15% Senior Secured Notes, including $3.7 million and $356,000 from interest and amortizing debt discounts, respectively, during the year ended December 31, 2016.
Of the interest expense of $27.3 million for year ended December 31, 2015, approximately $9.2 million represents interest paid on the White Eagle Revolving Credit Facility, which included $6.7 million withheld from borrowings by the lender and $2.5 million paid by White Eagle. Approximately $4.9 million represents interest expense attributable to the Red Falcon Revolving Credit Facility, which includes approximately $3.3 million attributable to debt issuance costs not capitalized as a result of electing the fair value option for valuating this debt and an additional$1.6 million related to interest payments paid during the year ended December 31, 2015.
Interest expense on the Convertible Notes totaled $9.1 million including $6.0 million, $2.7 million and $404,000 representing interest, amortization of debt discount and issuance costs, respectively.
The Company recorded $4.0 million of interest expense on the 12.875% Senior Secured Notes, including $3.2 million, $265,000, $264,000, and $277,000 from interest, unused fees, amortizing debt discounts and issuance costs, respectively, during the year ended December 31, 2015.
See Notes 8, "White Eagle Revolving Credit Facility," 9, "Red Falcon Revolving Credit Facility," and 10, "8.50% Senior Unsecured Convertible Notes,"," to the accompanying consolidated financial statements.
Extinguishment of debt (in thousands)
 
 
Year Ended December 31,
 
 
2016
 
2015
 
Change
 
% Change
 
 
Extinguishment of debt
 
$
554

 
$
8,782

 
$
(8,228
)
 
(94
)%
 
decrease
 
 
 
 
 
 
 
 
 
 
 
 
During the year ended December 31, 2016, the Company terminated the Red Falcon Revolving Credit Facility. The outstanding principal balance and unpaid interest due and paid upon termination of the facility on December 29, 2016 was $65.1 million. Approximately $554,000 was recorded as a loss on extinguishment of debt related to the early repayment of the facility. This includes the debt valuation allowance of $239,000 and costs incurred related to the facility termination of $315,000 at December 31, 2016.

During the year ended December 31, 2015, the Company redeemed all of the outstanding 12.875% Senior Secured Notes and discharged the related Secured Note indenture. The Secured Notes were redeemed at 106% of their principal amount plus interest up to but excluding November 10, 2015. Approximately $8.8 million was expensed as extinguishment related to the early repayment of the Secured Notes for the year ended December 31, 2015. This included $5.2 million, $171,000, $1.7 million and $1.7 million related to interest and prepayment penalties, unused fees, write off of debt discount and write off of issuance cost.

See Note 9 "Red Falcon Revolving Credit Facility," of the accompanying consolidated financial statements.
Change in fair value of the Revolving Credit Facilities (in thousands)
 
 
Year Ended Dece